UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x[X]Quarterly report PURSUANT TO Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended:SeptemberJune 30, 20182019

 

or

 

¨[  ]Transition report PURSUANT TO Section 13 or 15(d) of the Exchange Act of 1934

 

For the transition period from ___________ to ______________

 

Commission File No.000-54226

 

 


ARC GROUP, INC.

(Exact name of registrant as specified in its charter)

 

ARC GROUP, INC.Nevada
(Exact name of registrant as specified in its charter)

Nevada 59-3649554

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

6327-4 Argyle Forest Blvd.

1409 Kingsley Ave., Ste. 2

Orange Park, FL 32073

(Address of principal executive offices)

Jacksonville, FL 32244

(Address of principal executive offices)

 

(904) 741-5500
(Registrant’s telephone number, including area code)

(904) 741-5500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1394 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ¨[  ] No x[X]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes x[X] No ¨[  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨[  ]Accelerated filer ¨[  ]
  
Non-accelerated filer¨ [  ]Smaller reporting companyx [X]
  
 Emerging growth company¨ [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨ [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

 

Yes ¨[  ] No x[X]

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN

BANKRUPTCY PROCEEDINGS DURING THE

PRECEDING FIVE YEARS

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

Yes x[X] No ¨[  ]

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: There were6,524,4277,080,771shares of the issuer’s Class A common stock, $0.01 par value per share, issued and outstanding on November 14, 2018.August 9, 2019.

 

 

 

 

TABLE OF CONTENTS

 

  Page
PART I – FINANCIAL INFORMATION1
   
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements1
   
 Condensed Consolidated Balance Sheets at SeptemberJune 30, 20182019 (unaudited) and December 31, 201720181
   
 Condensed Consolidated Statements of Operations for the three- and nine-monthsix-month periods ended SeptemberJune 30, 20182019 and September 30, 20172018 (unaudited)2
   
 Condensed Consolidated Statements of Cash Flows for the nine-monthsix-month periods ended SeptemberJune 30, 20182019 and September 30, 20172018 (unaudited)3
   
 Notes to Condensed Consolidated Financial Statements (unaudited)4
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations45
Item 4.30Controls and Procedures54
   
Item 4.PART II – OTHER INFORMATIONControls and Procedures43
  
PART II – OTHER INFORMATION43
Item 2.Unregistered Sales of Securities and Use of Proceeds4354
   
Item 6.Exhibits4454

 

 i 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ARC Group, Inc.

Condensed Consolidated Balance Sheets

 

 September 30, December 31, 
 2018  2017  June 30, 2019 December 31, 2018 
 (Unaudited)     (Unaudited)   
          
Assets                
                
Cash and cash equivalents $57,084  $145,346  $256,404  $345,228 
Accounts receivable, net  98,007   166,987   185,544   127,930 
Accounts receivable, net – related party  891   1,505 
Ad funds receivable, net  11,274   36,837   11,641   10,500 
Ad funds receivable, net – related party  1,761   2,280 
Other receivables  370,312   -   570,919   556,986 
Prepaid expenses  44,037   -   61,937   34,582 
Inventory  139,634   45,417   180,088   211,025 
Notes receivable, net  9,412   28,522   17,344   2,967 
Deposits  14,695   21,189 
Other current assets  3,011   5,923   10,229   8,078 
                
Total current assets  750,118   454,006   1,294,106   1,297,296 
                
Deposits  44,565   49,421 
Notes receivable, net of current portion  3,191   5,106   1,273   2,553 
Intangible assets  844,840   - 
Intangible assets, net  784,681   786,565 
Property and equipment, net  12,498,305   99,114   1,268,451   12,537,502 
Operating lease right-of-use assets  3,665,275   - 
Financing lease right-of-use assets, net  11,041,222   - 
                
Total assets $14,096,454  $558,226  $18,099,573  $14,673,337 
                
Liabilities and stockholders' deficit        
Liabilities and stockholders’ deficit        
                
Accounts payable and accrued expenses $1,317,984  $467,264  $1,919,674  $1,478,745 
Accounts payable and accrued expenses – related party  100,892   94,150   270,917   231,187 
Other payables  551,025   544,098 
Accrued interest  19,499   13,472   54,520   29,105 
Settlement agreements payable  273,428   264,997   281,859   276,269 
Accrued legal contingency  161,790   155,935   167,646   163,764 
Contingent consideration  55,356   199,682   55,356   55,356 
Deferred franchise fees  26,803   -   13,093   13,718 
Capital lease obligation  171,411   - 
Deferred compensation liability  312,000   - 
Notes payable – related party  523,777   30,503 
Operating lease liability  275,723   - 
Financing lease liability  191,361   175,764 
Seller payable  312,000   312,000 
Notes payable – related party, net  605,238   720,178 
Gift card liabilities  91,805   9,147   75,982   81,956 
                
Total current liabilities  3,054,745   1,235,150   4,774,394   4,082,140 
                
Deferred franchise fees, net of current portion  124,411   -   44,891   51,516 
Capital lease obligation, net of current portion  11,241,915   - 
Operating lease liability, net of current portion  3,426,660   - 
Financing lease liability net of current portion  11,110,573   11,210,146 
                
Total liabilities  14,421,071   1,235,150   19,356,518   15,343,802 
                
Stockholders' equity deficit:        
Stockholders’ deficit:        
                
Class A common stock – $0.01 par value: 100,000,000 shares authorized, 6,524,427 and 6,950,869 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively  65,245   69,509 
Series A convertible preferred stock – $0.01 par value: 1,000,000 shares authorized, 449,581 and -0- outstanding at September 30, 2018 and December 31, 2017, respectively  4,496   - 
Class A common stock – $0.01 par value: 100,000,000 shares authorized, 7,080,771 and 6,680,065 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively  70,808   66,801 
Series A convertible preferred stock – $0.01 par value: 1,000,000 shares authorized, 449,581 outstanding at June 30, 2019 and December 31, 2018, respectively  4,496   4,496 
Series B convertible preferred stock – $0.01 par value: 2,500,000 shares authorized, -0- outstanding at June 30, 2019 and December 31, 2018, respectively  -   - 
Additional paid-in capital  4,190,559   3,995,306   4,586,148   4,490,338 
Stock subscriptions payable  290,603   26,853   34,960   15,453 
Accumulated deficit  (4,875,520)  (4,768,592)  (5,953,357)  (5,247,553)
                
Total stockholders' deficit  (324,617)  (676,924)
Total stockholders’ deficit  (1,256,945)  (670,465)
                
Total liabilities and stockholders' deficit $14,096,454  $558,226 
Total liabilities and stockholders’ deficit $18,099,573  $14,673,337 

 

The accompanying notes are an integral part of these financial statements

 

 1 

 

 

ARC Group, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

 

 For the Three Months Ended  For the Nine Months Ended  For the Three Months Ended For the Six Months Ended 
 September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017  June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018 
                  
Revenue:                                
Restaurant sales $2,197,463  $841,214  $4,076,307  $2,595,679  $3,967,890  $839,827  $8,346,681  $1,767,104 
Franchise and other revenue  231,983   165,905   690,892   509,032   221,077   225,650   431,107   458,909 
Franchise and other revenue – related party  23,256   40,285   100,994   123,343   -   49,110   -   77,738 
                                
Total revenue  2,452,702   1,047,404   4,868,193   3,228,054 
Total net revenue  4,188,967   1,114,587   8,777,788   2,303,751 
                                
Operating expenses:                                
Restaurant operating costs:                                
Cost of sales  811,009   274,846   1,360,529   869,600   1,346,705   278,985   3,078,336   549,520 
Labor  624,848   293,035   1,222,554   857,933   1,418,560   343,167   2,871,008   597,706 
Occupancy  57,713   92,729   171,048   187,264   160,936   52,876   315,027   113,335 
Other operating expenses  474,165   198,354   911,356   555,664   839,784   170,831   1,683,145   325,451 
Professional fees  366,956   67,975   614,123   351,185   132,705   118,254   391,156   247,167 
Employee compensation expense  163,512   91,033   414,924   250,626   344,929   120,207   571,936   251,412 
General and administrative expenses  418,301   50,991   720,033   82,437   253,364   161,147   432,189   301,732 
                                
Total operating expenses  2,916,504   1,068,963   5,414,567   3,154,709   4,496,983   1,245,467   9,342,797   2,386,323 
                                
(Loss) / income from operations  (463,802)  (21,559)  (546,374)  73,345 
Loss from operations  (308,016)  (130,880)  (565,009)  (82,572)
                                
Other income:                                
Interest expense  (74,258)  (6,506)  (85,131)  (22,730)  (201,723)  (5,479)  (404,786)  (10,873)
Gain on sale of investment in Paradise on Wings – related party  -   24,000   -   24,000 
Gain on bargain purchase option  625,193   -   625,193   - 
Income from insurance proceeds  181,588   -   181,588   - 
Other income  10,334   3,976   95,862   13,060   36,590   80,828   82,403   85,528 
                                
Total other income  561,269   21,470   635,924   14,330   16,455   75,349   (140,795)  74,655 
                                
Net income / (loss) $97,467  $(89) $89,550  $87,675 
Net loss $(291,561) $(55,531) $(705,804) $(7,917)
                                
Net income / (loss) per share – basic $0.01  $(0.00) $0.01  $0.01 
Net loss per share – basic and fully diluted $(0.04) $(0.01) $(0.10) $(0.00)
                                
Net income / (loss) per share – fully diluted $0.01  $(0.00) $0.01  $0.01 
                
Weighted average number of shares outstanding – basic  6,524,427   6,773,041   6,795,644   6,768,839 
                
Weighted average number of shares outstanding – fully diluted  6,554,427   6,773,041   6,810,809   6,768,839 
Weighted average number of shares outstanding – basic and fully diluted  7,071,985   6,901,687   7,076,402   6,933,500 

 

The accompanying notes are an integral part of these financial statements

 

 2 

 

 

ARC Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 For the Nine Months Ended September 30,  For the Six Months Ended June 30, 
 2018  2017  2019 2018 
          
Cash flows from operating activities                
                
Net income $89,550  $87,675 
Adjustments to reconcile net income to net cash provided by operating activities:        
Net loss $(705,804) $(7,917)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation expense  68,688   11,902   101,979   19,207 
Amortization of operating lease right-of-use assets  167,504   - 
Amortization of financing lease right-of-use assets  285,454   - 
Amortization of intangible assets  1,884   - 
Amortization of debt discount  2,596       15,438   - 
Stock-based compensation expense  303,503   233,740   110,623   39,126 
Stock-based payment for consulting fees due  -   30,000 
Gain on sale of investment in Paradise on Wings – related party  -   (24,000)
Gain on bargain purchase  (625,193)  - 
Changes in operating activities, net of the acquisition of the Fat Patty's franchise:        
Restricted cash  -   (13,076)
Gain from insurance recoveries on impaired fixed assets  (100,000)  - 
Changes in operating activities, net of acquisition of Fat Patty’s concept:        
Accounts receivable  68,980   18,424   (57,614)  122,624 
Accounts receivable – related party  614   11,512   -   772 
Ad fund receivable  25,563   (37,093)  (1,141)  26,130 
Ad fund receivable – related party  519   (2,601)  -   515 
Other receivables  (370,312)  (24,000)  (13,933)  - 
Prepaid expenses  (44,037)  -   (27,355)  - 
Inventory  (2,793)  4,383   30,937   (6,864)
Other assets  9,406   (14,067)
Other current assets  2,705   2,417 
Accounts payable and accrued liabilities  730,747   (31,522)  456,557   31,930 
Accrued liabilities – related party  6,742   (41,910)
Advertising fund liabilities  -   13,076 
Accounts payable and accrued liabilities – related party  65,145   (19,093)
Settlement agreements payable  8,431   8,431   5,590   5,590 
Accrued legal contingency  5,855   5,856 
Accrued legal settlement  3,882   3,882 
Deferred franchise fees  (45,264)  -   (7,250)  (38,014)
Gift card liabilities  2,192   5,889   (5,974)  - 
Other liabilities  -   2,999 
                
Net cash provided by operating activities  235,787   242,619   328,627   183,304 
                
Cash flows from investing activities                
                
Issuances of notes receivable  (15,000)  - 
Repayments of notes receivable  21,025   54,741   1,903   13,946 
Insurance recoveries for impaired fixed assets  100,000   - 
Contingent consideration  (144,326)  -   -   (143,326)
Sale of investment in Paradise on Wings  -   24,000 
Cash acquired in business acquisition  7,100   - 
Purchases of fixed assets  (227,584)  (33,055)  (160,097)  (137,952)
                
Net cash (used) / provided by investing activities  (343,785)  45,686 
Net cash used by investing activities  (73,194)  (267,332)
                
Cash flows from financing activities                
                
Proceeds from issuance of notes payable – related party  106,410   -   1,075,893   69,551 
Payments on capital lease obligation  (86,674)  - 
Payments on operating lease liability  (129,903)  - 
Payments on financing lease liability  (83,976)  - 
Repayments of notes payable – related party  -   (206,324)  (1,206,271)  (97,877)
                
Net cash provided / (used) by financing activities  19,736   (206,324)
Net cash used by financing activities  (344,257)  (28,326)
                
Net (decrease) / increase in cash and cash equivalents  (88,262)  81,981 
Net decrease in cash and cash equivalents  (88,824)  (112,354)
Cash and cash equivalents, beginning of period  145,346   50,923   345,228   145,346 
                
Cash and cash equivalents, end of period $57,084  $132,904  $256,404  $32,992 
                
Supplemental disclosure of cash flow information                
                
Cash paid for interest $-  $-  $354,462  $- 
Cash paid for income taxes $-  $-  $-  $- 
                
Schedule of non-cash financing activities        
Schedule of non-cash transactions        
                
Preferred stock issued in exchange for common stock $4,496  $-  $-  $4,496 
Property and equipment acquired through accounts payable $126,000  $-  $-  $126,000 
Acquisition of Fat Patty's franchise with note payable and deferred compensation liability $852,000  $- 
Property and equipment acquired with capital lease $11,500,000  $- 
Recognition of operating lease liability and right-of-use assets $3,832,779  $- 
Recognition of financing lease liability and right-of-use assets $11,326,676  $- 

 

The accompanying notes are an integral part of these financial statements

 

 3 

 

 

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1. Description of Business

 

ARC Group, Inc., a Nevada corporation (the “Company”), was incorporated in April 2000. The Company’s business is focused primarily on the development of theDick’s Wings & Grill® franchise (“Dick’s Wings”) andFat Patty’s® franchisesconcept (“Fat Patty’s”) and the acquisition of financial interests in other restaurant brands. The Dick’s Wings concept is currently comprised of its traditional restaurants like itsDick’s Wings & Grill® restaurants and non-traditional units like the Dick’s Wings concession stands that the Company has at TIAA Bank Field (formerly EverBank Field) and Jacksonville Veterans Memorial Arena in Jacksonville, Florida. The Fat Patty’s concept is currently comprised of its traditional Fat Patty’s restaurants.

 

On December 19, 2016, the Company acquired all of the issued and outstanding membership interests of Seediv, LLC, a Louisiana limited liability company (“Seediv”), for $600,000 and an earn-out payment. Seediv is the owner and operator of the Dick’s Wings & Grill restaurant located at 100 Marketside Avenue, Suite 301, in the Nocatee development in Ponte Vedra, Florida 32081 (the “Nocatee Restaurant”) and the Dick’s Wings & Grill restaurant located at 6055 Youngerman Circle in Argyle Village in Jacksonville, Florida 32244 (the “Youngerman Circle Restaurant”; together with the Nocatee Restaurant, the “Nocatee and Youngerman Restaurants”). A description of the Company’s acquisition of Seediv is set forth herein underNote 5 – Acquisition of Seediv.

On August 30, 2018, the Company closed upon an asset purchase agreement for the Fat Patty’s franchise (“Fat Patty’s”).Patty’s. Fat Patty’s is comprised of four company-owned restaurants located at 1442 Winchester Avenue, Ashland, Kentucky 41101, 5156 WV 34, Hurricane, West Virginia 25526, 3401 Rt. 60 East, Barboursville, West Virginia 25504, and 1935 Third Avenue, Huntington, West Virginia 25702 (collectively, the “Fat Patty’s Restaurants”).A description of the Company’s acquisition of SeedivFat Patty’s is set forth herein underNote 64. – Acquisition of Fat Patty’s.

At SeptemberOn October 30, 2018, the Company entered into an agreement to acquire theTilted Kilt Eatery and Pub® restaurant franchise (“Tilted Kilt”). At June 30, 2018, the Tilted Kilt franchise was comprised of 28 restaurants operating in 14 states and Canada, of which two were company owned and operated and the remaining 26 were franchise locations. A description of the transaction is set forth herein underNote 5. Agreement to Acquire Tilted Kilt.

On November 7, 2018, the Company became a franchisee of a Tilted Kilt restaurant located in Gonzales, Louisiana.

At June 30, 2019, the Company had 2120 Dick’s Wings restaurants and three Dick’s Wings concession stands. Of the 2120 restaurants, 16 were located in Florida and fivefour were located in Georgia. The Company’s concession stands were also located in Florida. TwoFour of the Company’s restaurants were owned by the Company, and the remaining 1916 restaurants were owned and operated by franchisees. The Company’s concession stands were also owned by the Company. In addition, the Company had four Fat Patty’s restaurants at SeptemberJune 30, 2018.2019. Of the four restaurants, three were located in West Virginia and one was located in Kentucky. All four of the restaurants were owned by the Company. The Company also had its Tilted Kilt restaurant in Louisiana for which it serves as a franchisee.

 

Note 2. Basis of Presentation and Significant Accounting Policies

 

Interim Financial Information

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Seediv, LLC.subsidiaries. All intercompany accounts and transactions were eliminated in consolidation.

 

 4 

 

 

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The accompanyingunaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Certain information and footnotes disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. Notwithstanding this, the Company believes that the disclosures herein are adequate to make the information presented not misleading.

 

The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 20172018 included in the Company’s Annual Report on Form 10-K. Information presented as of December 31, 20172018 is derived from the audited consolidated financial statements. The results of operations for the three- and nine-monthsix-month periods ended SeptemberJune 30, 20182019 are not necessarily indicative of the results that the Company will have for any subsequent quarter or full fiscal year.

 

This summary of significant accounting policies is provided to assist the reader in understanding the Company’s financial statements. The financial statements and notes thereto are representations of the Company’s management. The Company’s management is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and have been consistently applied in the preparation of the financial statements.

 

Estimates

 

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

Going ConcernRestatement

 

Prior to December 31, 2017, certainThe Company has restated its previously issued condensed consolidated statement of operations for the three- and six-month periods ended June 30, 2018. The impact of the restatement is more specifically described herein underNote 20. Restatement of Previously Issued Condensed Consolidated Financial Statements.

Going Concern

The company concluded that facts about the Company’s financial resultsexisted that created an uncertainty about the Company’s ability to continue as a going concern.concern as of December 31, 2016.The Company generated net income of $344,740 and cash flows from operations of $248,345 during the year ended December 31, 2017, and while2017. While the Company had a working capital deficit of $2,304,627$2,784,844 at September 30,December 31, 2018 and a net loss from operations of $546,374$282,483 during the nine-month periodyear ended September 30,December 31, 2018, it generated cash flows from operations of $235,787$478,238 during the nine-month periodyear ended September 30,December 31, 2018. The improvement in cash flows during the year ended December 31, 2017 was due primarily to the Company’s acquisition of Seedivtwo Company-owned Dick’s Wings restaurants in December 2016 and its2016. The improvement in cash flows during the year ended December 31, 2018 was due primarily to the Company’s acquisition of Fat Patty’s in August 2018. In addition,

5

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

While the Company hasgenerated a net loss of $705,804 during the six-month period ended June 30, 2019 and had a working capital deficit of $3,480,288 at June 30, 2019, the Company generated cash flow from operating activities of $328,627 during the six-month period ended June 30, 2019 and received continued financial support from related parties.parties during the six-month period ended June 30, 2019 and the years ended December 31, 2018 and 2017. As a result of these factors, the Company believesconcluded that the substantial doubt about its ability to continue as a going concern had been alleviated as of December 31, 2017 and SeptemberJune 30, 2018.

5

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)2019.

 

Segment Disclosure

 

The Company has bothCompany-owned restaurants and franchised restaurants, all of which operate in the full-service casual dining industry in the United States. Pursuant to the standards of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280,Segment Reporting (“ASC 280”), the Company’s Chief Executive Officer, and President, who comprisecomprises the Company'sCompany’s Chief Operating Decision Maker function for the purposes of ASC 280, concluded that the Company operateshas two segments for reporting purposes, which are Company-owned restaurants and franchise operations.

Other Receivables

Other receivableswas comprised primarily of receipts from credit card sales by Company-owned Fat Patty’s restaurants that occurred after the Company completed the acquisition of Fat Patty’s that were held by the former owner of Fat Patty’s, all of which are expected to be collected in full by the Company during the next 12 months.

Intangible Assets, Net

The Company acquired various intangible assets in connection with the acquisition of Fat Patty’s. The intangible assets were comprised of a tradename and a non-compete agreement. The Company amortizes the non-compete agreement on a straight-line basis over the expected period of benefit, which is five years. The tradename has an indefinite life and is not subject to amortization but tested for impairment on an annual basis. The Company recognized $942 and $1,884 of amortization expense for the non-compete agreement during the three- and six-month periods ended June 30, 2019.

Other Payables

Other payables was comprised primarily of accounts payable owed to the former owner of Fat Patty’s for alcohol and other items purchased by him in connection with the operation of the concept.

Revenue Recognition

The Company generates revenue from two primary sources: (a) retail sales at company-operated restaurants; and (b) franchise revenue, which consists of royalties based on a percentage of sales reported by franchised restaurants, funds contributed by franchisees to the Company’s general advertising fund, and initial and renewal franchise license fees.

6

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Revenue From Company-Owned Restaurants

Revenue from company-owned restaurants is primarily recognized as customers pay for products at the point of sale. The Company reports Company-owned restaurant revenues net of sales and use taxes collected from customers and remitted to governmental taxing authorities.

Revenue From Franchised Restaurants

The Company grants individual restaurant franchises to operators in exchange for initial franchise license fees and continuing royalty payments.

Initial and renewal franchise license fees are payable by the franchisee upon a new restaurant opening or renewal of an existing franchise agreement. Under franchise agreements, the Company provides franchisees with: (a) a franchise license, which includes a non-exclusive license to our intellectual property for the duration of the franchise agreement and where the Company manages a marketing or co-op advertising fund, advertising and promotion management; (b) pre-opening services, such as training and inspections; and (c) ongoing services, such as development of training materials and menu items and restaurant monitoring and inspections. The services that the Company provides are highly interrelated and dependent on the franchise license so the Company does not consider the services to be individually distinct and therefore accounts for them as a single segment for reporting purposes.performance obligation. The performance obligation is satisfied by providing a right to use the Company’s intellectual property over the term of each franchise agreement. Accordingly, initial and renewal franchise fees are recognized as revenue on a straight-line basis over the term of the respective agreement.

 

Revenue RecognitionThe Company’s performance obligation under area development agreements generally consists of an obligation to grant exclusive development rights for a particular geographic region over a stated term. These development rights are not distinct from franchise agreements and are creditable towards the initial franchise license fee, so upfront fees paid by franchisees for exclusive development rights are deferred and allocated to the appropriate franchise restaurant when the franchise agreement is executed.

 

Franchise royalty revenues represents sales-based royalties that are related entirely to the Company’s performance obligation under the franchise agreement. Continuing franchise royalty revenues are based on a percentage of monthly sales and are recognized on the accrual basis as franchise sales occur. In certain circumstances, the Company may reduce or waive franchise license fees and/or the franchise royalty percentage for a period of time.

