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:September 30, ~~2018~~2019

¨[ ]

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 class		Trading 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 company [X]

~~Non-accelerated filer~~¨	~~Smaller reporting company~~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[ ] 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 were~~6,524,427~~ 7,080,771 shares of the issuer’s Class A common stock, $0.01 par value per share, issued and outstanding on November ~~14, 2018.~~12, 2019.

TABLE OF CONTENTS

		Page
	PART I – FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets at September 30, ~~2018~~2019 (unaudited) and December 31, ~~2017~~2018	1

	Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, ~~2018~~2019 and ~~September 30, 2017~~2018 (unaudited)	2

	Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, ~~2018~~2019 and ~~September 30, 2017~~2018 (unaudited)	3

	Notes to Condensed Consolidated Financial Statements (unaudited)	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3049

Item 4.	Controls and Procedures	4358

	PART II – OTHER INFORMATION	4359

~~Item 2.~~	~~Unregistered Sales of Securities and Use of Proceeds~~	43

Item 6.	Exhibits	4459

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

ARC Group, Inc.

Condensed Consolidated Balance Sheets

	September 30,			December 31,
	2018			2017			September 30, 2019			December 31, 2018
	(Unaudited)						(Unaudited)

Assets

Cash and cash equivalents	$	57,084		$	145,346		$	231,180		$	345,228
Accounts receivable, net		98,007			166,987			82,087			127,930
Accounts receivable, net – related party		891			1,505
Ad funds receivable, net		11,274			36,837			11,443			10,500
Ad funds receivable, net – related party		1,761			2,280
Other receivables		370,312			-			579,984			556,986
Prepaid expenses		44,037			-			72,680			34,582
Inventory		139,634			45,417			195,123			211,025
Notes receivable, net		9,412			28,522			9,344			2,967
Deposits		14,695			21,189
Other current assets		3,011			5,923			16,414			8,078

Total current assets		750,118			454,006			1,198,255			1,297,296

Deposits								34,779			49,421
Notes receivable, net of current portion		3,191			5,106			634			2,553
Intangible assets		844,840			-
Intangible assets, net								783,739			786,565
Property and equipment, net		12,498,305			99,114			1,524,380			12,537,502
Operating lease right-of-use assets								3,582,774			-
Financing lease right-of-use assets, net								10,896,130			-

Total assets	$	14,096,454		$	558,226		$	18,020,691		$	14,673,337

Liabilities and stockholders' deficit
Liabilities and stockholders’ deficit

Accounts payable and accrued expenses	$	1,317,984		$	467,264		$	2,168,571		$	1,478,745
Accounts payable and accrued expenses – related party		100,892			94,150			350,530			231,187
Other payables								555,525			544,098
Accrued interest		19,499			13,472			76,267			29,105
Settlement agreements payable		273,428			264,997			284,700			276,269
Accrued legal contingency		161,790			155,935			169,620			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								284,059			-
Financing lease liability								202,944			175,764
Seller payable								312,000			312,000
Notes payable – related party, net								770,465			720,178
Gift card liabilities		91,805			9,147			55,999			81,956

Total current liabilities		3,054,745			1,235,150			5,299,129			4,082,140

Deferred franchise fees, net of current portion		124,411			-			90,173			51,516
Capital lease obligation, net of current portion		11,241,915			-
Operating lease liability, net of current portion								3,351,890			-
Financing lease liability net of current portion								11,054,732			11,210,146

Total liabilities		14,421,071			1,235,150			19,795,924			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 September 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 September 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 September 30, 2019 and December 31, 2018, respectively								-			-
Additional paid-in capital		4,190,559			3,995,306			4,635,652			4,490,338
Stock subscriptions payable		290,603			26,853			64,682			15,453
Accumulated deficit		(4,875,520	)		(4,768,592	)		(6,550,871	)		(5,247,553	)

Total stockholders' deficit		(324,617	)		(676,924	)
Total stockholders’ deficit								(1,775,233	)		(670,465	)

Total liabilities and stockholders' deficit	$	14,096,454		$	558,226
Total liabilities and stockholders’ deficit							$	18,020,691		$	14,673,337

The accompanying notes are an integral part of these financial statements

ARC Group, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

For the Three Months Ended For the Nine Months Ended
September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017

Revenue:
Restaurant sales $ 2,197,463 $ 841,214 $ 4,076,307 $ 2,595,679
Franchise and other revenue 231,983 165,905 690,892 509,032
Franchise and other revenue – related party 23,256 40,285 100,994 123,343

Total revenue 2,452,702 1,047,404 4,868,193 3,228,054

Operating expenses:
Restaurant operating costs:
Cost of sales 811,009 274,846 1,360,529 869,600
Labor 624,848 293,035 1,222,554 857,933
Occupancy 57,713 92,729 171,048 187,264
Other operating expenses 474,165 198,354 911,356 555,664
Professional fees 366,956 67,975 614,123 351,185
Employee compensation expense 163,512 91,033 414,924 250,626
General and administrative expenses 418,301 50,991 720,033 82,437

Total operating expenses 2,916,504 1,068,963 5,414,567 3,154,709

(Loss) / income from operations (463,802 ) (21,559 ) (546,374 ) 73,345

Other income:
Interest expense (74,258 ) (6,506 ) (85,131 ) (22,730 )
Gain on sale of investment in Paradise on Wings – related party - 24,000 - 24,000
Gain on bargain purchase option 625,193 - 625,193 -
Other income 10,334 3,976 95,862 13,060

Total other income 561,269 21,470 635,924 14,330

Net income / (loss) $ 97,467 $ (89 ) $ 89,550 $ 87,675

Net income / (loss) per share – basic $ 0.01 $ (0.00 ) $ 0.01 $ 0.01

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

For the Three Months Ended For the Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018

Revenue:
Restaurant sales $ 3,803,609 $ 2,104,825 $ 12,150,290 $ 3,871,929
Franchise and other revenue 239,035 231,983 670,142 690,892
Franchise and other revenue – related party - 23,256 - 100,994

Total revenue 4,042,644 2,360,064 12,820,432 4,663,815

Operating expenses:
Restaurant operating costs:
Cost of sales 1,368,797 811,009 4,447,133 1,360,529
Labor 1,232,549 624,848 4,103,557 1,222,554
Occupancy 117,436 57,713 432,463 171,048
Other operating expenses 844,257 381,527 2,527,402 706,978
Professional fees 52,828 366,956 443,984 614,123
Employee compensation expense 402,008 163,512 973,944 414,924
General and administrative expenses 446,730 418,301 878,919 720,033

Total operating expenses 4,464,605 2,823,866 13,807,402 5,210,189

Loss from operations (421,961 ) (463,802 ) (986,970 ) (546,374 )

Other (loss) / income:
Interest expense (211,211 ) (74,258 ) (615,997 ) (85,131 )
Income from insurance proceeds - - 181,588 -
Gain on bargain purchase option - 624,952 - 624,952
Other income 35,658 10,575 118,061 96,103

Total other (loss) / income (175,553 ) 561,269 (316,348 ) 635,924

Net (loss) / income $ (597,514) $ 97,467 $ (1,303,318 ) $ 89,550

Net (loss) / income per share – basic $ (0.08 ) $ 0.01 $ (0.18 ) $ 0.01

Net (loss) / income per share – fully diluted $ (0.08 ) $ 0.01 $ (0.18 ) $ 0.01

Weighted average number of shares outstanding – basic 7,071,985 6,524,427 7,077,875 6,795,644

Weighted average number of shares
outstanding – fully diluted 7,071,985 6,554,427 7,077,875 6,810,809
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,
2018 2017

Cash flows from operating activities

Net income $ 89,550 $ 87,675
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense 68,688 11,902
Amortization of debt discount 2,596
Stock-based compensation expense 303,503 233,740
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 )
Accounts receivable 68,980 18,424
Accounts receivable – related party 614 11,512
Ad fund receivable 25,563 (37,093 )
Ad fund receivable – related party 519 (2,601 )
Other receivables (370,312 ) (24,000 )
Prepaid expenses (44,037 ) -
Inventory (2,793 ) 4,383
Other assets 9,406 (14,067 )
Accounts payable and accrued liabilities 730,747 (31,522 )
Accrued liabilities – related party 6,742 (41,910 )
Advertising fund liabilities - 13,076
Settlement agreements payable 8,431 8,431
Accrued legal contingency 5,855 5,856
Deferred franchise fees (45,264 ) -
Gift card liabilities 2,192 5,889

Net cash provided by operating activities 235,787 242,619

Cash flows from investing activities

Repayments of notes receivable 21,025 54,741
Contingent consideration (144,326 ) -
Sale of investment in Paradise on Wings - 24,000
Cash acquired in business acquisition 7,100 -
Purchases of fixed assets (227,584 ) (33,055 )

Net cash (used) / provided by investing activities (343,785 ) 45,686

Cash flows from financing activities

Proceeds from issuance of notes payable – related party 106,410 -
Payments on capital lease obligation (86,674 ) -
Repayments of notes payable – related party - (206,324 )

Net cash provided / (used) by financing activities 19,736 (206,324 )

Net (decrease) / increase in cash and cash equivalents (88,262 ) 81,981
Cash and cash equivalents, beginning of period 145,346 50,923

Cash and cash equivalents, end of period $ 57,084 $ 132,904

Supplemental disclosure of cash flow information

Cash paid for interest $ - $ -
Cash paid for income taxes $ - $ -

Schedule of non-cash financing activities

Preferred stock issued in exchange for common stock $ 4,496 $ -
Property and equipment acquired through accounts payable $ 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 $ -
For the Nine Months Ended
September 30,
2019 2018

Cash flows from operating activities

Net (loss) / income $ (1,303,318 ) $ 89,550
Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation expense 163,830 68,688
Amortization of operating lease right-of-use assets 250,005 -
Amortization of financing lease right-of-use assets 430,545 -
Amortization of intangible assets 2,826 -
Amortization of debt discount 23,285 2,596
Stock-based compensation expense 189,849 303,503
Gain on bargain purchase - (624,952 )
Gain from insurance recoveries on impaired fixed assets (100,000 ) -
Changes in operating activities, net of acquisition of Fat Patty’s concept:
Accounts receivable 45,843 68,739
Accounts receivable – related party - 614
Ad fund receivable (943 ) 25,563
Ad fund receivable – related party 519
Other receivables (22,998 ) (370,312 )
Prepaid expenses (38,098 ) (44,037 )
Inventory 15,902 (2,793 )
Deposits 14,642 -
Other assets (8,336 ) 9,406
Accounts payable and accrued liabilities 709,955 730,747
Accounts payable and accrued liabilities – related party 166,505 6,742
Settlement agreements payable 8,431 8,431
Accrued legal settlement 5,856 5,855
Deferred franchise fees 38,032 (45,264 )
Gift card liabilities (25,957 ) 2,192

Net cash provided by operating activities 565,856 235,787

Cash flows from investing activities

Issuances of notes receivable (15,000 ) -
Repayments of notes receivable 10,542 21,025
Cash acquired in business acquisition - 7,100
Insurance recoveries for impaired fixed assets 100,000 -
Contingent consideration - (144,326 )
Purchases of fixed assets (477,877 ) (227,584 )

Net cash used by investing activities (382,335 ) (343,785 )

Cash flows from financing activities

Proceeds from issuance of notes payable – related party 1,540,886 106,410
Payments on operating lease liability (196,337 ) -
Payments on financing lease liability (128,234 ) -
Payments on capital lease obligation - (86,674 )
Repayments of notes payable – related party (1,513,884 ) -

Net cash (used) / provided by financing activities (297,569 ) 19,736

Net decrease in cash and cash equivalents (114,048 ) (88,262 )
Cash and cash equivalents, beginning of period 345,228 145,346

Cash and cash equivalents, end of period $ 231,180 $ 57,084

Supplemental disclosure of cash flow information

Cash paid for interest $ 530,701 $ -
Cash paid for income taxes $ - $ -

Schedule of non-cash transactions

Preferred stock issued in exchange for common stock $ - $ 4,496
Property and equipment acquired through accounts payable $ - $ 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^® ~~franchises~~concept (“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 its~~Dick’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 under~~Note 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 ~~Seediv~~Fat Patty’s is set forth herein underNote 64. – Acquisition of Fat Patty’s.
On October 30, 2018, the Company entered into an agreement to acquire theTilted Kilt Eatery and Pub^® restaurant franchise (“Tilted Kilt”). The Tilted Kilt franchise is comprised of 26 restaurants operating in 13 states, of which two were company owned and operated and the remaining 24 were franchise locations. A description of the transaction is set forth herein underNote 5. Agreement to Acquire Tilted Kilt.

