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EX-31.1 - EXHIBIT 31.1 - ARC Group, Inc.t1600152_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - ARC Group, Inc.t1600152_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - ARC Group, Inc.t1600152_ex32-1.htm
EX-23.1 - EXHIBIT 23.1 - ARC Group, Inc.t1600152_ex23-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

 

 

(Mark One)

 

xAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended:   December 31, 2015  

 

¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                        to                       .

 

Commission File Number:   000-54226  

 

 

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

 

  Nevada   59-3649554  
  (State or other jurisdiction   (I.R.S. Employer Identification No.)  
  of incorporation or organization)      
         
  212 Guilbeau Road      
  Lafayette, LA   70506  
  (Address of principal executive offices)   (Zip Code)  

 

  (904) 741-5500  
  (Registrant’s Telephone Number, Including Area Code)  
     
  Securities registered under Section 12(b) of the Act:  

 

  Title of each class:   Name of each exchange on which registered:  
         
  None   Not Applicable  

 

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

 

  Class A Common Stock, $.01 par value per share  
  (Title of Class)  

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes        x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ¨ Yes        x No

 

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 1934 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 Web site, 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 if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained herein, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was sold as of the last business day of the registrant’s most recently completed second fiscal quarter, which was June 30, 2015, was $1,942,663. Shares of common stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates of the registrant.  This determination of affiliate status is not a conclusive determination for other purposes.

 

As of April 11, 2016, 6,592,464 shares of the registrant’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
  PART I
     
Item 1. Business 3
     
Item 1A. Risk Factors 13
     
Item 1B. Unresolved Staff Comments 32
     
Item 2. Properties 32
     
Item 3. Legal Proceedings 33
     
Item 4. Mine Safety Disclosures 33
     
  PART II  
     
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 34
     
Item 6. Selected Financial Data 35
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
     
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44
     
Item 8. Financial Statements and Supplementary Data 44
     
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 44
     
Item 9A. Controls and Procedures 44
     
Item 9B. Other Information 46
     
  PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 47
     
Item 11. Executive Compensation 50
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 53
     
Item 13. Certain Relationships and Related Transactions, and Director Independence 55
     
Item 14. Principal Accounting Fees and Services 59
     
  PART IV  
     
Item 15. Exhibits, Financial Statement Schedules 61

 

 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

·market acceptance of our restaurants and products;

 

·food safety issues and other health concerns;

 

·the cost of food and other commodities;

 

·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 franchisees’ ability to identify suitable restaurant sites and open new restaurants;

 

·our franchisees’ ability to open new restaurants and operate them in a profitable manner;

 

·our limited control over the activities of our franchisees;

 

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

 

·our ability 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;

 

·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 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 1A. Risk Factors. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-looking statements.

 

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PART I

 

Item 1.Business.

 

Overview

 

We were formed in April 2000 to develop the Dick’s Wings concept, and are the operator and franchisor of the Dick’s Wings brand of restaurants. Our concept is currently comprised of 22 franchised restaurants and two concession stands located in the States of Florida and Georgia. 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®.

 

Strategy

 

Our plan is to grow our company from a primarily Florida-based franchisor of Dick’s Wings restaurants into a diversified restaurant 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 Unites States.

 

The first major component of our growth strategy is the continued improvement 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. We believe there are meaningful opportunities to grow the number of Dick’s Wings restaurants, and are in the process of implementing a rigorous and disciplined approach to drive franchising sales in the United States. In our existing markets, we plan to continue to open new franchise 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. We plan to open several new Dick’s Wings restaurants in the United States during our 2016 fiscal year.

 

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 a 50% ownership interest in Paradise on Wings Franchise Group, LLC, a Utah limited liability company that is the franchisor of the Wing Nutz brand of restaurants (“Paradise on Wings”), in January 2014. 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 will 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 franchised 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. A description of our investment in Paradise on Wings is set forth herein under Note 4 – Investment in Paradise on Wings in our financial statements.

 

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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 currently have 22 Dick’s Wings & Grill full service 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 at EverBank Field are located in Florida as well. All of our restaurants are owned by franchisees, and our concession stands at EverBank Field are licensed to a third-party operator.

 

Our restaurants typically range in size from 3,500 to 5,500 square feet and require an initial capital investment per restaurant of between $229,500 and $772,500. The initial capital investment is comprised of cash pre-opening costs and build-out costs. Factors contributing to the fluctuation in the initial capital investment per location include the size of the property, the geographical location, the type of construction, the cost of liquor and other licenses, and the type and amount of concessions, if any, received from landlords. We offer lower cost conversion packages that provide our franchisees with flexibility to convert existing restaurants into a Dick’s Wings restaurant. Because of this, some of our restaurants may be smaller or larger or cost more or less than the typical ranges.

 

Dick’s Wings Menu

 

Our restaurants feature a variety of menu items highlighted by our traditional and boneless Buffalo, New York-style chicken wings spun in one of our signature sauces and seasonings. Our sauces and seasonings range in heat intensity from sweet to blazing hot and include such flavors as Bourbon, Cajun Ranch, Caribbean Gold, Caribbean Jerk, Charlie Chan, Florida Girl, Garlic Parmesan, Georgia Girl, Gold Rush, Honey BBQ, Jamaican Jerk, Lemon Pepper, Mango Habanero, Margarita Ranch, Ragin’ Cajun, Raspberry, Sesame, Smokey Mountain Gold, Sriracha, Teriyaki and Victory Lane. These sauces and seasonings can be blended together to create more than 365 flavors. Our sauces and seasonings complement and distinguish our wings and other menu offerings to create a bold flavor profile for our guests. Other menu items that we offer include chicken tenders, quesadillas, specialty burgers and sandwiches, salads, wraps, flatbreads and desserts. We also provide kids meal options for children. All of our restaurants offer an extensive selection of domestic, imported and craft beers and wine, and several of our restaurants feature a full bar offering a variety of liquor and spirits. We also introduce new menu items from time to time.

 

We are focused on continually elevating our unique and high-quality food and beverage offerings. Our goal is to balance the established menu offerings that appeal to our loyal guests with new menu items, like our Dick’s Blingz® boneless chicken wings, that increase guest frequency and attract new guests. We believe that the development of new products can drive traffic by expanding our customer base and help us continue to build brand leadership in food quality and taste. For all new menu roll-outs, new product launches are combined with a new menu design and updated pricing to reflect the current economic environment, as well as our current strategic marketing and creative plan. All of our menu items are made-to-order and are available for take-out.

 

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Restaurant Atmosphere

 

We offer our customers a casual, family-fun restaurant environment designed to appeal to both families and sports fans alike. Our full service restaurants have a children’s area filled with video games and other forms of children’s entertainment that is visible from each of the tables in the restaurant, making our restaurants an ideal place for families to take their children. Our full service restaurants also have high-definition televisions located throughout the restaurants, making our restaurants an ideal gathering place for sports enthusiasts. We tailor the content and volume of our video and audio programming to reflect our guests’ tastes. We believe the design of our restaurants enhances our guests’ experiences, drives repeat visits, and solidifies the broad appeal of our brand.

 

Branding

 

We established our Dick’s Wings brand through coordinated marketing and operational execution that ensures brand recognition, quality and consistency throughout our concept. These efforts include marketing programs and advertising to support our restaurants. We prominently feature our Dick’s Wings logos, checkered flags, sports memorabilia, televisions and exterior trade dress at our restaurants and as branding for our marketing and advertising materials. Our brand is further strengthened by our emphasis on operational excellence supported by operating guidelines and employee training in our restaurants. We believe our brand has broad appeal because it attracts customers of all ages, our menu offers a variety of items, and our distinctive sauces allow guests to customize their experience, appealing to many tastes. Our distinctive concept, combined with our high-quality food, makes Dick’s Wings appeal to families, children, teenagers and adults of all ages and socio-economic backgrounds.

 

Franchisees and Franchise Agreements

 

Our franchise program is designed to promote consistency and quality. We believe that it is important to maintain strong and open relationships with our franchisees. To this end, we invest a significant amount of time working with our franchisees on key aspects of the business, including products, equipment, operational improvements and standards, and management techniques. Franchisees are approved on the basis of their business background, evidence of restaurant management experience, net worth and capital available for investment in relation to the scope of the proposed business relationship. Franchisees can range in size from individuals owning a single restaurant to larger corporate entities owning several restaurants.

 

Franchisees are required to execute a franchise agreement covering a standard set of terms and conditions prior to opening a Dick’s Wings restaurant. Under our franchise agreement, we grant franchisees the right to operate restaurants using the “Dick’s Wings” trademarks, trade dress and other intellectual property within the Dick’s Wings system, which includes uniform operating procedures, standards for consistency and quality of products, technical knowledge, and procedures for accounting, inventory control and management. In return, franchisees supply capital, initially by paying a franchisee fee to us in the amount of $35,000, purchasing or leasing the land, and purchasing the building, equipment, signs, seating, inventories and supplies, and, over the longer term, by reinvesting in the business. Franchisees are required to make weekly royalty payments to us in an amount equal to five percent of the gross revenue they generate during the applicable week. They are also required to spend at least two percent of their gross revenue on local advertising and contribute at least one percent, but not more than two percent, of their gross revenue to our general advertising fund.

 

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Our franchise agreements require that each franchised restaurant be operated in accordance with our defined operating procedures, adhere to the menu established by us, meet applicable quality, service, health and cleanliness standards, and comply with all applicable laws. We have the right to terminate a franchise agreement if the franchisee fails to pay us royalties, make contributions and expenditures for advertising, or otherwise operate and maintain its restaurant in accordance with the requirements of the agreement. Franchise agreements are not assignable without our consent, and we have a right of first refusal if a franchisee proposes to sell a restaurant. The initial term of the typical franchise agreement is 10 years with a 10-year renewal option for the franchisee, subject to conditions contained in the franchise agreement.

 

We also offer area development agreements pursuant to which we grant franchisees the right to open a specified number of Dick’s Wings restaurants within an exclusive development area in accordance with a specified development schedule. Our area development agreement establishes the number of restaurants that must be developed within a defined geographic area and the deadlines by which these restaurants must open. Franchisees that enter into an area development agreement pay us an initial franchise fee of $35,000 for the first restaurant and an area development fee determined by multiplying $15,000 by the number of additional restaurants to be opened in the area. Each time a new restaurant is opened, a credit in the amount of $15,000 is applied towards the $35,000 initial franchise fee payable in connection with the opening of the restaurant. The area development agreement can be terminated by us if, among other reasons, the area developer fails to open restaurants on schedule.

 

Site Selection

 

Our site selection process is integral to the successful execution of our growth strategy. The process begins with the selection of a proposed site by our franchisee. Once a site proposal package is submitted to us by the franchisee, we review the proposal to determine whether or not we will accept it. Criteria that we consider include:

 

·local market demographics, population density and psychographic profiles;

 

·occupancy rates and projected growth rates in the trade area;

 

·the location and performance of big box retailers and nationally branded peers;

 

·available square footage, parking and lease economics;

 

·local investment and operating costs;

 

·development and expansion constraints;

 

·vehicle traffic patterns, visibility and access;

 

·regional consumer trends and preferences;

 

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·those characteristics that are similar to our most successful existing restaurants; and

 

·other quantitative and qualitative measures.

 

We employ an opportunistic approach to site location through our preference for end caps, freestanding units and conversions in both urban and suburban trade areas.

 

Operations

 

We believe that operational excellence is critical to our long-term success. We define operational excellence as an uncompromising attention to the details of our recipes, food preparation, cooking procedures, handling procedures, sanitation, cleanliness and safety. Our operations strategy is designed to drive best-in-class restaurant operations by our franchisees and improve friendliness, cleanliness, speed of service and overall guest satisfaction to drive long-term growth.

