Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - ARC Group, Inc.tv479063_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - ARC Group, Inc.tv479063_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - ARC Group, Inc.tv479063_ex31-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

xQuarterly report PURSUANT TO Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended: September 30, 2017

 

or

 

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

 

For the transition period from ___________ to ______________

 

Commission File No. 000-54226

 

 

 

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

 

Nevada   59-3649554

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

6327-4 Argyle Forest Blvd.

Jacksonville, FL 32244

(Address of principal executive offices)

 

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

 

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

 

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 x     No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

 

Yes 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 (Do not check if a smaller reporting company) ¨ 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

 

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 ¨     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 6,937,869 shares of the issuer’s Class A common stock, $0.01 par value per share, issued and outstanding on November 10, 2017.

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
PART I – FINANCIAL INFORMATION
     
Item 1. Financial Statements 1
     
  Consolidated Balance Sheets at September 30, 2017 (unaudited) and December 31, 2016 1
     
  Consolidated Statements of Operations for the three- and nine-month periods ended  September 30, 2017 and September 30, 2016 (unaudited) 2
     
  Consolidated Statement of Stockholders’ Deficit for the nine-month period ended  September 30, 2017 (unaudited) 3
     
  Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2017  and September 30, 2016 (unaudited) 4
     
  Notes to Consolidated Financial Statements (unaudited) 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
     
Item 4. Controls and Procedures 46
     
PART II – OTHER INFORMATION
     
Item 2. Unregistered Sales of Securities and Use of Proceeds 47
     
Item 6. Exhibits 47

 

i 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.Financial Statements.

 

ARC Group, Inc.

Consolidated Balance Sheets

 

   September 30,   December 31, 
   2017   2016 
   (Unaudited)     
         
Assets          
           
Cash and cash equivalents  $132,904   $50,923 
Restricted cash and cash equivalents   13,076    - 
Accounts receivable, net   48,971    67,395 
Accounts receivable, net – related party   3,056    14,568 
Ad funds receivable, net   37,093    - 
Ad funds receivable, net – related party   2,601    - 
Other receivables, net – related party   24,000    - 
Inventory   40,867    45,250 
Notes receivable, net   37,171    63,742 
Interest receivable, net   -    838 
Other current assets   16,711    1,806 
           
     Total current assets   356,450    244,522 
           
Notes receivable, net of current portion   1,209    29,379 
Property and equipment, net   102,101    80,948 
           
          Total assets  $459,760   $354,849 
           
Liabilities and stockholders' deficit          
           
Accounts payable and accrued expenses  $703,809   $735,331 
Accounts payable and accrued expenses – related party   46,149    98,434 
Accrued interest   12,969    2,594 
Ad fund liability   13,076    - 
Settlement agreements payable   262,155    253,724 
Accrued legal settlement   153,961    148,105 
Notes payable – in default   7,000    7,000 
Notes payable – related party   26,248    232,572 
Contingent consideration   20,897    20,897 
Other current liabilities   10,985    5,096 
           
Total current liabilities   1,257,249    1,503,753 
           
Total liabilities   1,257,249    1,503,753 
           
Stockholders' deficit:          
           
Class A common stock – $0.01 par value: 100,000,000 shares authorized, 6,935,119 and 6,647,464 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively   69,351    66,475 
Additional paid-in capital   3,982,077    3,747,953 
Stock subscriptions payable   176,740    150,000 
Accumulated deficit   (5,025,657)   (5,113,332)
           
Total stockholders' deficit   (797,489)   (1,148,904)
           
Total liabilities and stockholders' deficit  $459,760   $354,849 

 

The accompanying notes are an integral part of these financial statements

 

 1 

 

 

ARC Group, Inc.

Consolidated Statements of Operations (Unaudited)

 

    For the Three Months Ended   For the Nine Months Ended 
   September 30, 2017   September 30, 2016   September 30, 2017   September 30, 2016 
                 
Revenue:                    
Restaurant sales  $841,214   $-   $2,595,679   $- 
Franchise and other revenue   165,905    174,499    509,032    476,831 
Franchise and other revenue – related party   40,285    9,092    123,343    314,576 
                     
Total net revenue   1,047,404    183,591    3,228,054    791,407 
                     
Operating expenses:                    
Restaurant operating costs:                    
Cost of sales   274,846    -    869,600    - 
Labor   293,035    -    857,933    - 
Occupancy   92,729    -    187,264    - 
Other operating expenses   198,354    -    555,664    - 
Professional fees   67,975    52,550    351,185    121,450 
Employee compensation expense   91,033    140,600    250,626    390,582 
General and administrative expenses   50,991    268,559    82,437    316,124 
                     
Total operating expenses   1,068,963    461,709    3,154,709    828,156 
                     
Income / (loss) from operations   (21,559)   (278,118)   73,345    (36,749)
                     
Other income:                    
Interest income / (expense)   (6,506)   (2,622)   (22,730)   293 
Income from investment in Paradise on Wings   -    101,056    -    106,082 
Gain on settlement of liabilities   -    175,449    -    175,449 
Gain on sale of investment in Paradise on Wings – related party   24,000    -    24,000    - 
Other income   3,976    -    13,060    864 
                     
Total other income   21,470    273,883    14,330    282,688 
                     
Net income / (loss)  $(89)  $(4,235)  $87,675   $245,939 
                     
Net income / (loss) per share – basic and fully diluted  $(0.00)  $(0.00)  $0.01   $0.04 
                     
Weighted average number of shares  outstanding – basic and fully diluted   6,773,041    6,612,983    6,768,839    6,599,357 

 

The accompanying notes are an integral part of these financial statements

 

 2 

 

 

ARC Group, Inc.

Consolidated Statement of Stockholders' Deficit (Unaudited)

 

           Additional   Stock         
   Common Stock   Paid-in   Subscriptions   Accumulated     
   Shares   Par Value   Capital   Payable   Deficit   Total 
Balance at December 31, 2016   6,647,464   $66,475   $3,747,953   $150,000   $(5,113,332)  $(1,148,904)
                               
Common stock issued for services   252,360    2,523    204,477    26,740    -    233,740 
 Common stock issued for payment of consulting  fees due   35,295    353    29,647    -    -    30,000 
 Net income   -    -    -    -    87,675    87,675 
                               
Balance at September 30, 2017   6,935,119   $69,351   $3,982,077   $176,740   $(5,025,657)  $(797,489)

 

The accompanying notes are an integral part of these financial statements

 

 3 

 

 

ARC Group, Inc.

Consolidated Statements of Cash Flows (Unaudited)

 

   For the Nine Months Ended September 30, 
   2017   2016 
         
Cash flows from operating activities          
           
Net income  $87,675   $245,939 
Adjustments to reconcile net income to net cash  provided by operating activities:          
Depreciation expense   11,902    - 
Stock-based compensation expense   233,740    37,295 
Stock-based payment for consulting fees due   30,000    - 
Bad debt expense   -    271,590 
Income from investment in Paradise on Wings   -    (106,082)
Gain on sale of investment in Paradise on Wings – related party   (24,000)   - 
Gain on settlement of liabilities   -    (175,449)
Changes in operating assets and liabilities:          
Restricted cash   (13,076)   - 
Accounts receivable   18,424    (36,858)
Accounts receivable – related party   11,512    (28,332)
Ad fund receivable   (37,093)   - 
Ad fund receivable – related party   (2,601)   - 
Other receivables   (24,000)   - 
Inventory   4,383    - 
Interest receivable   838    11,380 
Other assets   (14,905)   (28,841)
Accounts payable and accrued liabilities   (31,522)   63,579 
Accounts payable and accrued liabilities – related party   (41,910)   (23,023)
Advertising fund liabilities   13,076    - 
Settlement agreements payable   8,431    (6,401)
Accrued legal settlement   5,856    - 
Other liabilities   5,889    2,075 
           
Net cash provided by operating activities   242,619    226,872 
           
Cash flows from investing activities          
           
Issuance of notes receivable   -    (74,593)
Repayments of notes receivable   54,741    - 
Issuance of notes receivable – related party   -    (595,635)
Repayments of notes receivable – related party   -    445,683 
Sale of investment in Paradise on Wings   24,000    - 
Purchases of fixed assets   (33,055)   - 
           
Net cash provided / (used) by investing activities   45,686    (224,545)
           
Cash flows from financing activities          
           
Proceeds from issuance of notes payable – related party   -    783,323 
Repayments of notes payable – related party   (206,324)   (783,323)
           
Net cash used by financing activities   (206,324)   - 
           
Net decrease in cash and cash equivalents   81,981    2,327 
Cash and cash equivalents, beginning of period   50,923    6,775 
           
Cash and cash equivalents, end of period  $132,904   $9,102 
           
Supplemental disclosure of cash flow information          
           
Cash paid for interest  $-   $- 
Cash paid for income taxes  $-   $- 
           
Schedule of non-cash financing activities          
           
Stock issued for settlement of litigation  $-   $19,551 

 

The accompanying notes are an integral part of these financial statements

 

 4 

 

 

ARC Group, Inc.

Notes to 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 on the development of the Dick’s Wings® franchise and the acquisition of financial interests in other restaurant brands. The Dick’s Wings concept is currently comprised of 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 EverBank Field in Jacksonville, Florida.

 

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.

 

At September 30, 2017, the Company had 22 restaurants and two concession stands. Of the 22 restaurants, 17 were located in Florida and five were located in Georgia. The Company’s concession stands were also located in Florida. Two of the Company’s restaurants were owned by the Company, and the remaining 20 restaurants were owned and operated by franchisees. The operation of the Company’s concession stands at EverBank Field has been assigned to a third-party operator.

 

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

 

Interim Financial Information

 

The accompanying unaudited 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 consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Seediv, LLC. All intercompany accounts and transactions were eliminated in consolidation. 

 

The accompanying unaudited 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. In the opinion of management, the disclosures included in these financial statements are adequate to make the information presented not misleading.

 

 5 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The accompanying unaudited consolidated financial statements have been prepared on the same basis as the annual financial statements and in management’s opinion, reflect all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The unaudited financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K/A. The results of operations for the three- and nine-month periods ended September 30, 2017 are not necessarily indicative of the results that the Company will have for any subsequent quarter or full fiscal year.

 

Estimates

 

The preparation of 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 financial statements and accompanying notes. Actual results could differ from those estimates.