At September 30, ~~2018,~~2019, the Company had 2120 Dick’s Wings restaurants and ~~three~~nine Dick’s Wings concession stands. Of the 2120 restaurants, 16 were located in Florida and ~~five~~four were located in Georgia. The Company’s concession stands were also located in Florida. ~~Two~~Four 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 September 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.

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, ~~2017~~2018 included in the Company’s Annual Report on Form 10-K. Information presented as of December 31, ~~2017~~2018 is derived from the audited consolidated financial statements. The results of operations for the three- and nine-month periods ended September 30, ~~2018~~2019 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 Concern~~Restatement

~~Prior to December 31, 2017, certain~~The Company has restated its previously issued condensed consolidated statement of operations for the three- and nine-month periods ended September 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 results~~existed 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 while~~2017. 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 period~~year ended ~~September 30,~~December 31, 2018, it generated cash flows from operations of ~~$235,787~~$478,238 during the ~~nine-month period~~year 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 ~~Seediv~~two Company-owned Dick’s Wings restaurants in December ~~2016 and its~~2016. 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 ~~has~~generated a net loss of $1,303,318 during the nine-month period ended September 30, 2019 and had a working capital deficit of $4,100,874 at September 30, 2019, the Company generated cash flow from operating activities of $565,856 during the nine-month period ended September 30, 2019 and received continued financial support from related ~~parties.~~parties during the nine-month period ended September 30, 2019 and the years ended December 31, 2018 and 2017. As a result of these factors, the Company ~~believes~~concluded that the substantial doubt about its ability to continue as a going concern had been alleviated as of ~~December 31, 2017 and~~ September 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 ~~comprise~~comprises the ~~Company's~~Company’s Chief Operating Decision Maker function for the purposes of ASC 280, concluded that the Company ~~operates~~has 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 $2,826 of amortization expense for the non-compete agreement during the three- and nine-month periods ended September 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.
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 Recognition~~The 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, the~~The Company recognized $4,718 and $11,968 of deferred franchise fees inas income during the ~~amount~~three- and nine-month periods ended September 30, 2019, and recognized $7,250 and $45,264 of ~~$196,478 on its condensed consolidated balance sheets~~deferred franchise fees as income during the three- and nine-month periods ended September 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 $103,266 at September 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 $33,255 and $97,123 during the three- and nine-month periods ended September 30, 2019, and 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.~~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. ~~This~~The effect of this change on the Company’s condensed consolidated financial statements was negligible.

68

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 — —
7
~~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
September 30, 2019 Three Months Ended
September 30, 2018 Nine Months Ended
September 30, 2019 Nine Months Ended
September 30, 2018
Primary geographic markets
Primary
Geographic Markets
Florida $ 1,377,676 $ 3,694,208 $ 1,587,413 $ 1,285,038 $ 4,239,126 $ 3,489,830
Georgia 47,050 146,009 256,430 47,050 824,190 146,009
Kentucky 232,744 232,744 616,417 232,744 1,907,793 232,744
Louisiana 95,884 — 625,227 —
North Carolina 625 — 625 —
Texas 625 — 625 —
West Virginia 795,232 795,232 1,485,250 795,232 5,222,846 795,232
Total revenue $ 2,452,702 $ 4,868,193 $ 4,042,644 $ 2,360,064 $ 12,820,432 $ 4,663,815

Sources of revenue
Sources of Revenue
Restaurant sales $ 2,197,463 $ 4,076,307 $ 3,803,609 $ 2,104,825 $ 12,150,290 $ 3,871,929
Royalties 197,369 591,847 193,010 197,369 547,548 591,847
Franchise fees 7,250 45,264 4,718 7,250 11,968 45,264
Advertising fund fees 46,816 145,077 33,255 46,816 97,123 145,077
Other revenue 3,804 9,698 8,052 3,804 13,503 9,698
Total revenue $ 2,452,702 $ 4,868,193 $ 4,042,644 $ 2,360,064 $ 12,820,432 $ 4,663,815

~~Contract Balances~~Deferred 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-month period ended September 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 ) (11,968 )
New deferrals due to cash received — 50,000
Deferred franchise fees at September 30, 2018 $ 151,214
Deferred franchise fees at September 30, 2019 $ 103,266
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 September 30, ~~2018:~~2019:

Year Franchise
Fees
Recognized Franchise
Fees to be Recognized
2018 $ 7,250
2019 25,719
2019 (remaining three months) $ 4,250
2020 24,000 17,000
2021 22,923 15,925
2022 21,000 14,000
2023 11,637
Thereafter 50,322 40,454
Total $ 151,214 $ 103,266
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02,Leases(“ASU 2016-02”), establishing Accounting Standards Codification (“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 ~~estimated franchise fees~~Company adopted ASC Topic 842 effective January 1, 2019 applying the modified retrospective transition approach. Under this approach, results for ~~2018 represent the fees~~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 ~~during~~$3,832,779 and $3,832,286 of additional assets and liabilities, respectively, in connection with its operating leases upon the ~~remainder~~adoption of ASC Topic 842 on January 1, 2019. The Company did not recognize any additional assets or liabilities in connection with its financing lease upon the ~~2018 fiscal year.~~adoption of ASC Topic 842 on January 1, 2019.

810

ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

~~Other Receivables~~
The Company determines whether a contract is or contains a lease at inception of the contract based on whether an identified asset exists and ~~Payables~~
~~Other receivableswas comprised primarily of receipts from credit card sales by Company-owned Fat Patty’s restaurants that occurred after~~whether the Company ~~completed~~has the ~~acquisition of Fat Patty’s that were held by the former owner of Fat Patty’s,~~right to obtain substantially all of ~~which are expected~~the benefit of the assets and to ~~be collected in~~control its use over the full byterm of the agreement. When available, the Company ~~during~~uses the ~~next 12 months. Other payables~~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 ~~within accounts payable and accrued expenses consisted of $243,261 of accounts payable owed to~~in 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~~Company’s lease agreements. Certain of the ~~franchise.~~
~~Intangible Assets~~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.

The Company ~~acquired various intangible assets in connection with~~elected the ~~acquisition~~package 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 recognized~~allows for the ~~assembled workforce and non-compete agreement was $759 during~~following:
● 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~~The Company also elected to adopt the optional transition practical expedient provided in ASU 2018-01 to not evaluate under ASC Topic 842 for existing or expired land easements prior to the application date to determine if they meet the definition of a lease.

~~In February 2016, the FASB issued ASU 2016-02,~~ The impact of ASC Topic 842 is more specifically described herein underNote 12. 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 evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements.
~~In November 2016, 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 Definition 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.

In ~~March~~June 2018, the FASB issued ASU ~~2018-05,~~ 2018-07,~~Income Taxes (Topic 740)~~Improvements to Nonemployee Share-Based Payment Accounting(“ASU ~~2018-05”).ASU 2018-05 provides guidance on accounting for the income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Act”~~2018-07”), which ~~impacts U.S. corporate tax rates, business-related exclusions,~~expands the scope of ASC Topic 718, Compensation – Stock Compensation, to include share-based payment transactions for acquiring goods and ~~deductions~~services from nonemployees. ASU 2018-07 aligns the measurement and ~~credits. The Act also has tax consequences~~classification guidance for ~~many companies that operate internationally. The~~share-based payments to nonemployees with the guidance ~~in ASU 2018-05 addresses situations in which~~for share-based payments to employees, with certain exceptions. Under 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~~the measurement of equity-classified nonemployee awards is fixed at the ~~tax impact can be determined. If a provisional amount cannot be reasonably determined, the entity should continue to apply ASC Topic 740 based~~grant date. The Company adopted ASU 2018-07 on ~~the provisions of the tax laws that were in effect immediately prior to the Act being enacted.~~January 1, 2019. The adoption of ASU ~~2018-05~~2018-07 did not have a ~~material~~significant impact on the Company’s condensed consolidated 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.

11
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
Note 3. Net (Loss) / Income Per Share

The Company calculates basic and diluted net (loss) / income per share in accordance with ASC Topic 260,Earnings per Share. Basic net (loss) / income 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 (loss) / income for the applicable period by the weighted-average number of shares of common stock outstanding during the applicable period. Diluted net (loss) / income per share is calculated by dividing the reported net (loss) / income 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 forth the computation of basic and diluted net ~~income~~(loss) / ~~(loss)~~income 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 the~~~~Wing 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-month periods ended September 30, 2017 provided to the Company by Paradise on Wings~~:
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 under~~Note 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.
Three Months Ended Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Numerator
Net (loss) / income $ (597,514 ) $ 97,467 $ (1,303,318 ) $ 89,550

Denominator
Weighted average shares outstanding — basic 7,071,985 6,524,427 7,077,875 6,795,644
Dilutive effect of potential shares of common stock — 30,000 — 15,165
Weighted average shares outstanding – fully diluted 7,071,985 6,554,427 7,077,875 6,810,809
Basic net income / (loss) per share $ (0.08 ) $ 0.01 $ (0.18 ) $ 0.01
Fully diluted net income / (loss) per share $ (0.08 ) $ 0.01 $ (0.18 ) $ 0.01

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 (5^th) 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.

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.

13
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
For purposes of measuring the estimated fair value, where applicable, of the assets acquired and the liabilities assumed as reflected in the~~accompanying 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 periods~~year 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 until~~Company 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 and~~after evaluating additional information that was present on the ~~transaction costs incurred could differ from~~date the ~~preliminary recorded amounts.~~acquisition was completed.

