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 and
elsewhere in this report. See also "Special Note Regarding Forward-Looking
Statements" beginning on page 1 of this report. The following should be read in
conjunction with our consolidated financial statements beginning on page F-1 of
this report.
32
Overview
We were formed in April 2000 to develop the Dick's Wings restaurant franchise,
and are the owner, operator and franchisor of the Dick's Wings brand of
restaurants. Our Dick's Wings franchise is currently comprised of 21 restaurants
and three concession stands located in the States of Florida and Georgia. Dick's
Wings offers 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 August 30, 2018, we acquired the Fat Patty's restaurant concept. The Fat
Patty's concept is comprised of four restaurants located in West Virginia and
Kentucky. Fat Patty's offers a variety of specialty burgers and sandwiches,
wings, appetizers, salads, wraps, and steak and chicken dinners in a family
friendly, sports-oriented environment designed to appeal to a mix of families,
students, professors, locals, and visitors. A description of the transaction is
set forth herein under Item 1. Business - Recent Developments - Acquisition of
Fat Patty's and Note 4. Acquisition of Fat Patty's in our consolidated financial
statements.
On October 11, 2019, we acquired the WingHouse restaurant concept. The WingHouse
concept is comprised of 24 restaurants located in Florida. WingHouse offers a
variety of menu items highlighted by our traditional and boneless Buffalo style
chicken wings spun in our signature sauces and seasonings. Our WingHouse
restaurants serve lunch and dinner and provide a full-service bar. They offer a
variety of specialty burgers and sandwiches, wings, appetizers, salads, wraps,
and steak and chicken dinners in a family friendly, sports-oriented environment
designed to appeal to a mix of families, students, professors, locals, and
visitors. A description of the transaction is set forth herein under Item 1.
Business - Recent Developments - Acquisition of WingHouse and Note 5.
Acquisition of WingHouse in our consolidated financial statements
Strategy
Our plan is to grow our company into a diversified restaurant holding company
operating a portfolio of premium restaurant brands. We intend to focus on
developing brands that offer a variety of high-quality food and beverages in a
distinctive, casual, high- energy atmosphere in a diverse set of markets across
the United States.
The first major component of our growth strategy is the continued development
and expansion of our Dick's Wings, Fat Patty's and WingHouse brands. Key
elements of our strategy include strengthening the brands, developing new menu
items, lowering our costs, improving our operations and service, driving
customer satisfaction, and opening new restaurants in new and existing markets
in the United States. We believe there are meaningful opportunities to grow the
number of Dick's Wings and Fat Patty's restaurants in the United States and have
implemented a rigorous and disciplined approach to increasing the number of
company-owned and franchised restaurants. In our existing markets, we plan to
continue to open new restaurants until a market is penetrated to a point that
will enable us to gain marketing, operational, cost and other efficiencies. In
new markets, we plan to open several restaurants at a time to quickly build
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, like our acquisition of Fat
Patty's and WingHouse. 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. 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. As we acquire complementary brands, we intend to develop a scalable
infrastructure that will help us expand our margins as we execute upon our
growth strategy. Benefits of this infrastructure may include centralized support
services for all of our brands, including marketing, menu development, human
resources, legal, accounting and information systems. Additional benefits may
include the ability to cost effectively employ advertising and marketing
agencies for all of our brands, and efficiencies associated with being able to
utilize a single distribution model for all of our restaurants. Accordingly,
this structure should enable us to leverage our scale and share best practices
across key functional areas that are common to all of our brands.
Financial Results
We achieved revenue of $29,091,024 for the year ended December 31, 2019,
compared to $9,500,537 for the year ended December 31, 2018, primarily due to an
increase in sales of food and beverage products by the company-owned restaurants
that we acquired through our acquisition of Fat Patty's and WingHouse. Our total
operating expenses increased $20,797,694 to $31,076,875 for the year ended
December 31, 2019 from $10,279,181 for the year ended December 31, 2018,
primarily due to an increase in restaurant operating costs associated with the
operation of the company-owned restaurants that we acquired through our
acquisition of Fat Patty's and WingHouse. Accordingly, we incurred a loss from
operations of $1,985,851 and $778,644 during the years ended December 31, 2019
and 2018, respectively. We generated a net loss of $2,644,446, or $0.36 per
share of common stock, for the year ended December 31, 2019, compared to a net
loss of $282,483, or $0.04 per share of common stock, for the year ended
December 31, 2018. We had total assets of $86,081,618 and $14,673,337 at
December 31, 2019 and 2018, respectively, and generated cash flow from
operations of $330,606 and $478,238 for the years ended December 31, 2019 and
2018, respectively.