 

Reclassifications

 

Certain amounts in the Company’s financial statements for the 2016 fiscal year have been reclassified to conform to the 2017 fiscal year presentation. These reclassifications did not result in any change to the previously reported total assets, net income / (loss) or stockholders’ deficit.

 

Going Concern 

 

As shown in the accompanying financial statements, the Company had an accumulated deficit of $5,025,657 and a working capital deficit of $900,799 at September 30, 2017. In addition, the Company incurred net losses of $863,576 and $432,730 for the years ended December 31, 2016 and 2015, respectively, and experienced negative cash flows from operations for each of those years. Those facts create substantial doubt about the Company’s ability to continue as a going concern.

 

The Company’s ability to continue as a going concern is dependent upon it successfully executing upon its plan to generate positive cash flows during the remainder of its 2017 fiscal year and during its 2018 fiscal year. In furtherance of this plan, the Company is seeking to increase sales and reduce expenses at its company-owned restaurants, increase the number of franchised restaurants that it has, and acquire additional brands that can contribute profits and positive cash flows to the Company. The Company’s financial statements do not include any adjustments that might be necessary if it were unable to continue as a going concern.

 

Segment Disclosure

 

The Company has a single brand, all of the restaurants 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 the Company's Chief Operating Decision Maker function for the purposes of ASC 280, concluded that the Company operates as a single segment for reporting purposes.

 

 6 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Revenue Recognition

 

The Company’s revenue consists primarily of proceeds from the sale of food and beverage products at its Company-owned restaurants, and royalty payments, franchise fees and area development fees that it receives from its franchisees. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed and determinable, and collectability is reasonably assured in accordance with ASC Topic 605, Revenue Recognition. The Company records revenue from the sale of food and beverages as products are sold. Royalties are accrued as earned and are calculated each period based on restaurant sales. Franchise fees from individual franchise sales is recognized upon the opening of the franchised restaurant when all material obligations and initial services to be provided by the Company have been performed. Area development fees are dependent upon the number of restaurants in the territory, as are the Company’s obligations under the area development agreement. Consequently, as obligations are met, area development fees are recognized proportionally with expenses incurred with the opening of each new restaurant and any royalty-free periods.

 

The Company records gift cards under a Dick’s Wings system-wide program.  Gift cards sold are recorded as a gift card liability.  When redeemed, the gift card liability account is offset by recording the transaction as revenue.  Breakage income represents the value associated with the portion of gift cards sold that will most likely never be redeemed. Based on the Company’s historical gift card redemption patterns and the fact that the Company’s gift cards have no expiration dates or dormancy fees, the Company can reasonably estimate the amount of gift card balances for which redemption is remote and record breakage income based on this estimate. The Company updates its estimate of the breakage rate periodically and, if necessary, adjusts the gift card liability balance accordingly.

 

General Advertising Fund

 

The Company has established a general advertising fund that it uses to pay for advertising costs, sales promotions, market research and other support functions intended to maximize general public recognition and acceptance of the Dick’s Wings brand. Company-owned and franchised restaurants are required to contribute at least 1%, but not more than 2%, of their gross revenue to the Company’s general advertising fund. Contributions made by franchisees to the general advertising fund and marketing and advertising expenses paid by the general advertising fund are not recognized as revenues and expenses. They instead constitute agency transactions. These contributions are recorded as a liability against which specific costs are charged.

 

We account for the cash and cash equivalents held by the general advertising fund as restricted cash on our accompanying consolidated balance sheets. The restricted cash of this fund is classified as current as it is expected to be utilized to fund short-term obligations of the general advertising fund.

 

 7 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Significant Accounting Policies

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue From Contracts With Customers (“ASU 2014-09”). ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 introduces a five-step model to achieve its core principle of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016. Early adoption is not permitted. In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts With Customers – Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 deferred by one year the effective date of ASU 2014-09 by making ASU 2014-09 effective for annual reporting periods beginning after December 15, 2017, including interim period within that reporting period. The Company believes that the adoption of ASU 2014-09 will not have a material impact on its financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding on certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15: (i) provides a definition of the term “substantial doubt”, (ii) requires an evaluation every reporting period including interim periods, (iii) provides principles for considering the mitigating effects of management’s plans, (iv) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (v) requires an express statement and other disclosures when substantial doubt is not alleviated, and (vi) requires an assessment for a period of one year after the date that the financial statements are issued or available to be issued. ASU 2014-15 is effective for fiscal years ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of ASU 2014-15 did not have a material impact on the Company’s financial statements.

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), which changes the subsequent measurement of inventory from lower of cost or market to lower of cost or net realizable value. ASU 2015-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2015-11 did not have a material impact on the Company’s financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires that lease arrangements longer than 12 months result in the lessee recognizing a lease asset and liability. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently 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. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the impact of ASU 2016-18, but believes that ASU 2016-18 will not have a material impact on the Company’s financial statements.

 

 8 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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 Company is currently assessing the impact that ASU 2017-01will have on its financial statements.

 

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 financial statements as a result of future adoption.

 

Note 3. Net Income / (Loss) Per Share

 

The Company calculates basic and diluted net income / (loss) per share in accordance with ASC Topic 260, Earnings per Share. Basic net income / (loss) 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 income / (loss) for the applicable period by the weighted-average number of shares of common stock outstanding during the applicable period. Diluted net income / (loss) per share is calculated by dividing the reported net income / (loss) 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 Company did not have any securities outstanding at September 30, 2017 and 2016 that were exercisable or convertible into shares of the Company’s common stock. As a result, basic net income / (loss) per share was equal to diluted net income / (loss) per share for the three- and nine-month periods ended September 30, 2017 and 2016.

 

Note 4. Investment in Paradise on Wings

 

On January 20, 2014, the Company entered into a contribution agreement with 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.

 

Under the terms of the contribution agreement, the Company (sometimes referred to herein as the “Class B Member”) acquired 117.65 Class B membership interests in Paradise on Wings, representing all of the outstanding Class B membership interests and a 50% ownership interest in Paradise on Wings (the “Class B Membership Interests”). The incumbent members of Paradise on Wings (the “Class A Members”) converted their existing membership interests into a total of 117.65 Class A membership interests in Paradise on Wings, representing all of the outstanding Class A membership interests and a 50% ownership interest in Paradise on Wings (the “Class A Membership Interests”).

 

 9 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The Company agreed to pay $400,000 in cash, of which $350,000 was paid prior to closing and $50,000 was due upon closing, and $400,000 in shares of the Company’s common stock to Paradise on Wings in consideration for the Class B Membership Interests (the “Capital Contribution”). The shares of common stock (the “ARC Shares”) were valued based upon the opening bid price of the common stock on the OTCmarkets.com on the morning of the closing date, which was $1.70 per share. Accordingly, the Company issued 235,295 shares of common stock to Paradise on Wings on the closing date.

 

Under the operating agreement, the power to manage the business and affairs of Paradise on Wings has been vested in the managers of Paradise on Wings. The Class A Members may appoint up to two managers, which manager(s) have a total of 50% of the vote of all managers. The Company, as the owner of all of the Class B Membership Interests, may appoint one manager who has a total of 50% of the vote of all managers. Notwithstanding the foregoing, the Contributed Capital may not be used to pay salaries or bonuses to any of the Class A Members or Class B Members, and the vote of 60% of the total outstanding Class A Membership Interests and Class B Membership Interests is required in the event Paradise on Wings wishes to use the Contributed Capital for any permitted purpose.

 

The Class A Membership Interests are identical to the Class B Membership Interests in all respects except that the Class A Membership Interests have a preferred right to distributions from Paradise on Wings with respect to the ARC Shares. The Class A Members, through their ownership of the Class A Membership Interests, are entitled to receive a total of 50% of all items of income, gain, losses, deductions and expenses (including 100% of any such items associated with the ARC Shares), and the Company, through its ownership of the Class B Membership Interests, was entitled to receive 50% of all items of income, gain, losses, deductions and expenses (with the exception of any such items associated with the ARC Shares).

 

The Company accounted for its 50% ownership interest in Paradise on Wings using the equity method of accounting because the Company had the ability to exert significant influence, but not control, over the operating and financial policies of Paradise on Wings.   The investment was initially recorded at the fair value amount of the Company’s initial investment and subsequently adjusted for the Company’s share of the net income and loss, and cash contributions and distributions, to or from Paradise on Wings.  The Company reported its income from Paradise on Wings as income from investment in Paradise on Wings in its statements of operations, and reported its investment in Paradise on Wings as equity investment in Paradise on Wings in its balance sheets.

 

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 and 2016 provided to the Company by Paradise on Wings.

 

 10 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

  

Statement of Operations  Three Months
Ended
September 30,
2017
   Nine Months
Ended
September 30,
2017
   Three Months
Ended
September 30,
2016
   Nine Months
Ended
September 30,
2016
 
Revenue  $74,831   $226,273   $91,658   $251,421 
Operating expenses   (234,525)   (484,436)   (124,841)   (256,325)
Loss from operations   (159,694)   (258,163)   (33,183)   (4,904)
Other income / (expense)   (104,203)   (182,398)   235,295    217,067 
Net income / (loss)  $(263,897)  $(440,561)  $202,112   $212,163 
                     
Company’s share of net income / (loss)  $(131,949)  $(220,281)  $101,056   $106,082 

 

Set forth below is a summary of the unaudited balance sheet of Paradise on Wings at September 30, 2017 and December 31, 2016 provided to the Company by Paradise on Wings.

 

Balance Sheet 

September 30,

2017

  

December 31,

2016

 
Current assets  $119,837   $3,549 
Equity investment   -0-    141,168 
Total assets  $119,837   $144,717 
           
Total liabilities  $110,120   $110,596 
Equity   9,717    34,121 
Total liabilities and equity  $119,837   $144,717 

 

The Company performed a review of its investment in Paradise on Wings at the end of its 2016 fiscal year and determined that, for the reasons more fully described in Note 8. Fair Value Measurements, 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 September 30, 2017 and December 31, 2016. In addition, because the carrying amount of the Company’s investment in Paradise on Wings was zero at September 30, 2017, 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.