Franchises contributions to the Company’s general advertising funds are calculated as a percentage of monthly sales. Contributions to the fund generally represent sales-based or fixed monthly fee amounts that are related entirely to the Company’s performance obligation under the franchise agreement and are recognized as franchise sales occur.

7

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

ASC Topic 606

On January 1, 2018, the Company adopted the provisions of FASB ASC Topic 606,Revenue From Contracts With Customers (“ASC 606”). ASC 606 supersedes the current revenue recognition guidance, including industry-specific guidance. ASC 606provides a single framework in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services.

The Company adopted this new guidance effective the first day of fiscal year 2018, using themodified retrospective method of adoption.adoption. Under this method, the cumulative effect of initially adopting the guidance was recognized as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative period has not been adjusted and continues to be reported under the previous revenue recognition guidance. The details of the significant changes and quantitative impact of the changes are discussed below.

 

Franchise Fees

 

ASC 606 impacted the timing of recognition of franchise fees. Under previous guidance, these fees were typically recognized upon the opening of restaurants. Under ASC 606, the fees are deferred and recognized as revenue over the term of the individual franchise agreements. The effect of the required deferral of fees received in a given year will be mitigated by the recognition of revenue from fees retrospectively deferred from prior years. As a result of the adoption of ASC 606, theThe Company recognized $3,625 and $7,250 of deferred franchise fees inas income during the amountthree- and six-month periods ended June 30, 2019, and recognized $7,125 and $12,750 of $196,478 on its condensed consolidated balance sheetsdeferred franchise fees as income during the three- and six-month periods ended June 30, 2018, respectively. The carrying value of January 1, 2018 and an increase in its accumulated deficit by the same amount on that date.Company’s deferred franchised fees was $57,984 at June 30, 2019.

 

Advertising Funds

 

ASC 606 also impacted the accounting for transactions related to the Company’s general advertising fund. Under previous guidance, franchisee contributions to and expenditures by the fund were not included in the Company’s condensed consolidated financial statements. Under ASC 606, the Company records contributions to and expenditures by the fund as revenue and expenses within the Company’s condensed consolidated financial statements. The Company recognized contributions to and expenditures by the fund of $46,816$31,645 and $145,076$63,868 during the three- and nine-monthsix-month periods ended SeptemberJune 30, 2018.2019, and recognized contributions to and expenditures by the fund of $45,029 and $98,260 during the three- and six-month periods ended June 30, 2018, respectively.

 

Gift Card Funds

 

Additionally, ASC 606 impacted the accounting for transactions related to the Company’s gift card program. Under previous guidance, estimated breakage income on gift cards was deferred until it was deemed remote that the unused gift card balance would be redeemed. Under ASC 606, breakage income on gift cards is recognized as gift cards are utilized. ThisThe effect of this change on the Company’s condensed consolidated financial statements was negligible.

 

 6

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Impact on Financial Statements

The following table summarizes the impacts of adopting the revenue recognition standard on the Company’s condensed consolidated financial statements as of and for the three- and nine-month periods ended September 30, 2018:

     Adjustments    
  As
Reported		  

Franchise

Fees

  

Advertising

Funds

  Balances
Without
Adoption		 
Condensed Consolidated Balance Sheets                
Deferred franchise fees $26,803  $(26,803) $—  $— 
Total current liabilities  3,054,745   (26,803)  —   3,027,942 
Deferred franchise fees, net of current portion  124,411   (124,411)  —   — 
Total liabilities  14,421,071   (124,411)  —   14,296,660 
Accumulated deficit  (4,875,520)  151,214   —   (4,724,306)
Total stockholders’ deficit  (324,617)  151,214   —   (173,403)
                 
Condensed Consolidated Statements of Operations – Three-Month Period Ended September 30, 2018                
Franchise and other revenue $231,983  $(6,500) $(42,806) $182,677 
Franchise and other revenue – related party  23,256   (750)  (4,010)  18,496 
Total revenue  2,452,702   (7,250)  (46,816)  2,398,636 
General and administrative expenses  418,301   —   (46,816)  371,485 
Total operating expenses  2,916,504   —   (46,816)  2,869,688 
Loss from operations  (463,802)  (7,250)  —   (471,052)
Net income  97,467   (7,250)  —   90,217 
                 
Condensed Consolidated Statements of Operations – Nine-Month Period Ended September 30, 2018                
Franchise and other revenue $690,892  $(19,250) $(125,958) $545,684 
Franchise and other revenue – related party  100,994   (26,014)  (19,118)  55,862 
Total revenue  4,868,193   (45,264)  (145,076)  4,677,853 
General and administrative expenses  720,033   —   (145,076)  574,957 
Total operating expenses  5,414,567   —   (145,076)  5,269,491 
Loss from operations  (546,374)  (45,264)  —   (591,638)
Net income  89,550   (45,264)  —   44,286 
                 
Condensed Consolidated Statement of Cash Flows                
Cash flows from operating activities:                
Net income $89,550  $(45,264) $—  $44,286 
Changes in operating assets and liabilities:                
Deferred franchise fees  (45,264)  45,264   —   — 

78 

 

 

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Disaggregation of Revenue

 

The following table disaggregate revenue by primary geographical market and source:

 

 

Three Months

Ended

September 30,
2018

 

Nine Months
Ended

September 30,
2018

  Three Months Ended
June 30, 2019		 Three Months Ended
June 30, 2018		 Six Months Ended
June 30, 2019		 Six Months Ended
June 30, 2018		 
Primary geographic markets        
Primary Geographic Markets                
Florida $1,377,676  $3,694,208  $1,335,909  $1,065,922  $2,652,463  $2,204,792 
Georgia  47,050   146,009   267,966   48,665   567,010   98,959 
Kentucky  232,744   232,744   651,565   —   1,291,376   — 
Louisiana  227,067   —   529,343   — 
West Virginia  795,232   795,232   1,706,460   —   3,737,596   — 
Total revenue $2,452,702  $4,868,193  $4,188,967  $1,114,587  $8,777,788  $2,303,751 
                        
Sources of revenue        
Sources of Revenue         
Restaurant sales $2,197,463  $4,076,307  $3,967,890  $839,827  $8,346,681  $1,767,104 
Royalties  197,369   591,847   180,356   194,448   354,538   394,479 
Franchise fees  7,250   45,264   3,625   29,389   7,250   38,014 
Advertising fund fees  46,816   145,077   31,645   45,029   63,868   98,260 
Other revenue  3,804   9,698   5,451   5,894   5,451   5,894 
Total revenue $2,452,702  $4,868,193  $4,188,967  $1,114,587  $8,777,788  $2,303,751 

 

Contract BalancesDeferred Revenue

Deferred revenue consists of contract liabilities resulting from initial and renewal franchise license fees paid by franchisees, which are generally recognized on a straight-line basis over the term of the underlying franchise agreement, as well as upfront development fees paid by franchisees, which are generally recognized on a straight-line basis over the term of the underlying franchise agreement once it is executed or if the development agreement is terminated.

 

The following table presents changes in deferred franchise fees as of and for the nine-monthsix-month period ended SeptemberJune 30, 2018:2019:

 

 Total
Liabilities		  Total Liabilities 
Deferred franchise fees at January 1, 2018 $196,478 
Deferred franchise fees at December 31, 2018 $65,234 
Revenue recognized during the period  (45,264)  (7,250)
New deferrals due to cash received  —   — 
Deferred franchise fees at September 30, 2018 $151,214 
Deferred franchise fees at June 30, 2019 $57,984 

 

9

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Anticipated Future Recognition of Deferred Franchise Fees

 

The following table presents the estimated franchise fees to be recognized in the future related to performance obligations that were unsatisfied at SeptemberJune 30, 2018:2019:

 

Year Franchise
Fees
Recognized		  Franchise
Fees to be Recognized		 
2018 $7,250 
2019  25,719 
2019 (remaining six months) $6,468 
2020  24,000   12,000 
2021  22,923   10,926 
2022  21,000   9,000 
2023  6,637 
Thereafter  50,322   12,953 
Total $151,214  $57,984 

Recent Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02,Leases(“ASU 2016-02”), establishing ASC Topic 842,Leases (“ASC Topic 842”), which modified and superseded the guidance under ASC Topic 840,Leases (“ASC Topic 840”). The FASB subsequently issued several other Accounting Standards Updates, including ASU 2018-11 and ASU 2018-12, which among other things provide for a practical expedient related to the recognition of the cumulative effect on retained earnings resulting from the adoption of the pronouncements.

ASC Topic 842 modifies the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted for in the same manner as operating leases under ASC Topic 840.

The Company adopted ASC Topic 842 effective January 1, 2019 applying the modified retrospective transition approach. Under this approach, results for reporting periods beginning after January 1, 2019, are presented under Topic 842, while prior periods are not adjusted and continue to be reported under the accounting standards in effect for those periods. The Company recognized $3,832,779 and $3,832,286 of additional assets and liabilities, respectively, in connection with its operating leases upon the adoption of ASC Topic 842 on January 1, 2019. The Company did not recognize any additional assets or liabilities in connection with itsfinancing lease upon the adoption of ASC Topic 842 on January 1, 2019.

 

The estimated franchise fees for 2018 represent the fees to be recognized during the remainderCompany determines whether a contract is or contains a lease at inception of the 2018 fiscal year.contract based on whether an identified asset exists and whether the Company has the right to obtain substantially all of the benefit of the assets and to control its use over the full term of the agreement. When available, the Company uses the rate implicit in the lease to discount lease payments to present value. However, none of our leases provide a readily determinable implicit rate. Therefore, the Company estimated its incremental borrowing rate considering both the revolving credit rates and a credit notching approach to discount the lease payments based on information available at lease commencement. There are no material residual value guarantees and no restrictions or covenants included in the Company’s lease agreements. Certain of the Company’s leases include provisions for variable payments. These variable payments are typically determined based on a measure of throughput or actual days or another measure of usage and are not included in the calculation of lease liabilities and right-of-use assets.

 

 810 

 

 

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Other Receivables and Payables

Other receivableswas comprised primarily of receipts from credit card sales by Company-owned Fat Patty’s restaurants that occurred after the Company completed the acquisition of Fat Patty’s that were held by the former owner of Fat Patty’s, all of which are expected to be collected in full by the Company during the next 12 months. Other payables included within accounts payable and accrued expenses consisted of $243,261 of accounts payable owed to the former owner of Fat Patty’s for alcohol and other items purchase by the former owner of Fat Patty’s in connection with the operation of the franchise.

Intangible Assets

 

The Company acquired various intangible assets in connection withelected the acquisitionpackage of Fat Patty’s. Intangible assets include a tradename, an assembled workforce and a non-compete agreement. The Company amortizes the assembled workforce and non-compete agreement on a straight-line basis over the expected period of benefit,practical expedients available for implementation, which is three and five years, respectively. The tradename has an indefinite life and is not subject to amortization but tested for impairment on an annual basis. The amount of amortization recognizedallows for the assembled workforce and non-compete agreement was $759 duringfollowing:

●An entity need not reassess whether any expired or existing contracts are or contain leases;
●An entity need not reassess the lease classification for any expired or existing leases; and
●An entity need not reassess initial indirect costs for any existing leases.

Furthermore, the three- and nine-month periods ended September 30, 2018.Company elected the optional transition method to make January 1, 2019 the initial application date of the standard. This package of practical expedients allows entities to account for their existing leases for the remainder of their respective lease terms following the previous accounting guidance.

 

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases(“ASU 2016-02”). ASU 2016-02 requires that lease arrangements longer than 12 months result in the lessee recognizing a lease asset and liability. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluatingalso elected to adopt the impact thatoptional transition practical expedient provided in ASU 2018-01 to not evaluate under ASC Topic 842 for existing or expired land easements prior to the adoption of ASU 2016-02 will have on its financial statements.

In November 2016,application date to determine if they meet the FASB issued ASU 2016-18,Statement of Cash Flows: Restricted Cash (“ASU 2016-18”). ASU 2016-18 provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017. The adoption of ASU 2016-18 did not have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definitiondefinition of a Business (“ASU 2017-01”). ASU 2017-01 provides a more robust framework to use in determining when a set of assets and activities is considered a business. ASU 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for certain transactions. The adoption of ASU 2017-01 did not have a material impact on the Company’s financial statements.lease.

 

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740)(“ASU 2018-05”).ASU 2018-05 provides guidance on accounting for the income tax effectsThe impact of the Tax Cuts and Jobs Act of 2017 (the “Act”), which impacts U.S. corporate tax rates, business-related exclusions, and deductions and credits. The Act also has tax consequences for many companies that operate internationally. The guidance in ASU 2018-05 addresses situations in which the accounting for certain income tax effects of the Act is incomplete by the time financial statements are issued for the reporting period that includes the enactment date of December 22, 2017. The new guidance requires companies to report provisional amounts if a reasonable estimate of the tax impact can be determined. If a provisional amount cannot be reasonably determined, the entity should continue to apply ASC Topic 740 based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted.842 is more specifically described herein underNote 12. Leases.The adoption of ASU 2018-05 did not have a material impact on the Company’s financial statements.

9

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The Company reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to the Company’s operations or that no material effect is expected on the Company’s condensed consolidated financial statements as a result of future adoption.

 

Note 3. Net IncomeLoss Per Share

 

The Company calculates basic and diluted net incomeloss per share in accordance with ASC Topic 260,Earnings per Share. Basic net incomeloss per share is based on the weighted-average number of shares of the Company’s common stock outstanding during the applicable period and is calculated by dividing the reported net incomeloss for the applicable period by the weighted-average number of shares of common stock outstanding during the applicable period. Diluted net incomeloss per share is calculated by dividing the reported net incomeloss for the applicable period by the weighted-average number of shares of common stock outstanding during the applicable period, as adjusted to give effect to the exercise or conversion of all potentially dilutive securities outstanding at the end of the applicable period.

 

The following table sets forthAll of the shares of common stock underlying exercisable or convertible securities that were outstanding at June 30, 2019 and 2018 were excluded from the computation of basic and diluted net income / (loss)loss per share:

  Three Months Ended  Nine Months Ended 
  September 30,
2018		  September 30,
2017		  September 30,
2018		  September 30,
2017		 
Numerator                
Net income / (loss) $97,467  $(89) $89,550  $87,675 
                 
Denominator                
Weighted average shares outstanding — basic  6,524,427   6,773,041   6,795,644   6,768,839 
Dilutive effect of potential shares of common stock  30,000   -0-   15,165   -0- 
Weighted average shares outstanding – basic  6,554,427   6,773,041   6,810,809   6,768,839 
Basic net income / (loss) per share $0.01  $(0.00) $0.01  $0.01 
Fully diluted net income / (loss) per share $0.01  $(0.00) $0.01  $0.01 

10

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 4. Investment in Paradise on Wings

On January 20, 2014, the Company entered into a contribution agreement with Paradise on Wings Franchise Group, LLC, a Utah limited liability company that is the franchisor of theWing Nutz® brand of restaurants (“Paradise on Wings”). In connection with the execution of the contribution agreement, on January 20, 2014, the Company and the incumbent members of Paradise on Wings entered into an amended and restated operating agreement of Paradise on Wings to reflect the terms of the contribution agreement. The transactions contemplated by the contribution agreement and operating agreement were completed on January 20, 2014.

On September 30, 2017, the Company sold its 50% ownership interest in Paradise on Wings to Seenu G. Kasturi, the Company’s President, Chief Financial Officer and Chairman of the Board of Directors, for $24,000.

The Company performed a review of its investment in Paradise on Wings at the end of its 2016 fiscal year and determined that an “other-than-temporary” decline in the value of the investment had occurred and that a loss on impairment equal to its then carrying amount of $348,143 should be recognized. Accordingly, the carrying amount of the Company’s investment in Paradise on Wings was zero at December 31, 2017 and 2016. In addition, because the carrying amount of the Company’s investment in Paradise on Wings was zero at December 31, 2017 and 2016, the amount of the Company’s share of net loss incurred by Paradise on Wings that was recognized by the Company during the three- and nine-month periods ended September 30, 2017 was zero.

Set forth below is a summary of the unaudited income statement of Paradise on Wings for the three- and nine-monthsix-month periods ended SeptemberJune 30, 2017 provided2019 and 2018, respectively, because they were anti-dilutive. As a result, basic net loss per share was equal to diluted net loss per share for the Company by Paradise on Wings:three- and six-month periods ended June 30, 2019 and 2018, respectively.

Statement of Operations 

Three Months

Ended

September 30,
2017

  

Nine Months

Ended

September 30,
2017

 
Revenue $74,831  $226,273 
Operating expenses  (234,525)  (484,436)
Loss from operations  (159,694)  (258,163)
Other expense  (104,203)  (182,398)
Net loss $(263,897) $(440,561)
         
Company’s share of net loss $(131,949) $(220,281)

 

 11 

 

 

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Set forth below is a summary of the unaudited balance sheet of Paradise on Wings at September 30, 2017 provided to the Company by Paradise on Wings:

Balance Sheet September 30,
2017		 
Current assets $119,837 
Equity investment  -0- 
Total assets $119,837 
     
Total liabilities $110,120 
Equity  9,717 
Total liabilities and equity $119,837 

Note 5. Acquisition of Seediv

On December 19, 2016, the Company entered into a membership interest purchase agreement with Seenu G. Kasturi pursuant to which the Company agreed to acquire all of the issued and outstanding membership interests of Seediv from Mr. Kasturi. Seediv is the owner and operator of the Nocatee and Youngerman Restaurants. The closing of the acquisition occurred simultaneously with the execution of the membership interest purchase agreement by the Company and Mr. Kasturi on December 19, 2016.

In connection with the acquisition of Seediv, the Company agreed to make an earnout payment to Mr. Kasturi and recorded $20,897 of contingent consideration as the estimated initial fair value of the earnout payment. A description of the manner by which the earnout payment was valued is set forth herein underNote 10. Fair Value Measurements. As of December 31, 2017, the Company calculated the earnout payment in accordance with the provisions of the membership interest purchase agreement and determined that the earnout payment was $199,682. The Company made a payment of $144,326 to Mr. Kasturi with respect to the earnout payment during the three- and nine-month periods ended September 30, 2018. Accordingly, the outstanding balance of contingent consideration was $55,356 and $199,682 at September 30, 2018 and December 31, 2017, respectively.

 

Note 6.4. Acquisition of Fat Patty’s

 

On August 3, 2018, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”)asset purchase agreement with CSA, Inc., a West Virginia corporation (“CSA”), CSA Investments, LLC, a West Virginia limited liability company (“CSA Investments”), CSA of Teays Valley, Inc., a West Virginia corporation (“CSA Teays Valley”), CSA, Inc. of Ashland, a Kentucky corporation (“CSA Ashland”), Fat Patty’s, LLC, a West Virginia limited liability company (“FPLLC”), and Clint Artrip, an individual (“Artrip”; together with CSA, CSA Investments, CSA Teays Valley, and CSA Ashland, FPLLC, the “Sellers”), pursuant to which the Company agreed to acquire all of the assets associated with Fat Patty’s (the “Fat Patty’s Acquisition”). The Company agreed to pay the Sellers $12,352,000 for the assets, of which $12,000,000 was to be paid to the Sellers at closing, $40,000 was to be paid to the Sellers within 10 days after the closing and the remaining $312,000 will be paid to the Sellers on the first anniversary of the closing. The closing of the Fat Patty’s Acquisition occurred on August 30, 2018, however, as discussed below, the Company entered into a separate related agreement with a third party that resulted in a direct transfer of the Properties (as defined below) from the Sellers to the third party. Accordingly, in substance, the Company only acquired the net assets detailed below for a purchase price of $852,000.

 

12

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

In connection with the Fat Patty’s Acquisition, the Company entered into a secured convertible promissory note with Seenu G. Kasturi on August 30, 2018 pursuant to which the Company borrowed $622,929 from Mr. Kasturi to help finance the Fat Patty’s Acquisition. All principal and accrued but unpaid interest is due and payable by the Company in full on the earlier of (i) the fifth (5th) anniversary of the date of the note, or (ii) the date that Mr. Kasturi demands repayment in full by providing written notice thereof to the Company. Interest accrues at the rate of six percent (6%) per annum and is payable in full on the maturity date. Mr. Kasturi has the right, at any time during the term of the note and from time to time, to convert all of any portion of the outstanding principal of the note, together with accrued and unpaid interest payable thereon, into shares of the Company’s common stock at a conversion rate of $1.36 per share. The note is secured by all of the assets of the Company.

 

Also on August 3, 2018,the Company entered into a purchase and sale agreement with Store Capital Acquisitions, LLC, a Delaware limited liability company (“Store Capital”), pursuant to which the Company agreed to sell all of the real property acquired in the Fat Patty’s Acquisition to Store Capital (the “Property Acquisition”). The real property consists of the four properties upon which the restaurants acquired in the Asset Acquisition are located (collectively, the “Properties”). Store Capital agreed to pay the Company $11,500,000 for the Properties at closing. Title to the Properties was transferred directly from the applicable Sellers to Store Capital, and the purchase price for the Properties was paid by Store Capital directly to Sellers. Accordingly, the Company never took title to, or ownership of, the Properties. As a result, the ultimate purchase price paid by the Company was $852,000, which was the difference between the $12,352,000 purchase price for the assets that the Company agreed to pay to the Sellers and the $11,500,000 purchase price for the Properties that was paid by Store Capital. The closing of the Property Acquisition occurred on August 30, 2018.

 

In connection with the Property Acquisition, the Company entered into a master lease agreement (the “Master Lease”) with Store Capital on August 30, 2018 pursuant to which the Company leased each of the Properties from Store Capital. The initial term of the lease expires on August 31, 2038. The Company has the option to extend the term of the lease for four additional successive periods of five years each. The aggregate base annual rent is $876,875 and is subject to annual increases commencing September 1, 2019 in an amount equal to the lesser of: (i) 1.75%, or (ii) 1.25 times the change in the Consumer Price Index. The Company is responsible for all costs and obligations relating to the Properties.

 

12

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The acquisition of Fat Patty’s was accounted for as a business combinationusing the acquisition method of accounting in accordance with Accounting Standard Codification (“ASC”) Topic 805,Business Combinations (“ASC 805”), with the Company considered the acquirer of Fat Patty’s. In accordance with ASC 805, the assets acquired and the liabilities assumed have been measured at fair value based on various preliminary estimates,a report issued by a third-party valuation firm with the remaining purchase price, if any, recorded as goodwill.

 

For purposes of measuring the estimated fair value, where applicable, of the assets acquired and the liabilities assumed as reflected in theaccompanying unaudited Company’s condensed consolidated financial statements,, the guidance in ASC Topic 820,Fair Value Measurements and Disclosures (“ASC 820”) has been applied, which establishes a framework for measuring fair value. In accordance with ASC 820, fair value is an exit price and is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company incurred $82,929 of acquisition-related transaction costs. Under ASC 805, acquisition-related transaction costs and acquisition-related restructuring charges are not included as components of consideration transferred but are accounted for as expenses in the period in which the costs are incurred. Accordingly, the Company recognized $82,929 of acquisition-related transaction costs during the three- and nine-month periodsyear ended September 30,December 31, 2018. The acquisition-related transaction costs were recorded in general and administrative expenses.