 

Our restaurants are required to be operated in accordance with uniform operating standards and specifications relating to the selection, handling and preparation of menu items, food quality and safety, signage, decor, equipment maintenance, cleanliness, uniforms, suppliers, facility standards, customer service and accounting controls. We issue detailed operations manuals to our franchisees covering all aspects of our restaurant operations, as well as food and beverage manuals that detail the preparation procedures of our recipes. Each franchisee is required to furnish us with weekly sales and operating reports that assist us in monitoring the franchisee’s compliance with its franchise agreement. We make both announced and unannounced inspections of our restaurants to ensure that our practices and procedures are being followed. We systematically review the performance of our restaurants to ensure that each one meets our standards and conduct meetings with our franchisees to discuss the results of our reviews. When a restaurant falls below minimum standards, we conduct a thorough analysis to determine the causes, and implement marketing and operational plans to improve the restaurant’s performance. If the restaurant’s performance does not improve to acceptable levels, the restaurant is evaluated for relocation or closing.

 

An important aspect of our concept is the efficient design, layout and execution of our kitchen operations. Due to the relatively simple preparation of our menu items, the kitchen consists of fryers, grills and food preparation stations that are arranged assembly-line style for maximum productivity. Given our menu and kitchen design, our kitchens are staffed with hourly employees who require only basic training before reaching full productivity. We do not require the added expense of an on-site chef. The ease and simplicity of our kitchen operations allows us to achieve our goal of preparing quality food with minimal wait times.

 

Training

 

Our training program is available to all of our franchisees and their staff. It offers food safety, quality assurance and other programs that are designed to ensure that our franchisees and their staff are trained in proper food handling techniques. Before a restaurant opens for business, each franchisee must attend and successfully complete our training program. The training program is conducted in Jacksonville, Florida and lasts for between two and four weeks, unless we determine that additional training is needed. During our training program, we describe our philosophies and policies for administration, marketing, general manager tasks, operations by position, food preparation, set up and closing procedures, cleaning and sanitation, food borne illnesses and employee hygiene. We also utilize operation simulations. We offer customized instruction as needed and offer additional or refresher training courses from time to time. Our franchisees are certified in comprehensive state-approved food safety and sanitation courses, such as ServSafe, developed by the National Restaurant Association.

 

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Marketing and Advertising

 

We market our Dicks’ Wings restaurants as family fun fooderys® where both families and sports fans can go to have a unique and enjoyable restaurant experience from first bite to last call. Our marketing programs are designed to differentiate our Dick’s Wings restaurants from the restaurants of our competitors and showcase our food and brand in a family fun atmosphere. These efforts include marketing campaigns and advertising to support our restaurants. The primary goal of these efforts is to build brand awareness throughout the areas where we have restaurants located. Our marketing and advertising campaigns are also designed to: (i) support strong restaurant openings, (ii) drive positive same-store sales through additional visits by our existing guests and visits by new guests, (iii) increase average order size, and (iv) increase profit margins. Given our strategy to be a neighborhood destination, community marketing is key to driving sales and developing brand awareness in each market.

 

Our marketing strategy is fact-based, using consumer insights to build brand affinity and drive menu optimization. Local advertising is developed and implemented by our franchisees, and includes such events as live bands, car shows, pay-per-view television events and pool tournaments. System-wide marketing, advertising and promotions are developed and implemented by us through the use of our general advertising fund, which we use to pay for advertising costs, sales promotions, market research and other support functions. We implement periodic promotions as appropriate to maintain and increase the sales and profits of our franchisees and strengthen our brands. We also rely on outdoor billboard, direct mail and email advertising, as well as radio, newspapers, digital coupons, search engine marketing and social media such as Facebook® and Twitter®, as appropriate, to attract and retain customers for our franchisees. As part of our marketing strategy, we provide our franchisees with advertising support and guidance to ensure that a consistent message is being delivered to the public.

 

Supply and Distribution

 

We strive to maintain high quality standards. In furtherance of this, we establish the standards and specifications for most of the products used in the development and operation of our restaurants and for the direct and indirect sources of most of those items. In general, we approve the manufacturers and suppliers of the food, packaging and equipment products and other products used in our restaurants, as well as the distributors of these products to our restaurants. We also have the right to require, and generally do require, that our franchisees purchase products and services only from manufacturers and suppliers that we approve. We have arranged for our franchisees to purchase food, supplies and paper goods from Florida Food Service, Inc., and purchase soda beverages from The Coca-Cola Company. These requirements help us assure the quality and consistency of the products sold at our restaurants, and help us protect and enhance the image of the Dick’s Wings concept and brand.

 

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We provide detailed specifications to suppliers for our food ingredients, products and supplies. To maximize our purchasing efficiencies and obtain the lowest possible prices for our ingredients, products and supplies, we negotiate prices based on system-wide usage for our franchised restaurants. Suppliers are chosen based upon their ability to provide competitive pricing, a continuous supply of product that meets all safety and quality specifications, logistics expertise and freight management, customer service, and transparency of business relationships. We have not experienced any significant continuous shortages of supplies, and believe that competitively priced, high quality alternative suppliers are available should the need arise. We do not utilize the services of any purchasing or distribution cooperatives.

 

Information Technology

 

All of our restaurants are equipped with a computerized point-of-sale system. Our point-of-sale system provides effective communication between the kitchen and the server, allowing employees to serve customers in a quick and consistent manner while maintaining a high level of control. It includes a back office system that has the capability to provide support for inventory, payroll, accounts payable, cash management and management reporting functions. The system also helps dispatch and monitor delivery activities in our restaurants. Our point-of-sale system provides us with the ability to generate weekly and period-to-date operating results on a company-wide, brand-wide, regional or individual restaurant basis. This enables us to closely monitor sales, food and beverage costs, and labor and operating expenses at each of our restaurants. Our point-of-sale system runs on non-proprietary hardware with open architecture and offers intuitive touch screen interface and integrated credit and gift card processing.

 

We intend to implement additional technology-enabled business solutions in the future targeted at improved financial control, cost management, enhanced guest service and improved employee effectiveness. These solutions will be designed to be used across all of our restaurants and brands. Our strategy is to fully integrate the systems to drive operational efficiencies and enable restaurant teams to focus on restaurant operations excellence.

 

Intellectual Property

 

We own U.S. registered trademarks for many of the logos, designs and expressions that identify the products and services that we use in our business, including “Dick’s Wings” and “Dick’s Wings & Grill”, and have several U.S. registered trademark applications pending. We also have common law trademark rights for certain of our proprietary marks. We believe that our trademarks have significant value and are important to our business. Our policy is to pursue registration of our important trademarks whenever feasible and to oppose vigorously any infringement of our trademarks. Under current law and with proper use and registration, our rights in our trademarks will generally last indefinitely. The use of these trademarks by our franchisees has been authorized in our franchise agreements.

 

We may rely, and in some circumstances do rely, on trade secrets and common law rights to protect our intellectual property. We have established the standards and specifications for most of the goods and services used in the development, improvement and operation of our Dick’s Wings restaurants. These proprietary standards, specifications and restaurant operating procedures are trade secrets owned by us. We protect our trade secrets and proprietary information, in part, by entering into confidentiality agreements with our employees and franchisees, and have included confidentiality provisions in our franchise agreements. We also seek to preserve the integrity and confidentiality of our proprietary information by maintaining physical security of our premises and physical and electronic security of our information technology systems. Notwithstanding these protective measures, trade secrets and proprietary rights can be difficult to enforce. While we have confidence in the protective measures that we have implemented, our agreements and security measures may be breached, and we may not have adequate remedies for any such breach.

 

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Competition

 

The restaurant industry is fragmented and intensely competitive. We compete directly with Buffalo Wild Wings, Hooters, Hurricane Grill & Wings, Wings ‘N More, Wings ‘n Things, Wingstop and other restaurants offering chicken wings as one of their primary food offerings. We also compete with local and regional sports bars and national casual dining establishments, and to a lesser extent with quick service restaurants such as wing-based take-out concepts. Furthermore, because the restaurant industry has few barriers to entry, new competitors may emerge at any time. We compete with other restaurants and retail establishments on the basis of taste, quality and price of food offered, menu offering, perceived value, service, atmosphere, location and overall dining experience. We also compete with other restaurants and retail establishments for qualified franchisees, site locations and employees to work in our restaurants.

 

Many of our direct and indirect competitors are well-established national, regional and local restaurant chains that have been in business longer than we have, have greater consumer awareness than we do, and have substantially greater capital, marketing and human resources than we do. Due to the continuing difficult economic environment for casual dining restaurants, coupled with continuing pressure on consumer spending at restaurants in general, we expect that our larger chain restaurant competitors will continue to allocate substantial financial resources to their national media advertising and discounting programs in order to protect their respective market shares. Notwithstanding this, we believe that our attractive price-value relationship, the atmosphere of our restaurants, our focus on customers, and the quality and distinctive flavor of our food differentiates us from our competitors.

 

Government Regulation

 

The restaurant industry is subject to numerous federal, state and local laws and regulations relating to health, safety, sanitation, and building and fire codes, including compliance with applicable zoning, land use and environmental laws and regulations. Each of our franchisees is required to obtain various permits and licenses as part of its compliance with these laws and regulations. Difficulties experienced by our franchisees in obtaining, or the failure by our franchisees to obtain, required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. We have implemented policies, procedures and training to help ensure that our franchisees comply with these laws and regulations.

 

Our restaurants are also subject to licensing and regulation by federal, state and local departments relating to alcoholic beverages. Our franchisees must obtain appropriate licenses from regulatory authorities allowing them to sell liquor, beer and wine at our restaurants. These licenses must be renewed annually and may be suspended or revoked at any time. In addition, alcoholic beverage control regulations affect many aspects of our restaurant operations, including the minimum age of patrons and employees, hours of operation, advertising, trade practices, wholesale purchasing, inventory control, and the handling, storage and dispensing of alcoholic beverages. We and our franchisees may also be subject in certain states to “dram-shop” statutes, which generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.

 

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We and our franchisees are subject to federal and state employment laws and regulations, such as the Fair Labor Standards Act and the Immigration Reform and Control Act.  These laws and regulations govern such matters as wage and hour requirements, workers’ compensation insurance, unemployment and other taxes, working and safety conditions, and citizenship and immigration status. A significant number of our franchisees’ service, food preparation and other employees are paid at rates related to the federal minimum wage, which is currently $7.25 per hour. The amount that our franchisees must pay these employees is influenced by the tip credit allowance, which is the amount that an employer is permitted to assume an employee receives in tips when the employer calculates the employee’s hourly wage for minimum wage compliance purposes. Increases in the federal minimum wage, directly or by either a decrease in the tip credit amount or an insufficient increase in the tip credit amount to match an increase in the federal minimum wage, would increase our franchisees’ labor costs. In addition, employee claims based on, among other things, discrimination, harassment, wrongful termination, wage and hour requirements, and payments to employees who receive gratuities, may divert financial and management resources and adversely affect our operations or those of our franchisees.

 

We and our franchisees must comply with applicable requirements of the Americans with Disabilities Act and related state accessibility statutes. Under the Americans with Disabilities Act and related state laws, we and our franchisees must provide equivalent service to disabled persons and make reasonable accommodation for their employment, and when constructing or undertaking significant remodeling of our restaurants, we must make those facilities accessible. We and our franchisees must also comply with other anti-discrimination laws and regulations, such as the Civil Rights Act and the Age Discrimination Act, which mandate that people be dealt with on an equal basis regardless of such personal traits as sex, age, race, ethnicity, nationality, sexual orientation and gender identity.

 

Our franchising activities are subject to the rules and regulations of the Federal Trade Commission (the “FTC”) as well as the rules and regulations of the states in which we operate. The FTC’s “Franchise Rule” and other federal and state laws regulate the sale of franchises, require registration of the franchise disclosure document with state authorities, and require the delivery of a franchise disclosure document to prospective franchisees. These state laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise, and the ability of a franchisor to designate sources of supply.