 

On September 30, 2017, the Company sold its 50% ownership interest in Paradise on Wings to Seenu G. Kasturi for $24,000. The purchase price of $24,000 was reflected in Other Receivables, Net – Related Party and Gain on Sale of Investment in Paradise on Wings – Related Party at September 30, 2017. Mr. Kasturi paid the purchase price in full subsequent to September 30, 2017.

 

 11 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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.

 

The Company agreed to pay Mr. Kasturi $600,000 for the membership interests on the closing date, consisting of: (a) a cash payment of $13,665, (b) the cancellation and termination of accounts receivable originally owed to the Company by DWG Acquisitions, LLC, a Louisiana limited liability company (“DWG Acquisitions”), and subsequently transferred to Seediv, in the amount of $259,123, and (c) the cancellation and termination of debt originally owed to the Company by Raceland QSR, LLC, a Louisiana limited liability company (“Raceland QSR”), and subsequently transferred to Seediv, in the amount of $327,212. The Company also agreed to pay Mr. Kasturi an earn-out payment (the “Earn-Out Payment”) calculated as follows: (x) the amount equal to: (i) 5.5, multiplied by (ii) the amount equal to the sum of: (A) earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the Nocatee Restaurant for the year ended December 31, 2017 (the “Earn-Out Period”), plus (B) EBITDA for the Youngerman Circle Restaurant for the Earn-Out Period, less (y) $600,000; provided, however, that in no event shall the Earn-Out Payment be less than zero.

 

At any time on or prior to April 16, 2018, Mr. Kasturi may elect to receive all or part of the Earn-Out Payment in the form of shares of the Company’s common stock; provided, however, that Mr. Kasturi may only make this election if, at the time of making such election: (a) Mr. Kasturi is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), and (b) Mr. Kasturi executes a customary investment representation letter in a form acceptable to the Company. In the event Mr. Kasturi elects to receive shares of common stock, the number of shares will be calculated based on the average daily closing price of the shares of common stock on the OTCQB market tier of the “pink sheets” maintained by the OTC Markets Group, Inc. (the “OTCQB”) during the 30-day period immediately preceding the closing date. The shares will be “restricted securities” as such term is defined under Rule 144 of the Securities Act. Notwithstanding the foregoing: (x) in no event shall the Company be required to issue shares of common stock exceeding 20% of the number of shares of common stock issued and outstanding on the closing date, and (y) in no event shall the Company be required to issue more shares of common stock to Mr. Kasturi than are then authorized and available for issuance by the Company. In the event Mr. Kasturi elects to receive all or part of the Earn-Out Payment in the form of shares of common stock and the restrictions set forth in clauses (x) and/or (y) of the immediately preceding sentence are triggered, then, notwithstanding Mr. Kasturi’s election to receive all or part of the Earn-Out Payment in the form of shares of common stock, the Company shall issue the maximum number of shares of common stock permitted under clauses (x) and (y) and shall settle any liability to Mr. Kasturi created as a result thereof in cash.

 

 12 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

As of December 19, 2016, Mr. Kasturi owned approximately 14.8% of the Company’s issued and outstanding shares of Common Stock and all of the outstanding membership interests in Seediv. In addition, as of December 19, 2016, he served as the President, Treasurer and Secretary, and as the sole member of the board of directors, of Blue Victory Holdings, Inc., a Nevada corporation (“Blue Victory”), and owned 90% of the equity interests in Blue Victory. Blue Victory loaned the Company $840,353 and $1,987,953 during the years ended December 31, 2016 and 2015, respectively. As of December 19, 2016, Mr. Kasturi also served as the President, Treasurer and Secretary of, and is the sole member of, DWG Acquisitions and Raceland QSR, and owned all of the equity interests in DWG Acquisitions and Raceland QSR. DWG Acquisitions owned and operated six of the Company’s 22 franchised restaurants as of December 19, 2016. Raceland QSR served as the landlord under the Company’s lease for the Youngerman Circle Restaurant as of December 19, 2016.

 

The acquisition was accounted for as a business combination. Based upon its analysis of the above facts, the Company determined that the acquisition of Seediv was a related-party transaction. Accordingly, the assets acquired and liabilities assumed were recorded based on their cost basis at the time of the acquisition and the excess of the purchase price over the aggregate cost basis of the net assets acquired was allocated to Seediv compensation expense.

 

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

 

Cash and cash equivalents  $18,089 
Inventory   40,574 
Other current assets   6,538 
Leasehold improvements, net   46,541 
Furniture and equipment, net   33,701 
Total assets acquired   145,443 
      
Accounts payable – related party   (1,026)
Accrued expenses   (126,878)
Notes payable – related party   (234,286)
Total liabilities assumed   (362,190)
      
Seediv compensation expense   251,309 
Net consideration paid  $34,562 

 

In connection with the acquisition of Seediv, the Company 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 8. Fair Value Measurements.

 

 13 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The following table summarizes certain financial information for the three- and nine-month periods ended September 30, 2017 contained in the accompanying unaudited consolidated financial statements, and certain unaudited pro forma financial information for the three- and nine-month periods ended September 30, 2016 as if the acquisition of Seediv had occurred on January 1, 2016:

 

   Three Months
Ended
September 30,
2017
   Nine Months
Ended
September 30,
2017
   Three Months
Ended
September 30,
2016
   Nine Months
Ended
September 30,
2016
 
Revenue  $1,047,404   $3,228,054   $1,089,081   $3,546,474 
Income / (loss) from continuing operations   (21,559)   73,345    (358,656)   (84,279)
Net income / (loss)   (89)   87,675    (74,514)   198,398 
Net income / (loss) per share – basic and fully diluted  $(0.00)  $0.01   $(0.01)  $0.03 

 

The results of operations for Seediv were included in the Company's results of operations beginning December 19, 2016. The actual amounts of revenue and net income / (loss) for Seediv that are included in the Company’s Consolidated Statements of Operations for the three-month period ended September 30, 2017 were $841,214 and $(44,108), respectively, and for the nine-month period ended September 30, 2017 were $2,595,679 and $80,661, respectively.

 

The unaudited pro forma financial information has been presented for informational purposes only and is not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on January 1, 2016 or of the future results of the combined entities. For additional information about the Company’s acquisition of Seediv, please refer to the Company’s Current Report on Form 8-K and Current Report on Form 8-K/A filed with the Securities and Exchange Commission on December 23, 2016 and April 28, 2017, respectively.

 

Note 6. Inventory

 

Inventory was comprised of the following at September 30, 2017 and December 31, 2016, respectively:

 

   September 30,
2017
   December 31,
2016
 
Food  $28,369   $25,942 
Beverages   12,498    19,308 
Total  $40,867   $45,250 

 

 14 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Note 7. Property and Equipment, Net

 

Property and equipment were comprised of the following at September 30, 2017 and December 31, 2016, respectively:

 

   September 30,
2017
   December 31,
2016
 
Leasehold improvements  $68,346   $62,125 
Furniture, fixtures and equipment   82,154    50,140 
Subtotal   150,500    112,265 
Less: accumulated depreciation   (48,399)   (31,317)
Total  $102,101   $80,948 

 

Depreciation expense was $4,571 and $11,902 for the three- and nine-month periods ended September 30, 2017. The Company did not incur any depreciation expense for the three- and nine-month periods ended September 30, 2016.

 

Note 8. 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, respectively.

 

The Company performed a review of its investment in Paradise on Wings at the end of its 2016 fiscal year to determine whether an impairment must be recorded. As described more fully in Note 4. Investment in Paradise on Wings, Paradise on Wings incurred losses of $445,370 and $495,435 during the years ended December 31, 2016 and 2015, respectively. As a result of these recurring operating losses and other quantitative and qualitative factors and circumstances surrounding the investment, including prices for comparable businesses and those factors and circumstances more fully described in Note 2. Significant Account Policies – Investment in Paradise on Wings, the Company 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. In addition, because Paradise on Wings incurred losses of $263,897 and $440,561 during the three- and nine-month periods ended September 30, 2017, the carrying amount of the Company’s investment in Paradise on Wings remained unchanged at September 30, 2017. Accordingly, the carrying amount of the Company’s investment in Paradise on Wings was zero at September 30, 2017 and December 31, 2016. On September 30, 2017, the Company sold its 50% ownership interest in Paradise on Wings to Seenu G. Kasturi for $24,000.

 

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 fair value of this liability did not change from the initial valuation calculated on 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.

 

 15 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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 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.

 

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, 2017 and December 31, 2016, respectively:

 

   Level 1   Level 2   Level 3 
Contingent consideration:               
September 30, 2017  $-0-   $-0-   $20,897 
December 31, 2016  $-0-   $-0-   $20,897 

 

The fair value measurement of the contingent consideration represented a Level 3 fair value measurement because it was based on significant inputs not observed in the market. The Company’s other financial instruments consist of cash and cash equivalents, accounts, ad fund and other receivables, notes receivable, accounts payable, accrued expenses and notes payable. The estimated fair values of the cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates their respective carrying amounts due to the short-term maturities of these instruments. The estimated fair values of the notes receivable and notes payable also approximates their respective carrying amounts since their terms are similar to those in the lending market for comparable loans with comparable risks. The fair value of related-party transactions is not determinable due to their related-party nature. None of these instruments are held for trading purposes.

 

Note 9. Notes Receivable

 

Notes Receivable – Unrelated Parties

 

In May and June 2013, the Company made loans to certain of its franchisees in the aggregate original principal amount of $40,507 to assist them with the payment of franchise fees owed to the Company and the payment of other business expenses incurred by the franchisees in running their respective restaurants. The loans were for terms ranging from one year to three years in duration, were payable in monthly installments, and did not require the payment of any interest. Payments in the aggregate amount of $723 and $2,170 were made against the loans during the three- and nine-month periods ended September 30, 2016. The loans were paid off in full during the year ended December 31, 2016. Accordingly, no payments were made against the loans during the three- and nine-month periods ended September 30, 2017, and no principal was outstanding under the loans at September 30, 2017 and December 31, 2016.

 

 16 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

In September 2014, the Company made a loan to one of its franchisees in the aggregate original principal amount of $6,329 to assist it with the payment of franchise fees owed to the Company and the payment of other business expenses incurred by the franchisee in running its restaurant. The loan is for a term of three years, is payable in monthly installments, and does not require the payment of any interest. Payments in the aggregate amount of $527 and $1,582 were made against the loan during the three- and nine-month periods ended September 30, 2017, respectively, and the three- and nine-month periods ended September 30, 2016, respectively. A total of $201 and $1,783 of principal was outstanding under the loan at September 30, 2017 and December 31, 2016, respectively.