33
We have two reportable segments, which are company-owned restaurants and
franchise operations. Information on our reportable segments and a
reconciliation of income from operations to net (loss) / income is set forth
herein under Note 20. Segment Reporting in our consolidated financial
statements.
Outlook
We expect to begin generating net income during the next 12 months as we
generate increasing revenue from operations through our new and existing
company-owned and franchised restaurants. Notwithstanding the foregoing, in the
event we complete additional acquisitions of controlling or non-controlling
financial interests in other brands through mergers, acquisitions, joint
ventures or other strategic initiatives, such as our acquisition of Fat Patty's,
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
This Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our audited consolidated financial statements, which
have been prepared in accordance with United States generally accepted
accounting principles ("GAAP"). The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. When making these estimates and assumptions,
we consider our historical experience, our knowledge of economic and market
factors and various other factors, that we believe to be reasonable under the
circumstances. Actual results may differ under different estimates and
assumptions.
The accounting estimates and assumptions discussed in this section are those
that we consider to be the most critical to an understanding of our consolidated
financial statements because they inherently involve significant judgments and
uncertainties. For a more complete discussion of our accounting policies and
procedures, see our consolidated financial statements beginning on page F-1 of
this report.
Revenue Recognition
On January 1, 2018, we adopted the provisions of Financial Accounting Standards
Board Accounting Standards Codification ("ASC") Topic 606, Revenue From
Contracts With Customers ("ASC 606"). ASC 606 supersedes the current revenue
recognition guidance, including industry-specific guidance. ASC 606 provides a
single framework in which revenue is required to be recognized to depict the
transfer of goods or services to customers in amounts that reflect the
consideration to which a company expects to be entitled in exchange for those
goods or services.
We adopted this new guidance effective the first day of fiscal year 2018, using
the modified retrospective method of adoption. Under this method, the cumulative
effect of initially adopting the guidance was recognized as an adjustment to the
opening balance of equity at January 1, 2018. Therefore, the comparative period
has not been adjusted and continues to be reported under the previous revenue
recognition guidance. The details of the significant changes and quantitative
impact of the changes are discussed below.
Franchise Fees
ASC 606 impacted the timing of recognition of franchise fees. Under previous
guidance, these fees were typically recognized upon the opening of restaurants.
Under ASC 606, the fees are deferred and recognized as revenue over the term of
the individual franchise agreements. The effect of the required deferral of fees
received in a given year will be mitigated by the recognition of revenue from
fees retrospectively deferred from prior years. As a result of the adoption of
ASC 606, we recognized deferred franchise fees in the amount of $196,478 on our
consolidated balance sheet as of January 1, 2018 and an increase in our
accumulated deficit by the same amount on that date. We recognized a total of
$131,244 of deferred franchise fees as income during the year ended December 31,
2018. Accordingly, the carrying value of our deferred franchised fees was
$65,234 at December 31, 2018. We incurred an increase in our accumulated deficit
by $120,000 for the year ended December 31, 2019, while recognizing a total of
$16,718 of deferred franchise fees as income during the year ended December 31,
2019. Accordingly, the carrying value of our deferred franchised fees was
$168,516 at December 31, 2019.
Advertising Funds
ASC 606 also impacted the accounting for transactions related to our general
advertising fund. Under previous guidance, franchisee contributions to and
expenditures by the fund were not included in our consolidated financial
statements. Under ASC 606, we record contributions to and expenditures by the
fund as revenue and expenses within our consolidated financial statements. We
recognized contributions to and expenditures by the fund of $127,584 and
$189,362 for the years ended December 31, 2019, December 31, 2018, respectively.
34
Gift Card Funds
Additionally, ASC 606 impacted the accounting for transactions related to our
gift card program. Under previous guidance, estimated breakage income on gift
cards was deferred until it was deemed remote that the unused gift card balance
would be redeemed. Under ASC 606, breakage income on gift cards is recognized as
gift cards are utilized. This effect of this change on our consolidated
financial statements was negligible.