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 periods~~year 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 ~~accompanying~~Company’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-month periods ended September 30, ~~2018~~2019 contained in the ~~accompanying~~Company’s condensed~~unaudited condensed~~ consolidated financial statements andcertain unaudited pro forma financial information for thethree- and nine-month periods ended September 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
14
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
Three Months
Ended
September 30, 2019 Three Months
Ended
September 30, 2018 Nine Months
Ended
September 30, 2019 Nine Months
Ended
September 30, 2018
Revenue $ 4,042,644 $ 4,323,019 $ 12,820,432 $ 12,515,636
(Loss) / income from continuing operations (421,961 ) (13,051 ) (986,970 ) 1,256,629
Net income / (loss) (597,514 ) 548,218 (1,303,318 ) 1,892,553
Net income / (loss) per share – basic $ (0.08 ) $ 0.08 $ (0.18 ) $ 0.28
Net income / (loss) per share – fully diluted $ (0.08 ) $ 0.08 $ (0.18 ) $ 0.28

The results of operations for Fat Patty’s were included in the ~~Company's~~Company’s results of operations beginning August 30, 2018. The actual amounts of revenue and net income for Fat Patty’s that ~~are~~were included in the Company’s condensed consolidated statements of operations for the ~~three- and nine-month periods~~three-month period ended September 30, ~~2018~~2019 were ~~$1,027,976~~$2,101,667 and ~~$52,077,~~$110,399, 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 nine-month period ended September 30, 2019 were $7,130,639 and $720,887, 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, ~~2017~~2018 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 Commission~~SEC on August 9, 2018 and September 5, 2018.

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.
15
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
As of September 30, 3019, 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 September 30, ~~2018~~2019 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)~~
September 30, 2019 December 31, 2018
Food $ 130,786 $ 120,426
Beverages 64,337 90,599
Total $ 195,123 $ 211,025

Note 8.7. Property and Equipment, Net

Property and equipment ~~including capital lease assets, were~~was comprised of the following at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively:

September 30,
2018 December 31,
2017 September 30, 2019 December 31, 2018
Land, buildings and improvements $ 11,500,000 $ -0- $ -0- $ 11,500,000
Leasehold improvements 295,133 69,472 342,500 323,500
Furniture, fixtures and equipment 823,282 78,621 1,466,977 1,021,735
Subtotal 12,618,415 148,093 1,809,477 12,845,235
Less: accumulated depreciation (120,110 ) (48,979 ) (285,097 ) (307,733 )
Total $ 12,498,305 $ 99,114 $ 1,524,380 $ 12,537,502

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 expense~~was 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~~$61,851 and $163,830 during the three- and nine-month periods ended September 30, 2019, respectively, and was$~~68,688~~49,481 and $68,688 during the three- and nine-month periods ended September 30, 2018, ~~respectively, and w~~respectively.
16
asARC Group, Inc.~~$4,571 and $11,902during the three- and nine-month periods ended September 30, 2017~~.
Notes to Condensed Consolidated Financial Statements

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 ~~amount~~Company recognized $2,275 of amortization ~~recognized for~~expense on the ~~assembled workforce and~~ non-compete agreement ~~was $759~~during 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 $2,826 of amortization expense on the non-compete agreement during the three- and nine-month periods ended September 30, ~~2018.~~
16
~~ARC Group, Inc.~~
~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~2019. Accordingly, the Company had total intangible assets of $783,739 at September 30, 2019.

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

Year
Amortization
Expense to be
Recognized

2018 $ 2,275
2019 9,101
2020 9,101
2021 7,324
2022 3,768
Thereafter 2,512
Total $ 34,081
~~The amortization expense to be recognized for 2018 represent the expenses to be recognized during the remainder of the 2018 fiscal year.~~

Year
Amortization Expense
to be Recognized
2019 (remaining three months) $ 942
2020 3,768
2021 3,768
2022 3,768
2023 1,493
Thereafter —
Total $ 13,739

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 under~~~~Note 4. Investment in Paradise on Wings~~ ~~and~~~~Note 5. Acquisition of Seediv~~LLC, a Louisiana limited liability company (“Seediv”), ~~respectively.~~
~~On September 30, 2017, the Company sold its 50% ownership interest in Paradise on Wings to~~from 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, 2017~~owner and ~~ending September 30, 2017. As a result, the carrying amount~~operator of the ~~Company’s investment~~Dick’s Wings & Grill restaurant located at 100 Marketside Avenue, Suite 301, in ~~Paradise on~~the 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 year ended December 31, 2018. The Company did not make any payments to Mr. Kasturi during the nine-month period ended September 30, ~~2018.~~2019. Accordingly, the outstanding balance of contingent consideration was $55,356 ~~and $199,682~~ at September 30, ~~2018~~2019 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 September 30, ~~2018~~2019 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
September 30, 2019 $ — $ 55,356 $ —
December 31, 2018 $ — $ 55,356 $ —

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 September 30, ~~2018~~2019 and December 31, ~~2017~~2018 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, ~~capital~~operating 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 ~~capital~~financing and operating lease ~~obligation~~right-of-use assets and liabilities approximated ~~its~~their respective carrying ~~amount~~amounts as the interest rate ~~is implicit~~used in calculating the ~~underlying lease.~~right-of-use-assets and liabilities approximated the interest rate on the outstanding debt.
18
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements

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 ~~loans~~loan at December 31, 2018. The loan was repaid in full during the nine-month period ended September 30, ~~2018~~2019. Interest in the aggregate amount of $2 accrued and ~~December 31, 2017, respectively.~~was paid in full under the loans during the nine-month period ended September 30, 2019. Interest in the aggregate amount of $139 and $657 accrued and was paid in full under the loans during the three- and nine-month periods ended September 30, 2018, respectively. Interest in the aggregate amount of $425 and $1,515 accrued under the loans during the three- and nine-month periods ended September 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.No accrued interest was outstanding under the loans at September 30, ~~2018 or~~2019 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~~$2,979 and ~~$7,659~~$5,106 of principal was outstanding under the loan at September 30, ~~2018~~2019 and December 31, ~~2017, respectively~~2018, respectively.
.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 27^th day of each month thereafter beginning July 27^th, with a final payment of $1,000 due on January 27, 2020. The loan does not require the payment of any interest. A total of $7,000 of principal was outstanding under the loan at September 30, 2019.

The carrying value of the Company’s outstanding notes receivable was ~~$12,603~~$9,978 and ~~$33,628~~$5,520 at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, all of which was due from unrelated third parties. Of these amounts, ~~$9,412~~$9,344 and ~~$3,191~~$634 were classified as short-term and long-term notes receivable, respectively, at September 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~~ $2 during the nine-month period ended September 30, 2019, and ~~$1,515~~ generated interest income of $139 and $657 during the three- and nine-month periods ended September 30, 2018, ~~andgenerated interest income of $543 and $1,931 during the three- and nine-month periods ended September 30, 2017~~.respectively. The Company did not have any interest receivable outstanding at September 30, ~~2018 or~~2019 and December 31, ~~2017.~~2018.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements

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 facility~~entered into a loan agreement withBlue Victory Holdings, Inc., a Nevada corporation (“Blue Victory”), ~~and repaid $824,250 under~~pursuant 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 $61,721~~entered 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 $77,824~~will 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 ~~under~~has 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-month period ended September 30, ~~2018. Accordingly,~~2019 and the year ended December 31, 2018, and there was no principal outstanding under the credit facility at September 30, ~~2018 or~~2019 and December 31, ~~2017.~~
19
~~ARC Group, Inc.~~
~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~2018.

~~During~~The Company entered into an unsecured loan with Blue Victory during the year ended December 31, ~~2017, the Company borrowed~~2017.~~$372,049 from Blue Victory and repaid $341,546 to Blue Victory under a separate loan.Accordingly, the~~The 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 period~~year ended ~~September 30,~~December 31, 2018. Accordingly, the amount of principal outstanding under the loan was ~~$53,984~~$236,333 at December 31, 2018. The Company borrowed $1,540,886 and repaid $1,513,884 under the loan during the nine-month period ended September 30, 2019. Accordingly, the amount of principal outstanding under the loan was $263,335 at September 30, ~~2018.~~2019. The Company recognized $2,910 and $9,894 of interest expense under the loan ~~accrues~~during the three- and nine-month periods ended September 30, 2019, and recognized $816 and $2,466 of interest ~~at a rate of 6% per annum~~expense under the loan during the three- and ~~is payable on demand~~nine-month periods ended September 30, 2018..

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 (5~~^th~~) anniversary of the date~~A 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 rate~~is 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 $8,410 and $23,285 for amortization of the discount to the convertible note during the three- and nine-month periods ended September 30, 2019. Accordingly, the amount of unamortized debt discount outstanding was $115,799 at September 30, 2019, and the principal balance of the note net of unamortized debt discount outstanding was $507,130 at September 30, 2019. The Company recognized $9,416 and $27,848 of interest expense under the convertible note during the three- and nine-month periods ended September 30, 2019.

The carrying value of the Company’s outstanding promissory notes, net of unamortized discount of ~~$153,136~~$115,799 and ~~excluding capital lease obligations, was $523,777 and $30,503~~$139,084 at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, and excluding financing and operating lease liabilities, was $770,465 and $720,178 at September 30, 2019 and December 31, 2018, respectively.

20
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
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.
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 September 30, 2019:
Classification on the Condensed
Consolidated Balance Sheet September 30, 2019
Assets
Operating lease right-of-use assets Right-of-use assets $ 3,582,774
Financing lease right-of-use assets Right-of-use assets 10,896,130
Total right of use assets $ 14,478,904

Liabilities
Current liabilities:
Operating lease liability Current operating lease liabilities $ 284,059
Financing lease liability Current portion of other long-term liabilities 202,944
Non-current liabilities:
Operating lease liabilities, net of current portion Operating lease liabilities 3,351,890
Financing lease liabilities, net of current portion Other long-term liabilities 11,054,732
Total lease liabilities $ 14,893,625
21
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
The following table sets forth the supplemental cash flow information related to the Company’s leases for the three- and nine-month periods ended September 30, 2019:
Three Months Ended
September 30, 2019 Nine Months Ended
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 138,036 $ 387,477
Operating cash flows from financing leases 176,240 530,702
Financing cash flows from financing leases 145,092 430,545
The following table sets forth the components of lease costs related to the Company’s leases for the three- and nine-month periods ended September 30, 2019:
Three Months Ended
September 30, 2019 Nine Months Ended
September 30, 2019
Operating lease costs $ 154,597 $ 441,146

Financing lease costs:
Amortization of right-of-use assets $ 145,092 $ 430,546
Interest on lease liabilities 176,240 530,701
Total financing lease costs 321,332 961,247
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 10.91 7.73 %
Financing leases 18.92 8.00 %
22
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
The following table sets forth the maturity of our operating and financing leases liabilities as of September 30, 2019:
Operating Leases Financing Leases
Year Ended December 31,
2019 (remaining three months) $ 124,703 $ 223,055
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 5,502,452 19,832,122
Less: imputed interest (1,866,503 ) (8,574,446 )
Total $ 3,635,949 $ 11,257,676
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 September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, of which ~~6,524,427~~7,080,771 and ~~6,950,869~~6,680,065 shares of common stock were outstanding at September 30, ~~2018~~2019 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 September 30, ~~2018~~2019 and December 31, ~~2017, respectively,~~2018, of which449,581 ~~and -0-~~ shares wereoutstanding at September 30, ~~2018~~2019 and December 31, ~~2017, respectively.~~
~~On January 1,~~ 2018, ~~Mr. Kasturi earned 9,337~~and 2,500,000 shares of ~~the Company’s common stock pursuant to the terms~~Series B Convertible Preferred Stock, $0.01 par value per share, none of ~~his employment agreement with the Company.The Company recognized $147 of stock compensation expense during the nine-month period ended~~which was outstanding at September 30, ~~2018 in connection with the vesting of the shares of common stock earned by Mr. Kasturi on January 1,~~2019 and December 31, 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 price per share equal to the closing price 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 September 30, 2018.