13

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The assets acquired and liabilities assumed were comprised of the following:

 

Cash $7,100  $7,100 
Inventory  91,424   91,424 
Intangible assets  844,840   788,840 
Equipment  614,295   614,295 
Total assets acquired  1,557,659   1,501,659 
        
Gift card liabilities  (80,466)  (24,707)
Total liabilities assumed  (80,466)  (24,707)
        
Gain on bargain purchase option  (625,193)
Gain on bargain purchase  (624,952)
Net assets acquired with note payable and deferred compensation liability $852,000  $852,000 

 

The purchase price allocation is preliminary as of September 30, 2018. The preliminary estimates of fair values recorded are Level 3 inputs that have been determined by management based upon various market and income analyses and recent asset appraisals. The purchase price allocation will remain preliminary untilCompany made certain adjustments to the Company finalizes a third-party valuation, determines the fair values of assets acquired and liabilities assumed, and determines the actual transaction costs incurred. The final amounts initially allocated to intangible assets acquired and gift card liabilities assumed andafter evaluating additional information that was present on the transaction costs incurred could differ fromdate the preliminary recorded amounts.acquisition was completed.

13

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

 

The fair value of the identifiable assets acquired and liabilities assumed of $1,477,193$1,476,952 exceeded the purchase price of Fat Patty’s by $625,193.$624,952. Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. As a result, the Company recognized a gain of $625,193$624,952 during the three- and nine-month periodsyear ended September 30,December 31, 2018 in connection with the acquisition.The Sellers of Fat Patty’s received cash without any earnouts or indemnification holdbacks, which was the primary motivation for the sale of Fat Patty’s. This was the primary reason the acquisition resulted in a bargain purchase.The gain was recorded in the other income in the accompanyingCompany’s condensed consolidated statements of operations.

14

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following table summarizescertain financial information for the three- and nine-monthsix-month periods ended SeptemberJune 30, 20182019 contained in the accompanyingCompany’s condensedunaudited condensed consolidated financial statements andcertain unaudited pro forma financial information for thethree- and nine-monthsix-month periods ended SeptemberJune 30, 2018 and 2017 as if the acquisition of Fat Patty’s had occurred on January 1, 2017:2018:

 

  

Three Months

Ended

September 30,
2018

  

Nine Months

Ended

September 30,
2018

  

Three Months

Ended

September 30,
2017

  

Nine Months

Ended

September 30,
2017

 
Revenue $4,415,657  $12,720,014  $3,964,788  $11,980,207 
Income from continuing operations  (13,051)  1,256,629   168,493   149,061 
Net income  548,218   1,892,553   186,352   646,998 
Net income per share – basic $0.08  $0.28  $0.03  $0.10 
Net income per share – fully diluted $0.08  $0.28  $0.03  $0.10 
  Three Months
Ended
June 30, 2019		  Three Months
Ended
June 30, 2018		  Six Months
Ended
June 30, 2019		  Six Months Ended
June 30, 2018		 
Revenue $4,188,967  $3,868,152  $8,777,788  $8,059,247 
Income (loss) from continuing operations  (308,016)  393,701   (565,009)  1,118,135 
Net income / (loss)  (291,561)  472,419   (705,804)  1,196,159 
Net income / (loss) per share – basic $(0.04) $0.07  $(0.10) $0.17 
Net income / (loss) per share – fully diluted $(0.04) $0.07  $(0.10) $0.17 

 

The results of operations for Fat Patty’s were included in the Company'sCompany’s results of operations beginning August 30, 2018. The actual amounts of revenue and net income for Fat Patty’s that arewere included in the Company’s condensed consolidated statements of operations for the three-three-month period ended June 30, 2019 were $1,959,728 and nine-month periods$475,452, respectively, and the actual amounts of revenue and net income for Fat Patty’s that were included in the Company’s condensed consolidated statements of operations for the six-month period ended SeptemberJune 30, 20182019 were $1,027,976$4,630,375 and $52,077,$610,488, respectively.

 

The unaudited pro forma financial information has been presented for informational purposes only andis not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on January 1, 20172018 or of the future results of the combined entities. For additional information about the Company’s acquisition of Fat Patty’s, please refer to the Company’s Current Reports on Form 8-K filed with the Securities and Exchange CommissionSEC on August 9, 2018 and September 5, 2018.

14

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

 

Note 7.5. Agreement to Acquire Tilted Kilt

On October 30, 2018, the Company entered into a Membership Interest Purchase Agreement with SDA Holdings, LLC, a Louisiana limited liability company (“SDA Holdings”), and Fred D. Alexander pursuant to which the Company agreed to acquire all of the issued and outstanding membership interests in SDA Holdings for $10. SDA Holdings is the owner of theTilted Kilt Pub & Eatery® restaurant franchise. SDA Holdings is owned by Mr. Alexander, who is a member of the Company’s board of directors.

The closing of the transaction is conditioned upon SDA Holdings, Trustee Services Group (the “Custodian”), Seenu G. Kasturi, who served as the Company’s President and Chief Financial Officer and the Chairman of its board of directors as of December 31, 2018, Let’s Eat Incorporated (“Let’s Eat”), the Reilly Group, LLC (the “Reilly Group”) and John Reynauld entering into an amendment to that certain Custodian Agreement, dated June 7, 2018, by an among the parties to add SDA Holdings as a party to the agreement and remove Mr. Kasturi as a party to the agreement, in which event SDA Holdings will be required to deliver 718,563 shares of the Company’s common stock to the Custodian. The closing of the transaction is also conditioned upon the Company raising gross proceeds of at least $2,000,000 through the sale of debt or equity securities, as well as other customary closing conditions. Upon closing of this acquisition, the Company will issue 666,667 shares of common stock to Mr. Kasturi, place 718,563 shares of common stock into escrow to replace a like number of shares placed in escrow by Mr. Kasturi, and through a wholly-owned subsidiary, be the obligor under a demand promissory note in favor of Mr. Kasturi in the principal amount of up to $2,500,000.

As of June 30, 2019, the conditions to closing had not yet been satisfied or waived by the parties. There is no set closing date for the transaction.

Note 6. Inventory

 

Inventory was comprised of the following at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively:

 

  September 30,
2018		  December 31,
2017		 
Food $89,334  $23,987 
Beverages  50,300   21,430 
Total $139,634  $45,417 

15

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

  June 30, 2019  December 31, 2018 
Food $123,280  $120,426 
Beverages  56,808   90,599 
Total $180,088  $211,025 

 

Note 8.7. Property and Equipment, Net

 

Property and equipment including capital lease assets, werewas comprised of the following at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively:

 

 September 30,
2018		  December 31,
2017		  June 30, 2019 December 31, 2018 
Land, buildings and improvements $11,500,000  $-0-  $-0-  $11,500,000 
Leasehold improvements  295,133   69,472   332,500   323,500 
Furniture, fixtures and equipment  823,282   78,621   1,159,198   1,021,735 
Subtotal  12,618,415   148,093   1,491,698   12,845,235 
Less: accumulated depreciation  (120,110)  (48,979)  (223,247)  (307,733)
Total $12,498,305  $99,114  $1,268,451  $12,537,502 

15

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

 

The land, buildings and improvements of $11,500,000 included within property and equipment at September 30,December 31, 2018 consisted of gross assets acquired on the capital lease. On January 1, 2019, in connection with the adoption of ASC Topic 842, the Company determined that the lease with related depreciation expensewas a financing lease and accumulated depreciation of $24,000. recorded a right-of-use asset and lease liability for the lease, reversing the capital lease asset and capital lease obligation previously recognized.

Depreciation expense was $49,481$50,438 and$68,688 $101,979 during the three- and nine-monthsix-month periods ended SeptemberJune 30, 2018,2019, respectively, and waswas$4,57113,648 and $11,902$19,207 during the three- and nine-monthsix-month periods ended SeptemberJune 30, 20172018, respectively..

 

Note 9.8. Intangible Assets

 

The Company acquired various intangible assets in connection with the acquisition of Fat Patty’s. Intangible assets include a tradename valued at $810,000, an assembled workforce valued at $15,556$770,000 and a non-compete agreement valued at $18,526 at September$18,840 for a total of $788,840 on August 30, 2018. The Company did not have any intangible assets at December 31, 2017.2018, which is the date the acquisition of Fat Patty’s was completed. The Company amortizes the assembled workforce and non-compete agreement on a straight-line basis over the expected period of benefit, which is three and five years, respectively.years. The tradename has an indefinite life and is not subject to amortization but tested for impairment on an annual basis. The amountCompany recognized $2,275 of amortization recognized forexpense on the assembled workforce and non-compete agreement was $759during the year ended December 31, 2018. Accordingly, the Company had total intangible assets of $786,565 at December 31, 2018. The Company recognized $942 and $1,884 of amortization expense on the non-compete agreement during the three- and nine-monthsix-month periods ended SeptemberJune 30, 2018.

16

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)2019. Accordingly, the Company had total intangible assets of $784,681 at June 30, 2019.

 

The following table presents the future amortization expense to be recognized from the Company’s intangible assets at SeptemberJune 30, 2018:2019:

 

Year 

Amortization
Expense to be

Recognized

  Amortization Expense to be
Recognized		 
2018 $2,275 
2019  9,101 
2019 (remaining six months) $1,884 
2020  9,101   3,768 
2021  7,324   3,768 
2022  3,768   3,768 
2023  1,493 
Thereafter  2,512   — 
Total $34,081  $14,681 

16

 

The amortization expenseARC Group, Inc.

Notes to be recognized for 2018 represent the expenses to be recognized during the remainder of the 2018 fiscal year.Condensed Consolidated Financial Statements

 

Note 10.9. Fair Value Measurements

 

On January 20, 2014, the Company purchased a 50% ownership interest in Paradise on Wings. On December 19, 2016, the Company acquired all of the issued and outstanding membership interests of Seediv. A description of the investment in Paradise on Wings and the acquisition of Seediv, is set forth herein underNote 4. Investment in Paradise on Wings andNote 5. Acquisition of SeedivLLC, a Louisiana limited liability company (“Seediv”), respectively.

On September 30, 2017, the Company sold its 50% ownership interest in Paradise on Wings tofrom Seenu G. Kasturi for $24,000. Paradise on Wings incurred a loss of $440,561 during$600,000 and an earn-out payment. Seediv is the period beginning January 1, 2017owner and ending September 30, 2017. As a result, the carrying amountoperator of the Company’s investmentDick’s Wings & Grill restaurant located at 100 Marketside Avenue, Suite 301, in Paradise onthe Nocatee development in Ponte Vedra, Florida (the “Nocatee Restaurant”) and the Dick’s Wings was zero& Grill restaurant located at September 30, 2017.6055 Youngerman Circle in Argyle Village in Jacksonville, Florida (the “Youngerman Circle Restaurant”; together with the Nocatee Restaurant, the “Nocatee and Youngerman Circle Restaurants”).

 

In connection with the acquisition of Seediv, the Company agreed to pay contingent consideration in the form of an earn-out payment. The Company determined that the fair value of the liability for the contingent consideration was estimated to be $20,897 at the acquisition date. The Company determined the fair value of the contingent consideration based on a probability-weighted approach derived from earn-out criteria estimates and a probability assessment with respect to the likelihood of achieving the earn-out criteria. The measurement was based upon significant inputs not observable in the market, including internal projections and an analysis of the target markets. The resultant probability-weighted contingent consideration was discounted using a discount rate based upon the weighted-average cost of capital.

 

At each reporting date, the Company revalues the contingent consideration to the reporting date fair value and records increases and decreases in the fair value as income or expense under general and administrative expenses in the Company’s condensed consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration may result from, among other things, changes in discount periods and rates, changes in the timing and amount of earn-out criteria, and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.

17

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

As of December 31, 2017, the Company calculated the earnout payment in accordance with the provisions of the membership interest purchase agreement and determined that the earnout payment was $199,682. The Company recognized additional Seediv compensation expense in the amount of $178,785 during the year ended December 31, 2017 in connection with the earnout payment and the liability for the contingent consideration was increased by $178,785 to $199,682 at December 31, 2017. The Company made payments in the amount of $144,326 to Mr. Kasturi with respect to the earnout payment during the nine-monthyear ended December 31, 2018. The Company did not make any payments to Mr. Kasturi during the six-month period ended SeptemberJune 30, 2018.2019. Accordingly, the outstanding balance of contingent consideration was $55,356 and $199,682 at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively.

 

The following table presents the contingent consideration recorded by the Company in connection with the acquisition of Seediv within the fair value hierarchy utilized to measure fair value on a recurring basis at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively:

 

  Level 1  Level 2  Level 3 
September 30, 2018 $-0-  $55,356  $-0- 
December 31, 2017 $-0-  $199,682  $-0- 
  Level 1  Level 2  Level 3 
June 30, 2019 $—  $55,356  $— 
December 31, 2018 $—  $55,356  $— 

17

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

 

The earnout payment was to be calculated based on the earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the Nocatee and Youngerman Circle Restaurants during the year ended December 31, 2017. As of December 31, 2017, the EBITDA for the Nocatee and Youngerman Circle Restaurants was utilized to compute the ending contingent consideration liability. As a result, the fair value measurement of the contingent consideration represented a Level 2 fair value measurement at SeptemberJune 30, 20182019 and December 31, 20172018 because it was based on other significant observable inputs.

 

The Company’s other financial instruments consist of cash and cash equivalents, accounts and ad fund receivables, notes receivable, capitaloperating and financing lease right-of-use assets and liabilities, accounts payable, accrued expenses and notes payable. The estimated fair values of the cash and cash equivalents, accounts and ad fund receivables, notes receivable, accounts payable, accrued expenses and notes payable (and the related beneficial conversion feature associated with the notes payable) approximate their respective carrying amounts due to the short-term maturities of these instruments. The estimated fair value of the capitalfinancing and operating lease obligationright-of-use assets and liabilities approximated itstheir respective carrying amountamounts as the interest rate is implicitused in calculating the underlying lease.right-of-use-assets and liabilities approximated the interest rate on the outstanding debt.

 

Note 11.10. Notes Receivable

In September 2014, the Company made a loan to one of its franchisees in the aggregate original principal amount of $6,329. The loan was for a term of three years, was payable in monthly installments, and did not require the payment of any interest. A total of $25 of principal was outstanding under the loan at December 31, 2017. The loan was paid off in full during the nine-month period ended September 30, 2018.

18

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

In June 2016, the Company made a loan to one of its franchisees under a promissory note in the aggregate original principal amount of $25,000. In July 2016, the Company made an additional loan to the same franchisee under a line of credit agreement for an aggregate original principal amount of up to $28,136. In September 2016, the Company made an additional loan to the same franchisee under a second line of credit agreement for an aggregate original principal amount of up to $25,000. The loan under the promissory note is for a term of two years, is payable in monthly installments beginning January 1, 2017, and accrues interest at a rate of 5% per annum beginning September 1, 2016. The loan under the $28,136 line of credit agreement was for a term of two years, was payable in monthly installments beginning January 1, 2017, and did not require the payment of any interest. The loan was repaid in full during the year ended December 31, 2017. The loan under the $25,000 line of credit agreement is for a term of two years, is payable in monthly installments beginning January 1, 2017 and accrues interest at a rate of 5% per annum beginning October 1, 2016. A total of $6,858 and $25,944 of principal$414 was outstanding under the loansloan at September 30, 2018 and December 31, 2017, respectively.2018. The loan was repaid in full during the six-month period ended June 30, 2019. Interest in the aggregate amount of $139 and $657$2 accrued and was paid in full under the loans during the three- and nine-monthsix-month periods ended SeptemberJune 30, 2018, respectively.2018. Interest in the aggregate amount of $425$219 and $1,515$517 accrued and was paid in full under the loans during the three- and nine-monthsix-month periods ended SeptemberJune 30, 2017, respectively, and payments of interest in the aggregate amount of $425 and $2,354 were made under the loans during the three- and nine-month periods ended September 30, 2017.2018, respectively. No accrued interest was outstanding under the loans at SeptemberJune 30, 2018 or2019 and December 31, 2017.2018.

 

In October 2017, the Company made a loan to one of its franchisees in the aggregate original principal amount of $7,659. The loan is due and payable in full on December 1, 2020, is payable in monthly installments beginning January 1, 2018, and does not require the payment of any interest. The full amount of the loan was outstanding on December 31, 2017. A total of $5,745$3,617 and $7,659$5,106 of principal was outstanding under the loan at SeptemberJune 30, 20182019 and December 31, 2017, respectively2018, respectively.

18

.ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

In June 2019, the Company made a loan to one of its franchisees in the aggregate original principal amount of $15,000. The loan is due and payable in monthly installments with an initial payment of $2,000 due July 1, 2019, followed by six monthly payments of $2,000 due on the 27th day of each month thereafter beginning July 27th, with a final payment of $1,000 due on January 27, 2020. The loan does not require the payment of any interest. The entire $15,000 principal amount of the loan was outstanding on June 30, 2019.

 

The carrying value of the Company’s outstanding notes receivable was $12,603$18,617 and $33,628$5,520 at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, all of which was due from unrelated third parties. Of these amounts, $9,412$17,344 and $3,191$1,273 were classified as short-term and long-term notes receivable, respectively, at SeptemberJune 30, 2018,2019, and $28,522$2,967 and $5,106$2,553 were classified as short-term and long-term notes receivable, respectively, at December 31, 2017.2018. The Company generated interest income of$425 and $1,515  $2 during the three- and nine-monthsix-month periods ended SeptemberJune 30, 2018,2019, andgenerated generate interest income of $543$219 and $1,931$517 during the three- and nine-monthsix-month periods ended SeptemberJune 30, 2017.2018, respectively. The Company did not have any interest receivable outstanding at SeptemberJune 30, 2018 or2019 and December 31, 2017.2018.

 

Note 12.11. Debt Obligations

 

As of December 31, 2016,In September 2013, the Company had principal in the amount of $16,103 outstanding under its credit facilityentered into a loan agreement withBlue Victory Holdings, Inc., a Nevada corporation (“Blue Victory”), and repaid $824,250 underpursuant to which Blue Victory agreed to extend a revolving line of credit facility to the credit facility. During the year ended December 31,Company for up to $1,000,000. In March 2017, the Company borrowed $61,721entered into an amendment to the loan agreement with Blue Victory to reduce the maximum amount of funds available under the credit facility from $1,000,000 to $50,000. The credit facility is unsecured, accrues interest at a rate of 6% per annum, and repaid $77,824will terminate upon the earlier to occur of the fifth anniversary of the loan agreement or the occurrence of an event of default. The outstanding principal balance of the credit facility and any accrued and unpaid interest thereon are payable in full on the termination date. All loan requests are subject to approval by Blue Victory. Loans may be prepaid by the Company without penalty and borrowed again at any time prior to the termination date. Blue Victory underhas the right to convert all or any portion of the outstanding principal of the credit facility. facility, together with accrued interest payable thereon, into shares of common stock at a conversion rate equal to: (i) the closing price of the common stock on the date immediately preceding the conversion date if the common stock is then listed on the OTCQB or a national securities exchange, (ii) the average of the most recent bid and ask prices on the date immediately preceding the conversion date if the common stock is then listed on any of the tiers of the OTC Markets Group, Inc., or (iii) in all other cases, the fair market value of the common stock as determined by the Company and Blue Victory.The Company did not borrow any funds under the credit facility during the nine-monthsix-month period ended SeptemberJune 30, 2018. Accordingly,2019 and the year ended December 31, 2018, and there was no principal outstanding under the credit facility at SeptemberJune 30, 2018 or2019 and December 31, 2017.

19

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)2018.

 

DuringThe Company entered into an unsecured loan with Blue Victory during the year ended December 31, 2017, the Company borrowed2017.$372,049 from Blue Victory and repaid $341,546 to Blue Victory under a separate loan.Accordingly, theThe amount of principal outstanding under the loan was $30,503 at December 31, 2017. The Company borrowed $23,481$277,707 and repaid $71,877 under the loan during the nine-month periodyear ended September 30,December 31, 2018. Accordingly, the amount of principal outstanding under the loan was $53,984$236,333 at SeptemberDecember 31, 2018. The Company borrowed $1,075,893 and repaid $1,206,271 under the loan during the six-month period ended June 30, 2018.2019. Accordingly, the amount of principal outstanding under the loan was $105,955 at June 30, 2019. The Company recognized $3,080 and $6,984 of interest expense under the loan accruesduring the three- and six-month periods ended June 30, 2019, and recognized $877 and $1,650 of interest at a rate of 6% per annumexpense under the loan during the three- and is payable on demandsix-month periods ended June 30, 2018..

19

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

 

On August 30, 2018, the Company entered into a secured convertible promissory note with Seenu G. Kasturi pursuant to which the Company borrowed $622,929 to help finance the Fat Patty’s Acquisition. All principal and accrued but unpaid interest is due and payable by the Company in full on the earlier of (i) the fifth (5th) anniversary of the dateA description of the note or (ii) the date that Mr. Kasturi demands repayment in full by providing written notice thereof to the Company. Interest accrues at the rateis set forth herein underNote 4. Acquisition of six percent (6%) per annum and is payable in full on the maturity date. Mr. Kasturi has the right, at any time during the term of the note and from time to time, to convert all of any portion of the outstanding principal of the note, together with accrued and unpaid interest payable thereon, into shares of the Company’s common stock at a conversion rate of $1.36 per share. The note is secured by all of the assets of the Company.Fat Patty’s. At the date of the financing, because the effective conversion rate of the convertible note was less than the market value of the Company’s common stock, a beneficial conversion feature of $155,732 was recorded as a discount to the convertible note and an increase to additional paid in capital. The Company recorded a total of $16,648 for amortization of the discount to the convertible note during the year ended December 31, 2018. Accordingly, the amount of unamortized debt discount outstanding was $139,084 at December 31, 2018. The Company recorded $7,762 and $15,438 for amortization of the discount to the convertible note during the three- and six-month periods ended June 30, 2019. Accordingly, the amount of unamortized debt discount outstanding was $123,646 at June 30, 2019, and the principal balance of the note net of unamortized debt discount outstanding was $499,283 at June 30, 2019. The Company recognized $9,216 and $18,432 of interest expense under the convertible note during the three- and six-month periods ended June 30, 2019.

 

The carrying value of the Company’s outstanding promissory notes, net of unamortized discount of $153,136$123,646 and excluding capital lease obligations, was $523,777 and $30,503$139,084 at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, and excluding financing and operating lease liabilities, was $605,238 and $720,178 at June 30, 2019 and December 31, 2018, respectively.

 

Note 12. Leases

The Company leases certain office space, land, buildings and equipment. The Company’s lease agreements for equipment are immaterial in amount, both individually and collectively. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants, and none of the Company’s lease agreements include options to purchase the leased property. The Company does not have any significant leases that have not yet commenced that create significant rights and obligations for the Company. The Company elected the practical expedient under ASC 842 to not separate lease and non-lease components. A description of the Company’s operating and financing leases is set forth herein under Note 16.Commitments and Contingencies – Operating Leases and –Financing Leases.

Most of the Company’s lease agreements have fixed rental payments. Certain of the Company’s lease agreements include fixed rental payments that are adjusted periodically based on rate or are based in part on a percentage of sales. Payments based on a percentage of sales is not considered in the determination of lease payments for purposes of measuring the related lease liability.

Most of the Company’s real estate leases include one or more options to renew, with renewal terms that can extend the lease term from three to five years or more. The exercise of lease renewal options is at the Company’s sole discretion. If the Company is reasonably certain that it will exercise such options, the periods covered by such options are included in the lease term and are recognized as part of the Company’s right-of-use assets and liabilities.

20

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The Company determines discount rates based on the rates of its outstanding debt.