Disaggregation of Revenue
The following table disaggregate revenue by primary geographical market and
source:
Year Ended Year Ended
December 31, December 31,
2019 2018
Primary Geographic Markets
Florida $ 17,897,046 $ 5,011,328
Georgia 1,053,739 504,983
Kentucky 2,533,631 856,981
Louisiana 625,227 185,742
North Carolina 1,500
Texas 1,250
West Virginia 6,978,631 2,941,503
Total revenue $ 29,091,024 $ 9,500,537
Sources of Revenue
Restaurant sales $ 28,209,181 $ 8,374,022
Royalties 710,645 787,189
Franchise fees 17,968 131,244
Advertising fund fees 127,584 189,362
Other revenue 25,646 18,720
Total revenue $ 29,091,024 $ 9,500,537
Contract Balances
The following table presents changes in deferred franchise fees as of and for
the year ended December 31, 2019:
Total Liabilities
Deferred franchise fees at January 1, 2019 $ 65,234
Revenue recognized during the period (16,718 )
New deferrals due to cash received 120,000
Deferred franchise fees at December 31, 2019 $ 168,516
Anticipated Future Recognition of Deferred Franchise Fees
The following table presents the estimated franchise fees to be recognized in
the future related to performance obligations that were unsatisfied at December
31, 2019:
Franchise
Year Fees Recognized
2020 $ 24,000
2021 22,925
2022 21,000
2023 18,637
2024 18,000
Thereafter 63,954
Total $ 168,516
35
Acquisition of Fat Patty'sOn August 30, 2018, we acquired all of assets of Fat Patty's. A description of
the transaction is set forth herein under Note 4.
Acquisition of Fat Patty's in our consolidated financial statements.
The acquisition of Fat Patty's was accounted for as a business combination using
the acquisition method of accounting in accordance with Accounting Standard
Codification ("ASC") Topic 805, Business Combinations ("ASC 805"), with us
considered the acquirer of Fat Patty's. In accordance with ASC 805, the assets
acquired and the liabilities assumed have been measured at fair value based on
various preliminary estimates, with the remaining purchase price, if any,
recorded as goodwill. For purposes of measuring the estimated fair value, where
applicable, of the assets acquired and the liabilities assumed as reflected in
our consolidated financial statements, the guidance in ASC 820, Fair Value
Measurements and Disclosures ("ASC 820") has been applied, which establishes a
framework for measuring fair value. In accordance with ASC 820, fair value is an
exit price and is defined as "the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date." We incurred $82,929 of
acquisition-related transaction costs. Pursuant to the provisions of ASC 805,
acquisition-related transaction costs and acquisition-related restructuring
charges were not included as components of consideration transferred but were
accounted for as expenses in the period in which the costs were incurred.
Acquisition of WingHouse
On October 11, 2019, we acquired all of assets of WingHouse. A description of
the transaction is set forth herein under Note 5. Acquisition of WingHouse in
our consolidated financial statements.
The acquisition of WingHouse was accounted for as a business combination using
the acquisition method of accounting in accordance with Accounting Standard
Codification ("ASC") Topic 805, Business Combinations ("ASC 805"), with us
considered the acquirer of Fat Patty's. In accordance with ASC 805, the assets
acquired and the liabilities assumed have been measured at fair value based on
various preliminary estimates, with the remaining purchase price, if any,
recorded as goodwill. For purposes of measuring the estimated fair value, where
applicable, of the assets acquired and the liabilities assumed as reflected in
our consolidated financial statements, the guidance in ASC 820, Fair Value
Measurements and Disclosures ("ASC 820") has been applied, which establishes a
framework for measuring fair value. In accordance with ASC 820, fair value is an
exit price and is defined as "the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date." Pursuant to the provisions of ASC 805,
acquisition-related transaction costs and acquisition-related restructuring
charges were not included as components of consideration transferred but were
accounted for as expenses in the period in which the costs were incurred.
Stock-Based Compensation
We account for employee stock-based compensation in accordance with the fair
value recognition provisions of ASC Topic 718, Compensation - Stock Compensation
("ASC 718"). Under this method, compensation expense includes compensation
expense for all stock-based payments based on the grant-date fair value. Such
amounts have been reduced to reflect our estimate of forfeitures of all unvested
awards.