 

The operation of our restaurants is subject to laws and regulations relating to nutritional content, nutritional labeling, product safety, menu labeling and other regulations imposed by the Food and Drug Administration (the “FDA”), including the Food Safety Modernization Act. Regulations relating to nutritional labeling may lead to increased operational complexity and expenses and may impact our franchisees’ sales.

 

We and our franchisees are also subject to laws relating to information security, privacy, cashless payments and consumer credit, protection and fraud. An increasing number of governments and industry groups worldwide have established data privacy laws and standards for the protection of personal information, including social security numbers and financial information.

 

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Environmental Matters

 

We and our franchisees are subject to various federal, state and local environmental regulations, and increasing focus by U.S. governmental authorities on environmental matters is likely to lead to new governmental initiatives. Various laws concerning the handling, storage and disposal of hazardous materials and restaurant waste and the operation of restaurants in environmentally sensitive locations may impact aspects of our and our franchisees’ operations. To the extent these initiatives cause an increase in our franchisees’ supply or distribution costs, they may impact our business both directly and indirectly. However, we do not expect compliance with applicable environmental regulations to have a material effect on our capital expenditures, financial condition, results of operations, or competitive position.

 

Acquisitions

 

In January 2014, we acquired a 50% interest in Paradise on Wings, which is the franchisor of the Wing Nutz® brand of restaurants, for $400,000 in cash and $400,000 in shares of our common stock. The Wing Nutz concept is comprised of family-friendly, sports-themed restaurants offering a large selection of premium baked chicken wings, boneless wings, hog wings, chicken tenders, wraps, salads, nachos, sandwiches, quesadillas and other baked products. It also offers its own proprietary line of craft beers under the name “Nut Job Beers”. Wing Nutz currently has nine restaurants in Utah and one restaurant in each of Texas, Nevada and Idaho. A description of our investment in Paradise on Wings is set forth herein under Note 4 – Investment in Paradise on Wings in our financial statements.

 

We intend to acquire additional restaurant brands offering us product and geographic diversification during the next 12 months.

 

Seasonality

 

We do not consider our business to be seasonal to any material degree.

 

Employees

 

As of April 11, 2016, we had a total of five employees, four of whom were full-time employees and one of which was a part-time employee. We also utilize the services of consultants. Our franchisees are independent business owners, so their employees are not employees of ours and, therefore, are not included in our employee count. None of our employees are represented by a labor union, and we have never experienced a work stoppage. We believe that our relations with our employees are good.

 

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Available Information

 

We file reports and other materials with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements. We make available free of charge through our website at www.dickswingsandgrill.com all materials that we file electronically with the SEC as soon as reasonably practicable after electronically filing or furnishing such material with the SEC. These materials are also available on the SEC’s website at www.sec.gov, and may be read and copied by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330.

 

The information contained on, or accessible through, our website and the SEC’s website does not constitute a part of this report. The inclusion of our website and the SEC’s website in this report is an inactive textual reference only.

 

Item 1A.Risk Factors

 

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors in addition to other information in this report before purchasing our common stock. The risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to us, our industry and our stock. In addition to these risks, our business may be subject to risks currently unknown to us. If any of these or other risks actually occurs, our business may be adversely affected, the trading price of our common stock may decline and you may lose all or part of your investment.

 

Risks Associated With Our Business

 

We have a history of losses and can provide no assurance that we will ever become profitable.

 

            We incurred net losses to common stockholders of $432,730 and $193,833 for the years ended December 31, 2015 and December 28, 2014, respectively, and had an accumulated deficit of $4,299,619 at December 31, 2015. Our future profitability is dependent upon our ability to successfully execute our business plan. We can provide no assurance regarding when, if ever, we will become profitable. Even if we do become profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis. Accordingly, we may continue to generate losses for the foreseeable future and, in the extreme case, discontinue operations.

 

We may need to raise additional capital in the future, which capital may not be available or, if available, may not be available on acceptable terms.

 

Our current cash resources may not be sufficient to sustain our current operations for the next 12 months. Our cash outflows from operating activities were $57,353 during the year ended December 31, 2015. We are also a party to an employment agreement with Richard W. Akam, who serves as our Chief Executive Officer, Chief Operating Officer and Secretary, pursuant to which we are obligated to pay Mr. Akam an initial annual base salary of $150,000. A summary of the terms of these debt obligations is set forth under Note 8. Debt Obligations to our audited financial statements beginning on page F-1 of this report, and a summary of the terms of our employment agreement with Mr. Akam is set forth under Item 11. Executive Compensation – Employment Agreements and Arrangements. As a result, we may need to raise additional capital during the next 12 months to fund our operations and growth.

 

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We have historically relied upon cash generated by our operations, sales of our equity securities and the use of short- and long-term debt to fund our operations. More recently, we have relied upon the $1 million revolving credit facility that we obtained through Blue Victory Holdings, Inc. (“Blue Victory Holdings”) in September 2013 and proceeds from the promissory note issued by Seenu G. Kasturi under the $340,000 financing transaction that we entered into with him in February 2014 to fund our operations and recent expansion efforts. We intend to rely primarily on cash generated by our operations, proceeds from our credit facility with Blue Victory Holdings, and proceeds from the promissory note issued by Seenu G. Kasturi under the $340,000 financing transaction 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. A summary of the material terms of our credit facility with Blue Victory Holdings is set forth under Note 8. Debt Obligations to our audited financial statements beginning on page F-1 of this report, and a summary of the material terms of our financing transaction with Mr. Kasturi is set forth under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments.

 

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 or debt securities that we issue may have rights, preferences and privileges senior to those of the securities 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 or 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 operations.

 

We are dependent upon our franchisees for substantially all of our revenue, and our financial results are closely tied to the operational success of our franchisees.

 

All of our restaurants are franchised, and we intend to franchise any new restaurants that we open or acquire in the foreseeable future. We derive substantially all of our revenue from our franchisees in the form of royalty payments, franchise fees and area development fees, and expect royalty payments, franchisee fees and area development fees to comprise substantially all of our revenue for the foreseeable future. As a result, the success of our business depends in substantial part upon the operational and financial success of our franchisees. 

 

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Our franchisees are independent operators. As a result, we have limited control over how our franchisees run their respective businesses. If our franchisees fail to execute upon our concept and capitalize upon our brand recognition and marketing, their sales may be adversely affected. If our franchisees incur too much debt or if economic or sales trends deteriorate such that they are unable to operate their restaurants profitably or repay existing debt, it could result in them suffering financial distress, including insolvency or bankruptcy.  If a significant franchisee or a significant number of our franchisees become financially distressed, our operating results could be impacted through significantly reduced or delayed royalty payments. Moreover, our franchisees may be unwilling or unable to renew their franchise agreements with us due to low sales volumes, high real estate costs or the inability to secure lease renewals. Any event that negatively impacts our franchisees’ sales and operations will negatively impact our revenue through corresponding reductions in the royalty payments that we receive from our franchisees. Accordingly, any such event could have a material adverse effect on our business, financial condition and results of operations.

 

Our success depends in part upon our ability to grow the number of Dick’s Wings restaurants in our portfolio.

 

Our growth strategy depends in part on our ability to open new Dick’s Wings restaurants in existing markets and new markets where we have little or no operating experience.   While our Dick’s Wings brand has grown to 22 restaurant locations and two concession stand locations since our founding in 2000, it is still evolving and has not yet proven its long-term growth potential. While we believe the brand is positioned for expansion, we can provide no assurance that additional new restaurant growth will occur. Our Dick’s Wings brand will continue to be subject to the risks and uncertainties that accompany any emerging restaurant brand.

 

Our success will depend upon our ability to identify and retain franchisees that have adequate restaurant management experience and capital, the ability of our franchisees to open new restaurants in a timely manner, and the ability of our franchisees to operate their restaurants in a profitable manner. To attract and retain franchisees that have adequate restaurant management experience and capital, we must convince prospective franchisees that opening and operating one or more of our restaurants represents a profitable investment alternative. Changes in consumer preferences, decreases in disposable consumer income, increases in labor costs and certain commodity prices, such as food, supply and energy costs, and unfavorable publicity could negatively affect the marketability of our restaurants to prospective franchisees.

 

Even if we successfully recruit qualified franchisees, they may fail to open new restaurants in a timely manner.  Risks that could impact our franchisees’ ability to open new restaurants include our franchisees’ ability to identify suitable restaurant locations, negotiate acceptable lease or purchase terms for the locations, secure acceptable financing, obtain required permits and approvals in a timely manner, hire and train qualified personnel, and meet construction schedules.

 

Moreover, our franchisees may fail to operate their restaurants in a profitable manner.  Restaurant performance is affected by the different competitive conditions, consumer tastes, and discretionary spending patterns of the people residing in the market where the restaurant is located, as well as our franchisees’ ability to generate market awareness of the Dick’s Wings brand. Sales at restaurants opening in new markets may take longer to reach average annual restaurant sales, thereby affecting our revenue.

 

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We can provide no assurance that we will be able to identify and retain franchisees who meet our selection criteria or, if we identify such franchisees, that they will be successful in opening and operating their restaurants in a profitable manner. In the event fail to identify and retain such franchisees or, in the event we do, they fail to operate their restaurants in a profitable manner, our business, financial condition and results of operations could be adversely affected.

 

Strategic acquisitions and other transactions that we complete in the future could prove difficult to integrate, disrupt our business, adversely affect our operating results and dilute shareholder value.

 

Our growth strategy depends in part on our ability to expand our business through the acquisition and development of additional restaurant brands, like our acquisition of a 50% ownership interest in Paradise on Wings, which is the franchisor of the Wing Nutz brand of restaurants, in January 2014. Accordingly, we are actively seeking potential mergers, acquisitions, joint ventures, investments and other strategic initiatives through which we can acquire or develop additional restaurant brands.

 

To successfully execute any acquisition or development strategy, we need to identify suitable acquisition or development candidates, negotiate acceptable acquisition or development terms, obtain appropriate financing, and successfully integrate any businesses and assets acquired. Any acquisition or development transaction that we pursue, whether or not successfully completed, will subject us to numerous risks and uncertainties, including:

 

·our ability to accurately assess the value, growth potential, strengths, weaknesses, contingent and other liabilities, and potential profitability of the target businesses and assets;

 

·our ability to complete the transaction and integrate the operations, technologies, services and personnel of any businesses or assets acquired;

 

·the costs associated with the completion of the transaction and the integration of the businesses or assets acquired;

 

·our ability to generate sufficient revenue to offset the transaction costs and achieve projected economic and operating synergies;

 

·the diversion of financial and management resources from existing operations and potential loss of key personnel;

 

·the risks associated with entering new domestic markets and conducting operations where we have little or no prior experience;

 

·the possible negative impact of the transaction on our reputation and the reputation of our Dick’s Wings brand; and

 

·the effect of any limitations imposed by federal and state tax laws on our ability to use all or a portion of our pre-transaction net operating losses against post-transaction income.

 

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If we fail to properly evaluate and execute any acquisition or development transactions that we pursue, our business, financial condition and results of operations could be seriously harmed.

 

In addition, acquisition and development transactions could result in us issuing equity securities or short- or long-term debt to finance the transaction. The issuance of additional equity securities would result in dilution to our stockholders. The issuance of securities exercisable or convertible into shares of our common stock would result in dilution to our stockholders 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 or debt securities that we issue may have rights, preferences and privileges senior to those of the securities held by our stockholders. Future acquisition and development transactions could also result in us assuming debt obligations and liabilities and incurring impairment charges related to goodwill and other intangible assets, which could harm our business, financial condition and results of operations.

 

Our expected growth could strain our personnel and infrastructure resources.

 

We expect to enter a stage of rapid growth in our operations which could place a significant strain on our management, administrative, operational and financial infrastructure.   Our future success will depend in part upon the ability of our management to manage growth effectively.  Our existing restaurant management systems, financial and management controls, and information and reporting systems and procedures may not be adequate to support our planned expansion.  Our ability to manage our growth effectively will require us to continue to enhance these systems, controls and procedures and to locate, hire, train and retain qualified management and operating personnel. If we fail to successfully manage our growth, we may be unable to execute upon our business plan, which could have an adverse effect on our business, financial condition and results of operations.