In ~~June~~May 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, the~~Company 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 periods~~year 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 nine-month period ended September 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 periods~~year 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 ~~sheets~~sheet.
In ~~June 2018,~~February 2019, the ~~Company entered into a securities purchase agreement with Seenu G. Kasturi pursuant to which~~right 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 receipt~~termination of the ~~shares of common~~employee’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 year ended December 31, 2018 was reversed during the nine-month period ended September 30, ~~2018 in connection with the transaction.~~2019.

23
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
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 ~~3,500~~1,500 shares of common stock each month thereafter during the remainder of the term of the agreement. The Company recognized ~~$5,250~~$5,652 and $16,797 of stock compensation expense under the agreement duringthe three- and nine-month periods ended September 30, 2019.
The Company recognized $147 of stock compensation expense during the nine-month period ended September 30, 2019 in connection with the vesting 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 Seenu G. Kasturi, who is the Company’s Chief Executive Officer, pursuant to the terms of a new employment agreement that the Company entered into with him. The Company recognized $49,505 and $145,824 of stock compensation expense in connection therewith during the three- and ~~nine-months~~nine-month periods ended September 30, ~~2018 in connection with the issuance~~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.

In January 2019, the Company commenced 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 exercise 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 serve 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 warrants exercisable for a term of five 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.
2124

ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

~~In September 2018,~~
The Offering was originally contemplated to terminate on March 31, 2019, unless extended by the Company ~~entered into~~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 nine-month periods ended September 30, 2019.
On April 8, 2019, the Company granted a restricted stock award to Alex Andre, who is the Company’s Chief Financial Officer, 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 $24,070 and $45,785 of stock compensation expense in connection therewith during the three- and nine-month periods ended September 30, 2019, respectively.
On April 17, 2019, the Company revised the terms of the 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 ~~agreement with Maxim Group LLC (“Maxim”) to provide investment banking and mergers and acquisition services to the Company~~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 ~~year. Under the terms~~hundred twenty percent (120%) of the ~~agreement,~~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.
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 125,000~~five years to purchase that number of shares of common stock equal to ~~Maxim upon the execution~~7% 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.
25
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
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.
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 $240,625~~cannot undertake certain corporate actions without approval of ~~stock compensation expense~~the holders of a majority of the issued and outstanding shares of Series B convertible preferred stock.
The Offering terminated on May 31, 2019. No securities were sold in the offering during the three- and ~~nine-months~~nine-month periods ended September 30, ~~2018 in connection with the issuance of the shares.~~2019.

The Company recognized a total of ~~$265,629~~$79,226 and ~~$303,503~~$189,849 for stock compensation expense during the three- and nine-month periods ended September 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~~$64,682 and ~~$26,853~~$15,453 of stock subscription payable outstanding at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.
26
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
The following table sets forth the changes in stockholders’ equity as of September 30, 2019:
Common Stock Series A Convertible Preferred Stock Series B Convertible Preferred Stock Additional Stock
Shares Par
Value Shares Par
Value Shares Par
Value Paid-in Capital 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 — — — — 155,316 49,229 — 208,552
Cancellation of stock option
issued for services — — — — — — (10,002 ) — — (10,002 )
Net loss — — — — — — — — (1,303,318 ) (1,303,318 )
Balance at September 30, 2019 7,080,771 $ 70,808 449,581 $ 4,496 — — $ 4,635,652 $ 64,682 $ (6,550,871 ) $ (1,775,233 )
The following table sets forth the changes in stockholders’ equity as of September 30, 2018:
Common Stock Series A
Convertible
Preferred Stock Additional Stock
Shares Par
Value Shares Par
Value Paid-in Capital 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 23,139 232 — — 35,769 263,750 — 299,751
Stock option issued for services — — — — 3,752 — — 3,752
Deferred franchise fees — — — — — — (196,478 ) (196,478 )
Beneficial conversion feature — — — — 155,732 — — 155,732
Common stock exchanged for preferred stock (449,581 ) (4,496 ) 449,581 4,496 — — — —
Net income — — — — — — 89,550 89,550
Balance at September 30, 2018 6,524,427 $ 65,244 449,581 $ 4,496 $ 4,190,559 $ 290,603 $ (4,875,520 ) $ (324,617 )

Note 14. Stock Options and Warrants

The Company issued one stock option during the ~~nine-month period~~year 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 ~~vests~~vested 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 of~~In 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-month periods ended September 30, ~~2017,~~2019 and 2018, and no stock options or warrants were exercised during the three- and nine-month periods ended September 30, ~~2017.~~2019 and 2018. There were no stock options or warrants outstanding at September 30, ~~2017.~~2019.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
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 September 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 September 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.

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 1^st 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.
28
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
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 1^st 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.
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 will 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 will 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.
29
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
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.
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.
30
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
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 1^st of each year effective December 31, 2016, and clarified that the criteria for Mr. Akam’s annual bonuses will be identified and agreed upon by the Company and Mr. Akam by the end of the 1^st 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.
Alex Andre
On July 15, 2019, the Company appointed Alex Andre as its Chief Financial Officer. In connection therewith, on July 15, 2019, Seenu G. Kasturi resigned as the Company’s Chief Financial Officer. Mr. Kasturi continued to serve as the Company’s Chief Executive Officer and Chairman of the Company’s board 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 Company and, upon the completion of all applicable registration and licensing requirements, to serve as the General Counsel of the Company. 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 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 1^st 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 1^st 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.
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 ~~provides~~provided 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.
22
~~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 ~~provides~~provided for an initial monthly rent payment of $2,063 and ~~continues~~continued in place until it terminated on December 31, 2018.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
On November 15, 2018, the Company entered into a ~~month-to-month basis until either party~~triple 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 notice~~the 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 ~~Asset~~Seediv Purchase Agreement.
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 (5^th) 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, 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 with 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 42^nd month of the initial term in the event if gross sales during the period commencing on the first day of the 25^th month of the initial term and ending on the last day of the 36^th month of the initial term are less than $1,400,000.
2333
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.
~~Capital~~Financing 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 that~~concurrently assigned all of its rights and obligations under the ~~Master Lease~~concession 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 ~~recorded~~concurrently 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 asset~~sub-concession agreement with Jacksonville Sportservice, Inc. (“Jacksonville Sportservice”) and ~~capital lease obligation~~DWG Acquisitions with respect to the two concession stands previously covered by the Levy and Ovations subcontractor concession agreements. The Company concurrently assigned all of ~~$11,500,000~~its rights and obligations under the sub-concession agreement to DWG Acquisitions in ~~its condensed consolidated balance sheets that was~~return for a fee equal to the ~~present value of~~income generated by the ~~Company’s future minimum leaseback payments.The outstanding balance of~~concession stands less all expenses incurred by the ~~capital lease obligation was$11,413,326 at September 30, 2018, of~~concession stands for each full or partial month during which ~~$171,411 represented~~ the ~~short-term portion of~~concession agreement is in effect. In October 2017, the ~~capital lease obligation and $11,241,915 represented~~Company entered into a termination agreement with DWG Acquisitions whereby the ~~long-term portion of~~Company terminated the ~~capital lease obligation~~.
~~The following table presents the future annual minimum lease payments~~assignment to ~~be recognized under the capital lease at September 30, 2018:~~
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.~~
24
DWG Acquisitions.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~
In November 2017, the Company entered into a new five-year sponsorship agreement with the Jacksonville Jaguars. Under the terms of the 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 term of the sponsorship agreement commences on April 1, 2018 and expires on the later of: (i) the conclusion of the 2022/23 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 annual fee applicable during the then-current year of the agreement.
In July 2019, the Company entered into a First Amendment to Sponsorship Agreement (the “Amendment”), with theJacksonville Jaguars, LLC, a Delaware limited liability company (the “Jaguars”). The Amendment amended the terms of that certain Sponsorship Agreement, dated November 27, 2017, by and between the Company and the Jaguars.
Under the terms of the Amendment, during each preseason and regular season football game played by the National 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 display 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 “Official Watch Party Restaurant / Bar for Jaguars away games, including social media spots, radio spots and banner ads.
The Amendment is for a term of 10 NFL football seasons and expires on the later of: (i) the conclusion of the 2028/29 NFL season, and (ii) February 2029. The Company is 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.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements

The following table presents the future ~~obligations 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 obligation for 2018 represents the obligation to be recognized during the remainder of the 2018 fiscal year.~~
~~The land, buildings and improvements of $11,500,000 included within property and equipment in~~~~Note 8. Property and Equipment, Net~~ ~~at September 30, 2018 consisted of gross assets acquired on the capital lease.The gross amount of all future~~minimum annual payments under the ~~lease was $20,637,203 at~~sponsorship agreement as of September 30, ~~2018,~~2019:
Year
Minimum
Annual
Payments

2019 (remaining three months) $ 166,667
2020 794,000
2021 794,000
2022 794,000
2023 794,000
Thereafter 3,970,000
Total $ 7,312,667
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 company has an insurance policy in place on the property and received insurance proceeds in the amount of ~~which $9,223,877 was~~$186,224 and $766,109 under the policy for ~~interest.Depreciation expense~~such items as lost income and ~~accumulated depreciation were approximately $24,000~~damaged equipment during the three- and nine-month periods ended September 30, ~~3018. Interest expense~~2019. The Company recorded $186,224 and $584,521 of the insurance proceeds under “revenue – restaurant sales” for the three-and nine-month periods ended September 30, 2019 on its condensed consolidated statements of operations as that portion of the insurance proceeds was ~~$59,471 during~~paid for lost income from business interruption, and recorded the remaining $181,588 of the insurance proceeds under “income from insurance proceeds” on its condensed consolidated statements of operations for the three- and nine-month periods ended September 30, ~~2018. No depreciation or interest expense~~2019 as that portion of the insurance proceeds was ~~recognized during three-~~for equipment and ~~nine-month periods ended September 30, 2017.~~other assets that were destroyed in the fire. The restaurant is expected to reopen in mid-November 2019.