We account for non-employee stock-based compensation in accordance with ASC 718
and ASC Topic 505, Equity ("ASC 505"). ASC 718 and ASC 505 require that we
recognize compensation expense based on the estimated fair value of stock-based
compensation granted to non-employees over the vesting period, which is
generally the period during which services are rendered by the non-employees.
We use the Black-Scholes pricing model to determine the fair value of the
stock-based compensation that we grant to employees and non-employees. The
Black-Scholes pricing model takes into consideration such factors as the
estimated term of the securities, the conversion or exercise price of the
securities, the volatility of the price of our common stock, interest rates, and
the probability that the securities will be converted or exercised to determine
the fair value of the securities. The selection of these criteria requires
management's judgment and may impact our net income or loss. The computation of
volatility is intended to produce a volatility value that is representative of
our expectations about the future volatility of the price of our common stock
over an expected term. We used our share price history to determine volatility
and cannot predict what the price of our shares of common stock will be in the
future. As a result, the volatility value that we calculated may differ from the
actual volatility of the price of our shares of common stock in the future.
36
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02,
Leases ("ASU 2016-02"), establishing Accounting Standards Codification ("ASC")
Topic 842, Leases ("ASC Topic 842"), which modified and superseded the guidance
under ASC Topic 840, Leases ("ASC Topic 840"). The FASB subsequently issued
several other Accounting Standards Updates, including ASU 2018-11 and ASU
2018-12, which among other things provide for a practical expedient related to
the recognition of the cumulative effect on retained earnings resulting from the
adoption of the pronouncements.
ASC Topic 842 modifies the principles for the recognition, measurement,
presentation, and disclosure of leases for both parties to a contract (i.e.,
lessees and lessors). The new standard requires lessees to apply a dual
approach, classifying leases as either finance or operating leases based on the
principle of whether or not the lease is effectively a financed purchase by the
lessee. This classification determines whether lease expense is recognized based
on an effective interest method or on a straight-line basis over the term of the
lease, respectively. A lessee is also required to record a right-of-use asset
and lease liability for all leases with a term of greater than 12 months
regardless of their classification. Leases with a term of 12 months or less are
accounted for in the same manner as operating leases under ASC Topic 840.
The Company adopted ASC Topic 842 effective January 1, 2019 applying the
modified retrospective transition approach. Under this approach, results for
reporting periods beginning after January 1, 2019, are presented under Topic
842, while prior periods are not adjusted and continue to be reported under the
accounting standards in effect for those periods. The Company recognized
$3,832,779 and $3,832,286 of additional assets and liabilities, respectively, in
connection with its operating leases upon the adoption of ASC Topic 842 on
January 1, 2019. The Company did not recognize any additional assets or
liabilities in connection with its financing lease upon the adoption of ASC
Topic 842 on January 1, 2019.
The Company determines whether a contract is or contains a lease at inception of
the contract based on whether an identified asset exists and whether the Company
has the right to obtain substantially all of the benefit of the assets and to
control its use over the full term of the agreement. When available, the Company
uses the rate implicit in the lease to discount lease payments to present value.
However, none of our leases provide a readily determinable implicit rate.
Therefore, the Company estimated its incremental borrowing rate considering both
the revolving credit rates and a credit notching approach to discount the lease
payments based on information available at lease commencement. There are no
material residual value guarantees and no restrictions or covenants included in
the Company's lease agreements. Certain of the Company's leases include
provisions for variable payments. These variable payments are typically
determined based on a measure of throughput or actual days or another measure of
usage and are not included in the calculation of lease liabilities and
right-of-use assets.
The Company elected the package of practical expedients available for
implementation, which allows for the following:
? An entity need not reassess whether any expired or existing contracts are or
contain leases;
? An entity need not reassess the lease classification for any expired or
existing leases; and
? An entity need not reassess initial indirect costs for any existing leases.
Furthermore, the Company elected the optional transition method to make January
1, 2019 the initial application date of the standard. This package of practical
expedients allows entities to account for their existing leases for the
remainder of their respective lease terms following the previous accounting
guidance.
The Company also elected to adopt the optional transition practical expedient
provided in ASU 2018-01 to not evaluate under ASC Topic 842 for existing or
expired land easements prior to the application date to determine if they meet
the definition of a lease.
