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BOURBON BROTHERS HOLDING CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 8, 2014

In this Management's Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect our future results, including:

· Key events and recent developments within our Company; · Our results of operations for the three and six months ended June 30, 2014 and 2013; · Our liquidity and capital resources; · Any off balance sheet arrangements we utilize; · Any contractual obligations to which we are committed; · Our critical accounting policies; · The inflation and seasonality of our business; and · New accounting standards that affect our company.



The review of Management's Discussion and Analysis should be made in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this annual report.

Overview

Bourbon Brothers Holding Corporation ("BBHC" or the "Company") is a Colorado corporation. The Company, on January 22, 2014, with approval of a majority of the Company's shareholders, changed its name from Smokin Concepts Development Corporation to Bourbon Brothers Holding Corporation.

The Company's subsidiary, Southern Hospitality Franchisee Holding Corporation ("SH") entered into a franchise agreement and area development agreement with SH Franchising & Licensing LLC, dba Southern Hospitality BBQ (the "Franchisor") in November 2011. In May 2012, SH formed Southern Hospitality Denver Holdings, LLC ("SHDH"), a wholly-owned subsidiary, and Southern Hospitality Denver, LLC ("SHD"). SHD was formed for the purpose of owning and operating the Company's first franchised restaurant in Denver, Colorado. As of December 31, 2013, SHD is 51% owned by SHDH and 49% owned by non-controlling interest holders, of which a director of the Company is a 22% non-controlling interest holder.

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On September 30, 2013, the Company entered into an Acquisition Agreement with Bourbon Brothers Holding Company, LLC ("BBHCLLC") to acquire all of the equity interests in BBHCLLC (the "BB Transaction") and its subsidiaries. BBHCLLC is a Colorado limited liability company ("LLC") formed in May 2013, for the purpose of developing and managing all aspects of operating units related to a recently developed "Bourbon Brothers" brand. The principles of BBHCLLC were also, at various times, on the board of directors of the Company, and therefore BBHCLLC is considered to be a related party. As of December 31, 2013, BBHCLLC was a development stage company. BBHCLLC's subsidiaries (all LLCs formed in April 2013) include Bourbon Brothers Restaurant Group, LLC ("BBRG"), Bourbon Brothers Franchise, LLC ("BBF") and Bourbon Brothers Brand, LLC ("BBB"). BBRG owns the stores to encompass several Bourbon Brothers brands, and owns Bourbon Brothers Southern Kitchen Colorado Springs, LLC ("BBSK"), which opened its first restaurant in January 2014. BBRG also owns Bourbon Brothers Seafood and Chophouse Colorado Springs, LLC ("BBSF"). BBB manages all aspects of the Bourbon Brothers brand and anticipates establishing licensing and royalty agreements with producers of bourbon, spices, cigars and other products that fit the Company's core brand.

On January 22, 2014, the parties entered into a Second Amendment to the Acquisition Agreement, identifying the final conversion ratio of 1.82427. The Second Amendment identified the number of shares to be issued by the Company in the BB Transaction as 20,274,193 shares of common stock to BBHCLLC Class B Non-Voting members and 18,242,687 shares of Series A Convertible Preferred Stock to BBHCLLC Class A Voting members. These shares were issued at the closing of the BB Transaction. All outstanding options and warrants to acquire BBHCLLC units were assumed by the Company, applying the conversion ratio to the number of units and strike price.

On July 15, 2014, the Company announced that a third restaurant concept was approved by the Board of Directors. The third concept being added to the Bourbon Brothers collection is 53 Peaks, a Colorado-themed, casual-dining restaurant with a mission to serve as many locally sourced products as possible. The lease for the Lone Tree, Colorado 53 Peaks location was signed in July 2014, and plans to start the remodel of the existing building are underway. 53 Peaks Lone Tree is expected to open its doors to the public in the late fall of 2014.

Results of Operations - Three and Six Months ended June 30, 2014 and 2013

Revenues

During the three and six months ended June 30, 2014, the Company generated approximately $1,428,300 and $2,698,150 in net revenue as the Company opened its first restaurant in Denver, Colorado, on February 21, 2013, followed by its second restaurant located in Colorado Springs, Colorado, on January 27, 2014. These revenue figures compare to the three and six months ended June 30, 2013 of revenues of approximately $622,800 and $956,400 when the Company's first restaurant in Denver, Colorado, opened on February 21, 2013.

Cost of Revenue - Restaurant Operating Expenses

For the three and six months ended June 30, 2014 and 2013, the Company's cost of revenue was approximately $1,463,600, $2,805,500, $686,500 and $1,102,200. The cost of revenue was attributable to the two restaurants, including the cost of food, alcohol, labor and other costs of the restaurant.

Cost of revenue, comprised of operating expenses at the SH Denver and BBSK Colorado Springs restaurants, includes variable expenses and fluctuates with sales volumes for expenses such as food and beverage costs, payroll and franchise fees. Fixed expenses, such as lease expenses at both restaurant locations, are also included.