The following table sets forth information about the Company’s operating and financing lease assets and liabilities included in its condensed consolidated balance sheet as of June 30, 2019:

  Classification on the Condensed
Consolidated Balance Sheet		 June 30, 2019 
Assets     
Operating lease right-of-use assets Right-of-use assets $3,665,275 
Financing lease right-of-use assets Right-of-use assets  11,041,222 
Total right of use assets   $14,706,497 
       
Liabilities      
Current liabilities:      
Operating lease liability Current operating lease liabilities $275,723 
Financing lease liability Current portion of other long-term liabilities  191,361 
Non-current liabilities:      
Operating lease liabilities, net of
current portion		 Operating lease liabilities  3,426,660 
Financing lease liabilities, net of
current portion		 Other long-term liabilities  11,110,573 
Total lease liabilities   $15,004,317 

The following table sets forth the supplemental cash flow information related to the Company’s leases for the three- and six-month periods ended June 30, 2019:

  Three Months Ended
June 30, 2019		  Six Months Ended
June 30, 2019		 
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash flows from operating leases $128,036  $249,441 
Operating cash flows from financing leases  176,904   354,462 
Financing cash flows from financing leases  143,515   285,453 

21

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The following table sets forth the components of lease costs related to the Company’s leases for the three- and six-month periods ended June 30, 2019:

  Three Months
Ended
June 30, 2019		  Six Months
Ended
June 30, 2019		 
Operating lease costs  143,274  $286,549 
         
Financing lease costs:        
Amortization of right-of-use assets $143,515  $285,454 
Interest on lease liabilities  176,904   354,461 
Total financing lease costs  320,419   639,915 

The following table shows certain information related to the weighted-average remaining lease terms and the weighted-average discount rates for our operating and financing leases:

  Weighted Average Remaining
Lease Term		 Weighted
Average
Discount Rate
  (in years) (annual)
Operating leases  11.78   7.39%
Financing leases  19.67   8.00%

The following table sets forth the maturity of our operating and financing leases liabilities as of June 30, 2019:

  Operating Leases  Financing Leases 
Year Ended December 31,        
2019 (remaining six months) $262,740  $443,553 
2020  544,759   897,425 
2021  570,765   913,130 
2022  583,392   929,110 
2023  472,444   945,369 
Thereafter  3,206,389   15,924,033 
Total lease payments  5,640,489   20,052,620 
Less: imputed interest  (1,938,106)  (8,750,686)
Total $3,702,383  $11,301,934 

22

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 13. Capital Stock

 

The Company’s authorized capital consisted of 100,000,000 shares of Class A common stock, par value $0.01 per share, at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, of which 6,524,4277,080,771 and 6,950,8696,680,065 shares of common stock were outstanding at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, and consisted of 1,000,000 and -0- shares of Series A convertible preferred stock, par value $0.01 per share, at SeptemberJune 30, 20182019 and December 31, 2017, respectively,2018, of which449,581 and -0- shares wereoutstanding at SeptemberJune 30, 20182019 and December 31, 2017, respectively.

On January 1, 2018, Mr. Kasturi earned 9,337and 2,500,000 shares of the Company’s common stock pursuant to the terms of his employment agreement with the Company.The Company recognized $147 of stock compensation expense during the nine-month period ended September 30, 2018 in connection with the vesting of the shares of common stock earned by Mr. Kasturi on January 1, 2018. The Company also recognized $13,500 of stock compensation expense during the nine-month period ended September 30, 2018, respectively, in connection with the vesting of 9,660 shares of common stock earned by Mr. Kasturi on April 1, 2018 pursuant to the terms of his employment agreement with the Company, and recognized $148 and $13,500 of stock compensation expense during the three- and nine-month periods ended September 30, 2018, respectively, in connection with the vesting of 7,064 shares of common stock to be earned by Mr. Kasturi on July 1, 2018 pursuant to the terms of his employment agreement with the Company. The Company also recognized $13,353 of stock compensation expense during the three- and nine-month periods ended September 30, 2018in connection with the vesting of 7,414 shares of common stock earned by Mr. Kasturi on October 1, 2018.

20

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

In January 2018, the Company issued a total of 5,625 shares of its common stock to certain of its franchisees as incentive compensation. The shares were valued at a priceSeries B Convertible Preferred Stock, $0.01 par value per share, equal to the closing pricenone of the Company’s common stock on the OTCQB on the date of grant. The Company recognized $9,000 of stock compensation expense in connection therewith during the nine-month period ended Septemberwhich was outstanding at June 30, 2018.2019 and December 31, 2018.

 

In JuneMay 2018, the Company’s Board of Directors created Series A convertible preferred stock and authorized 1,000,000 shares of Series A convertible preferred stock, par value $0.01 per share, for issuance. Each share of Series A convertible preferred stock is entitled to 100 votes per share and is convertible into one share of the Company’s common stock at a conversion price of $0.75 per share of common stock. The conversion price may be paid in cash, through a reduction in the number of shares of common stock received, or by other methods approved by the Board of Directors. In the event any shares of the Series A convertible preferred stock are transferred by the holder thereof, such shares immediately and automatically convert into shares of common stock with the conversion price being paid by the recipient through a reduction in the number of shares of common stock received. The Series A convertible preferred stock is treated pari passu with the common stock in all other respects.

In May 2018, theCompany issued a stock option to an employee that is exercisable into 30,000 shares of common stock. The shares were valued on the date of grant by using the Black-Scholes pricing model. The Company recognized $3,752 and $5,628$10,002 of stock compensation expense during the three- and nine-month periodsyear ended September 30,December 31, 2018 in connection with the vesting of the option. In February 2019, the stock option terminated in its entirety upon the termination of the employee’s employment with the Company. In connection therewith, the stock compensation previously recognized by the Company during the year ended December 31, 2018 was reversed during the six-month period ended June 30, 2019.

 

In May 2018, the Company provided an employee with the right to receive $33,000 in cash or 20,000 shares of shares of the Company’s common stock on May 15, 2021. The shares were valued at a price per share equal to the closing price of the Company’s common stock on the OTCQB on the date of grant and remeasured as of September 30,December 31, 2018. In accordance withASC Topic 718,Compensation – Stock Compensation, as the employee is able to settle the right in either cash or common stock, the Company recognized $2,501 and $3,752$8,701 of stock compensation expense in connection therewith during the three- and nine-month periodsyear ended September 30,December 31, 2018 and recorded a corresponding liability which has been recorded in accounts payable and accrued expenses within the Company’s condensed consolidated balance sheetssheet.

In June 2018,February 2019, the Company entered into a securities purchase agreement with Seenu G. Kasturi pursuant to whichright terminatedin its entirety upon the Company issued Mr. Kasturi 449,581 shares of Series A convertible preferred stock in exchange for 449,581 shares of common stock held by Mr. Kasturi. Upon receipttermination of the shares of commonemployee’s employment with the Company.In connection therewith, the stock from Mr. Kasturi, the shares were retired and restored to the status of authorized and unissued shares of common stock. Accordingly, the number of shares of common stock outstanding immediately after the transaction was completed decreased from 6,974,008 shares to 6,524,427 shares.  No expense wascompensation previously recognized by the Company during the nine-monthyear ended December 31, 2018 was reversed during the six-month period ended SeptemberJune 30, 2018 in connection with the transaction.2019.

 

In August 2018, the Company entered into an agreement with a firm to provide investor relations services to the Company. Under the terms of the agreement, the Company agreed to pay the firm $12,250 and issue 3,500 shares of common stock to the firm upon the execution of the agreement as compensation for services to be performed during the months of August and September 2018. The Company agreed to pay the firm $7,000 and issue 3,5001,500 shares of common stock each month thereafter during the remainder of the term of the agreement. The Company recognized $5,250$5,775 and $11,145 of stock compensation expense under the agreement duringthe three- and six-month periods ended June 30, 2019.

The Company recognized $147 of stock compensation expense during the three- and nine-months periodssix-month period ended SeptemberJune 30, 20182019 in connection with the issuancevesting of 10,706 shares of common stock earned by Mr. Kasturi on January 1, 2019 under the employment agreement that he was then a party to with the Company.

In January 2019, the Company issued a restricted stock award to Mr. Kasturi pursuant to the terms of a new employment agreement that the Company entered into with him. The Company recognized $48,967 and $96,319 of stock compensation expense in connection therewith during the three- and six-month periods ended June 30, 2019. A description of the shares 3,500 shares.new employment agreement and restricted stock award is set forth herein underNote. 16 – Commitments and Contingencies – Employment Agreements – Seenu G. Kasturi.

 

 2123 

 

 

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

In September 2018,January 2019, the Company entered intocommenced a private offering of up to 5,000,000 units, each unit comprised of one share of common stock and one warrant to purchase one share of common stock, at a purchase price of $1.40 per unit (the “Offering”). Each warrant is exercisable for a term of five years at an agreement withexercise price of $1.55 per share, subject to adjustment. The units are being offered without registration under the Securities Act of 1933, as amended (“Securities Act”), solely to persons who qualify as accredited investors, as that term is defined in Rule 501 of Regulation D under the Securities Act, in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D promulgated thereunder.

The Company retained Maxim Group, LLC (“Maxim”) to provide investment bankingserve as its placement agent for the Offering. The Company agreed to pay the placement agent a placement fee equal to 7% of the aggregate gross proceeds raised in the Offering and mergers and acquisition services to the Companywarrants exercisable for a term of one year. Underfive years to purchase 4% of the number of shares of common stock included in the units sold in the Offering at an exercise price of $1.55 per share.

The Offering may be increased by up to an additional $1,000,000 at the mutual discretion of the Company and the placement agent. The initial closing of the Offering is conditioned, among other things, on the Company’s acceptance of subscriptions for at least $500,000 of units and the closing of the Company’s agreement to purchase all of the membership interests in SDA Holdings.

Net proceeds, if any, from the Offering will be used to fund the deferred portion of the purchase price for the Company’s acquisition of Fat Patty’s, future payments to the persons that owned Tilted Kilt prior to SDA Holdings, and the repayment of the loan made by Seenu G. Kasturi to help fund the acquisitions of Fat Patty’s and Tilted Kilt, and the balance for general corporate purposes.

The Offering was originally contemplated to terminate on March 31, 2019, unless extended by the Company and the placement agent to a date not later than May 31, 2019.On March 31, 2019, the Company extended the offering until May 31, 2019. No securities were sold in the offering during the three- and six-month periods ended June 30, 2019.

On April 8, 2019, the Company granted a restricted stock award to an employee for a total of 225,000 shares of the Company’s common stock. The shares vest in three equal annual installments commencing on April 30, 2020.The Company recognized $21,715 of stock compensation expense in connection therewith during the three- and six-month periods ended June 30, 2019.

On April 17, 2019, the Company revised the terms of the agreement,Offering. As revised, the Offering covers the sale of up to 1,785,715 units, each unit comprised of one share of Series B convertible preferred stock (the “Shares”) and one warrant to purchase one share of common stock at a purchase price of $1.40 per unit, for an aggregate offering price of $2,500,000. Each warrant is exercisable for a term of five years at an exercise price equal to the lesser of: (i) $1.70 per share, and the greater of: (ii) one hundred twenty percent (120%) of the conversion price of the Shares and $0.28 per share, subject to adjustment. The units are being offered without registration under the Securities Act solely to persons who qualify as accredited investors, as that term is defined in Rule 501 of Regulation D under the Securities Act, in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D promulgated thereunder.

24

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The Company retained Maxim and Joseph Gunnar & Co., LLC to serve as its placement agents for the Offering. The Company agreed to pay Maxim $7,500 per month during the placement agents an aggregate placement fee equal to 7% of the aggregate gross proceeds raised in the Offering and warrants exercisable for a term of the agreement and issue 125,000five years to purchase that number of shares of common stock equal to Maxim upon the execution7% of the agreement. number of Shares issued in the Offering and 7% of the number of shares of common stock underlying the warrants issued in the Offering at an exercise price of $1.70 per share.

The Offering may be increased by up to an additional $1,000,000 at the mutual discretion of the Company and Maxim. The Offering was set to terminate on April 30, 2019, unless extended by the Company and Maxim to a date not later than May 31, 2019. On April 30, 2019, the Company extended the Offering to May 31, 2019.

The initial closing of the Offering is conditioned, among other things, on the Company’s acceptance of subscriptions for at least $500,000 of Units and the closing of the Company’s agreement to purchase all of the membership interests in SDA Holdings, the sole owner of the entities which own Tilted Kilt.

The net proceeds, if any, from the Offering will be used to fund the partial repayment of the loan made by Seenu G. Kasturi, who is the Company’s Chief Executive Officer, Chief Financial Officer and Chairman of its board of directors, to SDA Holdings to help fund SDA Holding’s acquisition of Tilted Kilt.

In connection therewith, on April 17, 2019, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of the Series B Convertible Preferred Stock with the Secretary of State of Nevada designating 2,500,000 shares of the Company’s authorized but unissued shares of preferred stock, $0.01 par value per share, as Series B Convertible Preferred Stock (the “Series B Preferred Stock”).

The Series B convertible preferred stock has a stated value of $1.40 per share. In the event that the Company is liquidated, dissolved, effects certain mergers or consolidations, transfers all or substantially all of its assets, or completes certain other significant transactions, holders of the Series B convertible preferred stock are entitled to receive, in preference to holders of the Company’s common stock and the Company’s Series A convertible preferred stock, an amount per share equal to the greater of (i) $1.40 plus any declared and unpaid dividends thereon, and (ii) the amount per share such holder would receive if such holder converted such shares of Series B convertible preferred stock into shares of common stock at a conversion price of $1.40, subject to adjustment.

25

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Upon the completion of a firm commitment underwritten public offering (a “Qualified Public Offering”) of the Company’s common stock and concurrent listing of the Company’s common stock on the Nasdaq Stock Market, NYSE or NYSE MKT within 12 months after the final closing of the Offering, each share of Series B convertible preferred stock will automatically convert into the securities issued by the Company in the Qualified Public Offering (the “Conversion Securities”) at a conversion price equal to the lesser of: (a) $1.40 per share, and (b) the greater of: (i) 70% of the public offering price of the Conversion Securities, and (ii) $0.28 per share (the “Conversion Price”), subject to adjustment. The Conversion Price is subject to adjustment for stock splits, stock dividends, or the reclassification of the common stock. In the event that the Company does not complete a Qualified Public Offering within 12 months after the final closing of the Offering or does not file with the SEC the audited financial statements and other financial information required to be filed in connection with the Company’s acquisition of the Fat Patty’s restaurant concept on August 30, 2018 or in connection with the Company’s proposed acquisition of the Tilted Kilt within four months after the final closing of the Offering, the Company will be required to repurchase all Shares issued in the Offering for a purchase price of $1.75 per share.

The Series B convertible preferred stock participates, on an as-converted to common stock basis, in any dividends declared or paid on common stock and votes together with holders of common stock, on an as-converted to common stock basis, on all matters presented to holders of common stock.

The Company recognized $240,625cannot undertake certain corporate actions without approval of stock compensation expensethe holders of a majority of the issued and outstanding shares of Series B convertible preferred stock.

No securities were sold in the offering during the three- and nine-monthssix-month periods ended SeptemberJune 30, 2018 in connection with the issuance of the shares.2019.

 

The Company recognized a total of $265,629$76,457 and $303,503$110,623 for stock compensation expense during the three- and nine-monthsix-month periods ended SeptemberJune 30, 2018, respectively, and recognized a total of$26,889 and $233,740 for stock compensation expense during the three- and nine-month periods ended September 30, 2017,2019, respectively. The Company had a total of $290,603$34,960 and $26,853$15,453 of stock subscription payable outstanding at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively.

The following table sets forth the changes in stockholders’ equity as of June 30, 2019:

  Common Stock  Series A
Convertible
Preferred Stock		  Series B
Convertible
Preferred Stock		             
  Shares  Par
Value		  Shares  Par
Value		  Shares  Par
Value		  Additional
Paid-in
Capital		  Stock
Subscriptions
Payable		  Accumulated
Deficit		  Total 
Balance at December 31, 2018  6,680,065  $66,801   449,581  $4,496   —   —  $4,490,338  $15,453  $(5,247,553) $(670,465)
Common stock issued for services  400,706   4,007   —   —   —   —   105,812   19,507   —   129,326 
Cancellation of stock option issued for services  —   —   —   —   —   —   (10,002)  —   —   (10,002)
Net loss  —   —   —   —   —   —   —   —   (705,804)  (705,804)
Balance at June 30, 2019  7,080,771  $70,808   449,581  $4,496   —   —  $4,586,148  $34,960  $(5,953,357) $(1,256,945)

26

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The following table sets forth the changes in stockholders’ equity as of June 30, 2018:

  Common Stock  Series A Convertible Preferred Stock             
  Shares  Par Value  Shares  Par Value  Additional Paid-in Capital  Stock Subscriptions Payable  Accumulated Deficit  Total 
Balance at December 31, 2017  6,950,869  $69,509   —  $—  $3,995,306  $26,853  $(4,768,592) $(676,924)
Common stock issued for services  23,139   231   —   —   37,645   (1)  —   37,875 
Deferred franchise fees  —   —   —   —   —   —   (196,478)  (196,478)
Common stock exchanged for preferred stock  (449,581)  (4,496)  449,581   4,496   —   —   —   — 
Net loss  —   —   —   —   —   —   (7,917)  (7,917)
Balance at June 30, 2018  6,524,427  $65,244   449,581  $4,496  $4,032,951  $26,852  $(4,972,987) $(843,444)

 

Note 14. Stock Options and Warrants

 

The Company issued one stock option during the nine-month periodyear ended September 30,December 31, 2018. The stock option iswas exercisable into 30,000 shares of common stock at an exercise price of $1.49 and vestsvested in three equal annual installments commencing on the first anniversary of the date of issuance. The shares were valued on the date of grant by using the Black-Scholes pricing model in accordance with the provisions of ASC Topic 718,Compensation – Stock Compensation.718. This stock option was the only stock option outstanding at September 30,December 31, 2018. The Company did not issue any warrants exercisable into shares ofIn February 2019, the Company’s common stock during the three- and nine-month periods ended September 30, 2018, no warrants were exercised during the three- and nine-month periods ended September 30, 2018, and there were no warrants outstanding at September 30, 2018.

option terminated in its entirety. The Company did not issue any stock options or warrants exercisable into shares of the Company’s common stock during the three- and nine-monthsix-month periods ended SeptemberJune 30, 2017,2019 and 2018, and no stock options or warrants were exercised during the three- and nine-monthsix-month periods ended SeptemberJune 30, 2017.2019 and 2018. There were no stock options or warrants outstanding at SeptemberJune 30, 2017.2019.

Note 15. Stock Compensation Plans

American Restaurant Concepts, Inc. 2011 Stock Incentive Plan

In August 2011, the Company adopted the American Restaurant Concepts, Inc. 2011 Stock Incentive Plan. Under the plan, 1,214,286 shares of common stock may be granted to employees, officers and directors of, and consultants and advisors to, the Company under awards that may be made in the form of stock options, warrants, stock appreciation rights, restricted stock, restricted units, unrestricted stock and other equity-based or equity-related awards. As of June 30, 2019, 142,858 shares of the Company’s common stock remained available for issuance under the plan. The plan terminates in August 2021. On August 18, 2011, the Company filed a registration statement on Form S-8, File No. 333-176383, with the SEC covering the public sale of all 1,214,286 shares of common stock available for issuance under the plan.

ARC Group, Inc. 2014 Stock Incentive Plan

In June 2014, the Company adopted the ARC Group, Inc. 2014 Stock Incentive Plan. Under the plan, 1,000,000 shares of common stock may be granted to employees, officers and directors of, and consultants and advisors to, the Company under awards that may be made in the form of stock options, warrants, stock appreciation rights, restricted stock, restricted units, unrestricted stock and other equity-based or equity-related awards. As of June 30, 2019, all 1,000,000 shares of the Company’s common stock remained available for issuance under the plan. The plan terminates in June 2024.

27

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

 

Note 15.16. Commitments and Contingencies

 

Employment Agreements

Seenu G. Kasturi

On January 18, 2017, the Company appointed Seenu G. Kasturi as its President, Chief Financial Officer and Chairman of its board of directors. In connection therewith,on January 18, 2017, the Company entered into an employment agreement with Mr. Kasturi to serve as the President and Chief Financial Officer of the Company. The employment agreement was for an initial term of three years with automatic one-year renewals thereafter unless earlier terminated or not renewed as provided therein. Under the terms of the employment agreement, Mr. Kasturi was paid annual compensation in the amount of $80,000 per year, consisting of: (i) an initial annual base salary of $26,000, and (ii) equity awards equal in value to $54,000 per year. Mr. Kasturi was eligible to receive increases in salary on January 1st of each subsequent year in the discretion of the Company’s board of directors. He was also eligible to receive annual bonuses in the discretion of the Company’s board of directors beginning with the Company’s fiscal year ended December 31, 2017. The employment agreement contains customary confidentiality, non-competition and non-solicitation provisions in favor of the Company.

On January 2, 2019, the Company appointed Seenu G. Kasturi as its Chief Executive Officer. As a result of the appointment, Mr. Kasturi then served as the Company’s Chief Executive Officer, Chief Financial Officer and Chairman of the its board of directors. In connection therewith, on January 2, 2019, Mr. Kasturi resigned as the Company’s President and Richard W. Akam resigned as the Company’s Chief Executive Officer. Mr. Akam continues to serve as the Company’s Chief Operating Officer and Secretary.

On January 2, 2019, the Company entered into an amended and restated employment agreement with Mr. Kasturi to serve as the Chief Executive Officer and Chief Financial Officer of the Company. The agreement is for an initial term of three years with automatic one-year renewals thereafter unless earlier terminated or not renewed as provided therein. Under the terms of the agreement, Mr. Kasturi will be paid an initial annual base salary in the amount of $350,000. Mr. Kasturi will be eligible to receive increases in salary on January 1st of each subsequent year in the discretion of the Company’s board of directors. He will also be eligible to receive annual bonuses in the discretion of the Company’s board of directors beginning with the Company’s fiscal year ended December 31, 2019. The employment agreement contains customary confidentiality, non-competition and non-solicitation provisions in favor of the Company.

28

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Pursuant to the terms of the new employment agreement, the Company entered into a restricted stock award agreement with Mr. Kasturi pursuant to which the Company granted 390,000 shares of the Company’s common stock to Mr. Kasturi. The shares vest in accordance with the following schedule: (i) 130,000 shares on March 31, 2019; (ii) 130,000 shares on March 31, 2020; and (iii) 130,000 shares on March 31, 2021.In the event the Company terminates the employment of Mr. Kasturi without “cause”, as such term is defined in the employment agreement, his restricted stock award will vest in full immediately. In the event Mr. Kasturi’s employment with the Company terminates by reason of death or “disability”, as such term is defined in the employment agreement, or if the Company terminates Mr. Kasturi’s employment for “cause”, as such term is defined in the employment agreement, or if Mr. Kasturi terminates his own employment with the Company, then any shares that have not yet vested shall be forfeited to the Company. In the event of certain “changes in control” as such term is defined in the Company’s 2014 Stock Incentive Plan adopted by the Company’s board of directors on June 16, 2014, all restrictions and conditions on any of the shares then outstanding shall automatically be deemed terminated or satisfied in full, as applicable, immediately prior to the consummation of the change in control event.

Richard W. Akam

On January 22, 2013, the Company appointed Richard W. Akam to serve as its Chief Operating Officer. In connection therewith, the Company entered into an employment agreement with Mr. Akam pursuant to which it agreed to pay him an annual base salary of $150,000, subject to annual adjustment and discretionary bonuses, plus certain standard and customary fringe benefits. The initial term of the employment agreement is for one year and automatically renews for additional one-year terms until terminated by Mr. Akam or the Company.