Note ~~16.~~17. Related-Party Transactions

~~During~~Except as otherwise set forth below, all of the ~~year ended~~following 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 September 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.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
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 appointed~~as its President, Chief Financial Officer and Chairman of the board of directors ofand, in connection therewith, entered into an employment agreement with him. 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~~ September 30, ~~2018. He also~~2019, Mr. Kasturi served as the ~~President, Treasurer~~Company’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 member~~Company’s Chief Operating Officer. As of September 30, 2019, Mr. Akam served as the Company’s Chief Operating Officer and Secretary. A description of the ~~board~~employment agreement is set forth herein underNote 16. Commitments and Contingencies – Employment Agreements – Richard W. Akam.
In July 2019, the Company appointed Alex Andre as its Chief Financial Officer and, in connection therewith, entered into an employment agreement with him. A description of ~~directors,~~the employment agreement is set forth herein underNote 16. Commitments and Contingencies – Employment Agreements – Alex Andre.
Financing Transactions
The Company is a party to a credit facility with Blue Victory.A description of the 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.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
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 had 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 that the 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 and $100,994 in royalties and franchise fees through its franchise agreements with DWG Acquisitions during the three- and nine-month periods ended September 30, 2018, ~~respectively, and generated~~respectively. The Company had a total of~~$40,285~~ $41,512 for accounts payable and ~~$123,343~~ ~~in royalties and franchise fees through its franchise agreements with~~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 September 30, 2019.
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 closed the Tilted Kilt restaurant and terminated the franchise agreement in August 2019. The Company paid ad fund fees of $1,444 and $9,423 to Tilted Kilt during the three- and nine-month periods ended September 30, ~~2017, respectively.~~2019. The Company was not required to pay any royalties or franchise fees to Tilted Kilt under its franchise agreement with Tilted Kilt.

25
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.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

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 September 30, 2019. 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 representations, 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.
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 September 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.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
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 ~~$891~~$350,530 and ~~$1,505~~$231,187 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 for accounts payable and accrued expenses outstanding ~~from DWG Acquisitions and certain of its employees~~ at September 30, ~~2018~~2019 and December 31, ~~2017, respectively. The outstanding amounts~~2018, respectively, that were owed to employees and other affiliates of the Company primarily for ~~rent owed to DWG Acquisitions~~salaries 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 entitled~~~~American 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 entitled~~Cala 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 September 30, ~~2018~~2019 and December 31, ~~2017.~~2018. Interest expense in the amount of $2,841 ~~accrued on the outstanding balance of the settlement agreement payable during the three-month periods ended September 30, 2018~~ and ~~2017, respectively, and interest expense in the amount of~~ $8,431 accrued on the outstanding balance of the ~~settlement agreement payable~~loss during the three- and 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~~$89,953 and ~~$70,250~~$81,522 outstanding at September 30, ~~2018~~2019 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~~$89,953 totaled ~~$273,428 as of~~$284,700 at September 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.~~
26
~~ARC Group, Inc.~~
~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~2018.

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 September 30, 2019 and December 31, 2018. Interest expense in the amount of $1,974 and $5,856 accrued on the outstanding balance of the accrued legal contingency during the three- and nine-month period ended September 30, 2019. The interest expense was credited to accrued legal contingency. A total of ~~$39,665~~$47,495 and ~~$33,809~~$41,638 of accrued interest, and $10,586 of other expenses (excluding legal fees), were outstanding at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, resulting in an aggregate potential loss of ~~$161,790~~$169,620 and ~~$155,935~~$163,764 at September 30, ~~2018~~2019 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.
40
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
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 and Fat Patty’s. All Company-owned restaurants are casual dining restaurants. There were a total of eight and nine company-owned restaurants at September 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 Company enters 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 for royalty 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.
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. Franchisees are 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 of 16 and 17 franchised restaurants at September 30, 2019 and December 31, 2018, respectively.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
Segment Financial Information
Information on segments and a reconciliation of income from operations to net loss is as follows:
Three Months Ended
September 30, 2019 Three Months Ended
September 30, 2018 Nine Months Ended
September 30, 2019 Nine Months Ended
September 30, 2018
Revenue
Company-owned restaurants $ 3,803,609 $ 2,104,825 $ 12,150,290 $ 3,871,929
Franchise operations 239,035 255,239 670,142 791,886
Total revenue $ 4,042,644 $ 2,360,064 $ 12,820,432 $ 4,663,815

Net Loss
Company-owned restaurants $ 240,570 $ 229,728 $ 639,735 $ 410,820
Franchise operations 76,872 133,402 276,414 590,597
Total income from operations 317,442 363,130 916,149 1,001,417
Corporate and unallocated expenses (914,956 ) (265,663 ) (2,219,467 ) (911,867 )
Net (loss) / income $ (597,514 ) $ 97,467 $ (1,303,318 ) $ 89,550

Depreciation and Amortization
Company-owned restaurants $ 296,843 $ 47,833 $ 864,980 $ 70,995
Franchise operations — — — —
Corporate 1,389 146 5,511 289
Total $ 298,232 $ 47,979 $ 870,491 $ 71,284

Capital Expenditures
Company-owned restaurants $ 317,780 $ 88,408 $ 468,877 $ 223,526
Franchise operations — — — —
Corporate — 1,224 9,000 4,058
Total $ 317,780 $ 89,632 $ 477,877 $ 227,584
Note 20. Restatement of Previously Issued Condensed Consolidated Financial Statements
The Company is restating its condensed consolidated financial statements for the three- and nine-month periods ended September 30, 2018 to correct an error related to the manner by which it recorded $92,638 and $204,378, 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 $92,638 and $204,378 during the three-and nine-month periods ended September 30, 2018, respectively. The Company has restated its condensed consolidated financial statements for the three- and nine-month periods ended September 30, 2018 for the sole purpose of reducing restaurant sales and restaurant operating costs – other operating expenses by $92,638 and $204,378, respectively.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
The impact of the restatement on the Company’s condensed consolidated statement of operations for the three- and nine-month periods is presented below. The restatement did not have any impact on the Company’s condensed consolidated balance sheet as of September 30, 2018 or the Company’s statement of cash flows for the nine-month period ended September 30, 2018.
For the Three Months Ended September 30, 2018

Condensed Consolidated Statement of
Operations:
As Previously Reported Adjustments As
Restated
Restaurant sales $ 2,197,463 $ (92,638 ) $ 2,104,825
Revenue 2,452,702 (92,638 ) 2,360,064
Restaurant operating costs – other operating expenses (474,165 ) 92,638 (381,527 )
Total operating expenses (2,916,504 ) 92,638 (2,823,866 )
For the Nine Months Ended September 30, 2018

Condensed Consolidated Statement of
Operations:
As Previously Reported Adjustments As
Restated
Restaurant sales $ 4,076,307 $ (204,378 ) $ 3,871,929
Revenue 4,868,193 (204,378 ) 4,663,815
Restaurant operating costs – other operating expenses (911,356 ) 204,378 (706,978 )
Total operating expenses (5,414,567 ) 204,378 (5,210,189 )