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Operating Expenses - General and Administrative, Related Party Management Services and Selling and Marketing

For the three and six months ended June 30, 2014, the Company's operating expenses were approximately $2,262,500 and $4,607,400 compared to $1,377,000 and $2,448,700 for the same periods a year ago. The operating expenses in 2014 and 2013 were primarily related to expenses for preopening and ongoing operations. The Company's largest operating expense, excluding restaurant operating expenses, during the three and six months ended June 30, 2014 and 2013, were its general and administrative expenses totaling approximately $492,520, $1,304,500, $483,100 and $990,500. The increase in general and administrative costs is due to preopening and ongoing expenses for both restaurant locations primarily, including recurring corporate costs (such as payroll and related expenses). General and administrative for the three and six months ended June 30, 2014 and 2013, also included approximately $54,200, $157,600, $121,044 and $251,600 of (non-cash) stock-based compensation. Additionally, the Company incurred approximately $195,300, $285,900, $16,800 and $18,900 in selling and marketing expenses during the three and six months ended June 30, 2014 and 2013. The Company expects to incur general and administrative expenses going forward as it continues to grow its operations. The Company anticipates that its consolidated net loss will continue for the foreseeable future due to the overall expansion of the store locations and its subsidiaries and parent company overhead.

Depreciation and Amortization

For the three and six months ended June 30, 2014 and 2013, the Company's depreciation and amortization was approximately $111,000, $211,500, $73,200 and $102,300. Depreciation on fixed assets and amortization of the intangible asset for franchise fees began in February 2013 and continued through March 2014 with the opening of the SH Denver restaurant.

Other income (expense)

For the three and six months ended June 30, 2014 and 2013, the Company recognized other expense of approximately $26,130, $52,900, $51,100 and $460,400. The decrease in interest expense was primarily due to the lessor amount of promissory notes in 2014 compared to 2013 in regards to recognition of interest expense from the discount on the promissory notes being converted to common stock.

Liquidity and Capital Resources

As of June 30, 2014, the Company had working capital deficiency of approximately $259,800 and had approximately $191,700 of cash, which represents a $178,100 increase in cash from December 31, 2013. The Company's total assets increased as of June 30, 2014, when compared to December 31, 2013, due to the acquisition with BBHCLLC and BBSK's fixed asset additions.

As noted above, the Company incurred a net loss during the three and six months ended June 30, 2014, and 2013. Further, as of June 30, 2014, the Company had an accumulated deficit of approximately $7,093,000. The Company believes its Denver restaurant revenues (which began in February 2013) and its Colorado Springs restaurant revenues (which began in January 2014) which both are 51% owned by the Company, the overhead of the public company administration, coupled with the high cost of build out required for each restaurant under the Bourbon Brothers name, requires the Company to seek additional capital to help fund its operations in the near term. However, there can be no assurance that additional financing will be available to the Company on reasonable terms, if at all. The Company's ability to continue to pursue its plan of operations is dependent upon its ability to increase revenues and/or raise the capital necessary to meet its financial requirements on a continuing basis. The Company's continued implementation of its business plan is dependent on its future profitability and on additional debt or equity financing, which may not be available in amounts or on terms acceptable to the Company or at all. The Company believes the individual store performances in mid to late June 2014 reflect an ongoing effort to curb costs within food and labor, while also pursuing marketing activities to increase revenues during the third and fourth quarters of 2014.

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The Company's consolidated financial statements for the three and six months ended June 30, 2014, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Report of our Independent Registered Public Accounting Firm on the Company's consolidated financial statements as of and for the year ended December 31, 2013, includes a "going concern" explanatory paragraph which means that the auditors stated that conditions exist that raise doubt about the Company's ability to continue as a going concern. Liabilities

The Company's liabilities for convertible notes payable and accrued interest as of June 30, 2014, is approximately $627,000 compared to approximately $592,800 as of December 31, 2013. Accounts payable as of June 30, 2014, is approximately $149,900 compared to approximately $81,000 as of December 31, 2013. This increase is due to the acquisition of BBHC and its subsidiaries.

Operating Activities

Net cash used in operating activities was $1,263,095 in the six months ended June 30, 2014, as compared to net cash used in operating activities of approximately $1,374,500 in the same period of 2013. The decrease in net cash used in operating activities in 2014 (compared to 2013) was primarily due to: (i) the decrease in amortization of debt discount for the 2014 period, as compared to the 2013 period, and (ii) increases in prepaid expenses and security deposits, as well as the expansion of the business, as compared to the 2013 period.

Investing Activities

Net cash provided by investing activities in the six months ended June 30, 2014, was approximately $613,900, as compared to net cash used in investing activities of approximately $1,079,200 for the six months ended June 30, 2013. Net cash provided by investing activities for the six months ended June 30, 2014, was primarily the result of cash acquired in the BB Transaction while cash used in investing activities for the six months ended June 30, 2013, was primarily the result of cash used for purchases of property and equipment.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2014, was $827,300, compared to approximately $1,743,000 in the six months ended June 30, 2013. All $827,300 of cash provided by financing activities in 2014 was due from the sale of common stock.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our shareholders.