The employment agreement provided that, on July 22, 2013, the Company would grant Mr. Akam shares of its common stock equal in value to $50,000 if Mr. Akam was continuously employed by the Company through that date. The number of shares of common stock that the Company would issue to Mr. Akam would be calculated based on the last sales price of the Company’s common stock as reported on the OTCQB on July 22, 2013. The employment agreement also provided that the Company would grant Mr. Akam additional shares of its common stock equal in value to $50,000 on January 1st of each year thereafter if Mr. Akam was continuously employed by the Company through January 1st of the applicable year. The number of shares of common stock that the Company would issue to Mr. Akam for each applicable year would be calculated based on the average of the last sales price of shares of the Company’s common stock as reported on the OTCQB for the month of January of the applicable year.

Notwithstanding the above, and in connection therewith, Mr. Akam agreed that the number of shares that may be earned by him under his employment agreement in connection with any particular grant would be equal to the lesser of: (i) 71,429 shares of common stock, or (ii) the number of shares of common stock calculated by dividing $50,000 by the closing price of the Company’s common stock on the day immediately preceding the date the Company’s obligation to issue the shares to him fully accrues. Mr. Akam also agreed that in the event the Company was unable to fulfill its obligation to issue all of the shares earned by him with respect to any particular grant because it did not have enough shares of common stock authorized and available for issuance, (i) Mr. Akam would not require the Company to issue more shares of common stock than are then authorized and available for issuance by the Company, and (i) the Company would be permitted to settle any liability to Mr. Akam created as a result thereof in cash.

29

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

In the event the Company terminates Mr. Akam’s employment without “cause” (as such term is defined in the employment agreement), Mr. Akam will be entitled to receive the following severance compensation from the Company: (i) if the Company terminates Mr. Akam’s employment during the first year of his employment with the Company, that amount of compensation equal to the salary payable to Mr. Akam during that year, (ii) if the Company terminates Mr. Akam’s employment during the second year of his employment with the Company, that amount of compensation equal to nine months of the salary payable to Mr. Akam during that year, (iii) if the Company terminates Mr. Akam’s employment during the third year of his employment with the Company, that amount of compensation equal to six months of the salary payable to Mr. Akam during that year, and (iv) if the Company terminates Mr. Akam’s employment after the third year of his employment with the Company, that amount of compensation equal to three months of the salary payable to Mr. Akam during the year that such termination occurs. Mr. Akam will not be entitled to receive any severance compensation from the Company if the Company terminates his employment for “cause” or as a result of his disability, or if Mr. Akam resigns from his employment with the Company.

The employment agreement also contains customary provisions that provide that, during the term of Mr. Akam’s employment with the Company and for a period of one year thereafter, Mr. Akam is prohibited from disclosing confidential information of the Company, soliciting Company employees and certain other persons, and competing with the Company.

On July 31, 2013, the Company appointed Richard Akam as its Chief Executive Officer, Chief Financial Officer and Secretary. The Company and Mr. Akam did not amend the employment agreement in connection with the above appointments, and Mr. Akam did not receive any additional compensation in connection with the above appointments.

On August 19, 2013, Richard Akam resigned as the Company’s Chief Financial Officer. Mr. Akam retained his positions as the Company’s Chief Executive Officer, Chief Operating Officer and Secretary.

On January 31, 2017, the Company and Richard W. Akam entered into an amendment to the employment agreement. Under the terms of the amendment, the parties confirmed the appointment of Mr. Akam as the Company’s Chief Operating Officer on January 22, 2013 and as the Company’s Chief Executive Officer on July 31, 2013, clarified that Mr. Akam’s monthly base salary after the initial term of the employment agreement may be adjusted from time to time by the Company with Mr. Akam’s consent, removed the provision relating to the grant of shares of the Company’s common stock to Mr. Akam on January 1st of each year effective December 31, 2016, and clarified that the criteria for Mr. Akam’s annual bonuses shall be identified and agreed upon by the Company and Mr. Akam by the end of the 1st quarter of each fiscal year.

On January 2, 2019, theCompany entered into a Second Amendment to Employment Agreement with Richard W. Akam pursuant to which Mr. Akam resigned as the Company Chief Executive Officer but retained his positions as the Company’s Chief Operating Officer and Secretary.

Operating Leases

 

Company Headquarters

 

In January 2015, the Company entered into a lease with Crescent Hill Office Park for its corporate headquarters located at6327-4 Argyle Forest Boulevard, Jacksonville, Florida pursuant to which the Company leases approximately1,500 square feet of space.. The lease providesprovided for an initial monthly rent payment of $1,806 and expired on December 31, 2017, at which time it converted to a month-to-month lease.

 

 2230 

 

 

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

In January 2018, the Company entered into a new, month-to-month lease with Crescent Hill Office Park for its corporate headquarters located at6327-4 Argyle Forest Boulevard, Jacksonville, Florida pursuant to which the Company leases approximately1,500 square feet of space.. The lease providesprovided for an initial monthly rent payment of $2,063 and continuescontinued in place until it terminated on December 31, 2018.

On November 15, 2018, the Company entered into a month-to-month basis until either partytriple net lease with the Kasturi Children’s Trust (the “Trust”) for its new corporate headquarters located at 1409 Kingsley Ave., Ste. 2, Orange Park, Florida. The lease is for a term of 60 months and provides 60 days advance written noticethe Company with an option to extend the lease by three additional five-year periods. The lease provides for rent payments in the amount of their intent to terminate$4,000 per month. The Trust is an irrevocable trust for which the lease.children of Seenu G. Kasturi are the beneficiaries. The trustee of the Trust is an unrelated third party.

 

Nocatee Restaurant

 

In October 2013,DWG Acquisitions, LLC, a Louisiana limited liability company (“DWG Acquisitions”), entered into a triple net shopping center lease with NTC-REG, LLC (“NTC-REG) for the Nocatee Restaurant pursuant to which DWG Acquisitions leased approximately 2,900 square feet of space.Restaurant. The lease provides for an initial monthly rent payment of $1,100 and an additional annual rent payment equal to the amount by which 6% of the restaurant’s annual gross sales exceeds the aggregate monthly rent payments accrued during the applicable year. The lease has an initial term of 53 months and provides DWG Acquisitions with an option to extend the lease by an additional term of 60 months. The lease was assumed by Seediv when Seediv acquired all of the assets and liabilities associated with the Nocatee and Youngerman Circle Restaurants from DWG Acquisitions pursuant to the terms of that certain Asset Purchase Agreement,asset purchase agreement, dated December 1, 2016, by and between Seediv and DWG Acquisitions (the “Asset“Seediv Purchase Agreement”).

 

On April 1, 2017, DWG Acquisitions, Seediv and NTC-REG entered into an assignment and assumption & first modification to lease agreement for the Nocatee Restaurant. Under the agreement, DWG Acquisitions assigned all of its right, title, interest and claim in and to the Nocatee Lease,lease, and Seediv assumed the payment and performance of all obligations, liabilities and covenants of DWG Acquisitions under the lease for the Nocatee Restaurant. In addition, the parties amended certain terms of the lease to state that the lease covers approximately 3,400 square feet of space, to extend the term of the lease for a 60-month period commencing on April 1, 2018 and expiring March 31, 2023, and to change the rent payments to an initial monthly rent payment of $6,830$7,035 without an additional annual rent payment.

 

Youngerman Circle Restaurant

 

In May 2014,DWG Acquisitions entered into a triple net lease with Raceland QSR, LLC, a Louisiana limited liability company (“Raceland QSR”), which is a related party, for the Youngerman Circle Restaurant pursuant to which DWG Acquisitions leased approximately 6,500 square feet of space.Restaurant. The lease provides for a monthly rent payment equal to 7% of the restaurant’s monthly net sales. The lease has an initial term of 10 years and renews automatically for additional one-year terms unless prior written notice is provided by either party. The lease was assumed by Seediv when Seediv acquired all of the assets and liabilities associated with the Nocatee and Youngerman Circle Restaurants from DWG Acquisitions pursuant to the terms of the AssetSeediv Purchase Agreement.

31

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

 

On December 20, 2016, Seediv entered into a new triple net lease with Raceland QSR for the Youngerman Circle Restaurant. The lease provides for rent payments to be made by the Company for each of 13 rent periods per year, with each rent period comprised of four weeks. The lease provides for an initial base rent payment equal to the greater of: (i) $10,000 per rent period, or (ii) 7.5% of the Youngerman Circle Restaurant’s net sales for the applicable rent period. Commencing on the fifth (5th) anniversary and continuing every five years thereafter, the base rent will be equal to the sum of: (i) the average base rent previously in effect for the preceding five-year period, and (ii) the product of such previous average base rent multiplied by 7.5%. The lease has an initial term of 20 years and provides the Company with an option to extend the lease for two additional five-year periods. The Company agreed to guarantee Seediv’s payment and performance of all of its obligations under the lease.

Valdosta Dick’s Wings Restaurant

On December 31, 2017, DWAG Valdosta, LLC, a Georgia limited liability company that is a wholly-owned subsidiary of the Company (“DWAG Valdosta”), entered into a triple net lease with PLD, L.L.L.P., a Georgia limited liability company, for the Dick’s Wings and Grill restaurant located at 153 Baytree Road, Valdosta, Georgia. The lease provides for monthly rent payments of $3,333 for the first two years and $5,000 for the following three years, plus an additional annual rent payment equal to the amount by which 6% of the restaurant’s annual gross sales exceeds $1,000,000. The lease has an initial term of five years and provides the Company with an option to extend the lease for two additional five-year periods.

Panama City Beach Dick’s Wings Restaurant

On July 1, 2015, DWG Acquisitions entered into a lease Arquette Development Corporation, a Florida corporation (“Arquette Development”), for the Dick’s Wings and Grill restaurant located at 1136 Thomas Drive, Panama City Beach, Florida (the “Panama City Lease”). The lease provided for rent payments of $5,000 plus an additional annual rent payment equal to the amount by which 6% of the restaurant’s annual gross sales exceeds $1,200,000. The lease had an initial term of three years and provided DWG Acquisitions with an option to extend the lease for three additional three-year periods. The lease expired on June 30, 2018 and was not renewed by DWG Acquisitions. Upon the expiration of the lease, DWG Acquisitions entered into a month-to-month tenancy with Arquette Development pursuant to which DWAG PCB, LLC, a Florida limited liability company that is a wholly-owned subsidiary of the Company (“DWAG PCB”), makes monthly rent payments of $3,000 to Arquette Development on behalf of DWG Acquisitions.

Tallahassee Dick’s Wings Restaurant

On May 1, 2018, DWAG Tallahassee, LLC, a Florida limited liability company that is a wholly-owned subsidiary of the Company (“DWAG Tallahassee”), entered into a triple net lease with Bannerman Crossings III, LLC, a Florida limited liability company, for a Dick’s Wings and Grill restaurant to be located at 3427 Bannerman Rd., Suite 104, Tallahassee, Florida. The lease provides for no rent during the first year of the lease, followed by monthly rent payments equal to 6% of the restaurant’s monthly gross sales for each month remaining under the lease. The lease has an initial term of 10 years and provides the Company with an option to extend the lease for two additional five-year periods. Bannerman Crossings agreed to loan DWAG Tallahassee $250,000 to be used for tenant improvements to the property. DWAG has the right to terminate the lease at the end of the 42nd month of the initial term in the event if gross sales during the period commencing on the first day of the 25th month of the initial term and ending on the last day of the 36th month of the initial term are less than $1,400,000.

 

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ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Rent expense under the Company’s operating leases was $57,713 and $182,293 during the three- and nine-month periods ended September 30, 2018, respectively, and was$98,748 and $205,220 during the three- and nine-month periods ended September 30, 2017, respectively.Gonzalez Tilted Kilt Restaurant

 

On September 25, 2018, TK Gonzales LA, LLC, a Louisiana limited liability company that is a wholly-owned subsidiary of the Company (“TK Gonzales”), entered into a triple net lease with Acadiana Development of Gonzales, LLC, a Louisiana limited liability company, for the Tilted Kilt restaurant located at 2838 Outfitter’s Drive, Gonzales, Louisiana. The lease provides for initial monthly rent payments of $12,000 that increase to $17,600 during the term of the lease. The lease has an initial term of 10 years and provides the Company with an option to extend the lease for two additional five-year periods.

CapitalFinancing Leases

 

On August 30, 2018, the Company entered into the Master Lease. The initial term of the lease expires on August 31, 2038. The Company has the option to extend the term of the lease for four additional successive periods of five years each. The aggregate base annual rent is $876,875 and is subject to annual increases commencing September 1, 2019 in an amount equal to the lesser of: (i) 1.75%, or (ii) 1.25 times the change in the Consumer Price Index. The Company is responsible for all costs and obligations relating to the Properties.

 

Sponsorship Agreements

In July 2013, the Company entered into a three-year sponsorship agreement with the Jacksonville Jaguars, LLC (the “Jacksonville Jaguars”) and, in connection therewith, in August 2013, entered into a subcontractor concession agreement with Levy Premium Foodservice Limited Partnership (“Levy”) for a concession stand to be located at TIAA Bank Field in Jacksonville, Florida. The Company determined thatconcurrently assigned all of its rights and obligations under the Master Leaseconcession agreement to DWG Acquisitions in return for a fee of $2,000 per month for each full or partial month during which the concession agreement is in effect. In July 2015, the Company extended its sponsorship agreement with the Jaguars by an additional two years and entered into a capital lease.subcontractor concession agreement with Ovations Food Services, L.P. (“Ovations”) for a second concession stand at TIAA Bank Field. The Company recordedconcurrently assigned all of its rights and obligations under the second concession agreement to DWG Acquisitions in return for an additional fee of $3,000 per month for each full or partial month during which the concession agreement is in effect.

In September 2016, the Company terminated its subcontractor concession agreements with Levy and Ovations and the related assignment agreements with DWG Acquisitions, and entered into a capital lease assetsub-concession agreement with Jacksonville Sportservice, Inc. (“Jacksonville Sportservice”) and capital lease obligationDWG Acquisitions with respect to the two concession stands previously covered by the Levy and Ovations subcontractor concession agreements. The Company concurrently assigned all of $11,500,000its rights and obligations under the sub-concession agreement to DWG Acquisitions in its condensed consolidated balance sheets that wasreturn for a fee equal to the present valueincome generated by the concession stands less all expenses incurred by the concession stands for each full or partial month during which the concession agreement is in effect. In October 2017, the Company entered into a termination agreement with DWG Acquisitions whereby the Company terminated the assignment to DWG Acquisitions.

33

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

In November 2017, the Company entered into a new five-year sponsorship agreement with the Jacksonville Jaguars. Under the terms of the Company’s future minimum leaseback payments.sponsorship agreement, during each preseason and regular season football game played by the Jacksonville Jaguars and at certain other events held at the football-based stadium in Jacksonville, Florida currently named “Everbank Field”: (i) the Company has the right to display its branding on one fixed concession stand in the Bud Light Party Zone at Everbank Field and a second concession stand located on the concourse at Everbank Field, (ii) the Company has the right to have its food products sold or otherwise distributed from the stands and/or certain general concession areas at Everbank Field, and (iii) the Company has the right to receive a variety of stadium signage at Everbank Field, radio broadcasting on the Jacksonville Jaguars’ radio programming, and digital advertising on the Jacksonville Jaguars’ website and certain of its social media sites.

The outstanding balanceterm of the capital lease obligation was$11,413,326 at September 30,sponsorship agreement commences on April 1, 2018 and expires on the later of: (i) the conclusion of which $171,411 represented the short-term2022/23 NFL season, and (ii) February 28, 2023. The Company is required to pay the Jacksonville Jaguars annual fees in the amount of $200,000 during the first year of the agreement increasing to $216,490 during the last year of the agreement. In addition, the Company is required to provide the Jacksonville Jaguars with food, beverages and serving products equal in value to $35,000 during the first year of the agreement increasing to $37,890 during the last year of the agreement. In the event the Jacksonville Jaguars play in any post-season playoff games, the Company will pay the Jacksonville Jaguars an additional amount per playoff game equal to a pro-rated portion of the capital lease obligation and $11,241,915 representedannual fee applicable during the long-term portionthen-current year of the capital lease obligation.agreement.

 

The following table presents the future minimum annual minimum lease payments to be recognized under the capital lease at Septembersponsorship agreement as of June 30, 2018:2019:

 

Year 

Future

Minimum
Lease
Payments

 
2018 $146,146 
2019  881,990 
2020  897,425 
2021  913,130 
2022  929,110 
Thereafter  16,869,402 
Total  20,637,203 
Less: portion representing interest  (9,223,877)
Present value of lease payments $11,413,326 

The future annual minimum lease payments to be recognized for 2018 represent the payments to be recognized during the remainder of the 2018 fiscal year.

Year Minimum
Annual
Payments		 
2019 (remaining six months) $102,000 
2020  208,080 
2021  212,240 
2022  216,490 
2023  — 
Thereafter  — 
Total $738,810 

 

 2434 

 

 

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Teay’s Valley Fire

On March 25, 2019, the Company experienced a fire at its Fat Patty’s restaurant located at 5156 State Route 34 in Hurricane, West Virginia. As a result, the restaurant was closed for repair. The following table presentscompany has an insurance policy in place on the future obligationsproperty and received insurance proceeds in the amount of $579,885 under the capital lease at September 30, 2018:

Year Lease
Obligation
Recognized		 
2018 $27,416 
2019  175,764 
2020  202,944 
2021  232,148 
2022  263,512 
Thereafter  10,511,542 
Total $11,413,326 

The capital lease obligationpolicy for 2018 represents the obligation to be recognized during the remainder of the 2018 fiscal year.

The land, buildingssuch items as lost income and improvements of $11,500,000 included within property anddamaged equipment inNote 8. Property and Equipment, Net at September 30, 2018 consisted of gross assets acquired on the capital lease.The gross amount of all future payments under the lease was $20,637,203 at September 30, 2018, of which $9,223,877 was for interest.Depreciation expense and accumulated depreciation were approximately $24,000 during the three- and nine-monthsix-month periods ended SeptemberJune 30, 3018. Interest expense2019. The Company recorded $398,297 of the insurance proceeds under “revenue – restaurant sales” on its condensed consolidated statements of operations as that portion of the insurance proceeds was $59,471 duringpaid for lost income from business interruption, and recorded the three-remaining $181,588 of the insurance proceeds under “income from insurance proceeds” on its condensed consolidated statements of operations as that portion of the insurance proceeds was for equipment and nine-month periods ended September 30, 2018. No depreciation or interest expense was recognized during three- and nine-month periods ended September 30, 2017.other assets that were destroyed in the fire. The restaurant is expected to reopen in early October 2019.

 

Note 16.17. Related-Party Transactions

 

DuringExcept as otherwise set forth below, all of the year endedfollowing transactions are with Seenu G. Kasturi or an entity affiliated with Mr. Kasturi. On January 18, 2017, Mr. Kasturi was appointed as the Company’s President, Chief Financial Officer and Chairman of the Company’s board of directors. As of June 30, 2019, Mr. Kasturi was the beneficial owner of 30.3% of the Company’s common stock and 100% of the Company’s Series A convertible preferred stock, collectively representing 89.4% of the voting power of the Company’s capital stock.

Seenu G. Kasturi has served as Vice President and Controller of TKFO since June 2018. He has owned all of the outstanding membership interests in DWG Acquisitions and Raceland QSR and has served as the President, Treasurer and Secretary of DWG Acquisitions and Raceland QSR, since their formation in 2013 and 2012, respectively. Mr. Kasturi has owned 90% of the equity interests in Blue Victory and has served as its President, Treasurer, Secretary and sole member of its board of directors since its formation in 2009. He also owned all of the outstanding membership interests in Seediv, and served as its President, Treasurer and Secretary, from its formation in July 2016 to December 31,19, 2016, the date the Company acquired Seediv.

Employment Agreements

In January 2017, the Company borrowed$372,049 from Blue Victory and repaid $341,546 to Blue Victory under a separate loan.Accordingly, the amount of principal outstanding under the loan was $30,503 at December 31, 2017. The Company borrowed $23,481 under the loan during the nine-month period ended September 30, 2018. Accordingly, the amount of principal outstanding under the loan was $53,984 at September 30, 2018.The loan accrues interest at a rate of 6% per annum and is payable on demand.appointed Seenu G. Kasturi was appointedas its President, Chief Financial Officer and Chairman of the board of directors ofand, in connection therewith, entered into an employment agreement with Mr. Kasturi. In January 2019, the Company in January 2017. He owned approximately 17%appointed Mr. Kasturi as its Chief Executive Officer and entered into a new employment agreement with him. As of the Company’s common stock, all of the Company’s Series A convertible preferred stock, and 90% of the equity interests in Blue Victory at SeptemberJune 30, 2018. He also2019, Mr. Kasturi served as the President, TreasurerCompany’s Chief Executive Officer, Chief Financial Officer and Secretary,Chairman of the its board of directors. A description of the employment agreement is set forth herein underNote 16. Commitments and Contingencies – Employment Agreements – Seenu G. Kasturi.

In January 2013, the Company entered into an employment agreement with Richard W. Akam in connection with his appointment as the sole memberCompany’s Chief Operating Officer. As of June 30, 2019, Mr. Akam served as the Company’s Chief Operating Officer and Secretary. A description of the boardemployment agreement is set forth herein underNote 16. Commitments and Contingencies – Employment Agreements – Richard W. Akam.

35

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Financing Transactions

The Company is a party to a credit facility with Blue Victory.A description of directors, ofthe credit facility is set forth herein underNote 11. Debt Obligations.

The Company borrowedfunds from, and repaid funds to, Blue Victory under a separate loan that it had entered into with Blue Victory during the nine-month period ended September 30, 2018 and the year ended December 31, 2017.A description of the loan is set forth herein underNote 11. Debt Obligations.

 

Leases

In October 2013, DWG Acquisitions entered into a triple net shopping center lease with NTC-REG, LLC (“NTC-REG) for the Nocatee Restaurant. A description of the lease is set forth herein underNote 16. Commitments and Contingencies – Operating Leases.The lease was assumed by Seediv on December 1, 2016 when Seediv acquired all of the assets and liabilities associated with the Nocatee and Youngerman Circle Restaurants from DWG Acquisitions, and became the Company’s obligation when the Company acquired Seediv on December 19, 2016. On April 1, 2017, DWG Acquisitions, Seediv and NTC-REG entered into an assignment and assumption & first modification to lease agreement for the Nocatee Restaurant. A description of the agreement is set forth herein underNote 16. Commitments and Contingencies – Operating Leases.

In May 2014, DWG Acquisitions entered into a triple net lease with Raceland QSR for the Youngerman Circle Restaurant. A description of the lease is set forth herein underNote 16. Commitments and Contingencies – Operating Leases. The lease was assumed by Seediv on December 1, 2016 when Seediv acquired all of the assets and liabilities associated with the Nocatee and Youngerman Circle Restaurants from DWG Acquisitions, and became the Company’s obligation when the Company acquired Seediv on December 19, 2016. On December 20, 2016, Seediv entered into a new triple net lease with Raceland QSR for the Youngerman Circle Restaurant. A description of the lease is set forth herein underNote 16. Commitments and Contingencies – Operating Leases.

On November 15, 2018, the Company entered into a triple net lease with the Kasturi Children’s Trust (the “Trust”) for its new corporate headquarters. A description of the lease is set forth herein underNote 16. Commitments and Contingencies – Operating Leases.

Upon the expiration of the Panama City Lease on June 30, 2018, DWG Acquisitions entered into a month-to-month tenancy with Arquette Development pursuant to which DWAG PCB makes monthly rent payments of $3,000 to Arquette Development on behalf of DWG Acquisitions. A description of the Panama City Lease and DWG Acquisitions’ month-to-month tenancy with Arquette Development is set forth herein underNote 16. Commitments and Contingencies – Operating Leases.