 

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. Each of the loans was made to assist the franchisee with the payment of franchise fees owed to the Company and the payment of other business expenses incurred by the franchisee in running its restaurant. 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 under the $28,136 line of credit agreement was paid off in full during the nine-month period ended September 30, 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. Payments in the aggregate amount of $6,155 and $48,098 were made against the loans during the three- and nine-month periods ended September 30, 2017. Interest in the aggregate amount of $425 and $1,515 accrued during the three- and nine-month periods ended September 30, 2017, and payments of interest in the aggregate amount of $425 and $2,354 were made during the three- and nine-month periods ended September 30, 2017. Interest in the aggregate amount of $310 accrued during the three- and nine-month periods ended September 30, 2016. No payments of principal or interest were made against any of the loans during the three- and nine-month periods ended September 30, 2016. A total of $29,922 and $78,020 of principal was outstanding under the loans at September 30, 2017 and December 31, 2016, respectively, and a total of $838 of accrued interest was outstanding under the loans at December 31, 2016. No accrued interest was outstanding under the loans at September 30, 2017.

 

In September 2016, the Company made a loan to one of its franchisees in the aggregate original principal amount of $13,869 to assist it with the payment of business expenses incurred by the franchisee in running its restaurant. The loan is due and payable in full on November 15, 2018, is payable in monthly installments beginning December 15, 2016, and accrues interest at a rate of 5% per annum beginning October 1, 2016. Payments in the amount of $2,272 and $5,060 were made against the loan during the three- and nine-month periods ended September 30, 2017. Interest in the amount of $117 and $416 accrued during the three- and nine-month periods ended September 30, 2017, respectively, of which $161 and $416 was paid during the three-and nine-month periods ended September 30, 2017, respectively. No interest accrued during the three- and nine-month periods ended September 30, 2016, and no payments of principal or interest were made against any of the loans during the three- and nine-month periods ended September 30, 2016. A total of $8,258 and $13,318 of principal was outstanding under the loan at September 30, 2017 and December 31, 2016, respectively. No accrued interest was outstanding under the loan at September 30, 2017 and December 31, 2016.

 

 17 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The carrying value of the Company’s outstanding notes receivable was $38,380 and $93,121 at September 30, 2017 and December 31, 2016, respectively, all of which was due from unrelated third parties. The Company had interest receivable of $838 outstanding at December 31, 2016. The Company did not have any interest receivable outstanding at September 30, 2017. The Company generated interest income of $543 and $1,931 during the three- and nine-month periods ended September 30, 2017, and generated interest income of $310 during the three- and nine-month periods ended September 30, 2016.

 

Notes Receivable – Related Parties

 

During the year ended December 31, 2015, the Company loaned a total of $121,638 to Raceland QSR. The Company loaned an additional $595,635 to Raceland QSR during the nine-month period ended September 30, 2016, of which $445,683 was repaid to the Company during the nine-month period ended September 30, 2016. The Company loaned an additional $6,341 to Raceland QSR during the remainder of the year ended December 31, 2016. The loan accrued interest at a rate of 6% per year and was payable on demand. Raceland QSR did not make any interest payments under the loan during the year ended December 31, 2016. All accrued but unpaid interest was written off during the year ended December 31, 2016. During the three- and nine-month periods ended September 30, 2016, the Company recorded an allowance for uncollectible notes receivable of $271,590. Raceland QSR subsequently transferred the outstanding balance of the note receivable to Seediv in December 2016, and the outstanding balance of the loan was repaid in full on December 19, 2016 when the Company acquired Seediv. Accordingly, no principal was outstanding under the loan at September 30, 2017 and December 31, 2016. A description of the acquisition of Seediv by the Company is set forth herein under Note 5. Acquisition of Seediv.

 

Note 10. Debt Obligations

 

During the fourth quarter of 2008, the Company issued promissory notes to four investors for a total original principal amount of $11,000 in return for aggregate cash proceeds of $11,000. The notes bear interest at a rate of 6% per annum and provide for the payment of all principal and interest three years after the date of the respective notes. The notes provide for the payment of a penalty in an amount equal to 10% of the principal amount of the notes in the event they are not paid by the end of the term. In April 2015, the Company repaid notes to two of these investors representing a total original principal amount of $4,000. As a result, a total original principal balance of $7,000 was outstanding under the two remaining notes at September 30, 2017 and December 31, 2016. These notes are currently in default.

 

On September 13, 2013, the Company entered into a loan agreement with Blue Victory pursuant to which Blue Victory agreed to extend a revolving line of credit facility to the Company for up to $1 million. Under the terms of the loan agreement, Blue Victory agreed to make loans to the Company in such amounts as the Company may request from time to time, provided that the total amount of loans requested in any calendar month may not exceed $150,000. All loan requests are subject to approval by Blue Victory. The Company may use the proceeds from the credit facility for general working capital purposes.

 

 18 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

The credit facility is unsecured, accrues interest at a rate of 6% per annum, and 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. Loans may be prepaid by the Company without penalty and borrowed again at any time prior to the termination date. The obligation of the Company to pay the outstanding balance of the credit facility is evidenced by a promissory note that was issued by the Company to Blue Victory on September 13, 2013.

 

Blue Victory has the right, at any time on or after September 13, 2013, to convert all or any portion of the outstanding principal of the credit facility, together with accrued interest payable thereon, into shares of the Company’s 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. Notwithstanding the above, in the event the Company does not have adequate shares of common stock authorized and available for issuance to be able to fulfill a conversion request, or the Company would breach its obligations under the rules or regulations of any trading market on which its shares of common stock are then listed if it fulfilled a conversion request, Blue Victory will amend the conversion notice to reduce the amount of principal and/or interest for which the conversion was requested to that amount for which an adequate number of shares of common stock is authorized and available for issuance by the Company.

 

During the year ended December 31, 2016, the Company borrowed $840,353 under the credit facility, of which $824,250 was repaid by the Company during the year ended December 31, 2016. Accordingly, the amount of principal outstanding under the credit facility was $16,103 at December 31, 2016.

 

On March 24, 2017, the Company and Blue Victory entered into an amendment to the loan agreement, dated September 13, 2013, pursuant to which Blue Victory had extended a line of credit facility to the Company for up to $1 million. Under the terms of the amendment, the Company and Blue Victory agreed to reduce the maximum amount of funds available under the credit facility from $1 million to $50,000. Pursuant to the terms of the amendment, the promissory note that was issued by the Company to Blue Victory on September 13, 2013 to evidence the obligation of the Company to pay the outstanding balance of the credit facility, was terminated in its entirety. The obligation of the Company to pay any future outstanding balance of the credit facility was evidenced by a new promissory note that was issued by the Company to Blue Victory on March 24, 2017.

 

Between January 1, 2017 and September 30, 2017, the Company repaid the remaining outstanding balance of $16,103 to Blue Victory under the credit facility. Accordingly, no principal was outstanding under the credit facility at September 30, 2017.

 

 19 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

On December 19, 2016, the Company acquired Seediv. In connection therewith, the Company assumed debt owed by Seediv to Blue Victory pursuant to the terms of a promissory note issued by Seediv in favor of Blue Victory in the amount of $216,469. The promissory note accrued interest at a rate of 6% per annum and was payable on demand. No payments were made by the Company under the promissory note during the year ended December 31, 2016. Accordingly, the amount of principal outstanding under the promissory note was $216,469 at December 31, 2016. The Company repaid the remaining outstanding balance of the promissory note during the three- and nine-month periods ended September 30, 2017. Accordingly, no principal was outstanding under the promissory note at September 30, 2017.

 

During the nine-month period ended September 30, 2017, the Company borrowed $499,837 from Blue Victory and repaid $473,589 to Blue Victory under a separate loan. The loan accrues interest at a rate of 6% per annum and is payable on demand. Accordingly, the amount of principal outstanding under the loan was $26,248 at September 30, 2017.

 

The carrying value of the Company’s outstanding promissory notes, net of unamortized discount, was $33,248 and $239,572 at September 30, 2017 and December 31, 2016, respectively, as follows:  

 

   September 30,   December 31, 
   2017   2016 
Notes payable – related party  $26,248   $232,572 
Notes payable – in default   7,000    7,000 
Total notes payable, net  $33,248   $239,572 

 

Note 11. 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, 2017 and December 31, 2016, of which 6,935,119 and 6,647,464 shares of common stock were outstanding at September 30, 2017 and December 31, 2016, respectively.

 

In September 2011, the Company entered into an agreement with a consultant pursuant to which the Company agreed to issue 1,000,000 shares of its common stock to the consultant as payment for services to be performed in accordance with the terms of the agreement. The shares were valued at the closing price of the Company’s common stock on the date of grant for total consideration of $150,000. The Company had not issued any of the shares to the consultant as of September 30, 2017 and December 31, 2016. Accordingly, the Company had an outstanding balance of $150,000 in stock subscriptions payable at September 30, 2017 and December 31, 2016.

 

In January 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. The employment agreement provides in part that the Company will grant Mr. Akam shares of its common stock equal in value to $50,000 on January 1st of each year thereafter if Mr. Akam is continuously employed by the Company through January 1st of the applicable year. The number of shares of common stock that the Company will issue to Mr. Akam for each applicable year will 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. A description of the employment agreement is set forth herein under Note 14. Commitments and Contingencies – Employment Agreements.

 

 20 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

In January 2016, Mr. Akam earned 71,429 shares of common stock under the terms of his employment agreement with the Company. 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 the transactions were completed. The Company recognized $137 of stock compensation expense in connection therewith during the nine-month period ended September 30, 2016. The Company also recognized $12,568 and $37,295 of stock compensation expense during the three- and nine-month periods ended September 30, 2016 in connection with the vesting of the shares of common stock to be earned to Mr. Akam on January 1, 2017 under the terms of his employment agreement with the Company.

 

In August 2016, the Company issued 35,000 shares of its common stock to Guiseppe Cala (“Cala”) pursuant to the terms of a settlement and release agreement to which the Company and Cala were parties. 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. A description of the settlement and release agreement is set forth herein under Note 16. Judgments in Legal Proceedings.