The impact of ASC Topic 842 is more specifically described herein under Note 13.
Leases.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee
Share-Based Payment Accounting ("ASU 2018-07"), which expands the scope of ASC
Topic 718, Compensation- Stock Compensation, to include share-based payment
transactions for acquiring goods and services from nonemployees. ASU 2018-07
aligns the measurement and classification guidance for share-based payments to
nonemployees with the guidance for share-based payments to employees, with
certain exceptions. Under the new guidance, the measurement of equity-classified
nonemployee awards is fixed at the grant date. The Company adopted ASU 2018-07
on January 1, 2019. The adoption of ASU 2018-07 did not have a significant
impact on the Company's condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 removes
certain exceptions for recognizing deferred taxes for investments, performing
intra-period allocation and calculating income taxes in interim periods. ASU
2019-12 also provides guidance to reduce complexity in certain areas, including
recognizing deferred taxes for tax goodwill and allocating taxes to members of a
consolidated group. ASU 2019-12 is effective for interim and annual periods
beginning after December 15, 2020. Early adoption is permitted and any
adjustments should be reflected as of the beginning of the annual period of
adoption. Amendments relevant to the Company should be applied on a prospective
basis. The Company is currently assessing the impact of adopting this standard,
but does not expect the adoption of this guidance to have a material impact on
its consolidated financial statements.
37
The Company reviewed all other significant newly-issued accounting
pronouncements and concluded that they either are not applicable to the
Company's operations or that no material effect is expected on the Company's
condensed consolidated financial statements as a result of future adoption.
Comparison of the Years Ended December 31, 2019 and 2018
Revenue
Revenue consists primarily of proceeds from the sale of food and beverage
products by our company-owned restaurants and concession stands, and royalty
payments, franchise fees and ad fund fees that we receive from our franchisees.
Revenue increased $19,590,487 to $29,091,024 for the year ended December 31,
2019 from $9,500,537 for the year ended December 31, 2018. The increase of
$19,590,487 was due to increase of $19,835,159 for sales of food and beverage
products by our company-owned restaurants offset by decreases of $244,672 for
franchise and other revenue. The increase in sales of food and beverage products
was attributable to the restaurants that we acquired through our acquisition of
Fat Patty's and WingHouse, which contributed $18,082,856 of sales of food and
beverages, and an increase of $1,752,303 for sales of food and beverages at our
company-owned Dick's Wings and Tilted Kilt restaurants and concession stands.
The decrease in franchise and other revenue was due primarily to decreases of
$61,778 for ad fund fees and $113,276 for franchise fees that were recognized
beginning January 1, 2018 due to the implementation of ASC 606, and a decrease
in royalties of 69,618.
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 our Dick's Wings company-owned
restaurants and concession stands and our Fat Patty's and WingHouse
company-owned restaurants. Restaurant operating costs increased $19,079,998 to
$27,279,622 for the year ended December 31, 2019 compared to $8,199,624 for the
year ended December 31, 2018. Restaurant operating costs consisted of $9,705,951
for cost of sales, $9,579,783 for labor expenses, $1,452,731 for occupancy
expenses, and $6,541,157 for other operating expenses for the year ended
December 31, 2019. Restaurant operating costs consisted of $3,248,801 for cost
of sales, $2,801,867 for labor expenses, $308,295 for occupancy expenses, and
$1,840,661 for other operating expenses for the year ended December 31, 2018.
The increase of $19,079,998 was due to increases of $11,814,129 associated with
the operation of the restaurants that we acquired through our acquisition of
WingHouse, an increase of $5,518,935 associated with the operation of the
restaurants through our acquisition of Fat Patty's, $1,813,026 associated with
the operation of our Dick's Wings company- owned restaurants and concession
stands, and $529,438 increase associated with Tilted Kilt restaurant.
Professional Fees. Professional fees consist of fees paid to attorneys,
independent accountants, investment banks and placement agents, technology
consultants and other professionals and consultants. Professional fees decreased
$271,408 to $525,065 for the year ended December 31, 2019 from $796,473 for the
year ended December 31, 2018. The decrease of $271,408 was due primarily to
increases of $17,299 for legal fees, $6,366 for accounting fees, and $17,640 for
appraisal fees, offset by decreases of $35,121, for consulting fees, $11,906 for
other professional fees, and $265,685 for stock compensation expense associated
with the discontinued capital-raising program. We expect our professional fees
to decrease during the next 12 months due to the Covid-19 pandemic.