Franchise Agreements

Prior to December 31, 2018, the Company has been a party to several franchise agreements with DWG Acquisitions pursuant to which DWG Acquisitions owned and operated Dick’s Wings restaurants. The terms of these franchise agreements were identical to the terms of the franchise agreements that the Company enters into with unrelated franchisees, except thatthe Company did not require DWG Acquisitions to pay a franchise fee to the Company under the franchise agreements for the Nocatee and Youngerman Circle Restaurants. The Company generated a total of $23,256$49,110 and $100,994$77,738 in royalties and franchise fees through its franchise agreements with DWG Acquisitions during the three- and nine-monthsix-month periods ended SeptemberJune 30, 2018, respectively, and generated a total of$40,285 and $123,343 in royalties and franchise fees through its franchise agreements with DWG Acquisitions during the three- and nine-month periods ended September 30, 2017, respectively.

25

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

The Company had a total of $891 and $1,505 of accounts receivable outstanding from DWG Acquisitions at September 30, 2018 and December 31, 2017, respectively, and had a total of $1,761 and $2,280 of ad funds receivable outstanding from DWG Acquisitions at September 30, 2018 and December 31, 2017, respectively. The Company had a total of $100,892 and $94,150$41,512 for accounts payable and accrued expenses outstanding from DWG Acquisitions at December 31, 2018. The Company did not have any accounts payable and accrued expenses outstanding from DWG Acquisitions at June 30, 2019.

36

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

In September 2018, the Company became a franchisee of a Tilted Kilt restaurant located in Gonzales, Louisiana. Richard W. Akam, who serves as the Company’s Chief Operating Officer and Secretary, has served as President of TKFO since June 2018, and Ketan Pandya, who serves as a member of the Company’s board of directors, has served as Vice President of Franchise Relations of TKFO since June 2018. Fred D. Alexander, who serves as a member of the Company’s board of directors, is the owner of SDA Holdings.

The Company paid ad fund fees of $3,408 and $7,979 to Tilted Kilt during the three- and six-month periods ended June 30, 2019. The Company is not required to pay any royalties or franchise fees to Tilted Kilt under its franchise agreement with Tilted Kilt.

Series A Convertible Preferred Stock

In June 2018, the Company entered into a securities purchase agreement with Seenu G. Kasturi pursuant to which the Company issued Mr. Kasturi 449,581 shares of Series A convertible preferred stock in exchange for 449,581 shares of common stock then held by Mr. Kasturi. A description of this transaction is set forth herein underNote 13. Capital Stock.

Acquisitions and Dispositions

On December 19, 2016, the Company acquired all of the outstanding membership interests of Seediv from Seenu G. Kasturi for a purchase price of $600,000 and an earnout payment. The earn-out payment was determined to be $199,682, of which $144,326 had been paid as of December 31, 2018. As part of the transaction, the Company assumed debt owed by Seediv to Blue Victory in the amount of $216,469 which the Company repaid in full during the year ended December 31, 2017. A description of the debt is set forth herein underNote 11. Debt Obligations.

On October 4, 2017, Seediv entered into an agreement for purchase and sale of real estate with Raceland QSR pursuant to which Seediv agreed to purchase the real property located at 6055 Youngerman Circle in Argyle Circle, Jacksonville, Florida from Raceland QSR. The purchase price for the property was to be the lesser of: (i) $2,000,000, or (ii) the appraised value of the property determined by the appraisal completed by the financing source proposed to be utilized by Seediv to finance the acquisition of the property. The agreement provided for the payment by Seediv of a deposit of $10,000 within 10 days of the date of the agreement to an escrow agent to be selected by the parties with the remainder of the purchase price to be paid by Seediv at closing. Seediv had the right to terminate the transaction in the event that certain feasibility studies, the title commitment or the appraisal was unsatisfactory to Seediv, or if Raceland QSR breached any of its employees at Septemberrepresentations, warranties, covenants, agreements or obligations under the agreement, in which case the deposit would be returned to Seediv. The closing of the transaction was to occur on December 3, 2017.

37

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

On November 30, 2017,Seedivand Raceland QSR entered into an amendment to the agreement pursuant to which the parties agreed to extend the closing date by 60 calendar days. On February 1, 2018, Seediv and Raceland QSR entered into a termination agreement and mutual release with respect to the agreement pursuant to which the parties agreed to terminate the agreement and release each other from any claims arising out of the agreement.

On August 30, 2018, the Company closed upon the asset purchase agreement for Fat Patty’s. In connection therewith, the Company issued a secured convertible promissory note to Seenu G. Kasturi pursuant to which the Company borrowed $622,929 to help finance this acquisition. A description of the promissory note is set forth herein underNote 11. Debt Obligations.

On October 30, 2018, the Company entered into a membership interest purchase agreement with SDA Holdings and Fred D. Alexander pursuant to which the Company agreed to acquire all of the issued and outstanding membership interests in SDA Holdings. A description of this transaction is set forth herein underNote 5. Agreement to Acquire Tilted Kilt. Richard W. Akam, who served as the Company’s Chief Operating Officer and Secretary as of June 30, 2019, has served as President of TKFO since June 2018, and Ketan Pandya, who serves as a member of the Company’s board of directors, has served as Vice President of Franchise Relations of TKFO since June 2018. Mr. Alexander serves as a member of the Company’s board of directors.

Other Related-Party Arrangements.

Certain part-time employees of the Company are also employed on a part-time basis by various entities affiliated with Seenu G. Kasturi. In addition, the Company had a total of $270,917 and $231,187 of accounts payable and accrued expenses outstanding at June 30, 2019 and December 31, 2017, respectively. The outstanding amounts2018, respectively, that were owed to employees and other affiliates of the Company primarily for rent owed to DWG Acquisitionssalaries and other expenses owed to the employees.payroll liabilities.

 

Note 17.18. Judgments in Legal Proceedings

 

In October 2009, the Company initiated a legal proceeding entitledAmerican Restaurant Concepts, Inc. vs. Cala, et al was filed in in the United States District Court for the Middle District of Florida, Jacksonville Division, in Duval County (the “ARC Proceeding”). In the complaint, the Company alleged damages for trademark infringement. Also on that date, a legal proceeding entitledCala v. Rosenberger et al. was filed with the Fourth Judicial Circuit Court in and for Duval County, Florida (the “Cala Proceeding”; together with the ARC Proceeding, the “ARC & Cala Proceedings”). In the complaint, Cala alleged damages for breach of contract. In January 2010, the parties to each of the actions entered into a settlement agreement with respect to both actions pursuant to which the Company agreed to pay $250,000 in full settlement of the legal proceedings (the “2010 Settlement Agreement”). In early 2010, Cala breached the terms of the 2010 Settlement Agreement, relieving the Company of any further obligations under the agreement. The Company made total payments of $40,000 under the 2010 Settlement Agreement prior to the breach by Cala. Accordingly, the remaining balance of $210,000 outstanding under the settlement agreement was reflected in settlement agreements payable.

In August 2016, the Company entered into a full and final settlement and release agreement with Cala. Under the terms of the agreement, the Company and Cala agreed to release each other from all claims related to the ARC & Cala Proceedings, any and all other lawsuits that may have been filed by one party against the other, the 2010 Settlement Agreement, and any other matters, causes of action or claims either party may have had against the other. In consideration for the releases, the Company agreed to pay $15,000 to Cala and issue 35,000 shares of its common stock to Cala. The Company recognized a non-cash gain on settlement of liabilities of $175,449 in connection therewith during the year ended December 31, 2016. The remaining balance of $210,000 outstanding under the 2010 Settlement Agreement was debited to settlement agreements payable.

On February 25, 2011, a legal proceeding entitledDuval Station Investment, LLC vs. Hot Wing Concepts, Inc. d/b/a Dick’s Wings and Grill, and American Restaurant Concepts, Inc.was filed with the Fourth Judicial Circuit Court in and for Duval County, Florida. In the complaint, the plaintiff alleged damages for breach of guaranty. On October 4, 2011, a final judgment was entered by the court in favor of the plaintiff in the amount of $161,747, and on November 11, 2011 a final judgment for attorneys’ fees and costs was entered in favor of the plaintiff in the amount of $33,000. These judgments, together with accrued interest of $2,369 thereon, resulted in a total loss from legal proceedings of $197,116 during the year ended December 25, 2011. The Company had not paid any part of the judgment or the accrued interest thereon. As a result, the loss was reflected in settlement agreements payable at SeptemberJune 30, 20182019 and December 31, 2017.2018. Interest expense in the amount of $2,841$2,810 and $5,590 accrued on the outstanding balance of the settlement agreement payableloss during the three-monththree- and six-month periods ended SeptemberJune 30, 2018 and 2017, respectively, and interest expense in the amount of $8,431 accrued on the outstanding balance of the settlement agreement payable during the nine-month periods ended September 30, 2018 and 2017, respectively.2019. The interest expense was credited to settlement agreements payable. The Company had accrued interest of $78,681$87,112 and $70,250$81,522 outstanding at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. The outstanding judgment and legal fees in the amount of $194,747 along with the accrued interest of $78,681$87,112 totaled $273,428 as of September$281,859 at June 30, 2018.2019. The outstanding judgment and legal fees in the amount of $194,747 along with the accrued interest of $70,250$81,522 totaled $264,997$276,269 at December 31, 2017.2018.

 

 2638 

 

 

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

In January 2015, Santander Bank filed a complaint against the Company in the Circuit Court, Fourth Judicial Circuit in and for Duval County, Florida, seeking damages of $194,181 plus interest, costs and attorney’s fees for breach of a guaranty of certain obligations of Ritz Aviation, LLC (“Ritz Aviation”) under a promissory note executed by Ritz Aviation in July 2005. During the Company’s fourth fiscal quarter of 2016, Santander Bank informed the Company that certain assets of Ritz Aviation had been sold for $82,642 and that the proceeds from the sale were applied towards the balance of the damages being sought, resulting in an outstanding balance of damages sought of $111,539. The outstanding balance of damages sought was reflected in accrued legal contingency at June 30, 2019 and December 31, 2018. Interest expense in the amount of $1,930 and $3,882 accrued on the outstanding balance of the accrued legal contingency during the three- and six-month period ended June 30, 2019. The interest expense was credited to accrued legal contingency. A total of $39,665$45,521 and $33,809$41,638 of accrued interest, and $10,586 of other expenses (excluding legal fees), were outstanding at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, resulting in an aggregate potential loss of $161,790$167,646 and $155,935$163,764 at SeptemberJune 30, 20182019 and December 31, 2017, respectively. The potential losses of $161,790 and $155,935 were reflected in accrued legal contingency at September 30, 2018, and December 31, 2017, respectively. This case is currently pending.

Note 19. Segment Reporting

The Company has two reportable segments, which are Company-owned restaurants and franchise operations.

Company-Owned Restaurants

Company-owned restaurants consist of several brands that are aggregated into one reportable segment because of the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, the nature of the regulatory environment, and store level profit margin for each of the brands are similar. The brands are Dick’s Wings and Grill, Fat Patty’s and Tilted Kilt Eatery and Pub. All Company-owned restaurants are casual dining restaurants. There were a total of nine company-owned restaurants at June 30, 2019 and December 31, 2018, respectively.

Franchise Operations

The Company only offers franchises for the Dick’s Wings brand.All franchised restaurants are casual dining restaurants. Franchises are sold in markets where expansion is deemed advantageous to the development of the Dick’s Wings brand and system of restaurants. The Companyenters into franchise agreements with franchisees to build and operate restaurants using the Dicks Wings brand within a defined geographic area. The agreements have a 10-year term and can be renewed for one additional 10-year term.

In exchange forroyalty payments, advertising funds, franchise fees and area development fees, the Company provides the franchisees with the use of its Dick’s Wings trademarks and Dick’s Wings system, which includes uniform operating procedures, standards for consistency and quality of products, technical knowledge, and procedures for accounting, inventory control and management.The Company also provides franchisees with assistance with site selection, prototypical architectural plans, interior and exterior design and layout, training, marketing and sales techniques, and restaurant openings.Franchisees generally remit royalty payments weekly for the prior week’s sales. Franchise fees and area development fees are paid upon the signing of the related franchise agreements.

39

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Franchisees are required to operate their restaurants in compliance with their franchise agreements, which includes adherence to operating and quality control standards, procedures and specifications established by the Company. Franchiseesare evaluated regularly by the Company for compliance with their franchise agreements through the use of periodic, unannounced, on-site inspections and standard evaluation reports.

The Company is not required to provide loans, leases, or guarantees to franchisees or the franchisees’ employees and vendors. If a franchisee becomes financially distressed, the Company is not required to provide financial assistance. If financial distress leads to insolvency of the franchisee or the filing of a petition by or against the franchisee under bankruptcy laws, the Company has the right, but not the obligation, to acquire the franchise at fair value as determined by an independent appraiser selected by the Company.

There were a total of16 and 17franchised restaurants at June 30, 2019 and December 31, 2018, respectively.

Segment Financial Information

Information on segments and a reconciliation of income from operations to net loss is as follows:

  Three Months
Ended
June 30, 2019		  Three Months
Ended
June 30, 2018		  Six Months
Ended
June 30, 2019		  Six Months
Ended
June 30, 2018		 
Revenue            
Company-owned restaurants $3,967,890  $839,827  $8,346,681  $1,767,104 
Franchise operations  221,077   274,760   431,107   536,647 
Total revenue $4,188,967  $1,114,587  $8,777,788  $2,303,751 
                 
Net Loss                
Company-owned restaurants $201,905  $(6,032) $399,165  $181,092 
Franchise operations  66,165   262,795   199,542   457,195 
Total income from operations  268,070   256,763   598,707   638,287 
Corporate and unallocated expenses  (559,631)  (312,294)  (1,304,511)  (646,204)
Net loss $(291,561) $(55,531) $(705,804) $(7,917)
                 
Depreciation and Amortization                
Company-owned restaurants $287,275  $13,567  $569,526  $19,064 
Franchise operations  —   —   —   — 
Corporate  1,374   81   2,733   143 
Total $288,649  $13,648  $572,259  $19,207 
                 
Capital Expenditures                
Company-owned restaurants $127,823  $112,332  $151,097  $135,118 
Franchise operations  —   —   —   — 
Corporate  —   1,648   9,000   2,834 
Total $127,823  $113,980  $160,097  $137,952 

40

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 20. Restatement of Previously Issued Condensed Consolidated Financial Statements

The Company is restating its condensed consolidated financial statements for the three- and six-month periods ended June 30, 2018 to correct an error related to the manner by which it recorded $54,242 and $111,740, respectively, of food discounts provided to customers and complimentary meals provided to employees. The Company recorded each of these items as an increase to restaurant operating costs – other operating expenses rather than as a reduction to restaurant sales on its condensed consolidated statements of operations. As a result, restaurant sales and restaurant operating costs – other operating expenses were each overstated by $54,242 and $111,740 during the three-and six-month periods ended June 30, 2018, respectively. The Company has restated its condensed consolidated financial statements for the three- and six-month periods ended June 30, 2018 for the sole purpose of reducing restaurant sales and restaurant operating costs – other operating expenses by $54,242 and $111,740, respectively.

The impact of the restatement on the Company’s condensed consolidated statement of operations for the three- and six-month periods is presented below. The restatement did not have any impact on the Company’s condensed consolidated balance sheet as of June 30, 2018 or the Company’s statement of cash flows for the six-month period ended June 30, 2018.

  For the Three Months Ended June 30, 2018 
 As Previously Reported  Adjustments  As
Restated		 
Condensed Consolidated Statement of Operations:            
Restaurant sales $894,069  $(54,242) $839,827 
Revenue  1,168,829   (54,242)  1,114,587 
Restaurant operating costs – other operating expenses  (225,073)  54,242   (170,831)
Total operating expenses  (1,299,709)  54,242   (1,245,467)

  For the Six Months Ended June 30, 2018 
 As Previously Reported  Adjustments  As
Restated		 
Condensed Consolidated Statement of Operations:            
Restaurant sales $1,878,844  $(111,740) $1,767,104 
Revenue  2,415,491   (111,740)  2,303,751 
Restaurant operating costs – other operating expenses  (437,191)  111,740   (325,451)
Total operating expenses  (2,498,063)  111,740   (2,386,323)

41

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

 

Note 18.21. Subsequent Events

 

On October 1, 2018, Seenu G. Kasturi earned 7,414 shares of the Company’s common stock pursuant to the terms of his employment agreement with the Company.

On October 30, 2018,July 9, 2019, the Company entered into a Membership Interest PurchaseFirst Amendment to Sponsorship Agreement (the “Purchase Agreement”“Amendment”), with SDA Holdings,theJacksonville Jaguars, LLC, a LouisianaDelaware limited liability company (“SDA”(the “Jaguars”),. The Amendment amended the terms of that certain Sponsorship Agreement, dated November 27, 2017, by and Fred D. Alexander, an individual, pursuant to whichbetween the Company agreed to acquire alland the Jaguars.

Under the terms of the issuedAmendment, during each preseason and outstanding membership interests in SDA for $10.00. SDA is the owner of theTilted Kilt Pub & Eatery® restaurant franchise. The transactions contemplatedregular season football game played by the Purchase Agreement are sometimes referredNational Football League’s Jacksonville Jaguars and at certain other events held at the football-based stadium in Jacksonville, Florida currently named “TIAA Bank Field”: (i) the Company has the right to herein collectivelydisplay its branding on two fixed concession stands in the stadium located in the Bud Light Party Zone at Everbank Field, five fixed concession stands on the stadium concourse, and two fixed concession stands on the upper club level of the stadium, and up to four portable concession stands on the north end zone deck, (ii) the Company has the right to have its food products sold or otherwise distributed from the stands and/or certain general concession areas at TIAA Bank Field, (iii) the Company has the right to receive a variety of advertising and stadium signage at TIAA Bank Field, radio broadcasting on the Jacksonville Jaguars’ radio programming, and digital advertising on the Jacksonville Jaguars’ website and certain of its social media sites, and (iv) the Company will be identified as the “Tilted Kilt Acquisition”.“Official Watch Party Restaurant / Bar for Jaguars away games, including social media spots, radio spots and banner ads.

 

The closingAmendment is for a term of 10 NFL football seasons and expires on the later of: (i) the conclusion of the Tilted Kilt Acquisition2028/29 NFL season, and (ii) February 2029. The Company is conditioned upon SDA, Trustee Services Group (the “Custodian”),required to pay the Jaguars annual fees in the amount of $500,000 during the 2019/20 NFL season and $794,444 for each of the next nine NFL seasons. In addition,the Companyis required to provide the Jaguars with food, beverages and serving products equal in value to $35,700 during the 2019/20 NFL season increasing to $40,000 for each of the last six NFL seasons. In the event the Jaguars play in any post-season playoff games,the Companywill pay the Jaguars an additional amount per playoff game equal to a pro-rated portion of the annual fee applicable during the then-current year of the agreement.

On July 15, 2019, the Company appointed Alex Andre as its Chief Financial Officer. In connection therewith, on July 15, 2019, Seenu G. Kasturi Let’s Eat Incorporated (“Let’s Eat”),resigned as the Reilly Group, LLC (the “Reilly Group”) and John Reynauld (Mr. Reynauld, together with the Custodian,Company’s Chief Financial Officer. Mr. Kasturi Let’s Eat,will continue to serve as the Reilly Group, the “Parties”) entering into an amendment to that certain Custodian Agreement, dated June 7, 2018, by an among the Parties to add SDA as a party to the agreementCompany’s Chief Executive Officer and remove Mr. Kasturi as a party to the agreement, in which event SDA will be required to deliver to the Custodian a certificate evidencing 718,563 sharesChairman of the Company’s common stock. The closingboard of directors.

On July 15, 2019, the Company entered into an employment agreement with Mr. Andre to serve as the Chief Financial Officer of the Tilted Kilt Acquisition is also conditionedCompany and, upon the Company raising gross proceedscompletion of at least $2,000,000 throughall applicable registration and licensing requirements, to serve as the sale of debt or equity securities, as well as other customary closing conditions. The closingGeneral Counsel of the Tilted Kilt Acquisition will occur once allCompany. The employment agreement is for an initial term of three years with automatic one-year renewals thereafter unless earlier terminated or not renewed as provided therein. Under the terms of the closing conditions have been satisfied.agreement, Mr. Andre will be paid an initial annual base salary in the amount of $175,000. On May 1, 2020, Mr. Andre’s salary will increase to $200,000 for the remainder of the employment term. Mr. Andre will be eligible to receive increases in salary on January 1st of each subsequent year in the discretion of the Company’s board of directors. On November 1, 2019, he will be eligible to receive an interim bonus of up to an amount equal to 10% of his then current base salary in the discretion of the Company’s board of directors, and will be eligible to receive annual bonuses on May 1st of each year thereafter of up to an amount equal to 10% of his then current base salary in the discretion of the Company’s board of directors. The employment agreement contains customary confidentiality, non-competition and non-solicitation provisions in favor of the Company.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenue and costs, and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation thereon or similar terminology or expressions.

 

We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions that may cause our actual results to differ materially from results proposed in such statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to:

 

·●our ability to fund our future growth and implement our business strategy;

·
●market acceptance of our restaurants and products;

·
●food safety issues and other health concerns;

·
●the cost of food and other commodities;

·
●labor shortages and changes in employee compensation costs;

·
●shortages or interruptions in the availability and delivery of food and other supplies;

·
●our ability to maintain and increase the value of ourDick’s Wings® andFat Patty’s® brands;

·
●changes in consumer preferences;

·
●our ability to identify, attract and retain qualified franchisees;

·
●our limited control over the activities of our franchisees;

 

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●the ability of us and our franchisees to identify suitable restaurant sites, open new restaurants and operate them in a profitable manner;

·
●our ability to successfully operate our company-owned restaurants;

·
●our ability to identify, acquire and integrate new restaurant brands and businesses;

·
●the loss of key members of our management team;

·
●the impact of any failure of our information technology system or any breach of our network security;

·
●the impact of security breaches of confidential customer information in connection with the electronic processing of credit/debit card transactions by us and our franchisees;

 

 28

·●the ability of us and our franchisees to comply with applicable federal, state and local laws and regulations;

·
●our ability to protect our trademarks and other intellectual property;

·
●competition and consolidation in the restaurant industry;

·
●the effects of litigation on our business;

·
●our ability to obtain debt, equity or other financing on favorable terms, or at all;

·
●the impact of any decision to record asset impairment charges in the future;

·
●the condition of the securities and capital markets generally;

·
●economic conditions in the jurisdictions in which we operate and nationally;

 

and statements of assumption underlying any of the foregoing, as well as any other factors set forth herein underItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations below andItem 1A. Risk Factorsof our Annual Report on Form 10-K for our fiscal year ended December 31, 2017.2018. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-looking statements.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

ThisManagement’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this report are based on information available to us on the date hereof and, except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth herein underItem 1A. Risk Factors of our Annual Report on Form 10-K for our fiscal year ended December 31, 20172018 and elsewhere in this report. The following should be read in conjunction with our condensed consolidated financial statements beginning on page 1 of this report.

 

All of the financial information presented herein has been revised to reflect the restatement of our condensed consolidated financial statements as of and for the three- and six-month periods ended June 30, 2019 as more fully described inNote 20. Restatement of Previously Issued Condensed Consolidated Financial Statementsin our condensed consolidated financial statements.