 

In November 2016, the Company issued 20,000 shares of its common stock to one of its non-executive employees 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 $41,200 of stock compensation expense in connection therewith during the year ended December 31, 2016.

 

On January 18, 2017, the Company appointed Seenu G. Kasturi as its President, Chief Financial Officer and Chairman of the board of directors. In connection therewith, 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 provides in part that Mr. Kasturi will be 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. A description of the employment agreement is set forth herein under Note 14. Commitments and Contingencies – Employment Agreements.

 

The Company recognized $13,500 of stock compensation expense during the nine-month period ended September 30, 2017 in connection with the vesting of the shares of common stock earned by Mr. Kasturi on April 1, 2017. The Company recognized $148 and $13,500 of stock compensation expense during the three- and nine-month periods ended September 30, 2017, respectively, in connection with the vesting of the shares of common stock earned by Mr. Kasturi on July 1, 2017. The Company also recognized $13,352 of stock compensation expense during the three- and nine-month periods ended September 30, 2017 in connection with the vesting of the shares of common stock to be earned by Mr. Kasturi on October 1, 2017. This amount was credited to stock subscriptions payable.

 

 21 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

In May 2017, the Company entered into an agreement with Maxim Group LLC (“Maxim”) to provide general financial advisory and investment banking services to the Company for a term of one year. Under the terms of the agreement, the Company agreed to pay Maxim $5,000 per month during the term of the agreement and issue 225,000 shares of common stock to Maxim upon the execution of the agreement. The Company recognized $180,000 of stock compensation expense during the nine-month period ended September 30, 2017 in connection with the issuance of the shares.

 

In August 2017, the Company approved the issuance of a total of 2,750 shares of its common stock to certain of its non-executive employees 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 $2,338 of stock compensation expense in connection therewith during the three- and nine-month periods ended September 30, 2017. This amount was credited to stock subscriptions payable.

 

In August 2017, the Company approved the issuance of a total of 13,000 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 $11,050 of stock compensation expense in connection therewith during the three- and nine-month periods ended September 30, 2017. This amount was credited to stock subscriptions payable.

 

In August 2017, the Company issued 35,295 shares of its common stock to a consultant as payment for $30,000 of consulting fees then due and payable by the Company. 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 a total of $26,889 and $233,740 for stock compensation expense during the three- and nine-month periods ended September 30, 2017, respectively, and recognized a total of $12,568 and $37,295 for stock compensation expense during the three- and nine-month periods ended September 30, 2016, respectively. The Company had a total of $176,741 and $150,000 of stock subscription payable outstanding at September 30, 2017 and December 31, 2016, respectively.

 

Note 12. Stock Options and Warrants

 

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 and 2016, and no stock options or warrants were exercised during the three- and nine-month periods ended September 30, 2017 and 2016. There were no stock options or warrants outstanding at September 30, 2017 or December 31, 2016.

 

 22 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Note 13. 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, 2017, 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, 2017, 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 14. Commitments and Contingencies

 

Employment Agreements and Arrangements

 

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 provides 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 is 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 provides that the Company will 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 is continuously employed by the Company through January 1st of the applicable year. The number of shares of common stock that the Company will issue to Mr. Akam for each applicable year will 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.  

 

 23 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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 is unable to fulfill its obligation to issue all of the shares earned by him with respect to any particular grant because it does not have enough shares of common stock authorized and available for issuance, (i) Mr. Akam will 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 may 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, the Company appointed Daniel Slone as the Company’s Chief Financial Officer. In connection therewith, Richard Akam resigned as the Company’s Chief Financial Officer on August 19, 2013. Mr. Akam retained his positions as the Company’s Chief Executive Officer, Chief Operating Officer and Secretary.

 

On January 1, 2016, Mr. Akam earned 71,429 shares of common stock under the terms of his employment agreement with the Company.

 

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

 

 24 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Daniel Slone

 

On August 19, 2013, the Company appointed Daniel Slone as the Company’s Chief Financial Officer. The Company agreed to pay Mr. Slone an annual base salary of $1.00 in connection with his appointment. The Company did not enter into an employment agreement with Mr. Slone. On January 17, 2017, Daniel Slone resigned as the Company’s Chief Financial Officer.

 

Seenu G. Kasturi

 

On January 18, 2017, the Company appointed Seenu G. Kasturi as its President, Chief Financial Officer and Chairman of the 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 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 employment agreement, Mr. Kasturi will be 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 will be eligible to receive increases in salary on January 1st of each subsequent year in the discretion of the Company’s board of directors. He will also be eligible to receive annual bonuses in the discretion of the Company’s board of directors beginning with the Company’s fiscal year ended December 31, 2017. The employment agreement contains customary confidentiality, non-competition and non-solicitation provisions in favor of the Company.

 

Operating Leases

 

Corporate Headquarters

 

In January 2015, the Company entered into a lease with Crescent Hill Office Park for its corporate headquarters located at 6327-4 Argyle Forest Boulevard, Jacksonville, Florida pursuant to which the Company leases approximately 2,000 square feet of space. The lease provides for an initial monthly rent payment of $1,806 and expires on December 31, 2017.

 

Nocatee Restaurant

 

In October 2013, 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. 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 Restaurant and the Youngerman Circle Restaurant from DWG Acquisitions pursuant to the terms of that certain Asset Purchase Agreement, dated December 1, 2016, by and between Seediv and DWG Acquisitions (the “Asset Purchase Agreement”).

 25 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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, 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 $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 for the Youngerman Circle Restaurant pursuant to which DWG Acquisitions leased approximately 6,500 square feet of space. 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 Restaurant and the Youngerman Circle Restaurant from DWG Acquisitions pursuant to the terms of the Asset Purchase Agreement.

 

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

 

Rent expense was $98,748 and $205,220 during the three- and nine-month periods ended September 30, 2017, respectively, and was $5,718 and $17,053 during the three- and nine-month period ended September 30, 2016, respectively.

 

Note 15. Related-Party Transactions

 

Employment Agreements

 

In January 2013, the Company entered into an employment agreement with Richard W. Akam in connection with his appointment as the Company’s Chief Operating Officer. Mr. Akam currently serves as the Company’s Chief Executive Officer, Chief Operating Officer and Secretary. A description of the employment agreement is set forth herein under Note 14. Commitments and Contingencies – Employment Agreements.

 

 26 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

In January 2017, the Company appointed Seenu G. Kasturi as its President, Chief Financial Officer and Chairman of the board of directors and, in connection therewith, entered into an employment agreement with Mr. Kasturi. A description of the employment agreement is set forth herein under Note 14. Commitments and Contingencies – Employment Agreements.

 

Sponsorship Agreements

 

In July 2013, the Company entered into a three-year sponsorship agreement with the Jacksonville Jaguars, LLC 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 EverBank Field in Jacksonville, Florida. The Company concurrently assigned all of its rights and obligations under the 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 subcontractor concession agreement with Ovations Food Services, L.P. (“Ovations”) for a second concession stand at EverBank Field. The Company 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 sub-concession agreement with Jacksonville Sportservice, Inc. (“Jacksonville Sportservice”) and 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 its rights and obligations under the sub-concession agreement to DWG Acquisitions in return for a fee equal to the income generated by the concession stands less all expenses incurred by the concession stands for each full or partial month during which the concession agreement is in effect.

 

Seenu G. Kasturi was appointed President, Chief Financial Officer and Chairman of the board of directors of the Company in January 2017, and owned approximately 48.9% of the Company’s common stock at September 30, 2017. He owned all of the outstanding membership interests in DWG Acquisitions at September 30, 2017. He also served as the President, Treasurer and Secretary of DWG Acquisitions during the nine-month period ended September 30, 2017 and the year ended December 31, 2016. The Company generated revenue of $15,000 and $35,000 from DWG Acquisitions under the assignment agreements related to the Levy and Ovations subcontractor concession agreements during the three- and nine-month periods ended September 30, 2016. The Company generated fees of $1,915 and $(2,680) from DWG Acquisitions under the assignment agreement related to the Jacksonville Sportservice sub-concession agreement during the three- and nine-month periods ended September 30, 2017. The fees were credited against the Company’s ad fund liability.

 

 27 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Financing Transactions

 

In September 2013, the Company entered into a loan agreement with Blue Victory pursuant to which Blue Victory agreed to extend a revolving line of credit facility to the Company for up to $1 million. In March 2017, the Company and Blue Victory entered into an amendment to the loan agreement to reduce the maximum amount of funds available under the credit facility from $1 million to $50,000. Seenu G. Kasturi was appointed President, Chief Financial Officer and Chairman of the board of directors of the Company in January 2017. He owned approximately 48.9% of the Company’s common stock and 90% of the equity interests in Blue Victory at September 30, 2017. He also served as the President, Treasurer and Secretary, and as the sole member of the board of directors, of Blue Victory during the nine-month period ended September 30, 2017 and the year ended December 31, 2016. The Company had total principal in the amount of $16,103 outstanding under the credit facility at December 31, 2016. No principal was outstanding under the credit facility at September 30, 2017. A description of the credit facility is set forth herein under Note 10. Debt Obligations.

 

During the nine-month period ended September 30, 2017, the Company borrowed $499,837 from Blue Victory and repaid $473,589 to Blue Victory under a separate loan. Accordingly, the amount of principal outstanding under the loan was $26,248 at September 30, 2017. A description of this loan from Blue Victory is set forth herein under Note 10. Debt Obligations.

 

Leases

 

In May 2014, DWG Acquisitions entered into a triple net lease with Raceland QSR for the Youngerman Circle Restaurant pursuant to which DWG Acquisitions leased approximately 6,500 square feet of space. The lease was assumed by Seediv on December 1, 2016 when Seediv acquired all of the assets and liabilities associated with the Nocatee Restaurant and the Youngerman Circle Restaurant from DWG Acquisitions pursuant to the terms of the Asset Purchase Agreement, and became an obligation of the Company 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. Seenu G. Kasturi was appointed President, Chief Financial Officer and Chairman of the board of directors of the Company in January 2017, and owned approximately 48.9% of the Company’s common stock at September 30, 2017. He owned all of the outstanding membership interests in DWG Acquisitions and Raceland QSR at September 30, 2017. He also served as the President, Treasurer and Secretary of DWG Acquisitions and Raceland QSR during the nine-month period ended September 30, 2017 and the year ended December 31, 2016. A description of the leases is set forth herein under Note 14. Commitments and Contingencies.