 

Our success depends on the value and perception of our Dick’s Wings brand.

 

Our success depends in large part upon our ability to maintain and enhance the value of our Dick’s Wings brand and our customers’ connection with our Dick’s Wings brand.  Brand value is based in part on consumer perceptions on a variety of subjective qualities. While we believe we have built a strong reputation for the quality and breadth of our menu items as part of the total experience that guests enjoy in our restaurants, negative business incidents, whether isolated or recurring and whether originating from us, our franchisees or suppliers, could significantly reduce brand value and consumer trust, particularly if the incidents receive considerable publicity or result in litigation.  For example, our brand could be damaged by claims or perceptions about the quality or safety of our products or suppliers, regardless of whether such claims or perceptions are true.  Any such incident could cause a decline in consumer confidence in, or the perception of, our brand, resulting in a decrease in the value of our brand and consumer demand for our products. This would adversely affect our revenue, financial condition and results of operations.

 

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Unfavorable publicity could harm our business and our brand.

 

Multi-unit restaurant businesses such as ours can be adversely affected by publicity resulting from complaints or litigation, or general publicity regarding poor food quality, food-borne illness, personal injury, food tampering, adverse health effects of consumption of various food products or high-calorie foods (including obesity), or other concerns. Media outlets, including new social media platforms, provide the opportunity for individuals or organizations to publicize inappropriate or inaccurate stories or perceptions about us, our restaurants and the restaurant industry. Regardless of whether the allegations or complaints are valid, unfavorable publicity relating to one or more of our restaurants could adversely affect public perception of our entire Dick’s Wings brand. Adverse publicity and its effect on overall consumer perceptions of food safety, or our failure to respond effectively to adverse publicity, could have a material adverse effect on our business and brand.

 

Our current and future franchisees could take actions that could be harmful to our business.

 

Our franchisees are contractually obligated to operate their restaurants in accordance with our franchise agreements, operating standards and applicable law. Although we attempt to properly train and support our franchisees, they are independent third parties that we do not control. Our franchisees own, operate and oversee the daily operations of their respective restaurants. As a result, the ultimate success of any franchised restaurant rests with the franchisee. Adverse events beyond our control, such as quality issues related to a food product or a failure to maintain quality standards at a franchised restaurant, could negatively impact our business and brand.

 

Increases in food costs could harm our profitability and the profitability of our franchisees.

 

Our profitability and the profitability of our franchisees depends in part on our ability to anticipate and react to changes in food and supply costs. The market for chicken and beef is particularly volatile and is subject to significant price fluctuations due to seasonal shifts, climate conditions, demand for corn (a key ingredient of chicken and cattle feed), corn ethanol policy, industry demand, commodity markets, food safety concerns, product recalls, government regulation and other factors, all of which are beyond our control and, in many instances, unpredictable. If the price of chicken, beef or other commodities that our franchisees use in their restaurants increases in the future and we choose not to pass, or cannot pass, these increases on to customers, our franchisees’ profitability would be negatively impacted. In addition, if we raise our prices to offset increased commodity prices, our franchisees may experience reduced sales due to decreased consumer demand, which would have a negative impact on our franchisees’ profitability. Any event that negatively affects our franchisees’ profitability may negatively affect their ability to pay royalties to us and could cause them to close their restaurants. Any decline in franchisee sales would result in reduced royalty payments to us, which in turn would adversely affect our revenue, financial condition and results of operations.

 

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Changes in commodity prices and other restaurant operating costs could adversely affect our franchisees’ results of operations.

 

Any increase in certain commodity prices, such as food, supply and energy costs, could adversely affect our franchisees’ operating results.  Because our franchisees provide competitively priced food, their ability to pass along commodity price increases to our customers is limited.  Significant increases in gasoline prices could also result in a decrease of customer traffic at our restaurants or the imposition of fuel surcharges by our distributors, each of which could adversely affect our franchisees’ profit margins.  Our franchisees’ operating expenses also include employee wages and benefits and insurance costs (including workers’ compensation, general liability, property and health) which may increase over time as a result of such factors as minimum wage increases and competition. Any such increases could adversely affect our franchisees’ profitability, which may negatively affect their ability to pay royalties to us and could cause them to close their restaurants. This would adversely affect our revenue, financial condition and results of operations.

 

Shortages or interruptions in the availability and delivery of food and other supplies may increase our franchisees’ costs or reduce our revenue.

 

The products sold at our restaurants are sourced from a wide variety of suppliers and distributors. Our franchisees are dependent upon these suppliers and distributors to make and deliver food products and supplies that meet our specifications at competitive prices.   Shortages or interruptions in the supply of food items and other supplies to our restaurants could adversely affect the availability, quality and cost of the items our franchisees purchase and the operations of our restaurants.   Such shortages or disruptions could be caused by product quality issues, production or distribution problems, the inability of our vendors to obtain credit, the financial instability of our suppliers and distributors, the failure of our suppliers or distributors to meet our standards, and other factors relating to the suppliers and distributors. Shortages and disruptions could also be caused by factors outside the control of our suppliers and distributions, such as increased demand, food safety warnings or advisories, inclement weather, natural disasters, such as floods, drought and hurricanes, and other conditions beyond their control.   A shortage or interruption in the availability of certain food products or supplies could increase costs and limit the availability of products critical to the operations of our restaurants, which in turn could lead to a decrease in sales and restaurant closures.   In addition, the failure by a supplier or distributor to meet its service requirements could lead to a disruption in supplies until a new supplier or distributor is engaged, and any such disruption could have an adverse effect on our franchisees’ operations, which could in turn have a negative impact on our revenue and business.

 

Most of our restaurants are located in the greater Jacksonville, Florida area, which subjects us to risks and uncertainties associated with economic and other trends and developments in that region of the country.

 

Currently, 17 of our 22 restaurants, as well as our two concession stands in EverBank Field, are located in the greater Jacksonville, Florida area. As a result, we are particularly susceptible to adverse trends and economic conditions in that region of the country, including its labor markets. In addition, given our geographic concentration, negative publicity regarding any of our restaurants in that region could have a material adverse effect on our business and operations, as could other occurrences in that region, such as local competitive changes, changes in consumer preferences, local strikes, new or revised laws or regulations, energy shortages or increases in energy prices, droughts, hurricanes, fires, floods or other natural disasters. In the event any of such changes or events were to occur, our business, financial condition and results of operations could be harmed.

 

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Economic conditions have adversely effected, and may continue to adversely affect, our business and operating results.

 

We believe that our sales, guest traffic and profitability are strongly correlated to consumer discretionary spending, which is influenced by general economic conditions, disposable consumer income and, ultimately, consumer confidence. Our guests may have lower disposable income and reduce the frequency with which they dine out due to a variety of economic factors, including higher levels of unemployment, decreased salaries and wage rates, higher consumer debt levels, rising interest rates, increased energy prices, foreclosures, inflation, higher tax rates, increases in commodity prices and other economic factors that may affect discretionary consumer spending. Although the global economy has shown signs of recovery over the last three years, the United States continues to suffer from, and may continue to suffer from, depressed economic activity. This could result in reduced guest traffic, reduced average checks or limitations on the prices we can charge for our menu items, any of which could reduce our sales and profit margins.

 

The impact of negative economic factors on our franchisees’ existing and potential landlords, developers and surrounding tenants could also negatively affect our financial results. If our franchises’ landlords are unable to obtain financing or remain in good standing under their existing financing arrangements, they may be unable to provide construction contributions or satisfy other lease obligations owed to our franchisees. In addition, if our franchisees’ landlords are unable to obtain sufficient credit to continue to properly manage their retail centers, our franchisees may experience a drop in the level of quality of such centers. Our ability to develop new restaurants may also be adversely affected by the negative economic factors affecting developers and potential landlords. Developers and landlords may try to delay or cancel recent development projects (as well as renovations of existing projects) due to instability in the credit markets and recent declines in consumer spending, which could reduce the number of appropriate locations available that we would consider for new restaurants. If any of the foregoing affect any of our franchisees’ landlords, developers or surrounding tenants, we and our franchisees could be adversely affected.

 

Changes in consumer preferences regarding diet and health could harm our results of operations.

 

Our success depends, in part, upon the continued popularity of our Buffalo, New York-style chicken wings, our boneless chicken wings and our other food and beverage items, as well as the appeal of casual family dining restaurants and sports bars generally. We also depend on trends toward consumers eating away from home. Consumer preferences could change as a result of new information and attitudes regarding diet and health. Health concerns related to the cholesterol, carbohydrate, fat, calorie or salt content of certain food items, including negative publicity over the health aspects of such food items, could affect consumer preferences for our menu items. In addition, the federal government as well as a number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to make certain nutritional information available to guests (including caloric, sugar, sodium and fat content).

 

The success of our restaurant operations depends, in part, upon our ability to effectively respond to changes in consumer health and disclosure regulations and to adapt our menu offerings to fit the dietary needs and eating habits of our guests without sacrificing flavor. If consumer preferences change significantly, we may be required to modify or discontinue certain of our menu items. To the extent we are unable to respond with appropriate changes to our menu offerings, it could materially affect guest traffic and our franchisees’ sales, which would have a negative impact on our revenue and results of operations.

 

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The restaurant industry is subject to extensive federal, state and local laws, compliance with which is both complex and costly.

 

The restaurant industry is subject to extensive federal, state and local laws and regulations, including:

 

·the Fair Labor Standards Act, Immigration Reform and Control Act, and other federal and state laws governing such employment matters as minimum wage requirements, overtime pay, tip credits, healthcare, paid leaves of absence, mandated training, working conditions, payroll taxes, sales taxes, workers’ compensation, union memberships, citizenship requirements and immigration;

 

·federal, state and local laws governing health, sanitation, safety and fire standards, the sale of liquor, zoning, land use, traffic, and environmental and other matters, as well as the acquisition of permits and licenses in connection therewith;

 

·the Americans with Disabilities Act, which is a federal law that prohibits discrimination on the basis of disability in public accommodations and employment, and other federal and state laws governing anti-discrimination, such as the Civil Rights Act and the Age Discrimination Act;

 

·the FTC’s “Franchise Rule” and other federal and state laws that govern the offer and sale of franchises and other aspects of the franchisor-franchisee relationship, including terminations and the refusal to renew franchises;

 

·the FDA’s Food Safety Modernization Act and other federal and state laws that govern nutritional content, nutritional labeling, product safety, menu labeling and other aspects of our restaurants’ operations; and

 

·federal and state privacy, consumer protection and other laws.

 

Compliance with all of these laws and regulations is costly and exposes us and our franchisees to the possibility of litigation and governmental investigations and proceedings. Certain laws, such as the Americans with Disabilities Act, could require us or our franchisees to expend significant funds to make modifications to our restaurants if we fail to comply with applicable standards. Other rules, such as the FTC’s “Franchise Rule”, could result in the imposition of a ban or temporary suspension on our future franchise sales and a mandate that we make offers of rescission or restitution to our franchisees. If we or our franchisees fail to comply with the laws and regulatory requirements of federal, state and local authorities, we and our franchisees could be subject to, among other things, revocation of required licenses, administrative enforcement actions, fines, sanctions, and civil and criminal liability, and of which would have an adverse effect on our business, financial condition and results of operations.

 

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The sale of alcoholic beverages at our restaurants subjects us and our franchisees to additional regulations and potential liability.

 

Because our restaurants sell alcoholic beverages, we and our franchisees are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our restaurants are located. Alcoholic beverage control regulations require each of our franchisees to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on-premises and to provide service for extended hours and on Sundays. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of our restaurants, including the minimum age of patrons and employees, restaurant hours of operation, advertising and trade practices, wholesale purchasing, inventory control and handling, the storage and dispensing of alcoholic beverages, and other relationships with alcohol manufacturers, wholesalers and distributors. If we or our franchisees fail to comply with federal, state or local regulations, our franchisees’ licenses may be revoked and they may be forced to terminate the sale of alcoholic beverages at one or more of their restaurants. This would have a negative impact on our franchisees’ sales and our revenue.