Note ~~18.~~21. Subsequent Events
Acquisition of WingHouse Concept

On October ~~1, 2018, Seenu G. Kasturi earned 7,414 shares~~11, 2019, the Company and ARC WingHouse, LLC, a Florida limited liability company that is a wholly-owned subsidiary of the ~~Company’s common stock pursuant to the terms of his employment agreement with the Company.~~
~~On October 30, 2018, the~~ Company (“ARC WingHouse”), entered into ~~a Membership Interest~~an Asset Purchase Agreement (the ~~“Purchase~~“Asset Purchase Agreement”) with ~~SDA Holdings,~~Soaring Wings, LLC, a ~~Louisiana~~Florida limited liability company (“~~SDA”~~Soaring Wings”), Soaring Wings HQ, LLC, a Florida limited liability company (“Soaring Wings HQ”), Soaring Wings Advertising, LLC, a Florida limited liability company (“Soaring Wings Advertising”), Soaring Wings IP, LLC, a Florida limited liability company (“Soaring Wings IP”), and ~~Fred D. Alexander, an individual, pursuant to which~~ the ~~Company agreed to acquire~~wholly-owned subsidiaries of Soaring Wings that own and operate all of the ~~issued~~Restaurants (as defined below) (the “WH Operating Entities”). Soaring Wings, Soaring Wings HQ, Soaring Wings Advertising, Soaring Wings IP and ~~outstanding membership interests in SDA for $10.00. SDA is~~ the ~~owner of~~WH Operating Entities are sometimes collectively referred to as the~~Tilted Kilt Pub & Eatery~~^® ~~restaurant franchise.~~ “Sellers” and each a “Seller”. The Company and ARC Winghouse are sometimes collectively referred to as the “Purchasers”. The transactions contemplated by the Asset Purchase Agreement are sometimes referred to herein collectively as the ~~“Tilted Kilt Acquisition”~~“Acquisition”.
The closing of the ~~Tilted Kilt~~ Acquisition occurred on October 11, 2019 (the “Closing Date”).
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
Sellers are the owners and operators of the WingHouse Bar and Grill restaurant concept (the “WingHouse Concept”), which is ~~conditioned~~comprised of 24 WingHouse Bar and Grill restaurants (the “Restaurants”). Purchasers agreed to pay the Sellersa total of $18,000,000 as adjusted pursuant to a working capital adjustment (the “Purchase Price”), and to assume, satisfy and discharge certain assumed liabilities. On the Closing Date, ARC WingHouse paid $11,000,000 to the Sellers and delivered to Sellers a promissory note in the amount of $1,000,000 (the “Purchaser Note”). The Purchaser Note accrues interest at a rate of five percent (5%) per annum. The Purchaser Note isdue and payable in a single payment on the earliest to occur of the following: (i) the first anniversary of the date of the Purchaser Note, (ii) the merger or sale of substantially all the membership interest or assets of ARC WingHouse, and (iii) the liquidation, dissolution or winding up of ARC WingHouse.In addition, ARC WingHouse delivered to SW WH Holdings, LLC, a Florida limited liability company (“SW WH Holdings”), an equity interest in ARC WingHouse representing a ten percent (10%) ownership interest in ARC WingHouse (the “Equity Interest”). The Company also agreed to deliver to Soaring Wings shares (the “ARC Stock”) of the Company’s common stock on each of the first three anniversaries of the Closing Date. The number of shares of common stock to be delivered on each anniversary will beequal to the quotient of $1,000,000 divided by the following per share prices: (i) $1.40 per share of common stock on the first anniversary, (ii) 2.00 per share of common stock on the second anniversary, and (iii) $3.00 per share of common stock on the third anniversary (collectively, the “ARC Stock Consideration”). The per share price of the ARC Stock Consideration will be equitably adjusted for any stock dividend, stock split, reverse stock split or recapitalization. If the ARC Stock is not listed and quoted for trading on the NYSE,NASDAQ Global Select Market, NASDAQ Global Market or NASDAQ Capital Marketon any of the first, second and third anniversaries of the Closing (the first such anniversary referred to as a “Listing Failure Anniversary”), then ARC WingHouse will pay $1,000,000 cash to Soaring Wings on the Listing Failure Anniversary and each anniversary of the Closing after a Listing Failure Anniversary (if any), ending on the third anniversary of the Closing Date in full satisfaction of the Company’s obligation to deliver the ARC Stock Consideration to Soaring Wings on the Listing Failure Anniversary and each anniversary thereafter, ending on the 3^rd anniversary (the “Contingent Cash Consideration”). Notwithstanding the existence of a Listing Failure Anniversary, Soaring Wings may, in its sole discretion, elect to receive ARC Stock on the Listing Failure Anniversary and/or any anniversary after the Listing Failure Anniversary in lieu of a $1,000,000 cash payment by providing ARC WingHouse with written notice no less than 30 days before the Listing Failure Anniversary or subsequent anniversary, as applicable. The ARC Stock Consideration is subject to the terms of a Put Agreement (as defined below), and Sellers were granted customary piggy-back registration rights with respect to the ARC Stock Consideration.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
Also on October 11, 2019,the Purchasers entered into a Put Agreement (the “Put Agreement”; together with the Asset Purchase Agreement, the “Purchase Agreements”) with Soaring Wings pursuant to which Soaring Wings was granted the right, but not the obligation, upon ~~SDA, Trustee Services Group~~written notice to the Purchasers given at any time before the Put Deadline (as defined below), to require the Company to purchase, for cash, at the Put Closing (as defined below), all or any portion of the shares of ARC Stock received by Soaring Wings under Section 1.2(c) of the Asset Purchase Agreement or Section 15 of the Put Agreement. In the event Soaring Wings receives ARC Stock pursuant to Section 1.2(c) of the Asset Purchase Agreement and puts all of such ARC Stock to the Company, then the amount payable by the Company to Soaring Wings at the Put Closing will be equal to the Put Price (as defined below). In the event Soaring Wings elects to put only a portion of such shares to the Company, either because Soaring Wings received Contingent Cash Consideration on one or more of such anniversaries, Soaring Wings sold some of the ARC Stock, Soaring Wings elected to retain some of the ARC Stock and put only a portion of the ARC Stock to the Company, and/or for any other reason, then the amount payable by the Company to Soaring Wings at the Put Closing will calculated in the following manner: (x) the Put Price, multiplied by (y) a fraction, the numerator of which is the number of shares of ARC Stock put to the Company by Soaring Wings hereunder, and the denominator of which is the number of shares of ARC Stock received by Soaring Wings under the Asset Purchase Agreement had Soaring Wings received ARC Stock on each of the first, second and third anniversaries of the Closing Date. The amount payable by the Company to Soaring Wings at the Put Closing is referred to herein as, the “Put Payment”. In the event that Soaring Wings receives the Put Price from Purchasers, then, without any action on the part of the Purchasers, SW WH Holdings or any other person, the Equity Interest will be immediately terminated and forfeited to ARC WingHouse and no longer be owned beneficially or of record by SW WH Holdings.
For the purposes hereof, “Put Price” means an amount equal to: (i) $6,000,000, less (ii) the aggregate dividends (if any) received by Soaring Wings from the Company attributable to any shares of ARC Stock received by Soaring Wings under Section 1.2(c) of the Asset Purchase Agreement and not required to be paid to City National Bank (as defined below) pursuant to that certain Subordination Agreement, dated October 11, 2019, by ARC WingHouse and Soaring Wings for the benefit of City National Bank (the ~~“Custodian”~~“Subordination Agreement”), less (iii) the aggregate distributions (other than tax distributions) made by ARC WingHouse to Soaring Wings under its operating agreement that are not required to be paid to City National Bank pursuant to the Subordination Agreement, less (iv) the aggregate cash payments made by Purchaser to Soaring Wings following a Listing Failure Anniversary pursuant to Section 1.2(c) of the Asset Purchase Agreement that are not required to be paid to City National Bank pursuant to the Subordination Agreement (and for the avoidance of doubt, were not applied to satisfy losses pursuant to Section 7.9(b) under the Asset Purchase Agreement), less (v) the aggregate amount of losses satisfied by Sellers to Purchasers or their indemnitees pursuant to Sections 7.9(a), (b) and (c) under the Asset Purchase Agreement that are not required to be paid to City National Bank pursuant to the Subordination Agreement.
For the purposes hereof, “Put Deadline” means the later of (y) the fifth anniversary of the Closing Date and (z) 12 months following the date on which the Company provides written notice to Soaring Wings that: (i) it has indefeasibly paid and satisfied in full the Loan (as defined below), (ii) Soaring Wings is not restricted from exercising its rights under this Agreement (in whole or in part) pursuant to the Subordination Agreement, or otherwise, and (iii) the Company has legally sufficient funds to pay the Put Payment in full.
In connection with the closing of the Acquisition, Seenu G. Kasturi ~~Let’s Eat Incorporated~~executed a guaranty in favor of Soaring Wings guaranteeing all of the Purchasers’ obligations under the Asset Purchase Agreement, the Put Agreement, and the Purchaser Note.
Financing of WingHouse Acquisition
On October 11, 2019, ARC WingHouse entered into a Loan Agreement (the “Loan Agreement”) with City National Bank of Florida (“~~Let’s Eat”~~City National Bank”), pursuant to which the ~~Reilly~~Company borrowed $12,250,000 (the “Loan”) to help fund the acquisition of the WingHouse Concept. In connection therewith, ARC WingHouse issued a promissory note in favor of City National Bank in the amount of $12,250,000 (the “CNB Note”). Interest accrues under the CNB Note at a rate of six percent (6%) per annum. The Company makes monthly payments of principal and interest of$179,481 to City National Bank under the CNB Note.The entire outstanding principal balance of the CNB Note plus all accrued interest is due and payable in full on October 11, 2024.
ARC Group, ~~LLC (the “Reilly Group”~~Inc.
Notes to Condensed Consolidated Financial Statements
ARC WingHouse may make prepayments of principal under the CNB Note, provided, however, that (i) if ARC WingHouse prepays any portion of the outstanding balance of the CNB Note during the first year of the term of the CNB Note, ARC WingHouse will pay a fee to City National Bank in an amount equal to three percent (3%) of the amount prepaid by ARC WingHouse in excess of $2,250,000, (ii) if ARC WingHouse prepays any portion of the outstanding balance of the CNB Note during the second year of the term of the CNB Note, ARC WingHouse will pay to City National Bank a fee in an amount equal to two percent (2%) of the amount prepaid by ARC WingHouse, and ~~John Reynauld (Mr. Reynauld, together~~(iii) if ARC WingHouse prepays any portion of the outstanding balance of the CNB Note during the third (3^rd) year of the term of the CNB Note, ARC WingHouse will pay to City National Bank a fee in an amount equal to one percent (1%) of the amount prepaid by ARC WingHouse. Thereafter, ARC WingHouse may make prepayments of principal under the CNB Note without penalty or premium.
Seenu G. Kasturi, as guarantor for the loan, deposited $1,250,000 with City National Bank in an account that is under the sole control of City National Bank. Mr. Kasturi granted a security interest to City National Bank in the account and the funds held therein as security for the loan. City National Bank will return the funds to Mr. Kasturi in the event ARC WingHouse contributes a like amount of funds to City National Bank. City National Bank will return all funds held in the account to Mr. Kasturi or ARC WingHouse, as applicable, upon repayment of the loan by ARC WingHouse.
In addition, ARC WingHouse deposited $1,000,000 with City National Bank in an account that is under the sole control of City National Bank. ARC WingHouse granted a security interest to City National Bank in the account and the funds held therein as security for the loan. After April 11, 2020, but no sooner than City National Bank receives ARC WingHouse’s audited financial statements for the year ended December 31, 2019 and ARC Winghouse’s quarterly financial statements for the quarter end March 30, 2020, so long as ARC Winghouse is in compliance with the ~~Custodian,~~financial covenants contained in the Loan Agreement and no event of default as occurred, City National Bank, upon the request of ARC WingHouse, will disburse certain amounts to pay down the Purchaser Note.
The CNB Note is secured, in part, by that that certain Security Agreement, dated October 11, 2019, executed by ARC WingHouse in favor of City National Bank (as the same may be amended or modified from time to time, the “Security Agreement”), granting City National Bank a lien and security interest in and to all assets owned by ARC WingHouse. In addition, the Company entered into a Negative Pledge Agreement, dated October 11, 2019, pursuant to which the Company agreed not to: (i) sell, transfer, assign or lease any of its assets, except for the transfer or sale of assets in the ordinary course of business for at least equal consideration, (ii) create, incur, assume or suffer to exist certain types of liens on its assets, (iii) enter into any agreement with any person other than City National Bank which prohibits or limits the ability of the Company to create, incur, assume or suffer to exist any security interest, mortgage, pledge, lien or other encumbrance upon any of its assets, and (iv) create, incur, assume or suffer to exist certain types of indebtedness.
In connection with the completion of the Loan, Seenu G. Kasturi executed a guaranty in favor of City National Bank guaranteeing all of ARC WingHouse’s obligations under the CNB Note, the Loan Agreement and the other loan documents executed in connection therewith.
ARC Group, Inc.
Notes to Condensed Consolidated Financial Statements
Appointment of Alex Andre
On October 22, 2019, the Company appointed Alex Andre as its General Counsel, and on November 12, 2019, the Company appointed Mr. ~~Kasturi, Let’s Eat,~~Andre as its Secretary. Mr. Andre will also continue to serve as the ~~Reilly Group,~~Company’s Chief Financial Officer. In connection there with, Richard W. Akam resigned as the ~~“Parties”) entering~~Company’s Secretary.
Appointment of Joe Dominiak
On November 12, 2019, the Company appointed Joseph Dominiak, age 54, as its Chief Operating Officer. In connection therewith, on November 12, 2019, Richard W. Akam resigned as the Company’s Chief Operating Officer.
On November 6, 2019, the Company entered into an ~~amendment~~employment agreement with Mr. Dominiak to ~~that certain Custodian Agreement, dated June 7, 2018, by~~serve as the Chief Operating Officer of the Company. The employment agreement is for an ~~among~~initial term of three years with automatic one-year renewals thereafter unless earlier terminated or not renewed as provided therein. Under the ~~Parties to add SDA as a party to~~terms of the agreement, ~~and remove~~ Mr. ~~Kasturi as a party to the agreement, in which event SDA~~Dominiak will be ~~required~~paid an initial annual base salary in the amount of $200,000. Beginning January 1, 2021, he will be eligible to ~~deliver~~receive increases in salary in the discretion of the Company’s board of directors. Mr. Dominiak will be eligible to receive annual bonuses on each anniversary of the ~~Custodian~~Effective Date of up to 20% 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.
On November 12, 2019, the Company entered into a ~~certificate evidencing 718,563~~restricted stock award agreement with Mr. Dominiak pursuant to which the Company granted 100,000 shares of the Company’s common ~~stock.~~stock, $0.01 par value per share, to Mr. Dominiak. The ~~closing~~shares vest in accordance with the following schedule: (i) 33,333 shares on November 12, 2020; (ii) 33,333 shares on November 12, 2021; and (iii) 33,334 shares on November 12, 2022.In the event the Company terminates the employment of Mr. Dominiak without “cause”, as such term is defined in Section 4(c) of the ~~Tilted Kilt Acquisition is also conditioned upon~~employment agreement, then all shares that would have vested within the following 12 months had the Executive continued to be employed by the Company ~~raising gross proceeds~~during such period shall immediately vest in full. In the event Mr. Dominiak’s employment with the Company terminates by reason of ~~at least $2,000,000 through the sale of debt~~death or ~~equity securities,~~“disability”, as ~~well as other customary closing conditions. The closing~~such term is defined in Section 4(b) of the ~~Tilted Kilt Acquisition will occur once all~~employment agreement, or if the Company terminates Mr. Dominiak’s employment for “cause”, as such term is defined in Section 4(c) of the ~~closing~~employment agreement, or if Mr. Dominiak 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 ~~have been satisfied.~~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.
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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^® ~~and~~, Fat Patty’s^®andWingHouse^® brands;
·● changes in consumer preferences;
·● our ability to identify, attract and retain qualified franchisees;
·● our limited control over the activities of our franchisees;
·● 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, ~~2017~~2018 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 nine-month periods ended September 30, 2018 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 ~~concept~~franchise is currently comprised of ~~traditional~~20 restaurants ~~like our~~and 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 under~~Note 5 – Acquisition of Seedivin our condensed consolidated financial statements.~~
On August 30, 2018, we ~~closed upon an asset purchase agreement for~~acquired the Fat Patty’s ~~franchise~~restaurant 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 “Fat~~Kentucky. 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’s~~the transaction is set forth herein under~~Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments~~ ~~and~~Note ~~6 –~~4. Acquisition of Fat Patty’s in our condensed consolidated financial statements.
On October 30, 2018, we entered into an agreement to acquire theTilted Kilt Eatery and Pub^®restaurant franchise (“Tilted Kilt”).The Tilted Kilt franchise is currently comprised of 26 restaurants located in 13 states, of which two are company owned and operated and the remaining 24 are franchise locations.It 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. A description of the transaction is set forth herein underNote 5. Agreement to Acquire Tilted Kilt in our condensed consolidated financial statements.
On October 11, 2019, we acquired the WingHouse Bar & Grill restaurant concept (“WingHouse”). WingHouse is currently comprised of 24 restaurants located in Florida, all of which are company owned and operated. It offers a variety of chicken wings, appetizers, salads, burgers, sandwiches & wraps, tacos, seafood options and desserts. A description of the transaction is set forth herein underNote 21. Subsequent Eventsin 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 located 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.
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, including~~beverages 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 and WingHouse 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 and WingHouse 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 recent acquisitions of Fat Patty’s and WingHouse 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-restaurant~~acquire complementary brands, we intend to ~~focus on companies with established brands~~develop a scalable infrastructure that ~~are either underperforming or undervalued and that offer long-term~~will help us expand our margins as we execute upon our growth ~~potential.~~
~~Recent Transactions~~
~~Fat Patty’s~~
On August 3, 2018, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with CSA, Inc., a West Virginia corporation (“CSA”), CSA Investments, LLC, a West Virginia limited liability company (“CSA Investments”), CSAstrategy. Benefits 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 all of the assets associated with Fat Patty’s (the “Fat Patty’s Acquisition”). We agreed to pay the Sellers $12,352,000this infrastructure may include centralized support services 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, 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.
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In connection with 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 August 30, 2018 pursuant to which we 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 us in full on the earlier of (i) the fifth (5^th) 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.~~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 being 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 common to all of our brands.
Financial Results