 

Franchise Agreements

 

In October 2013, DWG Acquisitions became the franchisee of the Nocatee Restaurant. In connection therewith, DWG Acquisitions entered into a franchise agreement with the Company. The terms of the franchise agreement were identical to those 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. The Nocatee Restaurant was acquired by Seediv on December 1, 2016 when Seediv acquired all of the assets and liabilities associated with the Nocatee Restaurant and the Youngerman Circle Restaurant from DWG Acquisitions pursuant to the terms of the Asset Purchase Agreement. The Nocatee Restaurant was subsequently acquired by the Company when the Company acquired Seediv on December 19, 2016. A description of the transaction is set forth herein under Note 5. Acquisition of Seediv.

 

 28 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Seenu G. Kasturi was appointed President, Chief Financial Officer and Chairman of the board of directors of the Company in January 2017, and owned approximately 48.9% of the Company’s common stock at September 30, 2017. He owned all of the outstanding membership interests in DWG Acquisitions at September 30, 2017. He also served as the President, Treasurer and Secretary of DWG Acquisitions during the nine-month period ended September 30, 2017 and the year ended December 31, 2016. The Company generated $19,644 and $56,106 in royalties from DWG Acquisitions under the franchise agreement during the three- and nine-month period ended September 30, 2016. The Company did not generate any royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2017 as the Company owned the Nocatee Restaurant during those periods.

 

In May 2014, DWG Acquisitions became the franchisee of the Youngerman Circle Restaurant. In connection therewith, DWG Acquisitions entered into a franchise agreement with the Company. The terms of the franchise agreement were identical to those 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. The Youngerman Circle Restaurant was acquired by Seediv on December 1, 2016 when Seediv acquired all of the assets and liabilities associated with the Nocatee Restaurant and the Youngerman Circle Restaurant from DWG Acquisitions pursuant to the terms of the Asset Purchase Agreement. The Youngerman Circle Restaurant was subsequently acquired by the Company when the Company acquired Seediv on December 19, 2016. A description of the transaction is set forth herein under Note 5. Acquisition of Seediv.

 

In December 2016, the Company acquired Seediv and Seenu G. Kasturi was appointed President, Chief Financial Officer and Chairman of the board of directors of the Company in January 2017, and owned approximately 48.9% of the Company’s common stock at September 30, 2017. He owned all of the outstanding membership interests in DWG Acquisitions at September 30, 2017. He also served as the President, Treasurer and Secretary of DWG Acquisitions during the nine-month period ended September 30, 2017 and the year ended December 31, 2016. The Company generated $22,105 and $70,610 in royalties from DWG Acquisitions under the franchise agreement during the three- and nine-month periods ended September 30, 2016. The Company did not generate any royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2017 as the Company owned the Youngerman Circle Restaurant during those periods.

 

In December 2014, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located on Gornto Road in Valdosta, Georgia. In connection therewith, DWG Acquisitions entered into a franchise agreement with the Company. The terms of the franchise agreement were identical to those of the franchise agreements that the Company enters into with unrelated franchisees. Seenu G. Kasturi was appointed President, Chief Financial Officer and Chairman of the board of directors of the Company in January 2017, and owned approximately 48.9% of the Company’s common stock at September 30, 2017. He owned all of the outstanding membership interests in DWG Acquisitions at September 30, 2017. He also served as the President, Treasurer and Secretary of DWG Acquisitions during the nine-month period ended September 30, 2017 and the year ended December 31, 2016. The Company generated $10,193 and $32,224 in royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2017, respectively, and generated $10,887 and $35,308 in royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2016, respectively.

 

 29 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

In March 2015, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located in Tifton, Georgia. In connection therewith, DWG Acquisitions entered into a franchise agreement with the Company. The terms of the franchise agreement were identical to those of the franchise agreements that the Company enters into with unrelated franchisees. DWG Acquisitions closed the restaurant in January 2017. Seenu G. Kasturi was appointed President, Chief Financial Officer and Chairman of the board of directors of the Company in January 2017, and owned approximately 48.9% of the Company’s common stock at September 30, 2017. He owned all of the outstanding membership interests in DWG Acquisitions at September 30, 2017. He also served as the President, Treasurer and Secretary of DWG Acquisitions during the nine-month period ended September 30, 2017 and the year ended December 31, 2016. The Company generated $1,520 in royalties from DWG Acquisitions under the agreement during the nine-month period ended September 30, 2017, and generated $8,088 and $28,010 in royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2016, respectively.

 

In June 2015, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located in Fleming Island, Florida. In connection therewith, DWG Acquisitions entered into a franchise agreement with the Company. The terms of the franchise agreement were identical to those of the franchise agreements that the Company enters into with unrelated franchisees. DWG Acquisitions sold the restaurant to an unrelated third party on January 1, 2017, on which date the third party became the franchisee and the Company terminated the franchise agreement with DWG Acquisitions. Seenu G. Kasturi was appointed President, Chief Financial Officer and Chairman of the board of directors of the Company in January 2017, and owned approximately 48.9% of the Company’s common stock at September 30, 2017. He owned all of the outstanding membership interests in DWG Acquisitions at September 30, 2017. He also served as the President, Treasurer and Secretary of DWG Acquisitions during the nine-month period ended September 30, 2017 and the year ended December 31, 2016. The Company generated $10,464 and $34,171 in royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2016, respectively. The Company did not generate any royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2017.

 

In September 2015, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located in Panama City Beach, Florida. In connection therewith, DWG Acquisitions entered into a franchise agreement with the Company. The terms of the franchise agreement were identical to those of the franchise agreements that the Company enters into with unrelated franchisees. Seenu G. Kasturi was appointed President, Chief Financial Officer and Chairman of the board of directors of the Company in January 2017, and owned approximately 48.9% of the Company’s common stock at September 30, 2017. He owned all of the outstanding membership interests in DWG Acquisitions at September 30, 2017. He also served as the President, Treasurer and Secretary of DWG Acquisitions during the nine-month period ended September 30, 2017 and the year ended December 31, 2016. The Company generated $14,013 and $37,245 in royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2017, respectively, and generated $14,786 and $41,822 in royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2016, respectively.

 

 30 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

In March 2016, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located in Pensacola, Florida. In connection therewith, DWG Acquisitions entered into a franchise agreement with the Company. The terms of the franchise agreement were identical to those of the franchise agreements that the Company enters into with unrelated franchisees. Seenu G. Kasturi was appointed President, Chief Financial Officer and Chairman of the board of directors of the Company in January 2017, and owned approximately 48.9% of the Company’s common stock at September 30, 2017. He owned all of the outstanding membership interests in DWG Acquisitions at September 30, 2017. He also served as the President, Treasurer and Secretary of DWG Acquisitions during the nine-month period ended September 30, 2017 and the year ended December 31, 2016. The Company generated $7,408 and $22,152 in royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2017. The Company generated $8,861 and $22,809 in royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2016, respectively, and generated $30,000 in franchise fees from DWG Acquisitions under the agreement during the nine-month period ended September 30, 2016.

 

In March 2016, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located in Kingsland, Georgia. In connection therewith, DWG Acquisitions entered into a franchise agreement with the Company. The terms of the franchise agreement were identical to those of the franchise agreements that the Company enters into with unrelated franchisees. Seenu G. Kasturi was appointed President, Chief Financial Officer and Chairman of the board of directors of the Company in January 2017, and owned approximately 48.9% of the Company’s common stock at September 30, 2017. He owned all of the outstanding membership interests in DWG Acquisitions at September 30, 2017. He also served as the President, Treasurer and Secretary of DWG Acquisitions during the nine-month period ended September 30, 2017 and the year ended December 31, 2016. The Company generated $8,671 and $30,202 in royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2017, respectively. The Company generated $13,027 and $34,509 in royalties from DWG Acquisitions under the agreement during the three- and nine-month periods ended September 30, 2016, respectively, and generated $30,000 in franchise fees from DWG Acquisitions under the agreement during the nine-month period ended September 30, 2016.

 

The Company generated a total of $40,285 and $123,343 in royalties and franchise fees through its franchise agreements with DWG Acquisitions during the three- and nine-month periods ended September 30, 2017, respectively, and generated a total of $112,860 and $418,344 in royalties and franchise fees through its franchise agreements with DWG Acquisitions during the three- and nine-month periods ended September 30, 2016. The Company had a total of $3,056 and $14,568 of accounts receivable outstanding from DWG Acquisitions at September 30, 2017 and December 31, 2016, respectively, and had a total of $37,093 of ad funds receivable outstanding from DWG Acquisitions at September 30, 2017. The Company did not have any ad funds receivable outstanding from DWG Acquisitions at December 31, 2016.

 

 31 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Loans

 

During the year ended December 31, 2015, the Company loaned a total of $121,638 to Raceland QSR. The Company loaned an additional $595,635 to Raceland QSR during the nine-month period ended September 30, 2016, of which $445,683 was repaid to the Company during the nine-month period ended September 30, 2016. The Company loaned an additional $6,341 to Raceland QSR during the remainder of the year ended December 31, 2016. The loan was paid off in full by Raceland QSR during the year ended December 31, 2016. Seenu G. Kasturi owned approximately 8.7% of the Company’s common stock and all of the equity interests in Raceland QSR during the period for which the loan was outstanding. He also served as the President, Treasurer and Secretary of Raceland QSR during the year ended December 31, 2016. A description of the loan is set forth herein under Note 9. Notes Receivable.

 

Acquisition of Seediv

 

On December 19, 2016, the Company acquired all of the outstanding membership interests of Seediv from Seenu G. Kasturi. In connection therewith, the Company assumed debt owed by Seediv to Blue Victory pursuant to the terms of a promissory note issued by Seediv in favor of Blue Victory in the amount of $216,469. The loan was paid off in full by Raceland QSR during the nine-month period ended September 30, 2017. Mr. Kasturi owned approximately 14.8% of the Company’s common stock and all of the outstanding membership interests of Seediv at December 19, 2016. He also served as the President, Treasurer and Secretary of Seediv at December 19, 2016. A description of the transaction is set forth herein under Note 5. Acquisition of Seediv. A description of the promissory note is set forth herein under Note 10. Debt Obligations.