Overview

 

We were formed in April 2000 to develop the Dick’s Wings concept,restaurant franchise, and are the owner, operator and franchisor of the Dick’s Wings brand of restaurants. Our Dick’s Wings conceptfranchise is currently comprised of traditional20 restaurants like ourand three concession stands located in the States of Florida and Georgia. Dick’s Wings & Grill® restaurants, which are full service restaurants, and non-traditional units like our Dick’s Wings concession stands at TIAA Bank Field (formerly EverBank Field) and Jacksonville Veterans Memorial Arena in Jacksonville, Florida. We offeroffers a variety of boldly-flavored menu items highlighted by our Buffalo, New York-style chicken wings spun in our signature sauces and seasonings. We offer our customers a casual, family-fun restaurant environment designed to appeal to both families and sports fans alike. At Dick’s Wings, we strive to provide our customers with a unique and enjoyable experience from first bite to last call.

 

On December 19, 2016, we acquired all of the issued and outstanding membership interests of Seediv, LLC, a Louisiana limited liability company (“Seediv”), for $600,000 and an earn-out payment. Seediv is the owner and operator of the Dick’s Wings & Grill restaurant located at 100 Marketside Avenue, Suite 301, in the Nocatee development in Ponte Vedra, Florida 32081 (the “Nocatee Restaurant”) and the Dick’s Wings & Grill restaurant located at 6055 Youngerman Circle in Argyle Village in Jacksonville, Florida 32244 (the “Youngerman Circle Restaurant”). A description of our acquisition of Seediv is set forth herein underNote 5 – Acquisition of Seedivin our condensed consolidated financial statements.

On August 30, 2018, we closed upon an asset purchase agreement foracquired the Fat Patty’s franchiserestaurant concept (“Fat Patty’s”). Fat Patty’s is comprised of four company-owned restaurants located at 1442 Winchester Avenue, Ashland, Kentucky 41101, 5156 WV 34, Hurricane,in West Virginia 25526, 3401 Rt. 60 East, Barboursville, West Virginia 25504, and 1935 Third Avenue, Huntington, West Virginia 25702 (collectively, the “FatKentucky. Fat Patty’s Restaurants”).offers a variety of specialty burgers and sandwiches, wings, appetizers, salads, wraps, and steak and chicken dinners in a family friendly, sports-oriented environment designed to appeal to a mix of families, students, professors, locals, and visitors. A description of our acquisition of Fat Patty’sthe transaction is set forth herein underManagement’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments andNote 6 –4. Acquisition of Fat Patty’sin our condensed consolidated financial statementsstatements.

On October 30, 2018, we entered into an agreement to acquire the.Tilted Kilt Eatery and Pub®restaurant franchise (“Tilted Kilt”), which offersdinner entrees, traditional pub food, hamburgers, and salads made with fresh, quality ingredients, accompanied by full bar service, served up by uniquely kilt-clad wait staff in a lively, Celtic-themed atmosphere with numerous large screen televisions featuring sports programming. The Tilted Kilt franchise is currently comprised of 29 restaurants operating in 15 states and Canada, of which two are company owned and operated and the remaining 27 are franchise locations. A description of the transaction is set forth herein underNote 5. Agreement to Acquire Tilted Kilt in our condensed consolidated financial statements.

 

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We currently have 21 Dick’s Wings & Grill restaurants and three Dicks’ Wings concession stands. Of our 21 restaurants, 16 are locatedalso recently opened a Tilted Kilt restaurant in Florida and five are located in Georgia. Our concession stands are also located in Florida. Four of the restaurants are owned by us. The remaining 17 restaurants are owned and operated by franchisees. Our concession stands are also owned by us. We also have four Fat Patty’s restaurants. Of the four restaurants, three are located in West Virginia and one is located in Kentucky. All four of the restaurants are owned by us.Gonzales, Louisiana for which we serve as a franchisee.

 

Strategy

 

Our plan is to grow our company from a Florida and Georgia based franchisor of Dick’s Wings restaurants into a diversified restaurant holding company operating a portfolio of premium restaurant brands. We intend to focus on developing brands that offer a variety of high-quality food and potentially non-restaurant brands, includingbeverages in some cases, their related real estate properties.a distinctive, casual, high-energy atmosphere in a diverse set of markets across the United States.

 

The first major component of our growth strategy is the continued development and expansion of our legacy Dick’s Wings and Fat Patty’s brands. Key elements of our strategy include strengthening the brand,brands, developing new menu items, lowering our costs, improving our operations and service, driving customer satisfaction, and opening new restaurants in new and existing markets in the United States. We believe there are meaningful opportunities to grow the number of Dick’s Wings and Fat Patty’s restaurants in the United States and have implemented a rigorous and disciplined approach to drive franchising sales.increasing the number of company-owned and franchised restaurants. In our existing markets, we plan to continue to open new restaurants until a market is penetrated to a point that will enable us to gain marketing, operational, cost and other efficiencies. In new markets, we plan to open several restaurants at a time to quickly build our brand awareness.

 

The other major component of our growth strategy is the acquisition of controlling and non-controlling financial interests in other restaurant brands and potentially non-restaurant brands, offering us product and geographic diversification.diversification, like our acquisition of Fat Patty’s and our proposed acquisition of Tilted Kilt. We plan to complete, and are actively seeking, potential mergers, acquisitions, joint ventures and other strategic initiatives through which we can acquire or develop additional restaurant brands and, in some cases, their related real estate properties.brands. We are seeking brands offering proprietary menu items that emphasize the preparation of food with high quality ingredients, as well as unique recipes and special seasonings to provide appealing, tasty, convenient and attractive food at competitive prices. We are seeking real estate properties that enable us to build equity through monthly debt payments rather than rent payments, that provide us with tax and other expense incentives, and that offer long-term appreciation potential. In the eventAs we pursue non-restaurantacquire complementary brands, we intend to focus on companiesdevelop a scalable infrastructure that will help us expand our margins as we execute upon our growth strategy. Benefits of this infrastructure may include centralized support services for all of our brands, including marketing, menu development, human resources, legal, accounting and information systems. Additional benefits may include the ability to cost effectively employ advertising and marketing agencies for all of our brands, and efficiencies associated with established brandsbeing able to utilize a single distribution model for all of our restaurants. Accordingly, this structure should enable us to leverage our scale and share best practices across key functional areas that are either underperforming or undervalued and that offer long-term growth potential.common to all of our brands.

 

Recent TransactionsFinancial Results

 

Our revenue increased $3,074,380 to $4,188,967 for the three-month period ended June 30, 2019, compared to $1,114,587 for the three-month period ended June 30, 2018, primarily due to an increase in sales of food and beverage products by the company-owned restaurants that we acquired through our acquisition of Fat Patty’s

On August 3,Patty’s. Our total operating expenses increased $3,251,516 to $4,496,983 for three-month period ended June 30, 2019 from $1,245,467 for three-month period ended June 30, 2018, we entered intoprimarily due to an Asset Purchase Agreement (the “Asset Purchase Agreement”)increase in restaurant operating costs associated with CSA, Inc., a West Virginia corporation (“CSA”), CSA Investments, LLC, a West Virginia limited liability company (“CSA Investments”), CSA of Teays Valley, Inc., a West Virginia corporation (“CSA Teays Valley”), CSA, Inc. of Ashland, a Kentucky corporation (“CSA Ashland”), Fat Patty’s, LLC, a West Virginia limited liability company (“FPLLC”), and Clint Artrip, an individual (“Artrip”; together with CSA, CSA Investments, CSA Teays Valley, and CSA Ashland, FPLLC, the “Sellers”), pursuant to which we agreed to acquire alloperation of the assets associated with company-owned restaurants that we acquired through our acquisition ofFat Patty’s (the “Fat Patty’s Acquisition”). We agreedAccordingly, we incurred a loss from operations of $308,016 during the three-month period ended June 30, 2019 compared to pay the Sellers $12,352,000$130,880 for the assets,three-month period ended June 30, 2018. We generated a net loss of which $12,000,000 was$291,561, or $0.04 per share of common stock, for the three-month period ended June 30, 2019, compared to be paid toa net loss of $55,531, or $0.01 per share of common stock, for the Sellers at closing, $40,000 was to be paid to the Sellers within 10 days after the closing and the remaining $312,000 will be paid to the Sellers on the first anniversary of the closing. The closing of the Fat Patty’s Acquisition occurred on Augustthree-month period ended June 30, 2018, however, as discussed below, we entered into a separate related agreement with a third party that resulted in a direct transfer of the Properties (as defined below) from the Sellers to the third party. Accordingly, in substance, we only acquired the net assets detailed below for a purchase price of $852,000.2018.

 

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In connection withOur revenue increased $6,474,037 to $8,777,788 for the Fat Patty’s Acquisition, we entered into a secured convertible promissory note with Seenu G. Kasturi, who is our President, Chief Financial Officer and Chairman of our board of directors, on Augustsix-month period ended June 30, 2019, compared to $2,303,751 for the six-month period ended June 30, 2018, pursuantprimarily due to which we borrowed $622,929 from Mr. Kasturi to help financean increase in sales of food and beverage products by the Fat Patty’s Acquisition. All principal and accrued but unpaid interest is due and payable by us in full on the earlier of (i) the fifth (5th) anniversary of the date of the note, or (ii) the date that Mr. Kasturi demands repayment in full by providing written notice thereof to us. Interest accrues at the rate of six percent (6%) per annum and is payable in full on the maturity date. Mr. Kasturi has the right, at any time during the term of the note and from time to time, to convert all of any portion of the outstanding principal of the note, together with accrued and unpaid interest payable thereon, into shares of our common stock at a conversion rate of $1.36 per share. The note is secured by all of our assets.

Also on August 3, 2018, we entered into a purchase and sale agreement with Store Capital Acquisitions, LLC, a Delaware limited liability company (“Store Capital”), pursuant to which we agreed to sell all of the real property acquired in the Fat Patty’s Acquisition to Store Capital (the “Property Acquisition”). The real property consists of the four properties upon which thecompany-owned restaurants acquired in the Asset Acquisition are located (collectively, the “Properties”). Store Capital agreed to pay us $11,500,000 for the Properties at closing. Title to the Properties was transferred directly from the applicable Sellers to Store Capital, and the purchase price for the Properties was paid by Store Capital directly to Sellers. Accordingly, we never took title to, or possession of, the Properties. As a result, the ultimate purchase price that we paid was $852,000, which was the difference between the $12,352,000 purchase price for the assets that we agreed to pay to the Sellers and the $11,500,000 purchase price for the Properties that was paid by Store Capital. The closingacquired through our acquisition of the Property Acquisition occurred on August 30, 2018.

In connection with the Property Acquisition, we entered into a master lease agreement (the “Master Lease”) with Store Capital on August 30, 2018 pursuant to which we leased each of the Properties from Store Capital. The initial term of the lease expires on August 31, 2038. We have the option to extend the term of the lease for four additional successive periods of five years each. The aggregate base annual rent is $876,875 and is subject to annual increases commencing September 1, 2019 in an amount equal to the lesser of: (i) 1.75%, or (ii) 1.25 times the change in the Consumer Price Index. We are responsible for all costs and obligations relating to the Properties.

Tilted Kilt Pub & Eatery

On October 30, 2018, we entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with SDA Holdings, LLC, a Louisiana limited liability company (“SDA”), and Fred D. Alexander, who is a member of our board of directors, pursuant to which we agreed to acquire all of the issued and outstanding membership interests in SDA for $10.00. SDA is the owner of theTilted Kilt Pub & Eatery® restaurant franchise (“Tilted Kilt”). The transactions contemplated by the Purchase Agreement are sometimes referred to herein collectively as the “Tilted Kilt Acquisition”.

32

The closing of the Tilted Kilt Acquisition is conditioned upon SDA, Trustee Services Group (the “Custodian”), Seenu G. Kasturi, Let’s Eat Incorporated (“Let’s Eat”), the Reilly Group, LLC (the “Reilly Group”) and John Reynauld (Mr. Reynauld, together with the Custodian, Mr. Kasturi, Let’s Eat, the Reilly Group, the “Parties”) entering into an amendment to that certain Custodian Agreement, dated June 7, 2018, by an among the Parties to add SDA as a party to the agreement and remove Mr. Kasturi as a party to the agreement, in which event SDA will be required to deliver to the Custodian a certificate evidencing 718,563 shares of our common stock. The closing of the Tilted Kilt Acquisition is also conditioned upon us raising gross proceeds of at least $2,000,000 through the sale of debt or equity securities, as well as other customary closing conditions. The closing of the Tilted Kilt Acquisition will occur once all of the closing conditions have been satisfied.

Financial Results

We achieved revenue of $2,452,702 for the three-month period ended September 30, 2018, compared to $1,047,404 for the three-month period ended September 30, 2017.Fat Patty’s. Our total operating expenses were $2,916,504increased $6,956,474 to $9,342,797 for the three-monthsix-month period ended SeptemberJune 30, 2019 from $2,386,323 for six-month period ended June 30, 2018, comparedprimarily due to $1,068,963 foran increase in restaurant operating costs associated with the three-month period ended September 30, 2017. We generatedoperation of the company-owned restaurants that we acquired through our acquisition ofFat Patty’s. Accordingly, we incurred a loss from operations of $463,802$565,009 during the six-month period ended June 30, 2019 compared to $82,572 for the three-monthsix-month period ended SeptemberJune 30, 2018 compared to $21,5592018. We generated a net loss of $705,804, or $0.10 per share of common stock, for the three-monthsix-month period ended SeptemberJune 30, 2017. We generated net income of $97,467, or $0.01 per share, for the three-month period ended September 30, 20182019, compared to a net loss of $89,$7,917, or $0.00 per share of common stock, for the three-monthsix-month period ended SeptemberJune 30, 2017.2018

 

We achieved revenuehad total assets of $4,868,193 for the nine-month period ended September$18,099,573 and $14,673,337 at June 30, 2019 and December 31, 2018, compared to $3,228,054 for the nine-month period ended September 30, 2017. Our total operating expenses were $5,414,567 for the nine-month period ended September 30, 2018, compared to $3,154,709 for the nine-month period ended September 30, 2017. We generated a loss from operations of $546,374 for the nine-month period ended September 30, 2018 compared to income from operations of $73,345 for the nine-month period ended September 30, 2017. We generated net income of $89,550, or $0.01 per share, for the nine-month period ended September 30, 2018 compared to $87,675, or $0.01 per share, for the nine-month period ended September 30, 2017.respectively. Net cash flows provided by operating activities were $235,787was $328,627 for the nine-monthsix-month period ended SeptemberJune 30, 2018,2019, compared to $242,619cash flow from operating activities of $183,304 for the nine-monthsix-month period ended SeptemberJune 30, 2017.2018.

 

We have two reportable segments, which are company-owned restaurants and franchise operations. Information on our reportable segments and a reconciliation of income from operations to net loss is set forth herein underNote 19. Segment Reportingin our condensed consolidated financial statements.

Outlook

 

We expect our revenue to increase during the next 12 months as we generate sales through our company-owned restaurants, as we continue to improve the operations of our existing Dick’s Wings and Fat Patty’s restaurants, and as we open new Dick’s Wings and Fat Patty’s restaurants.restaurants, and generate sales through our recently opened Tilted Kilt restaurant. We also expect our revenue to increase as a result of our pending acquisition of Tilted Kilt and as we acquire additional interests in other restaurant brands and potentially non-restaurant brands. We expect to begin generating an increasing amount of net income during the next 12 months as we generate increasing revenue and income from operations through our new and existing company-owned and franchised restaurants. Notwithstanding the foregoing, in the event we complete additional acquisitions of controlling or non-controlling financial interests in other brands through mergers, acquisitions, joint ventures or other strategic initiatives, such as our recently completed acquisition of Fat Patty’s and our pending acquisition of Tilted Kilt, our financial results will include and reflect the financial results of the target entities. Accordingly, the completion of any such transactions in the future may have a substantial beneficial or negative impact on our business, financial condition and results of operations.

 

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Critical Accounting Policies

 

For information regarding ourOur critical accounting policies please refer to the discussion providedare those that affect or could affect our financial statements materially and involve a significant level of judgment by management. The accounting policies and related risks described in our Annual Report on Form 10-K for our fiscalthe year ended December 31, 2017 under the caption“Item 7. Management’s Discussion2018 are those that depend most heavily on these judgments and Analysisestimates. As of Financial Condition and Results of Operations – Critical Accounting Policies” and the discussion set forth below.

Revenue Recognition

On January 1, 2018, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606,Revenue From Contracts With Customers (“ASC 606”). ASC 606 supersedes the current revenue recognition guidance, including industry-specific guidance. ASC 606provides a single framework in which revenue is requiredJune 30, 2019, there have been no material changes to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services.

We adopted this new guidance effective the first day of fiscal year 2018, using themodified retrospective method of adoption. Under this method, the cumulative effect of initially adopting the guidance was recognized as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative period has not been adjusted and continues to be reported under the previous revenue recognition guidance. The detailsany of the significant changes and quantitative impact ofcritical accounting policies contained in our Annual Report on Form 10-K for the changes are discussed below.

Franchise Fees

ASC 606 impacted the timing of recognition of franchise fees. Under previous guidance, these fees were typically recognized upon the opening of restaurants. Under ASC 606, the fees are deferred and recognized as revenue over the term of the individual franchise agreements. The effect of the required deferral of fees received in a given year will be mitigated by the recognition of revenue from fees retrospectively deferred from prior years. As a result ofended December 31, 2018 other than with respect to the adoption of ASC 606, we recognized deferred franchise fees in the amount of $196,478Topic 842 on its balance sheet as of January 1, 20182019, a description of which is provided herein underNote 2. Basis of Presentation and an increase in its accumulated deficit by the same amount on that date.

Advertising FundsSignificant Accounting Policies – Recent Accounting Pronouncements

ASC 606 also impacted the accounting for transactions related to our general advertising fund. Under previous guidance, franchisee contributions to and expenditures by the fund were not included in our condensed consolidated financial statements. Under ASC 606, we record contributions to and expenditures by the fund as revenue and expenses within our condensed consolidated financial statements. We recognized contributions to and expenditures by the fund of $46,816 and $145,076 during the three- and nine-month periods ended September 30, 2018.

 

Gift Card FundsRecent Accounting Pronouncements

 

Additionally, ASC 606 impacted the accounting for transactions related to our gift card program. Under previous guidance, estimated breakage income on gift cards was deferred until it was deemed remote that the unused gift card balance would be redeemed. Under ASC 606, breakage income on gift cards is recognized as gift cards are utilized. This effect of this change on our financial statements was negligible.

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Impact on Financial Statements

The following table summarizes the impacts of adopting the revenue recognition standard on our condensed consolidated financial statements as of and for the three- and nine-month periods ended September 30, 2018:

     Adjustments    
  As
Reported		  

Franchise

Fees

  Advertising
Funds		  Balances
Without
Adoption		 
Condensed Consolidated Balance Sheets                
Deferred franchise fees $26,803  $(26,803) $—  $— 
Total current liabilities  3,054,745   (26,803)  —   3,027,942 
Deferred franchise fees, net of current portion  124,411   (124,411)  —   — 
Total liabilities  14,421,071   (124,411)  —   14,296,660 
Accumulated deficit  (4,875,520)  151,214   —   (4,724,306)
Total stockholders’ deficit  (324,617)  151,214   —   (173,403)
                 
Condensed Consolidated Statements of Operations – Three-Month Period Ended September 30, 2018                
Franchise and other revenue $231,983  $(6,500) $(42,806) $182,677 
Franchise and other revenue – related party  23,256   (750)  (4,010)  18,496 
Total revenue  2,452,702   (7,250)  (46,816)  2,398,636 
General and administrative expenses  418,301   —   (46,816)  371,485 
Total operating expenses  2,916,504   —   (46,816)  2,869,688 
Loss from operations  (463,802)  (7,250)  —   (471,052)
Net income  97,467   (7,250)  —   90,217 
                 
Condensed Consolidated Statements of Operations – Nine-Month Period Ended September 30, 2018                
Franchise and other revenue $690,892  $(19,250) $(125,958) $545,684 
Franchise and other revenue – related party  100,994   (26,014)  (19,118)  55,862 
Total revenue  4,868,193   (45,264)  (145,076)  4,677,853 
General and administrative expenses  720,033   —   (145,076)  574,957 
Total operating expenses  5,414,567   —   (145,076)  5,269,491 
Loss from operations  (546,374)  (45,264)  —   (591,638)
Net income  89,550   (45,264)  —   44,286 
                 
Condensed Consolidated Statement of Cash Flows                
Cash flows from operating activities:                
Net income $89,550  $(45,264) $—  $44,286 
Changes in operating assets and liabilities:                
Deferred franchise fees  (45,264)  45,264   —   — 

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Disaggregation of Revenue

The following table disaggregate revenue by primary geographical market and source:

  

Three Months

Ended

September 30,
2018

  

Nine Months
Ended

September 30,
2018

 
Primary geographic markets        
Florida $1,377,676  $3,694,208 
Georgia  47,050   146,009 
Kentucky  232,744   232,744 
West Virginia  795,232   795,232 
Total revenue $2,452,702  $4,868,193 
         
Sources of revenue        
Restaurant sales $2,197,463  $4,076,307 
Royalties  197,369   591,847 
Franchise fees  7,250   45,264 
Advertising fund fees  46,816   145,077 
Other revenue  3,804   9,698 
Total revenue $2,452,702  $4,868,193 

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Contract Balances

The following table presents changes in deferred franchise fees as of and for the nine-month period ended September 30, 2018:

  Total
Liabilities		 
Deferred franchise fees at January 1, 2018 $196,478 
Revenue recognized during the period  (45,264)
New deferrals due to cash received  — 
Deferred franchise fees at September 30, 2018 $151,214 

Anticipated Future Recognition of Deferred Franchise Fees

The following table presents the estimated franchise fees to be recognized in the future related to performance obligations that were unsatisfied at September 30, 2018:

Year Franchise
Fees
Recognized		 
2018 $7,250 
2019  25,719 
2020  24,000 
2021  22,923 
2022  21,000 
Thereafter  50,322 
Total $151,214 

The estimated franchise fees for 2018 represent the fees to be recognized during the remainder of the 2018 fiscal year.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements applicable to our business, please referto the discussion providedherein underNote 2. Basis of Presentation and Significant Accounting Policies – Recent Accounting Pronouncements in our condensed consolidated financial statements.

 

37

Comparison of the Three-Month Periods Ended SeptemberJune 30, 2019 and 2018

 

Revenue

 

Revenue consists primarily of proceeds from the sale of food and beverage products by our company-owned restaurants and concession stands, and royalty payments, franchise fees and ad fund fees that we receive from our franchisees. Revenue increased $1,405,298$3,074,380 to$2,452,702 $4,188,967 for the three-month period ended SeptemberJune 30, 2018 2019from$1,047,4041,114,587 for the three-month period ended SeptemberJune 30, 2017.2018. The increase of $1,405,298$3,074,380 was due primarily to an increase of $1,356,249 from the sale$3,128,063 for sales of food and beverage products by our company-owned restaurants, partially offset by a decrease of which $1,027,976$53,683 for franchise and other revenue. The increase in sales of food and beverage products was generated fromattributable to the Fat Patty’s restaurants that we acquired on August 30, 2018.through our acquisition of Fat Patty’s, which contributed $2,358,025 of sales of food and beverages, and an increase of $770,038 for sales of food and beverages at our company-owned Dick’s Wings and Tilted Kilt restaurants and concession stands. We expect our revenue to increase during the next 12 months as we generate sales through our company-owned restaurants, as we continue to improve the operations of our existing Dick’s Wings and Fat Patty’s restaurants, and as we open new Dick’s Wings and Fat Patty’s restaurants.restaurants, and generate sales through our recently opened Tilted Kilt restaurant. We also expect our revenue to increase as a result of our pending acquisition of Tilted Kilt and as we acquire additional interests in other restaurant brands and potentially non-restaurant brands.