 

In addition, we and our franchisees are subject to state and local “dram shop” statutes, which may subject us and our franchisees to uninsured liabilities. These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Because a plaintiff may seek punitive damages, which may not be fully covered by insurance, this type of action could have an adverse impact on our and our franchisees’ financial condition and results of operations. Further, adverse publicity resulting from any such allegations may adversely affect our business and our brand.

 

Food safety and food-borne illness concerns may have an adverse effect on our business.

 

Food safety is a top priority for us, and we dedicate substantial resources to ensure that our guests enjoy safe, quality food products. Notwithstanding this, food-borne illnesses, such as E. coli, hepatitis A, trichinosis, “mad cow disease” or salmonella, and food safety issues, such as food tampering, contamination or adulteration, have occurred in the restaurant industry in the past and could occur in the future. If one of our customers becomes ill from food-borne illnesses or as a result of food safety issues, all of our restaurants may be temporarily closed.  In addition, instances or allegations of food-borne illness or food safety issues, real or perceived, involving our restaurants, restaurants of our competitors, or restaurant suppliers or distributors (regardless of whether we use or have used those suppliers or distributors), or otherwise involving the types of food served at our restaurants, could result in negative publicity that could adversely affect our franchisees’ sales. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain. Any report or publicity linking us or one of our restaurants to instances of food-borne illness or food safety issues could adversely affect our brand and reputation as well as our revenue and profits, and possibly lead to litigation.

 

Health concerns arising from outbreaks of viruses may have a material adverse effect on our business.

 

The United States and other countries have experienced, and may experience in the future, outbreaks of viruses, such as H1N1, or “swine flu,” avian flu, SARS and various other forms of influenza. Some viruses, such as avian flu, may cause fear about the consumption of chicken, eggs and other products derived from poultry, which could cause customers to consume less poultry and related products. Avian flu outbreaks could also adversely affect the price and availability of poultry. Other viruses, such as H1N1, may be transmitted through human contact. The risk of contracting viruses could cause employees or guests to avoid gathering in public places, which could adversely affect restaurant guest traffic or the ability to adequately staff restaurants.   We could also be adversely affected if jurisdictions in which we have restaurants impose mandatory closures, seek voluntary closures or impose restrictions on the operation of our restaurants.   Even if such measures are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or health risk may negatively affect our business.

 

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Our failure or inability to enforce our trademarks, trade secrets and other proprietary rights could adversely affect our competitive position or the value of our brand.

 

We own U.S. registered trademarks for many of the signs, designs and expressions that identify the products and services that we use in our business, including “Dick’s Wings” and “Dick’s Wings & Grill”, and have several U.S. registered trademark applications pending. We also have common law trademark rights for certain of our proprietary marks, and rely upon trade secrets to protect certain of our rights. We believe that our trademarks, trade secrets and other proprietary rights have significant value and are important to our business and competitive position. We, therefore, devote time and resources to the protection of these rights. Our policy is to pursue registration of our important trademarks whenever feasible and to oppose vigorously any infringement of our trademarks. We protect our trade secrets and proprietary information, in part, by entering into confidentiality agreements with our employees and consultants, and have included confidentiality provisions in our franchise agreements. We also seek to preserve the integrity and confidentiality of our proprietary information by maintaining physical security of our premises and physical and electronic security of our information technology systems.

 

We cannot assure you that the protective actions that we take will successfully prevent unauthorized use or imitation of our intellectual property and proprietary rights by other parties. In the event third parties unlawfully use or imitate our intellectual property and proprietary rights, we could suffer harm to our image, brand and competitive position. If we commence litigation to enforce our intellectual property and proprietary rights, we will incur significant legal fees and may not be successful in enforcing our rights. Moreover, we cannot assure you that third parties will not claim infringement by us of their intellectual property and proprietary rights in the future. Any such claim, whether or not it has merit, could be time-consuming and distracting for management to defend, result in costly litigation, require us to enter into royalty or licensing agreements, or cause us to change existing menu items or delay the introduction of new menu items. As a result, any such claim could have a material adverse effect on our business, financial condition and results of operations.

 

We may be unable to compete effectively in the restaurant industry.

 

The restaurant industry is fragmented and intensely competitive. We compete with Buffalo Wild Wings, Hooters, Hurricane Grill & Wings, Wings ‘N More, Wings ‘n Things, Wingstop and other restaurants offering chicken wings as one of their primary food offerings. We also compete with local and regional sports bars and national casual dining and quick casual establishments, and to a lesser extent with quick service restaurants such as wing-based take-out concepts. Furthermore, because the restaurant industry has few barriers to entry, new competitors may emerge at any time. We compete with other restaurants and retail establishments on the basis of price, taste and quality of food, menu offering, perceived value, customer service, atmosphere, location and overall dining experience. We also compete with other restaurants and retail establishments for qualified franchisees, site locations and employees to work in our restaurants.

 

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Many of our competitors have significantly greater financial and other resources than we do. Many of our competitors also have greater influence over their respective restaurant systems than we do because of their significantly higher percentage of company-owned restaurants and/or ownership of franchise real estate, giving them a greater ability to implement operational initiatives and business strategies. Some of our competitors are local restaurants that, in some cases, have a loyal guest base and strong brand recognition within a particular market. As our competitors expand their operations and as new competitors enter the industry, we expect competition to intensify. Increased competition could result in price reductions, decreases in profitability and loss of market share by our franchisees. In the event we are unable to compete successfully with our current and future competitors, our business, financial condition and results of operations could be materially and adversely affected.

 

We and our franchisees may be subject to increased labor and insurance costs.

 

Our restaurant operations are subject to federal and state laws governing such matters as minimum wages, working conditions, overtime and tip credits. As federal and state minimum wage rates increase, we and our franchisees may need to increase not only the wages of our minimum wage employees, but also the wages paid to employees at wage rates that are above minimum wage. Labor shortages, increased employee turnover and health care mandates could also increase labor costs. In addition, the current premiums that we and our franchisees pay for various types of insurance may increase at any time, thereby further increasing costs. The dollar amount of claims that we and our franchisees actually incur under our respective insurance policies may also increase at any time, thereby further increasing costs. Additionally, the decreased availability of property and liability insurance has the potential to negatively impact the cost of premiums and the magnitude of uninsured losses incurred by us and our franchisees. The occurrence of any of these events could have a negative impact on our business.

 

Our franchisees may not be able to obtain and maintain licenses and permits necessary to operate our restaurants.

 

The restaurant industry is subject to various federal, state and local government regulations, including those relating to the sale of food and alcoholic beverages, all of which are subject to change from time to time. To comply with these regulations, our franchisees must obtain licenses and permits to operate their restaurants. Typically, the licenses and permits must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine that our franchisees’ operations violate applicable regulations. The failure of our franchisees to obtain and maintain these licenses and permits could delay or result in our decision to cancel the opening of new restaurants or result in the temporary suspension or permanent shutdown of existing restaurants, any of which would adversely affect our business.

 

Our franchisees must attract and retain qualified restaurant personnel to operate our restaurants.

 

Our future performance will depend upon the ability of our franchisees to attract, motivate, develop and retain a sufficient number of qualified restaurant personnel, including restaurant managers and hourly employees. Competition for these employees is intense, and the availability of staff varies widely from restaurant to restaurant. If our franchisees lose the services of their restaurant staff and are unable to replace them with qualified personnel as needed, or if restaurant management and staff turnover increases, we could suffer from significant indirect costs, including restaurant disruptions due to management changeover, potential delays in new restaurant openings, or adverse guest reactions to inadequate guest service levels due to staff shortages, all of which would adversely affect our business and brand.

 

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We could be party to litigation that could adversely affect us by diverting management attention, increasing our expenses and subjecting us to significant monetary damages and other remedies.

 

From time to time, we may be subject to complaints or lawsuits by restaurant guests and employees alleging that they suffered an illness or injury after a visit to one of our restaurants, or that we have problems with food quality or operations. We may also be subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims, and claims alleging violations of federal and state law regarding workplace and employment matters, discrimination and other matters. In addition, the restaurant industry has been subject to a growing number of claims relating to the nutritional content of food products, as well as claims that the menus and practices of restaurant chains have led to the obesity of some customers. A number of these industry lawsuits have resulted in the payment of substantial damages by defendants.

 

In the event we are subject to these types of claims in the future, such claims may be expensive to defend against and may divert resources away from our operations, regardless of whether any such claims are valid or whether we are ultimately held liable. In the event we are found liable for any such claims, we could be required to pay substantial damages. With respect to insured claims, a judgment for monetary damages in excess of any insurance coverage that we have could result in us being required to pay substantial damages.  Any adverse publicity resulting from these claims may also adversely affect our reputation. Any such payments of damages or adverse publicity could have a material adverse effect on our business, financial condition and results of operations.

 

We depend upon our executive officers and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.

 

We believe that we have benefited substantially from the leadership and experience of our executive officers, including our Chief Executive Officer, Richard W. Akam. Our executive officers may terminate their employment with us at any time without penalty, and we do not maintain key person life insurance policies on any of our executive officers. The loss of the services of any of our executive officers could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis. In addition, any such departure could be viewed in a negative light by investors and analysts, which could cause our common stock price to decline. As our business expands, our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified executive-level personnel. Our inability to attract and retain qualified executive officers could impair our growth and harm our business.

 

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Our current insurance may not provide adequate levels of coverage against claims.

 

We currently maintain insurance that we believe is appropriate for a business of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure against. Such losses could have a material adverse effect on our business and results of operations. In addition, we self-insure a portion of our expected losses under our insurance policies. Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves for these losses could result in materially different amounts of expense under these programs, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could materially adversely impact our business.

 

There has been a marked increase in the use of social media platforms, including weblogs (blogs), social media websites, and other forms of Internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms may be inaccurate or adverse to our interests, and we may have little or no opportunity to redress or correct the information. The dissemination of such information online, regardless of its accuracy, could harm our business, reputation and brand.

 

Other risks associated with the use of social media include improper disclosure of proprietary information, personally identifiable information and out-of-date information, as well as fraud, by our customers, employees and business partners. The inappropriate use of social media by our customers, employees or business partners could increase our costs, lead to litigation or result in negative publicity that could damage our business, reputation and brand.

 

Our business may be harmed by disruptions to our computer hardware, software and Internet applications.

 

We rely on information systems across our operations, including, for example, point-of-sale processing in our restaurants, the management of our supply chain, the collection of cash, the payment of financial obligations, and various other processes and procedures. Our ability to efficiently manage our business depends on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with maintenance, upgrading or transitioning to replacement systems, or a breach in security of these systems could cause delays in customer service and reduce efficiency in our operations. In addition, while our computer and communications hardware is protected through physical and software safeguards, it remains vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events. If we fail to maintain the necessary computer capacity and data to support our accounting and billing departments, for example, we could experience a loss of, or delay in receiving, revenue. Significant capital expenditures may be required to remediate any of the above problems, the payment of which could adversely affect our business, financial condition and results of operations.

 

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Failure to protect the integrity and security of personal information of our customers and employees could result in substantial costs, expose us to litigation and damage our reputation.

 

We receive and maintain certain personal information about our customers and employees. The use of this information is regulated by applicable law, as well as by certain third-party contracts. If our security and information systems are compromised, or our employees, franchisees or vendors fail to comply with these laws and regulations, this information could be obtained by unauthorized persons or used inappropriately. We could incur substantial costs, sustain damage to our reputation, suffer a loss of customer confidence, and be subject to government enforcement actions and litigation as a result, any of which could harm our business, financial condition and results of operations.

 

We rely on third parties for most of our management information systems and for other back-office functions.