 

Sale of Ownership Interest in Paradise on Wings

 

On September 30, 2017, the Company sold its 50% ownership interest in Paradise on Wings to Seenu G. Kasturi for $24,000. A description of the transaction is set forth herein under Note 4. Investment in Paradise on Wings.

 

Note 16. 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.

 

 32 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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 entitled Duval 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, 2017 and December 31, 2016. Interest expense in the amount of $2,841 and $8,431 accrued on the outstanding balance of the settlement agreement payable during the three- and nine-month periods ended September 30, 2017, respectively, and interest expense in the amount of $2,841 and $8,462 accrued on the outstanding balance of the settlement agreement payable during the three- and nine-month periods ended September 30, 2016, respectively. The interest expense was credited to settlement agreements payable.

 

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. A total of $31,836 and $25,980 of accrued interest, and $10,586 of other expenses, were outstanding at September 30, 2017 and December 31, 2016, respectively, resulting in an aggregate potential loss of $153,961 and $148,105 at September 30, 2017 and December 31, 2016, respectively. The potential losses of $153,961 and $148,105 were reflected in accrued legal settlement at September 30, 2017 and December 31, 2016, respectively. This case is currently pending.

 

Note 17. Subsequent Events

 

On October 1, 2017, Seenu G. Kasturi earned 8,177 shares of the Company’s common stock pursuant to the terms of his employment agreement with the Company.

 

 33 

 

 

ARC Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

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 32244 (the “Property”) from Raceland QSR. The purchase price for the Property will be the lesser of: (i) $2 million, 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 provides 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 has the right to terminate the transaction in the event that certain feasibility studies, the title commitment or the appraisal is unsatisfactory to Seediv, or if Raceland QSR breaches any of its representations, warranties, covenants, agreements or obligations under the agreement, in which case the deposit shall be returned to Seediv. The closing of the transaction will occur on December 3, 2017.

 

On or about October 18, 2017, the Company issued the 2,750 shares of common stock previously approved for issuance to certain of its non-executive employees as incentive compensation in August 2017.

 

 34 

 

 

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 our Dick’s Wings® brand;

 

·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;

 

 35 

 

 

·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 under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations below and Item 1A. Risk Factors of our Annual Report on Form 10-K/A for our fiscal year ended December 31, 2016. 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.

 

 36 

 

 

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

 

This Management’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 under Item 1A. Risk Factors of our Annual Report on Form 10-K/A for our fiscal year ended December 31, 2016 and elsewhere in this report. The following should be read in conjunction with our consolidated financial statements beginning on page 1 of this report.

 

Overview

 

We were formed in April 2000 to develop the Dick’s Wings concept, and are the owner, operator and franchisor of the Dick’s Wings brand of restaurants. Our Dick’s Wings concept is comprised of traditional restaurants like our Dick’s Wings & Grill® restaurants, which are full service restaurants, and non-traditional units like our Dick’s Wings concession stands at EverBank Field. We offer 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 Seediv in our consolidated financial statements.

 

On October 4, 2017, Seediv entered into an Agreement for Purchase and Sale of Real Estate with Raceland QSR, LLC, a Louisiana limited liability company (“Raceland QSR”). Under the terms of the agreement, Seediv agreed to purchase the real property located at 6055 Youngerman Circle in Argyle Circle, Jacksonville, Florida 32244 (the “Property”) from Raceland QSR. The purchase price for the Property will be the lesser of: (i) $2 million, 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 provides 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 has the right to terminate the transaction in the event that certain feasibility studies, the title commitment or the appraisal is unsatisfactory to Seediv, or if Raceland QSR breaches any of its representations, warranties, covenants, agreements or obligations under the agreement, in which case the deposit shall be returned to Seediv. The closing of the transaction will occur on December 3, 2017.

 

 37 

 

 

We had 24 Dick’s Wings & Grill restaurants and one Dicks’ Wings concession stand at the end of our 2016 fiscal year. During our 2017 fiscal year, we opened a second concession stand closed two of our franchised restaurants. As a result, we currently have 22 Dick’s Wings & Grill restaurants and two Dicks’ Wings concession stands. Of our 22 restaurants, 17 are located in Florida and five are located in Georgia. Our concession stands are also located in Florida. Two of the restaurants are owned by us. The remaining 20 restaurants are owned and operated by franchisees.

 

Strategy

 

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

 

The first major component of our growth strategy is the continued development and expansion of our legacy Dick’s Wings brand. Key elements of our strategy include strengthening the brand, developing new menu items, 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 restaurants, and have implemented a rigorous and disciplined approach to drive franchising sales. 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 offering us product and geographic diversification. 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. 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.

 

Financial Results

 

We achieved revenue of $1,047,404 for the three-month period ended September 30, 2017, compared to $183,591 for the three-month period ended September 30, 2016, primarily due to an increase of $841,214 for sales by the company-owned restaurants that we acquired through our acquisition of Seediv. Our total operating expenses increased $607,254 to $1,068,963 for the three-month period ended September 30, 2017, compared to $461,709 for the three-month period ended September 30, 2016, primarily due to an increase of $858,964 for restaurant operating costs for the company-owned restaurants that we acquired through our acquisition of Seediv. We generated a loss from operations of $21,559 for the three-month period ended September 30, 2017, compared to a loss from operations of $278,118 for the three-month period ended September 30, 2016. We generated a net loss of $89, or $0.00 per share, for the three-month period ended September 30, 2017, compared to a net loss of $4,235, or $0.00 per share, for the three-month period ended September 30, 2016.

 

 38 

 

 

We achieved revenue of $3,228,054 for the nine-month period ended September 30, 2017, compared to $791,407 for the nine-month period ended September 30, 2016, primarily due to an increase of $2,595,679 for sales by the company-owned restaurants that we acquired through our acquisition of Seediv. Our total operating expenses increased $2,326,553 to $3,154,709 for the nine-month period ended September 30, 2017, compared to $828,156 for the nine-month period ended September 30, 2016, primarily due to an increase of $2,470,461 for restaurant operating costs for the company-owned restaurants that we acquired through our acquisition of Seediv. We generated income from operations of $73,345 for the nine-month period ended September 30, 2017, compared to a loss from operations of $36,749 for the nine-month period ended September 30, 2016. We generated net income of $87,675, or $0.01 per share, for the nine-month period ended September 30, 2017, compared to net income of $245,939, or $0.04 per share, for the nine-month period ended September 30, 2016. Net cash flows provided by operating activities increased $15,747 to $242,619 for the nine-month period ended September 30, 2017, compared to $226,872 for the nine-month period ended September 30, 2016.

 

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 restaurants and open new Dick’s Wings restaurants, and as we acquire additional interests in other restaurant brands. We expect to continue generating net income during the next 12 months as we generate 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 restaurant brands through mergers, acquisitions, joint ventures or other strategic initiatives, 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.

 

Critical Accounting Policies

 

For information regarding our critical accounting policies, please refer to the discussion provided in our Annual Report on Form 10-K/A for our fiscal year ended December 31, 2016 under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies”.

 

Recent Accounting Pronouncements

 

For information regarding recent accounting pronouncements applicable to our business, please refer to the discussion provided herein under Note 2. Basis of Presentation and Summary of Significant Accounting Policies – Recent Accounting Pronouncements in our consolidated financial statements.

 

 39 

 

 

Comparison of the Three-Month Periods Ended September 30, 2017 and 2016

 

Revenue

 

Revenue consists primarily of proceeds from the sale of food and beverage products by our company-owned restaurants, and royalty payments, franchise fees and area development fees that we receive from our franchisees. Revenue increased $863,813 to $1,047,404 for the three-month period ended September 30, 2017 from $183,591 for the three-month period ended September 30, 2016. The increase of $863,813 was due primarily to an increase of $841,241 for sales by our company-owned restaurants that we acquired through our acquisition of Seediv. 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 restaurants and open new Dick’s Wings restaurants, and as we acquire additional interests in other restaurant brands.

 

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 of cost of sales, labor expenses, occupancy expenses and other operating expenses that we incur in connection with the operation of the company-owned restaurants that we acquired through our acquisition of Seediv. Restaurant operating costs were $858,964 for the three-month period ended September 30, 2017. We did not incur any restaurant operating costs for the three-month period ended September 30, 2016 because we did not acquire Seediv until December 19, 2016. 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. We expect our restaurant operating costs to remain at similar levels during the next 12 months.

 

Professional Fees. Professional fees consist of fees paid to our independent accountants, lawyers, technology consultants and other professionals and consultants. Professional fees increased $15,425 to $67,975 for the three-month period ended September 30, 2017 from $52,550 for the three-month period ended September 30, 2016. The increase of $15,425 was due primarily to an increase of $13,550 for consulting fees. We expect our professional fees to continue to increase during the next 12 months as we incur increased legal, accounting, 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 other employees that are not employed by our company-owned restaurants, and the related payroll taxes. Employee compensation expense decreased $49,567 to $91,033 for the three-month period ended September 30, 2017 from $140,600 for the three-month period ended September 30, 2016. The decrease of $49,567 was due primarily to a decrease of $57,237 for salaries and hourly wages paid to employees, partially offset by an increase of $14,321 for stock compensation expense. We expect employee compensation expense to increase over the next 12 months as we hire additional executive officers and other employees in connection with the growth and expansion of our business and operations.

 

 40 

 

 

General and Administrative Expenses. General and administrative expenses consist of marketing and advertising expenses, bank service charges, computer and internet expenses, dues and subscriptions, licenses and filing fees, insurance expenses, investor relations expenses, shareholder meeting expenses, bad debt expense, 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 decreased $217,568 to $50,991 for the three-month period ended September 30, 2017 from $268,559 for the three-month period ended September 30, 2016. The decrease of $217,568 was due primarily to a decrease of $273,763 for bad debt expense, partially offset by an increase of $15,097 for SEC filings fees and investor relations expenses and increases in other miscellaneous general and administrative expenses. We expect general and administrative expenses to increase over the next 12 months as we incur increasing expenses for marketing and advertising, investor relations, travel, rent, office supplies, insurance and other miscellaneous items associated with the general growth of our business and operations.