Contractual Cash Obligations

In April 2012, the Company entered into a lease that expires in August 2022, with the option to extend for two, five year periods, and requires lease payments of approximately $15,550 per month for the first year, escalating up to approximately $20,289 per month in the tenth year.

In January 2014, the Company entered into a 78 month lease with an unrelated party for its corporate office. The Company will pay approximately $5,800 per month escalating up to $6,000 per month in year 6.

In January 2014, the Company entered into a 120 month lease with a related party for its Colorado Springs-based restaurant. The Company will pay $32,083 per month escalating by approximately 10% every 60 months.

In July 2014, the Company entered into a ten-year, non-cancellable lease for the restaurant in Lone Tree, Colorado. The lease provides for an initial lease term of ten years for two, five-year renewal options. Rent payments are approximately $9,900 per month plus certain common area maintenance charges, and are subject to escalation provisions. This location is anticipated to open Fall 2014.

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Critical Accounting Policies

The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make a variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements.

Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increase, these judgments become even more subjective and complex. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operation and/or financial condition. Our significant accounting policies are disclosed in Note 2 to the Financial Statements included in this Form 10-Q. Our critical accounting policies are outlined below.

Fair Value Measurements

The carrying value of cash and non-related party payables approximates fair value due to their short maturities. The carrying value of non-related party notes payable approximates fair value based on effective interest rates estimated to approximate market. The carrying amount of payables to related parties are not practicable to estimate based on the related party nature of the underlying transactions.

Intangible assets

Intangible assets at June 30, 2014, represent franchise license costs for the Denver restaurant. These costs are amortized beginning with the restaurant opening over the ten-year term of the franchise agreement using the straight line method. The Company assesses potential impairment to intangible assets when there is evidence that events or changes in circumstances indicate that the recovery of the assets' carrying value is not recoverable.

Property and Equipment

The Company began capitalizing certain leasehold improvements, as well as equipment the Company purchased in 2013 and 2014 and began depreciating the assets when the Denver-based restaurant opened in February 2013 and when the Colorado Springs-based restaurant opened in January 2014. Management reviews property and equipment, including leasehold improvements, for impairment when events or circumstances indicate these assets might be impaired.

The Company's management considers, or will consider, such factors as the Company's history of losses and the disruptions in the overall economy in preparing an analysis of its property, including leasehold improvements, to determine if events or circumstances have caused these assets to be impaired. Management bases this assessment upon the carrying value versus the fair value of the asset and whether or not that difference is recoverable. Such assessment is to be performed on a restaurant-by-restaurant basis and is to include other relevant facts and circumstances including the physical condition of the asset. If management determines the carrying value of the restaurant assets exceeds the projected future undiscounted cash flows, an impairment charge would be recorded to reduce the carrying value of the restaurant assets to their fair value. Leasehold improvements, property and equipment are stated at cost. Internal costs directly associated with the acquisition, development and construction of a restaurant are capitalized. Expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, and leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Construction in process (leasehold improvements in process) and other property and equipment are not depreciated/amortized until placed in service. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss is reflected in earnings.

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The estimated useful lives are as follows:

Leasehold improvements 10 years Furniture and fixtures 3-10 years Equipment 3-7 years



Leases and Deferred Rent

The Company intends to lease substantially all of its restaurant properties, and in April 2012, the Company entered into a ten-year lease for its planned restaurant in Denver, Colorado. For leases that contain rent escalation clauses, the Company records the total rent payable during the lease term and recognizes expense on a straight-line basis over the initial lease term, including the "build-out" or "rent-holiday" period where no rent payments are typically due under the terms of the lease. Any difference between minimum rent and straight-line rent is recorded as deferred rent. Additionally, contingent rent expense based on a percentage of revenue is accrued and recorded to the extent it is expected to exceed minimum base rent per the lease agreement based on estimates of probable levels of revenue during the contingency period. Deferred rent also includes tenant improvement allowances the Company may receive, which is amortized as a reduction of rent expense, also on a straight-line basis over the initial term of the lease.

Revenue Recognition

The Company began revenue generating activities through the Denver restaurant as of February 21, 2013. The Company began revenue activities pursuant to Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, and applicable related guidance. Revenue is expected to be derived from the sale of prepared food and beverage and select retail items. Revenue is to be recognized at the time of sale and is to be reported on the Company's consolidated statements of operations net of sales taxes collected. The amount of sales tax collected is to be included in accrued expenses until the taxes are remitted to the appropriate taxing authorities.

Stock-Based Compensation

The Company accounts for stock-based compensation under Accounting Standards Codification ("ASC") 718, Share-Based Payment. ASC 718 requires the recognition of the cost of services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. ASC 718 also requires the stock-based compensation expense to be recognized over the period of service in exchange for the award (generally the vesting period). The Company estimates the fair value of each stock option at the grant date by using an option pricing model, typically the Black Scholes model.

Recently issued and adopted accounting pronouncements

The Company reviews new accounting standards as issued. In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts from Customers, which supersedes the revenue recognition in Revenue Recognition (Topic 05), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early adoption no permitted. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption. Management has not identified any other standards that it believes will have a significant impact on the Company's consolidated financial statements.


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