~~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~~Our revenue increased $1,682,580 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 the restaurants acquired in the Asset Acquisition are located (collectively, the “Properties”). Store Capital agreed to pay us $11,500,000$4,042,644 for the ~~Properties at closing. Title~~three-month period ended September 30, 2019, compared 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 closing 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 the~~Tilted 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”.~~
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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~~$2,360,064 for the three-month period ended September 30, 2018, ~~compared~~primarily due to ~~$1,047,404~~an increase in sales of food and beverage products by the company-owned restaurants that we acquired through our acquisition of Fat Patty’s. Our total operating expenses increased $1,640,739 to $4,464,605 for three-month period ended September 30, 2019 from $2,823,866 for three-month period ended September 30, 2018, primarily due to an increase in restaurant operating costs associated with the operation of the company-owned restaurants that we acquired through our acquisition ofFat Patty’s. Accordingly, we incurred a loss from operations of $421,961 for the three-month period ended September 30, ~~2017. Our total operating expenses were $2,916,504 for the three-month period ended September 30, 2018,~~2019 compared to ~~$1,068,963 for the three-month period ended September 30, 2017. We generated a loss from operations of~~ $463,802 for the three-month period ended September 30, ~~2018 compared to $21,559~~2018. We generated a net loss of $597,514, or $0.08 per share of common stock, for the three-month period ended September 30, ~~2017. We generated~~2019, compared to net income of $97,467, or $0.01 per share of common stock, for the three-month period ended September 30, ~~2018 compared~~2018.
Our revenue increased $8,156,617 to ~~a net loss of $89, or $0.00 per share,~~$12,820,432 for the ~~three-month~~nine-month period ended September 30, ~~2017.~~
~~We achieved revenue of $4,868,193~~2019, compared to $4,663,815 for the nine-month period ended September 30, 2018, ~~compared~~primarily due to ~~$3,228,054~~an increase in sales of food and beverage products by the company-owned restaurants that we acquired through our acquisition of Fat Patty’s. Our total operating expenses increased $8,597,213 to $13,807,402 for nine-month period ended September 30, 2019 from $5,210,189 for nine-month period ended September 30, 2018, primarily due to an increase in restaurant operating costs associated with the operation of the company-owned restaurants that we acquired through our acquisition ofFat Patty’s. Accordingly, we incurred a loss from operations of $986,970 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,~~2019 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~~2018. We generated a net loss of ~~$73,345~~$1,303,318, or $0.18 per share of common stock, for the nine-month period ended September 30, ~~2017. We generated~~2019, compared to net income of $89,550, or $0.01 per share of common stock, for the nine-month period ended September 30, 2018 ~~compared to $87,675, or $0.01 per share,~~
We had total assets of $18,020,691 and $14,673,337 at September 30, 2019 and December 31, 2018, respectively. Net cash provided by operating activities was $565,856 for the nine-month period ended September 30, ~~2017. Net~~2019, compared to cash ~~flows provided by~~flow from operating activities ~~were~~of $235,787 for the nine-month period ended September 30, ~~2018, compared to $242,619 for the nine-month period ended September 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 and WingHouse restaurants and ~~as we~~ open new Dick’s Wings, ~~and~~ Fat Patty’s and WingHouse restaurants. 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.~~brands and assets. 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~~acquisitions of Fat Patty’s and WingHouse 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 our~~Our critical accounting policies ~~please refer to the discussion provided~~are 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 fiscal~~the year ended December 31, ~~2017 under~~2018 are those that depend most heavily on these judgments and estimates. As of September 30, 2019, there have been no material changes to any of the ~~caption~~~~“Item 7. Management’s Discussion and Analysis~~critical accounting policies contained in our Annual Report on Form 10-K for the year ended December 31, 2018 other than with respect to the adoption 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 606~~provides 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.
~~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~~842 on January 1, ~~2018. Therefore, the comparative period has not been adjusted~~2019, a description of which is provided herein underNote 2. Basis of Presentation 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~~Significant Accounting Policies – Recent Accounting Pronouncements
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, we recognized deferred franchise fees in the amount of $196,478 on its balance sheet as of January 1, 2018 and an increase in its accumulated deficit by the same amount on that date.
~~Advertising Funds~~
~~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 Funds~~Recent 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.

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Comparison of the Three-Month Periods Ended September 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~~$1,682,580 to~~$2,452,702~~ $4,042,644 for the three-month period ended September 30, ~~2018~~ 2019from$~~1,047,404~~2,360,064 for the three-month period ended September 30, ~~2017.~~2018. The increase of ~~$1,405,298~~$1,682,580 was due ~~primarily~~ to an increase of ~~$1,356,249 from the sale~~$1,698,784 for sales of food and beverage products by our company-owned restaurants, partially offset by a decrease of ~~which $1,027,976~~$16,204 for franchise and other revenue. The increase in sales of food and beverage products was ~~generated from~~attributable to increases of $1,073,691 for sales of food and beverages at the restaurants we acquired through our acquisition of Fat Patty’s and $625,093 for sales of food and beverages at our other company-owned restaurants ~~that we acquired on August 30, 2018.~~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 and WingHouse restaurants and ~~as we~~ open new Dick’s Wings, ~~and~~ Fat Patty’s and WingHouse restaurants. We ~~also~~ expect ~~our~~ revenue to increase further 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.~~brands and assets.

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 ~~consists~~consist 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, Fat Patty’s and WingHouse company-owned restaurants and ~~our four Fat Patty’s company-owned restaurants.~~concession stands. Restaurant operating costs increased ~~$1,108,771~~$1,687,942 to ~~$1,967,735~~$3,563,039 for the three-month period ended September 30, ~~2018~~2019 compared to ~~$858,964~~$1,875,097 for the three-month period ended September 30, ~~2017. Our restaurant~~2018. Restaurant operating costs consisted of $1,368,797 for cost of sales, $1,232,549 for labor expenses, $117,436 for occupancy expenses, and $844,257 for other operating expenses for the three-month period ended September 30, 2019. Restaurant operating costs consisted of $811,009 for cost of sales, $624,848 for labor expenses, $57,713 for occupancy expenses, and ~~$474,165~~$381,527 for other operating expenses for the three-month period ended September 30, 2018. Our restaurant operating costs consisted of $274,846 for cost of sales, $293,035 for labor expenses, $92,729 for occupancy expenses, and $198,354 for other operating expenses for the three-month period ended September 30, 2017. The increase of ~~$1,108,771~~$1,687,942 was due ~~primarily~~ to ~~costs incurred~~increases of $614,578 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 $1,073,364 associated with the operation of our other company-owned restaurants and concession stands. We expect our restaurant operating costs to increase during the next 12 months ~~in the event~~as we ~~complete the~~open new Dick’s Wings, Fat Patty’s and WingHouse restaurants. We expect them to increase further as a result of our pending acquisition of Tilted Kilt and ~~to otherwise remain at similar levels during the next 12 months if~~as we ~~don’t complete the acquisition.~~acquire additional interests in other restaurant brands and potentially non-restaurant brands and assets.
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~~decreased $314,128 to $52,828for the three-month period ended September 30, 2019from $366,956 for the three-month period ended September 30, ~~2018 from $67,975 for the three-month period ended September 30, 2017.~~2018. The ~~increase~~decrease of ~~$298,981~~$319,780 was due primarily to ~~increases~~decreases of~~$240,625~~ $244,598 for stock compensation ~~expense~~paid to investment banks and ~~$55,206~~other firms and $24,683 for legal fees ~~partially offset by a decrease of $40,975 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~~$238,496 to $402,008 for the three-month period ended September 30, 2019 from $163,512 for the three-month period ended September 30, ~~2018 from $91,033 for the three-month period ended September 30, 2017.~~2018. The increase of ~~$72,479~~$238,496 was due primarily to an increase of ~~$63,888~~$135,334 for salaries paid to executive officers and other non-restaurant ~~employees.~~employees and $53,819 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.