Employee Compensation Expense. Employee compensation expense consists of
salaries, hourly wages, bonuses and other cash compensation, equity-based
compensation and employee benefits paid or granted to our executive officers and
non-restaurant employees, and the related payroll taxes. Employee compensation
expense increased $785,245 to $1,349,766 for the year ended December 31, 2019
from $564,521 for the year ended December 31, 2018. The increase of $785,245 was
due primarily to that we acquired Fat Patty's and WingHouse restaurants.
General and Administrative Expenses. General and administrative expenses consist
of ad fund expenses, selling commissions and expenses, marketing and advertising
expenses, acquisition-related transaction costs, bank service charges, computer
and internet expenses, dues and subscriptions, licenses and filing fees,
insurance expenses, SEC filing expenses, stock listing expenses, investor
relations expenses, shareholder meeting expenses, office supplies, rent expense,
repairs and maintenance expenses, telephone expenses, travel expenses, utilities
expenses and other miscellaneous general and administrative expenses. General
and administrative expenses increased $608,329 to $1,326,893 for the year ended
December 31, 2019 from $718,563 for the year ended December 31, 2018. The
increase of $608,329 was due primarily to increases of $357,554 for marketing
and advertising expenses, $64,454 increase in travel expenses, and $35,614 in
rental expenses for the corporate office. We expect general and administrative
expenses to continue to increase during the next 12 months as we incur
increasing expenses for commissions paid to the owner of our concession stands
at TIAA Bank Field, our ad fund, marketing and advertising, investor relations,
travel, rent, office supplies, insurance and other miscellaneous items
associated with the general growth of our business and operations.
38
Interest Expense
Interest expense consists of the interest that we record under the master lease
agreement that we entered into with Store Capital in August 30, 2018 in
connection with the acquisition of Fat Patty's, our outstanding debt
obligations, and our outstanding settlement agreements payable and accrued legal
contingencies. In addition, ARC WingHouse issued a promissory note in favor of
City National Bank in the amount of $12,250,000 (the "CNB Note"), as a result of
the WingHouse acquisition. Interest accrues under the CNB Note at a rate of six
percent (6%) per annum. Interest expense increased $785,823 to $1,016,079 for
the year ended December 31, 2019 from $230,256. The increase of $785,823 was due
primarily for interest that we record under our master lease agreement with
Store Capital, and the CNB Note. We expect interest expense to continue to
increase during the next 12 months as we continue to record interest under our
master lease agreement with Store Capital, and the CNB Note.
Gain on Bargain Purchase
Gain on bargain purchase consists of the gain that we recognized in connection
with the acquisition of Fat Patty's on August 30, 2018. The fair value of the
identifiable assets acquired and liabilities assumed of $1,476,952 exceeded the
purchase price of Fat Patty's by $624,952. As a result, we recognized a gain of
$624,952 during the year ended December 31, 2018. We did not recognize any gain
on bargain purchase during the year ended December 31, 2019. We do not expect to
recognize any additional gains on bargain purchases during the next 12 months. A
description of the bargain purchase is set forth herein under Note 4.
Acquisition of Fat Patty's in our consolidated financial statements.
Net (Loss) / Income
We generated a net loss of $2,644,446 during the year ended December 31, 2019
and a net loss of $282,483 during the year ended December 31, 2018. The
difference of $627,223 was due primarily to increases of $5,008,839 for
restaurant operating costs, $388,961 for professional fees, $175,577 for
employee compensation expense, $363,613 for general and administrative expenses,
$200,276 for interest expense, and decreases of $251,238 for gain on write-off
of accounts payable and $150,000 for gain on write-off of stock subscriptions
payable. This was partially offset by increases of $5,242,960 for revenue, and
$624,952 for gain on bargain purchase. Notwithstanding the foregoing, in the
event we complete additional acquisitions of controlling or non-controlling
financial interests in other brands through mergers, acquisitions, joint
ventures or other strategic initiatives, such as our recently completed
acquisition of Fat Patty's, and WingHouse, 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.
Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through cash
generated by our operations, private sales of equity securities and the use of
short- and long-term debt.
Net cash provided by operating activities was $330,606 during the year ended
December 31, 2019 compared to $478,238 during the year ended December 31, 2018.
The decrease of $147,632 was due primarily to decreases of $511,786 for accounts
payable and accrued liabilities, $2,361,963 for net loss, $132,281 for debt
discount amortization, $17,088 for stock-based compensation expense, $175,682
for accounts receivable, $70,947 for deposits, $100,000 for gain from insurance
recoveries, $38,532 for gift card liabilities, and 28,727 for ad fund
receivable. This was partially offset by increases of $624,952 for gain on
bargain purchase, $359,023 for depreciation expense, $538,663 for other
receivables, $183,968 for inventory, $404,945 for prepaid expenses, $35,735 for
other assets, and $907,562 for amortization.
Net cash used by investing activities was $11,911,566 during the year ended
December 31, 2019 compared to net cash used by investing activities of $460,125
during the year ended December 31, 2018. The increase of $11,451,441 for net
cash used by investing activities was due primarily to the acquisition of
WingHouse of $11,000,000, $39,044 for repayments of notes receivable, increases
of $663,739 for purchases of fixed assets, offset by $144,326 of contingent
consideration, and $100,000 for insurance recoveries.
Net cash provided by financing activities was $14,605,798 during the year ended
December 31, 2019 compared to net cash provided by financing activities of
$181,769 during the year ended December 31, 2018. The difference of $14,424,029
was due to an increase of $12,807,098 for proceeds from notes payable issued for
the WingHouse acquisition, $1,828,104 for proceeds from notes payable issued to
related parties, $114,090 for payments on capital lease obligation, partially
offset by a decrease of $149,499 for payments on operating lease liability, and
$175,764 for payments on financing lease liability.
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Our primary sources of capital since January 1, 2017 are set forth below.
During the year ended December 31, 2017, we borrowed $61,721 under our credit
facility with Blue Victory and repaid $77,824 to Blue Victory under the credit
facility. There was no principal outstanding under the credit facility at
December 31, 2017. We did not borrow any funds under the credit facility during
the year ended December 31, 2018. Accordingly, there was no principal
outstanding under the credit facility at December 31, 2018 or December 31, 2019.
A summary of the terms of our credit facility with Blue Victory is set forth
herein under Note 12. Debt Obligations in our consolidated financial statements.
During the year ended December 31, 2017, we borrowed $372,049 from Blue Victory
and repaid $341,546 to Blue Victory under a separate loan. Accordingly, the
amount of principal outstanding under the loan was $30,503 at December 31, 2017.
We repaid the loan in full in February 2018. A summary of the terms of our loan
from Blue Victory is set forth herein under Note 12. Debt Obligations in our
consolidated financial statements. We borrowed $277,707 and repaid $71,877 under
the loan during the year ended December 31, 2018. Accordingly, the amount of
principal outstanding under the loan was $236,333 at December 31, 2018.
On August 30, 2018, we entered into a secured convertible promissory note with
Seenu G. Kasturi pursuant to which we borrowed $622,929 to help finance the
acquisition of Fat Patty's, all of which was outstanding at December 31, 2018. A
description of the note is set forth herein under Note 4. Acquisition of Fat
Patty's in our consolidated financial statements.
On October 11, 2019, ARC WingHouse entered into a Loan Agreement (the "Loan
Agreement") with City National Bank of Florida ("City National Bank") pursuant
to which the Company borrowed $12,250,000 (the "Loan") to help fund the
acquisition of the WingHouse Concept. A description of the loan agreement is set
forth herein under Note 5. Acquisition of WingHouse in our consolidated
financial statements.
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 restaurant operating costs, professional fees,
employee compensation expenses, and general and administrative expenses
discussed above. We intend to continue to rely upon each of these sources to
fund our operations and expansion efforts.
We can provide no assurance that these sources of capital will be adequate to
fund our operations 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 December 31, 2019, we did not have any relationships with unconsolidated
entities or financial partners, such as entities often referred to as structured
finance or special purpose entities, that had been established for the purpose
of facilitating off-balance sheet arrangements or for other contractually narrow
or limited purposes. As such, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.
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