 

We use third-party vendors to provide, support and maintain most of our management information systems. We also outsource certain accounting, payroll and human resource functions to third-party service providers. The parties that we utilize for these services may not be able to handle the volume of activity or perform the quality of service necessary for our operations. The failure of these parties to fulfill their support and maintenance obligations or service obligations could disrupt our operations and the operations of our franchisees. Furthermore, the outsourcing of certain of our business processes could negatively impact our internal control processes. Any such effects on our operations or internal controls could have an adverse effect on our business.

 

The impact of new restaurant openings could result in fluctuations in our financial performance.

 

As discussed above, we plan to open several new Dick’s Wings restaurants during our 2016 fiscal year. Each time we enter into a franchise agreement for a new restaurant, we are entitled to receive a franchise fee in the amount of $30,000. In addition, when new restaurants open, they typically generate significant guest traffic and, therefore, high sales in their initial months. Over time, these restaurants may experience a decrease in guest traffic and sales compared to their opening months. Accordingly, sales achieved by new restaurants during their initial months of operation may not be indicative of the results they will generate on an ongoing basis in the future. As a result, due to the foregoing factors, results for one fiscal quarter may not be indicative of results to be expected for any other fiscal quarter or for a full fiscal year.

 

Significant adverse weather conditions and other disasters could negatively impact our results of operations.

 

Our restaurants could be negatively affected by adverse weather conditions and acts of god, such as regional winter storms, fires, floods, hurricanes, tropical storms and earthquakes, and other disasters, such as oil spills and nuclear meltdowns. Most of our restaurants are located in northern Florida, making them particularly susceptible to hurricanes, tropical storms and flooding. The occurrence of any such events could cause substantial damage to our restaurants and result in one or more of our restaurants being closed for an indefinite period of time. Such damages could also subject our franchisees to substantial repair costs. Accordingly, any such events could have a material adverse effect on our business, financial condition and results of operations.

 

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Risks Related to Our Stock

 

Future sales of our common stock may cause our stock price to decline.

 

As of April 11, 2016, there were 6,592,464 shares of our common stock outstanding. Of this number, 1,979,022 shares were freely tradable without restriction, unless the shares are purchased by our affiliates. The remaining 4,613,442 shares were “restricted securities” as that term is defined under Rule 144 of the Securities Act. None of our directors, executive officers or employees is subject to lock-up agreements or market stand-off provisions that limit their ability to sell shares of our common stock. The sale of a large number of shares of our common stock, or the belief that such sales may occur, could cause a drop in the market price of our common stock.

 

We may raise additional funds in the future through the issuances of debt or equity securities, which funding may be dilutive to stockholders or impose operational restrictions on us.

 

We may need to raise 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 or debt securities that we issue may have rights, preferences and privileges senior to those of the securities held by our stockholders.

 

The market price of our common stock is likely to be highly volatile and subject to wide fluctuations.

 

The market price of our common stock may fluctuate significantly in response to a number of factors, many of which we cannot control, including:

 

·fluctuations in our annual or quarterly operating results;

 

·changes in capital market conditions or other adverse economic conditions;

 

·upgrades or downgrades by securities analysts following our stock;

 

·changes in financial estimates by securities analysts following our stock;

 

·our achievement, or our failure to achieve, projected financial results;

 

·future sales of our stock by our officers, directors and significant stockholders;

 

·investors’ perceptions of our business and prospects relative to other investment alternatives;

 

·significant contracts, acquisitions, joint ventures or capital commitments by our competitors;

 

·global economic, legal and regulatory factors unrelated to our performance; and

 

·the other risks and uncertainties set forth herein under Item 1A. Risk Factors and elsewhere in this report.

 

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The stock market has experienced significant price and volume fluctuations that have affected the market price of the stock of many companies and that often have been unrelated or disproportionate to the operating performance of these companies. Market fluctuations such as these may seriously harm the price of our common stock. Further, securities class action suits have been filed against companies following periods of market volatility in the price of their securities. If such an action is instituted against us, we may incur substantial costs and a diversion of management attention and resources, which would seriously harm our business, financial condition and results of operations. In addition, the initiation of any such action could cause the price of our common stock to decline.

 

Our quarterly and annual operating results may fluctuate due to increases and decreases in sales, food costs, and other factors.

 

Our quarterly and annual operating results may fluctuate significantly because of a variety of factors, including:

 

·increases or decreases in same-store sales;

 

·the timing of new restaurant openings;

 

·our ability to operate effectively in new markets;

 

·the profitability of our restaurants, particularly in new markets;

 

·labor availability and costs for hourly and management personnel;

 

·changes in consumer preferences and competitive conditions;

 

·negative publicity relating to us, our restaurants, our vendors or the products we serve;

 

·disruptions in the type and delivery of supplies;

 

·consumer confidence and fluctuations in discretionary spending;

 

·changes in labor costs or other variable expenses;

 

·potential distractions or unusual expenses associated with our expansion plans;

 

·the impact of inclement weather, natural disasters, and other calamities; and

 

·economic conditions in the jurisdictions in which we operate and nationally.

 

As a result of the factors discussed above, as well as some of the other factors set forth herein under Item 1A. Risk Factors and elsewhere in this report, our operating results for one quarter or year are not necessarily indicative of results to be expected for any other quarter or year. These fluctuations may cause future operating results to fall below our estimates or the expectations of our stockholders or the investment community in general. If our results of operations do not meet the expectations of our stockholders or the investment community, the price of our common stock may decline.

 

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William D. Leopold owns approximately 35% of our outstanding common stock and has the ability to exert significant control over our business and affairs, which may prevent us from taking actions that may be favorable to our other stockholders.

 

As of April 11, 2016, William D. Leopold beneficially owned approximately 35% of our outstanding common stock. As a result, Mr. Leopold has the ability to exert substantial influence over any matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control of us or impeding a merger or consolidation, takeover or other business combination involving us that could be favorable to you.

 

An active trading market for our shares of common stock does not currently exist and we can provide no assurance that such a market will develop in the future.

 

Our shares of common stock are thinly traded. Only a small percentage of our common stock is available to be traded and the price, if traded, may not reflect our actual or perceived value. The liquidity of our stock will be dependent on the perception of our operating business, among other things. Investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business. Conversely, trading may be at an inflated price relative to our performance due to, among other things, the lack of available sellers of our shares. Because there may be a low price for our shares of common stock, many brokerage firms or clearing firms may not be willing to effect transactions in the securities or accept shares of our common stock for deposit in an account. Even if an investor finds a broker willing to effect a transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of low priced shares of common stock as collateral for any loans. We can provide no assurance that an active trading market for our shares of common stock will develop in the future.

 

Our shares of common stock are not listed for trading on a national securities exchange.

 

Our common stock currently trades on the OTCQB marketplace maintained by the OTC Markets Group, Inc. (the “OTCQB”) and is not listed for trading on a national securities exchange. Investments in securities trading on the OTCQB are generally less liquid than investments in securities trading on a national securities exchange. The failure of our shares to be approved for trading on a national securities exchange may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

 

We identified material weaknesses in our internal control over financial reporting during the assessment of our internal controls that we performed in connection with the preparation of the audited financial statements included in this report.

 

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require management to complete an annual assessment of our internal control over financial reporting. During the preparation of our audited financial statements for the year ended December 31, 2015, we identified several control deficiencies that have been classified as material weaknesses in our internal control over financial reporting. A material weakness is a control deficiency that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions. Based on the material weaknesses identified, management concluded that our internal control over financial reporting was not effective as of December 31, 2015. A description of the material weakness is set forth herein under Item 9A. Controls and Procedures.

 

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The standards that must be met for management to assess the internal control over financial reporting are complex and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing the activities necessary to make future assessments of our internal control over financial reporting and completing the implementation of any necessary improvements. Future assessments may require us to incur substantial costs and may require a significant amount of time and attention of management, which could seriously harm our business, financial condition and results of operations.

 

If we are unable to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately or prevent fraud.

 

Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. We have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist, and may in the future discover areas of our internal control that need improvement. If we are unable to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately or prevent fraud.

 

We are not required to obtain an attestation report on our assessment of our internal control over financial reporting from an independent registered public accounting firm, which may cause investors to lose confidence in us and cause our stock to be negatively impacted.

 

Under rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are not required to obtain from our independent registered public accounting firm an attestation report on our assessment of our internal control over financial reporting, and we have not voluntarily sought such a report in the past. If we do not voluntarily seek to obtain an unqualified attestation report on our assessment of our internal control over financial reporting from our independent registered public accounting firm, or if we seek to obtain such a report but our independent registered public accounting firm is unable to provide one to us, investors may lose confidence in us and our stock may be negatively impacted.

 

We are not subject to certain of the corporate governance provisions of the Sarbanes-Oxley Act of 2002 and, without voluntary compliance with such provisions, we will not receive the benefits and protections they were enacted to provide.

 

Since our common stock is not listed for trading on a national securities exchange, we are not subject to certain of the corporate governance rules established by the national securities exchanges pursuant to the Sarbanes-Oxley Act of 2002. These rules relate to independent director standards, director nomination procedures, audit and compensation committees standards, the use of an audit committee financial expert and the adoption of a code of ethics.

 

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Our board of directors currently consists of Fred D. Alexander and Ketan B. Pandya. Mr. Alexander is not an “independent director” as such term is defined by any of the national securities exchanges. As a result, we do not have a board of directors comprised of a majority of independent directors. Our board of directors has not created a separately-designated standing audit committee, and neither Mr. Alexander nor Mr. Pandya qualifies as an “audit committee financial expert” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act. Unless we voluntarily elect to fully comply with all of these rules, we will not receive the benefits and protections they were enacted to provide.

 

Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock, which may affect the trading price of our common stock.

 

Our common stock is a “penny stock” as defined under Rule 3a51-1 of the Exchange Act and is accordingly subject to SEC rules and regulations that impose limitations upon the manner in which our common stock can be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend penny stocks to persons other than established customers or certain accredited investors must make a special written suitability determination regarding the purchaser and receive the purchaser’s written agreement to participate in the transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

 

We have never paid any dividends on our common stock and do not intend to pay any dividends on our common stock in the foreseeable future.

 

We have never paid any dividends on our common stock and do not intend to pay any dividends on our common stock in the foreseeable future. We intend to use any cash generated from our operations for reinvestment in the growth of our business. Any determination to pay dividends in the future will be made by our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law, and other factors deemed relevant by our board of directors. Accordingly, realization of a gain on stockholders’ investments in our common stock will depend on the appreciation of the price of our common stock. We can provide no assurance that our common stock will appreciate in value or even maintain the price at which stockholders purchased their shares.

 

Item 1B.Unresolved Staff Comments.

 

None.

 

Item 2.Properties.

 

Our corporate headquarters is located at 6327-4 Argyle Forest Boulevard, Jacksonville, Florida. We believe that our corporate headquarters is adequate to support our operations for the next 12 months.

 

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Item 3. Legal Proceedings.

 

In January 2015, Santander Bank filed a complaint against us in the Circuit Court, Fourth Judicial Circuit in and for Duval County, Florida, seeking damages of approximately $194,000 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. This case is currently pending. 

 

Item 4. Mine Safety Disclosures.

 

Not Applicable.

 

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PART II

 

Item 5.Market For Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common stock currently trades on the OTCQB under the symbol “ARCK.” The first reported trade of our common stock occurred on December 30, 2010. The following table sets forth the range of high and low bid quotations for shares of our common stock for the periods indicated as reported by The Nasdaq Stock Market. The quotations represent inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.

 

   High   Low 
         
Fiscal Year Ended December 31, 2015          
           
Quarter ended March 31, 2015  $0.60   $0.20 
           
Quarter ended June 30. 2015  $0.55   $0.20 
           
Quarter ended September 30, 2015  $0.52   $0.26 
           
Quarter ended December 31, 2015  $0.60   $0.28 
           
Fiscal Year Ended December 28, 2014          
           
Quarter ended March 30, 2014  $2.05   $1.16 
           
Quarter ended June 29, 2014  $2.19   $0.91 
           
Quarter ended September 28, 2014  $0.91   $0.23 
           
Quarter ended December 28, 2014  $0.50   $0.18 

 

The last reported trading price of our common stock as reported on the OTCQB on April 11, 2016 was $0.60 per share.