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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~~$28,429 to $446,730 for the three-month period ended September 30, 2019 from $418,301 for the three-month period ended September 30, ~~2018 from $50,991 for the three-month period ended September 30, 2017.~~2018. The increase of ~~$367,310~~$28,429 was due primarily to ~~increases~~an increase 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$40,326 for marketing and advertising expenses, partially offset by ~~decreases in other miscellaneous general and administrative~~a decrease of $21,900 for investor relations expenses. We expect general and administrative expenses to continue to ~~increases~~increase 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.
Interest Expense

Interest expense consists of the interest that we record 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, our outstanding debt obligations, and our outstanding settlement agreements payable and accrued legal contingencies. Interest expense increased $136,953 to $211,211 for the three-month period ended September 30, 2019 from $74,258 for the three-month period ended September 30, 2018. The increase of $136,953 was due primarily to an increase of$116,768 for interest that we recognized under our master lease agreement with Store Capital. We expect interest expense to continue to increase during the next 12 months due to the debt we incurred in connection with our acquisition of WingHouse.
Gain on Bargain Purchase Option

Gain on bargain purchase option consists of the gain that we recognized in connection with the acquisition of Fat Patty’s on August 30, 2018. The fair value of the identifiable assets acquired and liabilities assumed of $1,477,193 exceeded the purchase price of Fat Patty’s by ~~$625,193.~~$624,952. As a result, we recognized a gain of ~~$625,193~~$624,952 for the three-month period ended September 30, 2018. We did not recognize any gain on bargain purchase option during the three-month period ended September 30, ~~2017.~~2019. We do not expect to recognize any additional gains on bargain purchase options during the next 12 months.A description of the bargain purchase option is set forth herein underNote 64 – Acquisition of Fat Patty’sin our condensed consolidated financial statements.

Net ~~Income / (Loss)~~Loss

~~Net income was $97,467 for~~We generated a net loss of $597,514 during the three-month period ended September 30, ~~2018~~2019 compared to net ~~loss~~income of ~~$89 for~~$97,467 during the three-month period ended September 30, ~~2017.~~2018. The difference of ~~$97,556~~$694,981 was due primarily to increases of ~~$1,405,298~~$1,687,942 for ~~revenue~~restaurant operating costs, $238,496 for employee compensation expense and ~~$625,193~~$136,953 for interest expense, and a decrease of $624,952 for gain on bargain purchase ~~option,~~option. This was partially offset by ~~increases~~an increase of ~~$1,108,771~~$1,682,580 for ~~restaurant operating costs, $298,981~~revenue and a decrease of $319,780 for professional ~~fees, $72,479 for employee compensation expense and $367,310 for general and administrative expenses.~~fees. 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~~acquisitions of Fat Patty’s and WingHouse 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-Month Periods Ended September 30, 2019 and 2018

Revenue

Revenue increased ~~$1,640,139~~$8,156,617 to~~$4,868,193~~ $12,820,432 for the nine-month period ended September 30, ~~2018~~ 2019from$~~3,228,054~~4,663,815 for the nine-month period ended September 30, ~~2017.~~2018. The increase of ~~$1,640,139~~$8,156,617 was due ~~primarily~~ to an increase of ~~$1,480,628 from the sale~~$8,278,361 for sales of food and beverage products by our company-owned restaurants, partially offset by a decrease of ~~which $1,027,976~~$121,744 for franchise and other revenue. The increase in sales of food and beverage products was ~~generated from~~attributable to increases of $6,102,663 for sales of food and beverages at the restaurants we acquired through our acquisition of Fat Patty’s and $2,175,698 for sales of food and beverages at our other company-owned restaurants ~~that we acquired on August 30, 2018.~~and concession stands.

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~~$8,049,446 to ~~$3,665,487~~$11,510,555 for the nine-month period ended September 30, ~~2018~~2019 compared to ~~$2,470,461~~$3,461,109 for the nine-month period ended September 30, ~~2017. Our restaurant~~2018. Restaurant operating costs consisted of $4,447,133 for cost of sales, $4,103,557 for labor expenses, $432,463 for occupancy expenses, and $2,527,402 for other operating expenses for the nine-month period ended September 30, 2019. Restaurant operating costs consisted of $1,360,529 for cost of sales, $1,222,554 for labor expenses, $171,048 for occupancy expenses, and ~~$911,356~~$706,978 for other operating expenses for the nine-month period ended September 30, 2018. ~~Our restaurant operating costs consisted~~The increase of ~~$869,600 for cost~~$8,049,446 was due to increases of ~~sales, $857,933 for labor expenses, $187,264 for occupancy expenses,~~$3,235,465 associated with the operation of the restaurants that we acquired through our acquisition of Fat Patty’s and ~~$555,664 for~~$4,813,981 associated with the operation of our other ~~operating expenses~~ company-owned restaurants and concession stands.
Professional Fees. Professional fees decreased $170,139 to $443,984for the nine-month period ended September 30, ~~2017. The increase of $1,195,026 was due primarily to costs incurred with the operation of the Fat Patty’s restaurants that we acquired on August 30, 2018.~~
~~Professional Fees~~~~. Professional fees increased $262,938 to~~2019from $614,123 for the nine-month period ended September 30, ~~2018 from $351,185 for the nine-month period ended September 30, 2017.~~2018. The ~~increase~~decrease of ~~$262,938~~$170,139 was due primarily to ~~increases~~decreases of ~~$65,000~~$233,453 for stock compensation ~~expense, $70,772~~paid to investment banks and other firms and $68,560 for ~~accounting fees, and 141,716 for legal~~consulting fees, partially offset by ~~a decrease~~an increase of ~~$32,550~~$142,436 for ~~consulting~~legal and accounting fees.

Employee Compensation Expense. Employee compensation expense increased ~~$164,298~~$559,020 to $973,944 for the nine-month period ended September 30, 2019 from $414,924 for the nine-month period ended September 30, ~~2018 from $250,626 for the nine-month period ended September 30, 2017.~~2018. The increase of ~~$164,298~~$559,020 was due primarily to an increase of ~~$140,414~~$360,885 for salaries paid to executive officers and other non-restaurant ~~employees.~~employees and $115,422 for stock compensation expense.

General and Administrative Expenses. General and administrative expenses increased ~~$637,596~~$158,886 to $878,919 for the nine-month period ended September 30, 2019 from $720,033 for the nine-month period ended September 30, ~~2018 from $82,437 for the nine-month period ended September 30, 2017.~~2018. The increase of ~~$637,596~~$158,886 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$197,221 for marketing and advertising expenses, partially offset by decreases in other miscellaneous general and administrative expenses.
Interest Expense

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Interest expense increased $530,866 to $615,997 for the nine-month period ended September 30, 2019 from $85,131 for the nine-month period ended September 30, 2018. The increase of $530,866 was due primarily to an increase of$471,229 for interest that we recognized under our master lease agreement with Store Capital.

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 March 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 $766,109 during the nine-month period ended September 30, 2019, 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 nine-month period ended September 30, 2018. We expect to receive additional insurance proceeds in connection with the fire that occurred at this restaurant during the next 12 months. A description of the fire is set forth herein underNote 16. Commitments and Contingencies – Teay’s Valley Firein our condensed consolidated financial statements.
Gain on Bargain Purchase Option

Gain on bargain purchase option consists of the gain that we recognized in connection with the acquisition of Fat Patty’s on August 30, 2018. The fair value 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, weWe recognized a gain of ~~$625,193~~$624,952 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.~~2019. We do not expect to recognize any additional gains on bargain purchase options during the next 12 months.A description of the bargain purchase option is set forth herein underNote 64 – Acquisition of Fat Patty’sin our condensed consolidated financial statements.

Net ~~Income~~Loss

~~Net income was $89,550 for~~We generated a net loss of $1,303,318 during the nine-month period ended September 30, ~~2018~~2019 compared to ~~$87,675 for~~net income of $89,550 during the nine-month period ended September 30, ~~2017.~~2018. The difference of ~~$1,875~~$1,392,868 was due primarily to increases of ~~$1,640,139~~$8,049,446 for ~~revenue~~restaurant operating costs, $559,020 for employee compensation expense and ~~$625,193~~$530,866 for ~~gain on bargain purchase option,~~interest expense, partially offset by increases of ~~$1,195,026~~$8,156,617 for ~~restaurant operating costs, $262,938 for professional fees, $164,298 for employee compensation expense and $637,596 for general and administrative expenses.~~revenue.

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~~$565,856 during the nine-month period ended September 30, ~~2018~~2019 compared to ~~$242,619 for~~$235,787 during the nine-month period ended September 30, ~~2017.~~2018. The ~~decrease~~increase of ~~$6,832~~$330,069 was due primarily to ~~increases of $625,193 for gain on bargain purchase, $346,312 for~~an increase in accounts payable and accrued liabilities and a decrease in other ~~receivables and $45,264 for deferred franchise fees.~~receivables. This was partially offset by increases ~~of $810,921 for accounts payable and accrued liabilities and $69,763 for stock-based compensation expense, and a decrease of $105,434 for accounts and ad funds receivable.~~
in operating expenses.
Net cash used by investing activities was ~~$343,785 for~~$382,335 during the nine-month period ended September 30, ~~2018~~2019 compared to $343,785 during the nine-month period ended September 30, 2018. The increase of $38,550 for net cash used by investing activities was due primarily to an increase of $250,293 for purchases of fixed assets, partially offset by an increase of $100,000 for insurance recoveries for impaired fixed assets and a decrease of $144,326 for contingent consideration.
Net cash used by financing activities was $297,569 during the nine-month period ended September 30, 2019 compared to net cash provided by ~~investing~~financing activities of ~~$45,686 for~~$19,736 during the nine-month period ended September 30, ~~2017.~~2018. The difference of ~~$389,471~~$317,305 was due to increases of ~~$194,529 for purchases of fixed assets and $144,326 for contingent consideration, and decreases of $33,716~~$1,513,884 for repayments of notes ~~receivable~~payable to related parties, $196,337 for payments on our operating lease liability and ~~$24,000~~$128,234 for ~~proceeds from the sale of investment in Paradise~~payments on ~~Wings.~~our financing lease liability. This was partially offset by an increase of ~~$7,100 for cash acquired in the acquisition of Fat Patty’s.~~
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 due to an increase of $106,410$1,434,476 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, ~~2017~~2018 are set forth below.

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~~As of December 31, 2016, we had principal in the amount of $16,103 outstanding under our credit facility~~We entered into an unsecured loan with Blue Victory Holdings, Inc., a Nevada corporation, ~~(“Blue Victory”), and repaid $824,250 under the credit facility. During~~during 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, the~~The 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 period~~year ended ~~September 30,~~December 31, 2018. Accordingly, the amount of principal outstanding under the loan was ~~$53,984~~$236,333 at December 31, 2018. We borrowed $1,540,886 and repaid $1,513,884 under the loan during the nine-month period ended September 30, 2019. Accordingly, the amount of principal outstanding under the loan was $263,335 at September 30, ~~2018.The loan accrues interest at a rate of 6% per annum and is payable on demand~~2019..

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 earlier~~Patty’s, all of ~~(i) the fifth (5~~^th~~) anniversary of the date~~which was outstanding at September 30, 2019. 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 note~~funds that we ~~issued to Seenu G. Kasturi.~~have borrowed from related parties.We have used these sources of capital to ~~acquire Seediv~~pay virtually all of the costs and ~~Fat Patty’s, as well as~~expenses that we have incurred to ~~pay~~date. 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 as well as cash generated by WingHouse 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 September 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.

Item 4. Controls and Procedures.

As of September 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 September 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 September 30, ~~2018~~2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION
~~Item 2. Unregistered Sales of Securities and Use of Proceeds.~~
~~In July 2018, Seenu G. Kasturi earned7,064~~shares of common stock pursuant to the terms of his employment agreement with us. 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
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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, 2018~~14, 2019 /s/ ~~Seenu G. Kasturi~~Alex Andre
~~Seenu G. Kasturi~~Alex Andre

Chief Financial Officer
(principal financial officer and duly authorized officer)

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~~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~~
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