 

Operating Expenses

 

Operating expenses consist of restaurant operating costs, professional fees, employee compensation expense, and general and administrative expenses.

 

48

Restaurant Operating Costs. Restaurant operating costs consistsconsist of cost of sales, labor, expenses, occupancy expenses and other operating expenses that we incur in connection with the operation of our two Dick’s Wings company-owned restaurants and concession stands, our four Fat Patty’s company-owned restaurants.restaurants and our Tilted Kilt company-owned restaurant. Restaurant operating costs increased $1,108,771$2,920,126 to $1,967,735$3,765,985 for the three-month period ended SeptemberJune 30, 20182019 compared to $858,964$845,859 for the three-month period ended SeptemberJune 30, 2017. Our restaurant2018. Restaurant operating costs consisted of $811,009$1,346,705 for cost of sales, $624,848$1,418,560 for labor expenses, $57,713$160,936 for occupancy expenses, and $474,165$839,784 for other operating expenses for the three-month period ended SeptemberJune 30, 2018. Our restaurant2019. Restaurant operating costs consisted of $274,846$278,985 for cost of sales, $293,035$343,167 for labor expenses, $92,729$52,876 for occupancy expenses, and $198,354$170,831 for other operating expenses for the three-month period ended SeptemberJune 30, 2017.2018. The increase of $1,108,771$2,920,126 was due primarily to costs incurredincreases of $1,272,195 associated with the operation of the Fat Patty’s restaurants that we acquired on August 30, 2018.through our acquisition of Fat Patty’s and $1,647,931 associated with the operation of our Dick’s Wings company-owned restaurants and concession stands and our Tilted Kilt company-owned restaurant. We expect our restaurant operating costs to increase during the next 12 months in the event we open additional company-owned restaurants or complete the acquisition of Tilted Kilt, and to otherwise remain at similar levels during the next 12 months if we don’t open additional company-owned restaurants or complete the acquisition.acquisition of Tilted Kilt.

Professional Fees. Professional fees consist of fees paid to attorneys, independent accountants, investment banks and placement agents, technology consultants and other professionals and consultants. Professional fees increased $298,981$14,451 to $366,956 $132,705for the three-month period ended SeptemberJune 30, 2018 2019from $67,975$118,254 for the three-month period ended SeptemberJune 30, 2017.2018. The increase of $298,981$14,451 was due primarily to increasesan increase of$240,625for stock compensation expense and $55,206 $34,760 for legal and accounting fees, partially offset by a decrease of $40,975$20,309 for consulting fees.We expect our professional fees to continue to increase during the next 12 months as we incur increased legal, accounting, investment banking, technology and consulting fees in connection with the general expansion of our business and operations and our compliance with the rules and regulations of the SEC.

Employee Compensation Expense. Employee compensation expense consists of salaries, hourly wages, bonuses and other cash compensation, equity-based compensation and employee benefits paid or granted to our executive officers and non-restaurant employees, and the related payroll taxes. Employee compensation expense increased $72,479$224,722 to $163,512$344,929 for the three-month period ended SeptemberJune 30, 20182019 from $91,033$120,207 for the three-month period ended SeptemberJune 30, 2017.2018. The increase of $72,479$224,722 was due primarily to an increase of $63,888$127,214 for salaries paid to executive officers and other non-restaurant employees.employees and $61,079 for stock compensation expense. We expect employee compensation expense to increase during the next 12 months as we hire additional executive officers and other non-restaurant employees in connection with the growth and expansion of our business and operations.

 

38

General and Administrative Expenses. General and administrative expenses consist of ad fund expenses, selling commissions and expenses, marketing and advertising expenses, acquisition-related transaction costs, bank service charges, computer and internet expenses, dues and subscriptions, licenses and filing fees, insurance expenses, SEC filing expenses, stock listing expenses, investor relations expenses, shareholder meeting expenses, office supplies, rent expense, repairs and maintenance expenses, telephone expenses, travel expenses, utilities expenses and other miscellaneous general and administrative expenses. General and administrative expenses increased $367,310$92,217 to $418,301$253,364 for the three-month period ended SeptemberJune 30, 20182019 from $50,991$161,147 for the three-month period ended SeptemberJune 30, 2017.2018. The increase of $367,310$92,217 was due primarily to increases of $46,816 for ad fund expenses that were recognized beginning January 1, 2018 due to the implementation of ASC 606, $160,437 for commissions paid to the owner of our concession stands at TIAA Bank Field, $82,929 for acquisition-related transaction costs incurred in connection with our acquisition of Fat Patty’s, and $125,344$50,577 for marketing and advertising expenses partially offset by decreases in other miscellaneous general and administrative$15,801 for investor relations expenses. We expect general and administrative expenses to continue to increasesincrease during the next 12 months as we incur increasing expenses for commissions paid to the owner of our concession stands at TIAA Bank Field, our ad fund, marketing and advertising, investor relations, travel, rent, office supplies, insurance and other miscellaneous items associated with the general growth of our business and operations.

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Interest Expense

 

Gain on Bargain Purchase Option

Gain on bargain purchase optionInterest expense consists of the gaininterest that we recognizedrecord under the master lease agreement that we entered into with Store Capital on August 30, 2018 in connection with the acquisition of Fat Patty’s, on August 30, 2018. The fair value of the identifiable assets acquiredour outstanding debt obligations, and liabilities assumed of $1,477,193 exceeded the purchase price of Fat Patty’s by $625,193. As a result, we recognized a gain of $625,193our outstanding settlement agreements payable and accrued legal contingencies. Interest expense increased $196,244 to $201,723 for the three-month period ended SeptemberJune 30, 2019 from $5,479 for the three-month period ended June 30, 2018. The increase of $196,244 was due primarily to an increase of$176,904 for interest that we recognized under our master lease agreement with Store Capital. We did not recognize any gainexpect interest expense to remain at similar levels during the next 12 months.

Income From Insurance Proceeds

Income from insurance proceeds consists of the insurance proceeds that we received for equipment and other assets that were damaged or destroyed in the fire that occurred on bargain purchase optionMarch 25, 2019 at our Fat Patty’s restaurant located at5156 State Route 34 in Hurricane, West Virginia. We received insurance proceeds in the amount of $579,885 during the three-month period ended SeptemberJune 30, 2017.2019, of which $181,588 was for equipment and other assets that were damaged or destroyed in the fire. We dodid not receive any insurance proceeds during the three-month period ended June 30, 2018. We expect to recognize anyreceive additional gains on bargain purchase optionsinsurance proceeds in connection with the fire that occurred at this restaurant during the next 12 months.A description of the bargain purchase optionfire is set forth herein underNote 616. Commitments and Contingencies – Acquisition of Fat Patty’sTeay’s Valley Firein our condensed consolidated financial statements.statements

 

Net Income / (Loss)Loss

 

Net income was $97,467 forWe generated a net loss of $291,561 during the three-month period ended SeptemberJune 30, 20182019 compared to a net loss of $89 for$55,531 during the three-month period ended SeptemberJune 30, 2017.2018. The differenceincrease of $97,556$236,030 was due primarily to increases of $1,405,298 for revenue and $625,193 for gain on bargain purchase option, partially offset by increases of $1,108,771$2,920,126 for restaurant operating costs, $298,981 for professional fees, $72,479$224,722 for employee compensation expense and $367,310$196,244 for generalinterest expense, partially offset by an increase of $3,074,380 for revenue and administrative expenses.$181,588 for income from insurance proceeds for equipment and other assets that were damaged or destroyed in the fire. We expect to begin generating an increasing amount of net income during the next 12 months as we generate increasing revenue and income from operations through our new and existing company-owned and franchised restaurants. Notwithstanding the foregoing, in the event we complete additional acquisitions of controlling or non-controlling financial interests in other brands through mergers, acquisitions, joint ventures or other strategic initiatives, such as our recently completed acquisition of Fat Patty’s and our pending acquisition of Tilted Kilt, our financial results will include and reflect the financial results of the target entities. Accordingly, the completion of any such transactions in the future may have a substantial beneficial or negative impact on our business, financial condition and results of operations.

 

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Comparison of the Nine-MonthSix-Month Periods Ended SeptemberJune 30, 2019 and 2018

 

Revenue

 

Revenue increased $1,640,139$6,474,037 to$4,868,193 $8,777,788 for the nine-monthsix-month period ended SeptemberJune 30, 2018 2019from$3,228,0542,303,751 for the nine-monthsix-month period ended SeptemberJune 30, 2017.2018. The increase of $1,640,139$6,474,037 was due primarily to an increase of $1,480,628 from the sale$6,579,577 for sales of food and beverage products by our company-owned restaurants, partially offset by a decrease of which $1,027,976$105,540 for franchise and other revenue. The increase in sales of food and beverage products was generated fromattributable to the Fat Patty’s restaurants that we acquired on August 30, 2018.through our acquisition of Fat Patty’s, which contributed $5,086,470of sales of food and beverages, and an increase of $1,493,107 for sales of food and beverages at our company-owned Dick’s Wings and Tilted Kilt restaurants and concession stands. We expect revenue to increase during the next 12 months as we generate sales through our company-owned restaurants, continue to improve the operations of our existing Dick’s Wings and Fat Patty’s restaurants, open new Dick’s Wings and Fat Patty’s restaurants, and generate sales through our recently opened Tilted Kilt restaurant.

 

Operating Expenses

Operating expenses consist of restaurant operating costs, professional fees, employee compensation expense, and general and administrative expenses.

 

Restaurant Operating Costs. Restaurant operating costs increased $1,195,026$6,361,504 to $3,665,487$7,947,516 for the nine-monthsix-month period ended SeptemberJune 30, 20182019 compared to $2,470,461$1,586,012 for the nine-monthsix-month period ended SeptemberJune 30, 2017. Our restaurant2018. Restaurant operating costs consisted of $1,360,529$3,078,336 for cost of sales, $1,222,554$2,871,008 for labor expenses, $171,048$315,027 for occupancy expenses, and $911,356$1,683,145 for other operating expenses for the nine-monthsix-month period ended SeptemberJune 30, 2018. Our restaurant2019. Restaurant operating costs consisted of $869,600$549,520 for cost of sales, $857,933$597,706 for labor expenses, $187,264$113,335 for occupancy expenses, and $555,664$325,451 for other operating expenses for the nine-monthsix-month period ended SeptemberJune 30, 2017.2018. The increase of $1,195,026$6,361,504 was due primarily to costs incurredincreases of $2,620,887 associated with the operation of the Fat Patty’s restaurants that we acquired on August 30, 2018.through our acquisition of Fat Patty’s and $3,740,617 associated with the operation of our Dick’s Wings company-owned restaurants and concession stands and our Tilted Kilt company-owned restaurant.

Professional Fees. Professional fees increased $262,938$143,989 to $614,123 $391,156for the nine-monthsix-month period ended SeptemberJune 30, 2018 2019from $351,185$247,167 for the nine-monthsix-month period ended SeptemberJune 30, 2017.2018. The increase of $262,938$143,989 was due primarily to increasesan increase of $65,000$192,805 for stock compensation expense, $70,772 forlegal and accounting fees and 141,716 for legal fees,, partially offset by a decrease of $32,550$61,124 for consulting fees.

Employee Compensation Expense. Employee compensation expense increased $164,298$320,524 to $414,924$571,936 for the nine-monthsix-month period ended SeptemberJune 30, 20182019 from $250,626$251,412 for the nine-monthsix-month period ended SeptemberJune 30, 2017.2018. The increase of $164,298$320,524 was due primarily to an increase of $140,414$225,551 for salaries paid to executive officers and other non-restaurant employees.employees and $72,748 for stock compensation expense.

 

General and Administrative Expenses. General and administrative expenses increased $637,596$130,457 to $720,033$432,189 for the nine-monthsix-month period ended SeptemberJune 30, 20182019 from $82,437$301,732 for the nine-monthsix-month period ended SeptemberJune 30, 2017.2018. The increase of $637,596$130,457 was due primarily to increases of $145,076 for ad fund expenses that were recognized beginning January 1, 2018 due to the implementation of ASC 606, $208,745 for commissions paid to the owner of our concession stands at TIAA Bank Field, $82,929 for acquisition-related transaction costs incurred in connection with our acquisition of Fat Patty’s, and $201,072$156,885 for marketing and advertising expenses, partially offset by decreases in other miscellaneous general and administrative expenses.

Interest Expense

Interest expense increased $393,913 to $404,786 for the six-month period ended June 30, 2019 from $10,873 for the six-month period ended June 30, 2018. The increase of $393,913 was due primarily to an increase of$354,462 for interest that we recognized under our master lease agreement with Store Capital.

 

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Gain on Bargain Purchase OptionIncome From Insurance Proceeds

 

Gain on bargain purchase option consistsWe received insurance proceeds in the amount of $579,885 during the gain that we recognized six-month period ended June 30, 2019in connection with the acquisition offire that occurred on March 25, 2019 at our Fat Patty’s on Augustrestaurant located at5156 State Route 34 in Hurricane, West Virginia, of which $181,588 was for equipment and other assets that were damaged or destroyed in the fire. We did not receive any insurance proceeds during the six-month period ended June 30, 2018.

Net Loss

We generated a net loss of $705,804 during the six-month period ended June 30, 2019 compared to a net loss of $7,917 during the six-month period ended June 30, 2018. The fair valueincrease of the identifiable assets acquired and liabilities assumed of $1,477,193 exceeded the purchase price of Fat Patty’s by $625,193. As a result, we recognized a gain of $625,193 for the nine-month period ended September 30, 2018. We did not recognize any gain on bargain purchase option during the nine-month period ended September 30, 2017.A description of the bargain purchase option is set forth herein underNote 6 – Acquisition of Fat Patty’sin our condensed consolidated financial statements.

Net Income

Net income was $89,550 for the nine-month period ended September 30, 2018 compared to $87,675 for the nine-month period ended September 30, 2017. The difference of $1,875$697,887 was due primarily to increases of $1,640,139$6,361,504 for revenuerestaurant operating costs, $320,524 for employee compensation expense and $625,193$393,913 for gain on bargain purchase option,interest expense, partially offset by increases of $1,195,026$6,474,037 for restaurant operating costs, $262,938revenue and $181,588 for professional fees, $164,298income from insurance proceeds for employee compensation expenseequipment and $637,596 for general and administrative expenses.other assets that were damaged or destroyed in the fire.

 

Liquidity and Capital Resources

 

Since our inception, we have funded our operations primarily through cash generated by our operations, private sales of equity securities and the use of short- and long-term debt and cash flows from operating activities.debt.

 

Net cash provided by operating activities was $235,787 for$328,627 during the nine-monthsix-month period ended SeptemberJune 30, 20182019 compared to $242,619 for$183,304 during the nine-monthsix-month period ended SeptemberJune 30, 2017.2018. The decreaseincrease of $6,832$145,323 was due primarily to increases of $625,193$285,453 for gain on bargain purchase, $346,312amortization of financing lease right-of-use assets, $167,504 for other receivablesamortization of operating lease right-of-use assets, and $45,264 for deferred franchise fees. This was partially offset by increases of $810,921$508,865 for accounts payable and accrued liabilities, partially offset by increases of $697,887 for net loss and $69,763$100,000 for stock-based compensation expense, and a decrease of $105,434 for accounts and ad funds receivable.gain from insurance recoveries on impaired fixed assets.

 

Net cash used by investing activities was $343,785 for$73,194 during the nine-monthsix-month period ended SeptemberJune 30, 20182019 compared to $267,332 during the six-month period ended June 30, 2018. The decrease of $194,138 for net cash providedused by investing activities of $45,686 for the nine-month period ended September 30, 2017. The difference of $389,471 was due primarily to increasesa decrease of $194,529 for purchases of fixed assets and $144,326$143,326 for contingent consideration and decreasesan increase of $33,716$100,000 for repayments of notes receivable and $24,000insurance recoveries for proceeds from the sale of investment in Paradise on Wings. This wasimpaired fixed assets, partially offset by an increase of $7,100$22,145 for cash acquired in the acquisitionpurchases of Fat Patty’s.fixed assets.

 

Net cash provided by financing activities was $19,736 for the nine-month period ended September 30, 2018 compared to net cash used by financing activities of $206,324 for the nine-month period ended September 30, 2017. The difference of $226,060 of net cash used by financing activities was $344,257 during the six-month period ended June 30, 2019 compared to $28,326 during the six-month period ended June 30, 2018. The increase of $315,931 was due to increases of $1,108,394 for repayments of notes payable to related parties, $129,903 for payments on our operating lease liability and $83,976 for payments on our financing lease liability, partially offset by an increase of $106,410$1,006,342 for proceeds from the issuance of notes payable to related parties and a decrease of $206,324 for repayments of notes payable issued to related parties. This was partially offset by an increase of $86,674 for payments on our capital lease obligation.

 

Our primary sources of capital since January 1, 20172018 are set forth below.

 

41

As of December 31, 2016, we had principal in the amount of $16,103 outstanding under our credit facilityWe entered into an unsecured loan with Blue Victory Holdings, Inc., a Nevada corporation, (“Blue Victory”), and repaid $824,250 under the credit facility. Duringduring the year ended December 31, 2017, we borrowed $61,721 under the credit facility and repaid $77,824 to Blue Victory under the credit facility. We did not borrow any funds under the credit facility during the nine-month period ended September 30, 2018. Accordingly, there was no principal outstanding under the credit facility at September 30, 2018 or December 31, 2017.

During the year ended December 31, 2017, we borrowed$372,049 from Blue Victory and repaid $341,546 to Blue Victory under a separate loan.Accordingly, theThe amount of principal outstanding under the loan was $30,503 at December 31, 2017. We borrowed $23,481$277,707 and repaid $71,877 under the loan during the nine-month periodyear ended September 30,December 31, 2018. Accordingly, the amount of principal outstanding under the loan was $53,984$236,333 at SeptemberDecember 31, 2018. We borrowed $1,075,893 and repaid $1,206,271 under the loan during the six-month period ended June 30, 2018.The2019. Accordingly, the amount of principal outstanding under the loan accrues interestwas $105,955 at a rate of 6% per annum and is payable on demandJune 30, 2019..

 

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On August 30, 2018, we entered into a secured convertible promissory note with Seenu G. Kasturi who is our President, Chief Financial Officer and Chairman of our board of directors, pursuant to which we borrowed $622,929 to help finance the acquisition of Fat Patty’s. All principal and accrued but unpaid interest is due and payable by us in full on the earlierPatty’s, all of (i) the fifth (5th) anniversary of the datewhich was outstanding at December 31, 2018. A description of the note or (ii) the date that Mr. Kasturi demands repayment is set forth herein underNote 4. Acquisition of Fat Patty’sin full by providing written notice thereof to us. Interest accrues at the rate of six percent (6%) per annum and is payable in full on the maturity date. Mr. Kasturi has the right, at any time during the term of the note and from time to time, to convert all of any portion of the outstanding principal of the note, together with accrued and unpaid interest payable thereon, into shares of our common stock at a conversion rate of $1.36 per share. The note is secured by all of our assets.condensed consolidated financial statements.

 

To date, our capital needs have been met throughcash generated by our operations, sales of our equity securities and the use of short- and long-term debt to fund our operations, including our credit facility with Blue Victory and the secured convertible promissory notefunds that we issued to Seenu G. Kasturi.have borrowed from related parties.We have used these sources of capital to acquire Seedivpay virtually all of the costs and Fat Patty’s, as well asexpenses that we have incurred to paydate. These costs and expenses have been comprised primarily of the restaurant operating costs, professional fees, employee compensation expenses, and general and administrative expenses discussed above.We intend to continue to rely upon each of these sources to fund our operations and expansion efforts, includingadditional acquisitions of controlling or non-controlling financial interests in other restaurant brands, and potentially non-restaurant brands, and, in some cases, their related real estate properties, during the next 12 months.

 

We can provide no assurance that these sources of capital will be adequate to fund our operations and expansion efforts during the next 12 months. If these sources of capital are not adequate, we will need to obtain additional capital through alternative sources of financing. We may attempt to obtain additional capital through the sale of equity securities or the issuance of short- and long-term debt.If we raise additional funds by issuing shares of our common stock, our stockholders will experience dilution. If we raise additional funds by issuing securities exercisable or convertible into shares of our common stock, our stockholders will experience dilution in the event the securities are exercised or converted, as the case may be, into shares of our common stock.Debt financing may involve agreements containing covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, issuing equity securities, making capital expenditures for certain purposes or above a certain amount, or declaring dividends.In addition, any equity securities or debt that we issue may have rights, preferences and privileges senior to those of the shares of common stock held by our stockholders.

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We have not made arrangements to obtain additional capital and can provide no assurance that additional financing will be available in an amount or on terms acceptable to us, if at all. Our ability to obtain additional capital will be subject to a number of factors, including market conditions and our operating performance. These factors may make the timing, amount, terms and conditions of any proposed future financing transactions unattractive to us.If we cannot raise additional capital when needed, or if such capital cannot be obtained on acceptable terms, we may not be able to pay our costs and expenses as they are incurred, take advantage of future acquisition opportunities, respond to competitive pressures or unanticipated events, or otherwise execute upon our business plan. This may adversely affect our business, financial condition and results of operations and, in the extreme case, cause us to discontinue our operations.

 

Off-Balance Sheet Arrangements

 

As of SeptemberJune 30, 2018,2019, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, that had been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

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Item 4. Controls and Procedures.

 

As of SeptemberJune 30, 2018,2019, we carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of SeptemberJune 30, 2018,2019, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

There has been no change in our internal control over financial reporting identified in connection with this evaluation that occurred during our fiscal quarter ended SeptemberJune 30, 20182019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 2. Unregistered Sales of Securities and Use of Proceeds.

 

In July 2018, Seenu G. Kasturi earned7,064On April 8, 2019, we issued a restricted stock award for 225,000 shares of our common stock pursuant to the terms of his employment agreement with us.an employee. The securities were earned by an accredited investor in a private placement transaction that was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of the Securities Act directly by us without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.

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In August 2018, we entered into an agreement with a firm to provide us with investor relations services. Under the terms of the agreement, we agreed to pay the firm $12,250 and issue 3,500 shares of common stock to the firm upon the execution of the agreement as compensation for services to be performed during the months of August and September 2018. We agreed to pay the firm $7,000 and issue 3,500 shares of common stock each month thereafter during the remainder of the term of the agreement.The securities were earned by an accredited investor in a private placement transaction that was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of the Securities Act directly by us without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.

In September 2018, we entered into an agreement with Maxim Group LLC (“Maxim”) to provide investment banking and mergers and acquisition services to us for a term of one year. Under the terms of the agreement, we agreed to pay Maxim $7,500 per month during the term of the agreement and issue 125,000 shares of common stock to Maxim upon the execution of the agreement.The securities were earned by an accredited investor in a private placement transaction that was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of the Securities Act directly by us without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.

 

Item 6. Exhibits.

 

The documents set forth below are filed as exhibits to this report.

 

Exhibit No. Exhibit Description
31.1 Certification of Chief Executive Officer of the registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer of the registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1 

Certification of Chief Executive Officer and Chief Financial Officer of the registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended

101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

 4454 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

ARC GROUP, INC.

  
Date: November 16, 2018August 14, 2019/s/ Seenu G. KasturiAlex Andre
 Seenu G. KasturiAlex Andre
 

Chief Financial Officer

(principal financial officer and duly authorized officer)

 

 4555 

 

 

EXHIBIT INDEX

 

Exhibit No. Exhibit Description
31.1 Certification of Chief Executive Officer of the registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer of the registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1 

Certification of Chief Executive Officer and Chief Financial Officer of the registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended

101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 4656