 

Holders

 

As of April 11, 2016, the number of stockholders of record of our common stock was 57.

 

Dividends

 

We have not paid any dividends on our common stock to date, nor do we intend to pay any dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, to finance the growth of our business.

 

Transfer Agent

 

The transfer agent for our common stock is Island Stock Transfer, 15500 Roosevelt Boulevard, Suite 301, Clearwater, Florida 33760.

 

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Recent Sales of Unregistered Securities

 

None.

 

Item 6.Selected Financial Data.

 

Not Applicable.

 

Item 7.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 and elsewhere in this report. See also “Special Note Regarding Forward-Looking Statements” on page 1 of this report. The following should be read in conjunction with our audited financial statements beginning on page F-1 of this report.

 

On June 13, 2014, our shareholders approved proposals to change our name from “American Restaurant Concepts, Inc.” to “ARC Group, Inc.” and change our state of incorporation from Florida to Nevada. The changes became effective on July 16, 2014. In connection with our name change, effective July 23, 2014, the stock trading symbol for our shares of common stock was changed from “ANPZ” to “ARCK”. Our shares of common stock continue to be listed on the OTCQB marketplace maintained by the OTC Markets Group, Inc. (“OTCQB”).

 

On June 18, 2014, our board of directors approved a resolution changing our fiscal year end from the last Sunday in December of the applicable calendar year to December 31st. The change will be effective beginning with the Company’s 2015 fiscal year. Pursuant to Rules 13a-10 and 15d-10 of the Exchange Act, we are not required to file a transition report in connection with the change of our fiscal year end.

 

Overview

 

We were formed in April 2000 to develop the Dick’s Wings concept, and are the operator and franchisor of the Dick’s Wings brand of restaurants. 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.

 

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 two Dick’s Wings concession stands that we have at EverBank Field. We currently have 22 full-service restaurants and our two Dick’s Wings concession stands at EverBank Field. Of our 22 restaurants, 17 are located in Florida and five are located in Georgia. Our concession stands at EverBank Field are also located in Florida. All of our restaurants are owned by franchisees, and our concession stands at EverBank Field are licensed to a third-party operator.

 

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Strategy

 

Our plan is to grow our company from a primarily Florida-based franchisor of Dick’s Wings restaurants into a diversified restaurant company operating a portfolio of premium restaurant brands. The first major component of our growth strategy is the continued improvement and expansion of our legacy Dick’s Wings brand. In furtherance of this, we plan to open franchised restaurants in both new and existing markets in the U.S. In our existing markets, we plan to continue to open new franchise 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. We currently plan to open several new Dick’s Wings restaurants in the U.S. during the next 12 months.

 

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. In furtherance of this strategy, in January 2014, we acquired a 50% ownership interest in Paradise on Wings Franchise Group, LLC, a Utah limited liability company that is the franchisor of the Wing Nutz brand of restaurants (“Paradise on Wings”). A description of our investment in Paradise on Wings is set forth herein under Note 4 – Investment in Paradise on Wings in our financial statements.

 

Financial Results

 

We achieved revenue of $966,931 for the year ended December 31, 2015, compared to $588,856 for the year ended December 28, 2014, representing an increase of 64%. Our total operating expenses increased $131,674 to $920,485 for the year ended December 31, 2015 from $788,811 for the year ended December 28, 2014. Net loss was $432,730 for the year ended December 31, 2015, compared to $193,833 for the year ended December 28, 2014. Our total assets decreased $101,693 to $795,638 at December 31, 2015 from $897,331 at December 28, 2014, and our total debt decreased $7,420 to $7,000 at December 31, 2015 from $14,420 at December 28, 2014. We had a stockholders’ deficit of $396,079 at December 31, 2015 compared to a stockholders’ deficit of $119,503 at December 28, 2014. We generated negative cash flows from operations of $57,353 during the year ended December 31, 2015 compared to negative cash flows from operations of $221,617 during the year ended December 28, 2014, representing a decrease of $164,264.

 

Outlook

 

We expect our revenue to increase during the next 12 months as we continue to improve the operations of our existing Dick’s Wings restaurants and open new Dick’s Wings restaurants, as we acquire interests in other restaurant brands, and as the economy continues to improve. We expect net income to increase during the next 12 months as we generate additional revenue through our new and existing restaurants and as we generate additional income through our 50% ownership interest in Paradise on Wings. 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.

 

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Critical Accounting Policies

 

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon our financial statements and accompanying notes, 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 financial statements because they inherently involve significant judgments and uncertainties. For a more complete discussion of our accounting policies and procedures, see our audited financial statements beginning on page F-1 of this report.

 

Revenue Recognition

 

Our revenue consists primarily of royalty payments, franchise fees and area development fees that we receive from our franchisees.  We generate revenue by entering into franchise agreements with parties to build and operate restaurants using the Dick’s Wings brand within a defined geographical area. The agreements have a 10-year term and can be renewed for one additional 10-year term. We provide the use of our Dick’s Wings trademarks and Dick’s Wings system, which includes uniform operating procedures, standards for consistency and quality of products, technical knowledge, an procedures for accounting, inventory control and management, in return for the royalty payments, franchise fees and area development fees.

 

Franchisees are required to operate their restaurants in compliance with their franchise agreements, which includes adherence to operating and quality control procedures established by us. We are not required to provide loans, leases, or guarantees to franchisees or the franchisees’ employees and vendors. If a franchisee becomes financially distressed, we are not required to provide financial assistance. If financial distress leads to insolvency of the franchisee or the filing of a petition by or against the franchisee under bankruptcy laws, we have the right, but not the obligation, to acquire the franchise at fair value as determined by an independent appraiser selected by us. Franchisees generally remit royalty payments weekly for the prior week’s sales. Franchise and area development fees are paid upon the signing of the related agreements.

 

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We recognize the royalties, franchise fees and area development fees that we receive as 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. Royalties are accrued as earned and are calculated each period based on restaurant sales. Franchise fee revenue from individual franchise sales is recognized upon the opening of the franchised restaurant when all material obligations and initial services to be provided by us have been performed. Area development fees are dependent upon the number of restaurants in the territory, as are our 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.

 

Investments

 

On January 20, 2014, we purchased a 50% ownership interest in Paradise on Wings, which is the franchisor of the Wing Nutz brand of restaurants. A description of our investment in Paradise on Wings is set forth herein under Note 4. Investment in Paradise on Wings in our financial statements.

 

We accounted for our investment in Paradise on Wings under the equity method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 323Investments – Equity Method and Joint Ventures (“ASC 323”). ASC 323 provides that investments be accounted for under the equity method of accounting when the investor has the ability to exert significant influence, but not control, over the operating and financial policies of the investee. The determination of the level of influence that an investor has over each equity method investment involves consideration of such factors as the investor’s ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. Investments accounted for under the equity method are recorded at the fair value amount of the investor’s initial investment on the balance sheet and adjusted each period for the investor’s share of the investee’s income or loss. The investor’s share of the income or losses from equity investments is reported as a component of other income / (expense) in the statements of operations.   Contributions paid to, and distributions received from, equity investees are recorded as additions or reductions, respectively, to the respective investment balance.

 

We review our investment in Paradise on Wings for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable in accordance with ASC 323. The standard for determining whether an impairment must be recorded under ASC 323 is whether an “other-than-temporary” decline in value of the investment has occurred. The evaluation and measurement of impairments under ASC 323 involves quantitative and qualitative factors and circumstances surrounding the investment, such as recurring operating losses, credit defaults and subsequent rounds of financing. If an unrealized loss on the investment is considered to be other-than-temporary, the loss is recognized in the period the determination is made and the value of the investment is reduced by the amount of the loss.

 

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”), using the modified prospective transition method. Under this method, compensation expense includes: (a) compensation expense for all stock-based payments granted, but not yet vested, as of January 1, 2006 based on the grant-date fair value, and (b) compensation expense for all stock-based payments granted subsequent to January 1, 2006, based on the grant-date fair value. Such amounts have been reduced to reflect our estimate of forfeitures of all unvested awards.

 

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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.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue with Contracts from Customers (“ASU 2014-09”). ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The guidance introduces a five-step model to achieve its core principal 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. The updated guidance is effective for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. We are currently evaluating the impact of the updated guidance but we do not believe the adoption of ASU 2014-09 will have a significant impact on our 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”). This update 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. This update is effective for the fiscal years ending after December 15, 2016 and for annual periods and interim periods thereafter. Early application is permitted. ASU 2014-15 did not have a material impact on our financial statements.

 

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In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 modifies the analysis that must be performed to determine whether a reporting entity should consolidate certain types of legal entities. The updated guidance is effective for interim and annual periods beginning after December 15, 2015, and early adoption is permitted. We do not believe the adoption of ASU 2014-09 will have a material impact on our financial statements.

 

Comparison of the Years Ended December 31, 2015 and December 28, 2014

 

Revenue

 

Revenue consists primarily of royalty payments and franchise fees that we receive from our franchisees. Revenue increased $378,075 to $966,931 for the year ended December 31, 2015 from $588,856 for the year ended December 28, 2014. The increase of $378,075 was due primarily to an increase of $284,301 for royalties and $75,000 for franchise fees. Our royalties were positively impacted by increased sales by our franchisees at our existing restaurants, sales by franchisees at new restaurants that opened during the past 12 months, and operational improvements that we implemented at each of our franchisees’ restaurants. Our franchise fees increased as a result of the opening of new Dicks Wings restaurants. We expect our revenue to increase during the next 12 months as we continue to improve the operations of our existing Dick’s Wings restaurants and open new Dick’s Wings restaurants, as we acquire additional interests in other restaurant brands, and as the economy continues to improve.

 

Operating Expenses

 

Operating expenses consist primarily of professional fees, employee compensation expense, and general and administrative expenses.

 

Professional Fees. Professional fees consist of fees paid to our independent accountants, lawyers, technology consultants and other professionals and consultants. Professional fees decreased $24,466 to $160,178 for the year ended December 31, 2015 from $184,644 for the year ended December 28, 2014. The decrease of $24,466 was due to a decrease of $18,257 for legal and accounting 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, bonuses and other cash compensation, equity-based compensation and employee benefits paid or granted to our executive officers and employees, and the related payroll taxes. Employee compensation expense increased $166,609 to $585,128 for the year ended December 31, 2015 from $418,519 for the year ended December 28, 2014. The increase of $166,609 was due primarily to increases of $76,114 for salaries and $76,750 for bonuses. We expect employee compensation expense to continue 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.

 

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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, 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 $10,469 to $175,179 for the year ended December 31, 2015 from $185,648 for the year ended December 28, 2014. The decrease of $10,469 was due primarily to a decrease of $33,440 for SEC filing fees and shareholder meeting expenses, partially offset by an increase of $12,041 for travel 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.

 

Interest Expense

 

Interest expense consists of the interest and discount amortization costs that we incur on the debt obligations that we have, interest on legal judgments that we have incurred, and imputed interest on no-interest loans that have been made to us. Interest expense decreased $7,956 to $16,452 for the year ended December 31, 2015 from $24,408 for the year ended December 28, 2014. The decrease of $7,956 was due primarily to a decrease in the amount of interest that we incurred on loans that we obtained under our revolving credit facility with Blue Victory Holdings, Inc. (“Blue Victory Holdings”). A summary of the terms of our credit facility with Blue Victory Holdings is set forth under Note 8. Debt Obligations in our financial statements. We expect interest expense to fluctuate during the next 12 months as we continue to borrow and repay loans under our credit facility with Blue Victory Holdings.