 

Income From Investment in Paradise on Wings

 

Income from investment in Paradise on Wings consists of our share of the income from our 50% ownership interest in Paradise on Wings that we purchased on January 20, 2014. Income from investment in Paradise on Wings was $101,056 for the three-month period ended September 30, 2016. We did not generate any income from investment in Paradise on Wings for the three-month period ended September 30, 2017. We performed a review of its investment in Paradise on Wings at the end of the year ended December 31, 2016 and determined that, for the reasons more fully described herein under Note 8. Fair Value Measurements in our consolidated financial statements, 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 our investment in Paradise on Wings was zero at September 30, 2017 and December 31, 2016. In addition, because the carrying amount of our investment in Paradise on Wings was zero at September 30, 2017, the amount of our share of net loss incurred by Paradise on Wings that we recognized during the three-month period ended September 30, 2017 was zero. We sold our 50% ownership interest in Paradise on Wings on September 30, 2017. As a result, we do not expect to recognize any income or losses from investment in Paradise on Wings in the future.

 

Gain on Settlement of Liabilities

 

Gain on settlement of liabilities consists of the gain that we realized upon entering into a settlement agreement with Guiseppe Cala with respect to several legal proceedings that had been initiated between us and Mr. Cala and breaches of a settlement agreement entered into between us and Mr. Cala in 2010. We recognized a gain on the settlement of liabilities of $175,449 for the three-month period ended September 30, 2016. We did not recognize any gain on the settlement of liabilities for the three-month period ended September 30, 2017. A description of the current settlement agreement, the 2010 settlement agreement and the legal proceedings is set forth under Note 16. Judgments in Legal Proceedings in our consolidated financial statements. We do not expect to generate any additional gain on settlement of liabilities during the next 12 months.

 

 41 

 

 

Net Loss

 

We generated a net loss of $89 for the three-month period ended September 30, 2017 compared to a net loss of $4,235 for the three-month period ended September 30, 2016. The decrease of $4,146 was due primarily to an increase of $863,813 for revenue and decreases of $49,567 for employee compensation expense and $217,568 for general and administrative expenses. This was partially offset by increases of $858,964 for restaurant operating costs and decreases of $175,449 for gain on settlement of liabilities and $101,056 for income from investment in Paradise on Wings. We expect to continue generating net income during the next 12 months as we generate 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 restaurant brands through mergers, acquisitions, joint ventures or other strategic initiatives, 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.

 

Comparison of the Nine-Month Periods Ended September 30, 2017 and 2016

 

Revenue

 

Revenue increased $2,436,647 to $3,228,054 for the nine-month period ended September 30, 2017 from $791,407 for the nine-month period ended September 30, 2016. The increase of $2,436,647 was due primarily to an increase of $2,595,679 for sales by our company-owned restaurants, partially offset by decreases of $105,000 for franchise fees received from our franchisees. The increase in sales by our company-owned restaurants was attributable to the restaurants that we acquired through our acquisition of Seediv. The decrease in franchise fees was attributable to a reduction in new franchise agreements that we executed during the nine-month period ended September 30, 2017.

 

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 were $2,470,461 for the nine-month period ended September 30, 2017. We did not incur any restaurant operating costs for the nine-month period ended September 30, 2016 because we did not acquire Seediv until December 19, 2016. Our restaurant operating costs consisted of $869,600 for cost of sales, $857,933 for labor expenses, $187,264 for occupancy expenses, and $555,664 for other operating expenses. We expect our restaurant operating costs to remain at similar levels during the next 12 months.

 

Professional Fees. Professional fees increased $229,735 to $351,185 for the nine-month period ended September 30, 2017 from $121,450 for the nine-month period ended September 30, 2016. The increase of $229,735 was due primarily to increases of $180,000 for stock compensation expense and $44,566 for consulting fees.

 

 42 

 

 

Employee Compensation Expense. Employee compensation expense decreased $139,956 to $250,626 for the nine-month period ended September 30, 2017 from $390,582 for the nine-month period ended September 30, 2016. The decrease of $139,956 was due primarily to a decrease of $160,850 for salaries and hourly wages paid to employees, partially offset by increases in other miscellaneous employee compensation expenses. We expect employee compensation expense to increase over the next 12 months as we hire additional executive officers and other employees in connection with the growth and expansion of our business and operations.

 

General and Administrative Expenses. General and administrative expenses decreased $233,687 to $82,437 for the nine-month period ended September 30, 2017 from $316,124 for the nine-month period ended September 30, 2016. The decrease of $233,687 was due primarily to a decrease of $273,763 for bad debt expense, partially offset by $26,375 for SEC filings fees and investor relations expenses and increases in other miscellaneous general and administrative expenses.

 

Income From Investment in Paradise on Wings

 

Income from investment in Paradise on Wings consists of our share of the income from our 50% ownership interest in Paradise on Wings that we purchased on January 20, 2014. Income from investment in Paradise on Wings was $106,082 for the nine-month period ended September 30, 2016. We did not generate any income from investment in Paradise on Wings for the nine-month period ended September 30, 2017. We performed a review of its investment in Paradise on Wings at the end of the year ended December 31, 2016 and determined that, for the reasons more fully described herein under Note 8. Fair Value Measurements in our consolidated financial statements, 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 our investment in Paradise on Wings was zero at September 30, 2017 and December 31, 2016. In addition, because the carrying amount of our investment in Paradise on Wings was zero at September 30, 2017, the amount of our share of net loss incurred by Paradise on Wings that we recognized during the nine-month period ended September 30, 2017 was zero. We sold our 50% ownership interest in Paradise on Wings on September 30, 2017.

 

Gain on Settlement of Liabilities

 

We recognized a gain on the settlement of liabilities of $175,449 for the nine-month period ended September 30, 2016. We did not recognize any gain on the settlement of liabilities for the three-month period ended September 30, 2017. A description of the current settlement agreement, the 2010 settlement agreement and the legal proceedings is set forth under Note 16. Judgments in Legal Proceedings in our consolidated financial statements.

 

 43 

 

 

Net Income

 

We generated net income of $87,675 for the nine-month period ended September 30, 2017 compared to $245,939 for the nine-month period ended September 30, 2016. The decrease of $158,264 was due primarily to increases of $2,470,461 for restaurant operating costs and $229,735 for professional fees, and decreases of $106,082 for income from investment in Paradise on Wings and $175,449 for gain on settlement of liabilities. This was partially offset by an increase of $2,436,647 for revenue and decreases of $139,956 for employee compensation expense and $233,687 for general and administrative expenses.

 

Liquidity and Capital Resources

 

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

 

Net cash provided by operating activities was $242,619 during the nine-month period ended September 30, 2017 compared to $226,872 during the nine-month period ended September 30, 2016. The increase of $15,747 was due primarily to an increase of $196,445 for stock compensation expense, and decreases of $106,082 for income from investment in Paradise on Wings, $175,449 for gain on settlement of liabilities and $95,126 for accounts receivable. This was partially offset by decreases of $158,264 for net income, $271,590 for bad debt expense and $113,988 for accounts payable and accrued liabilities.

 

Net cash provided by investing activities was $45,686 during the nine-month period ended September 30, 2017 compared to net cash used by investing activities of $224,545 during the nine-month period ended September 30, 2016. The difference of $270,231 was due to decreases of $74,593 for the issuance of notes receivable and $595,635 for the issuance of notes receivable to related parties, and increases of $54,741 for repayments of notes receivable and $24,000 for the sale of our 50% ownership interest in Paradise on Wings. This was partially offset by a decrease of $445,683 for the repayment of notes receivable issued to related parties, and an increase of $33,055 for purchases of fixed assets.

 

Net cash used by financing activities was $206,324 during the nine-month period ended September 30, 2017. We did not have any net cash flows from financing activities during the nine-month period ended September 30, 2016. The increase of $206,324 of net cash used by financing activities was due to a decrease of $783,323 for proceeds from the issuance of notes payable to related parties, partially offset by a decrease of $576,999 for repayments of notes payable issued to related parties.

 

Our primary sources of capital since January 1, 2016 are set forth below.

 

During the year ended December 31, 2016, we borrowed $840,353 under our credit facility with Blue Victory and repaid $824,250 under the credit facility. Accordingly, the amount of principal outstanding under the credit facility was $16,103 at December 31, 2016. We repaid the remaining $16,103 under the credit facility during the nine-month period ended September 30, 2017. Accordingly, no principal was outstanding under the credit facility at September 30, 2017. A summary of the terms of our credit facility with Blue Victory is set forth herein under Note 10. Debt Obligations in our consolidated financial statements.

 

During the nine-month period ended September 30, 2017, we borrowed $499,837 from Blue Victory and repaid $473,589 to Blue Victory under a separate loan. Accordingly, the amount of principal outstanding under the loan was $26,248 at September 30, 2017. A description of this loan from Blue Victory is set forth herein under Note 10. Debt Obligations in our consolidated financial statements.

 

 44 

 

 

To date, our capital needs have been met through cash 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. We have used these sources of capital to pay virtually all of the costs and expenses that we have incurred to date. These costs and expenses have been comprised primarily of the professional fees, employee compensation expenses, and general and administrative expenses discussed above. We intend to continue to rely upon each of these sources to fund our operations and expansion efforts, including additional acquisitions of controlling or non-controlling financial interests in other restaurant brands, 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.

 

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, 2017, 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.

 

 45 

 

 

Item 4.Controls and Procedures.

 

As of September 30, 2017, 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, 2017, 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, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 46 

 

 

PART II – OTHER INFORMATION

 

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

 

In July 2017, we issued 16,823 shares of our common stock to Seenu G. Kasturi under the terms of his employment agreement with us. The securities were issued to 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. A description of Mr. Kasturi’s employment agreement is set forth herein under Note 14. Commitments and Contingencies in our consolidated financial statements.

 

In August 2017, we approved the issuance of a total of 2,750 shares of our common stock to certain of our non-executive employees as incentive compensation. The securities were issued to a limited number of individuals 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 August 2017, we approved the issuance of a total of 13,000 shares of our common stock to certain of our franchisees as incentive compensation. The securities were issued to a limited number of individuals 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 August 2017, we issued 35,295 shares of our common stock to a consultant as payment for $30,000 of consulting fees that we owed the consultant. The securities were issued to 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

 

 

 47 

 

 

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 14, 2017 /s/ Seenu G. Kasturi
  Seenu G. Kasturi
  Chief Financial Officer
  (principal financial officer and duly authorized officer)

 

 48 

 

 

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