 

Income (Loss) From Investment in Paradise on Wings

 

Income loss from investment in Paradise on Wings consists of our share of the income and loss from our 50% ownership interest in Paradise on Wings that we purchased on January 20, 2014. Income from investment in Paradise on Wings decreased $266,262 to $247,717 for the year ended December 31, 2015 from $18,545 for the year ended December 28, 2014. The decrease of $266,262 was primarily due to mark to market losses on investments and allowance reserves on notes receivable, partially offset by an increase in sales by Paradise on Wings. A description of our investment in Paradise on Wings is set forth under Note 4. Investment in Paradise on Wings in our financial statements. We expect to recognize additional income, and may incur losses, from our investment in Paradise on Wings during the next 12 months. The amount of such income and losses will fluctuate based on the financial results of Paradise on Wings.

 

Loss on Settlement of Litigation

 

Loss on settlement of litigation consists of the losses that we incur for judgments in legal proceedings and settlements of legal proceedings. We incurred loss on settlement of litigation of $221,323 during the year ended December 31, 2015. We did not incur any loss on settlement of legal proceedings during the year ended December 28, 2014. The loss that we recognized during the year ended December 31, 2015 related to the settlement of a legal proceeding entitled J. David Eberle vs. American Restaurant Concepts, Inc. and a reserve that we accrued in connection with a complaint filed by Santander Bank in January 2015. A summary of these legal proceedings is set forth under Note 13. Judgments in Legal Proceedings in the footnotes to our financial statements beginning on page F-1 of this report. We do not expect to recognize any additional losses on the settlement of legal proceedings during the next 12 months. 

 

Net Loss

 

We generated a net loss of $432,730 during the year ended December 31, 2015 compared to a net loss of $193,833 during the year ended December 28, 2014. The increase of $238,897 was due primarily to a loss of $247,717 from our investment in Paradise on Wings, $221,323 for loss on settlement of litigation and an increase of $166,619 for employee compensation expense. This was partially offset by an increase of $378,075 for revenue and a decrease of $24,466 for professional fees. We expect earnings to improve during the next 12 months as we generate additional revenue through our new and existing restaurants and as we generate additional income through our 50% ownership interest in Paradise on Wings.

 

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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.

 

Liquidity and Capital Resources

 

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

 

Net cash used by operating activities was $57,353 during the year ended December 31, 2015 compared to $221,617 during the year ended December 28, 2014. The decrease of $164,264 for net cash used by operating activities was due primarily to a decrease of $432,730 for net loss and increases of $103,581 for accounts payable and accrued liabilities and $221,323 for losses on litigation. This was partially offset by decreases of $247,717 for a decrease in our equity investment in Paradise on Wings, and decreases of $62,948 for advertising fund liabilities and $99,876 for settlement agreements payable.

 

Net cash used by investing activities was $98,452 during the year ended December 31, 2015 compared to $401,755 during the year ended December 28, 2014. The decrease of $303,303 for net cash used by investing activities was due to a decrease of $400,000 for our equity investment in Paradise on Wings and an increase of $199,466 for repayments of notes receivable. This was offset by an increase of $297,918 for the issuance of notes receivable to related parties.

 

Net cash provided by financing activities was $162,580 during the year ended December 31, 2015 compared to $618,310 during the year ended December 28, 2014. The decrease of $455,730 for net cash provided by financing activities was due to an increase of $787,567 for repayments of notes payable, partially offset by an increase of $331,837 for proceeds from the issuance of notes payable to a related party.

 

Our primary sources of capital since January 1, 2014 are set forth below.

 

Between November 6, 2013 and January 21, 2014, we borrowed $567,662 under our credit facility with Blue Victory Holdings. Accordingly, on January 21, 2014, we had a total of $570,529 of principal and accrued but unpaid interest outstanding under the credit facility. On that date, Blue Victory Holdings converted all of the outstanding principal and interest into a total of 326,017 shares of our common stock. A summary of the terms of our credit facility with Blue Victory Holdings is set forth under Note 8. Debt Obligations in our financial statements.

 

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On February 27, 2014, we entered into a securities purchase agreement with Seenu G. Kasturi pursuant to which Mr. Kasturi agreed to purchase 206,061 shares of our common stock for $340,000. Mr. Kasturi paid for the shares through the issuance of a promissory note in favor of the Company in the amount of $340,000. The promissory note was unsecured, accrued interest at a rate of 6% per annum, and had a maturity date of March 31, 2015. The principal and interest were payable in four equal quarterly installments of $85,000 beginning June 30, 2014. The final quarterly installment of $85,000 was paid by Mr. Kasturi during April 2015.

 

Between January 22, 2014 and December 28, 2014, we borrowed an additional $1,445,216 under our credit facility from Blue Victory Holdings, and between June 30, 2014 and December 28, 2014, we repaid $1,441,796 under the credit facility. Accordingly, as of December 28, 2014, the outstanding principal amount of the credit facility was $3,420.

 

Between December 29, 2014 and December 31, 2015, we borrowed an additional $1,987,953 under our credit facility from Blue Victory Holdings. During the year ended December 31, 2015, we repaid $1,991,373 under the credit facility. Accordingly, as of December 31, 2015, we did not have any principal outstanding under the credit facility.

 

To date, our capital needs have been met primarily through cash generated by our operations, sales of our equity securities and the use of short- and long-term debt to fund our operations. More recently, we have relied upon the $1 million revolving credit facility that we obtained through Blue Victory Holdings in September 2013 and the proceeds from the promissory note issued to us by Seenu G. Kasturi in connection with the $340,000 financing transaction that we entered into with him in February 2014 to fund our operations and recent expansion efforts. We have used the proceeds from the sale of our equity securities and the issuance of short-and long-term debt 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 rely primarily on cash generated by our operations, proceeds from our credit facility with Blue Victory Holdings, and proceeds from the promissory note issued to us by Seenu G. Kasturi in connection with the $340,000 financing transaction that we entered into with him in February 2014, to fund our operations and expansion efforts, including additional acquisitions of controlling and non-controlling financial interests in other restaurant brands, during the next 12 months. A summary of the material terms of our credit facility with Blue Victory Holdings is set forth under Note 8. Debt Obligations in our financial statements, and a summary of the material terms of our financing transaction with Mr. Kasturi is set forth above under Note 9. Capital Stock in our financial statements.

 

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 or debt securities that we issue may have rights, preferences and privileges senior to those of the shares of common stock held by our stockholders.

 

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

 

Off-Balance Sheet Arrangements

 

As of December 31, 2015, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, that had been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 8.Financial Statements and Supplementary Data.

 

Our audited financial statements at and for each of the years ended December 31, 2015 and December 28, 2014, respectively, begin on page F-1 of this report located immediately after the signature page hereto.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet management’s objectives.

 

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As of December 31, 2015, we carried out the evaluation of the effectiveness of our disclosure controls and procedures as defined 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 December 31, 2015, our disclosure controls and procedures were 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.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.  Internal control over financial reporting includes policies and procedures that:  

 

1.           pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

2.           provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

 

3.           provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on our financial statements.

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design safeguards to reduce, though not eliminate, this risk.

 

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Our management used the framework set forth in the report entitled, “Internal Control – Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, our management concluded that our internal control over financial reporting was not effective at December 31, 2015 due to the existence of a material weakness in our internal controls.

 

A material weakness is a control deficiency, or a combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management, in consultation with our independent registered public accounting firm, concluded that the following material weaknesses existed in the following areas as of December 31, 2015:

 

1. Our board of directors is comprised of Fred D. Alexander and Ketan B. Pandya. Mr. Alexander serves as an officer for Blue Victory Holdings, a company that loaned us $1,987,953 and $1,656,116 during the years ended December 31, 2015 and December 28, 2014, respectively. As a result, we do not have a board of directors comprised of a majority of independent directors monitoring the actions of our senior management. One of the responsibilities of a company’s board of directors is to act as an independent source for monitoring the actions of a company’s senior management. The lack of a majority of independent directors on our board of directors constitutes a material weakness in our internal controls.

 

2. We had inadequate written policies and procedures for accounting and financial reporting with respect to both GAAP and the guidelines of the SEC.

 

3. Our closing process was inadequate to ensure that all material misstatements are corrected in the financial statements.

 

To remediate these material weaknesses, we intend to implement more comprehensive written policies and procedures and a more comprehensive closing process. In addition, we are currently seeking independent directors to join our board of directors.  The addition of such board members will provide us with independent directors who can monitor the actions of our top management.  Our efforts to do so have been hindered substantially by the fact that we do not have a directors and officers insurance policy in place.  Because such policies are very expensive, we believe it is in our best interest to forego the purchase of such a policy and instead focus the use of our limited financial resources on our development and growth. Notwithstanding the foregoing, we will continue seeking independent directors to join our board of directors.

 

Notwithstanding the existence of these material weaknesses in our internal controls, we believe that our financial statements fairly present, in all material respects, our balance sheets at December 31, 2015 and December 28, 2014 and our statements of operations, stockholders’ equity / (deficit) and cash flows for the years ended December 31, 2015 and December 28, 2014 in conformity with GAAP.

 

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only our management’s report in this annual report.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

Not applicable.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Directors and Executive Officers

 

The following chart sets forth certain information about each of our directors and executive officers.

 

Name   Age     Positions Held  
Richard W. Akam 60   Chief Executive Officer, Chief Operating Officer, and Secretary
Daniel Slone 46   Chief Financial Officer
Fred D. Alexander 69   Chairman of the Board
Ketan B. Pandya 47   Director
         

Board of Directors

 

We believe that our board of directors should be composed of individuals with sophistication and experience in many substantive areas that impact our business. We believe that experience, qualifications or skills in the following areas are most important: (i) organizational leadership and vision; (ii) strategic, financial and operational planning; (iii) restaurant and franchising industry experience; (iv) corporate restructuring and performance enhancement; (v) corporate finance; and (vi) experience as a board member of other corporations. These areas are in addition to the personal qualifications described in this section. We believe that our current board members possess the professional and personal qualifications necessary for board service, and have highlighted particularly noteworthy attributes for these board members below. The principal occupation and business experience, for at least the past five years, of our current directors are as follows:

 

Fred D. Alexander has served as the Chairman of our board of directors since November 2012. He has served as the Vice President of Business Development for Blue Victory Holdings, Inc., a private equity firm that is focused primarily on the development and management of branded assets, where he is responsible for the identification, acquisition and financing of branded restaurants, since July 2010.  He has also served as the Managing Member and Director of Business Development for Quantum Leap, LLC, a real estate company that he founded that acquires, develops, and manages underperforming properties and other assets, since July 2007.  Mr. Alexander serves as the General Partner of Southern Real Estate, LLP, a real estate company that he founded in August 2002 that acquires, rehabilitates and markets low-income apartment properties, and as the Managing Member and Director of Operations for American Phoenix, LLC, a real estate company that he founded in December 2003 that acquires, developments and markets high-end real estate assets, including apartment buildings, condominiums and shopping centers.  Mr. Alexander obtained his college degree at the University of Louisiana, at Lafayette, and has been a licensed real estate broker since 1972.

 

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We believe Mr. Alexander is qualified to serve as a director due to his extensive experience with identifying, evaluating, acquiring and financing branded restaurants and other assets, and his more than 40 years of experience in management, operations and finance.

 

Ketan B. Pandya has served as a member of our board of directors since August 2013. He has served as the Senior Director of National Account Sales for SMART Technologies, a developer of Web-based integrated customer relationship solutions, since March 2012. He has also served as a Senior Consultant to ProTechnology, a consumer electronics company, since January 2010, and as a member of the advisory board of Axelo, a developer of advanced sensing technologies, since January 2008. Prior to that, Mr. Pandya served as the Director of Marketing/Sales for Advanced Micro Devices, a multinational semiconductor company, from March 2010 to December 2011, and served as the Senior Manager for Product Marketing and Retail Sales Support for Dell, a multinational computer technology company, from September 1999 to February 2010. Mr. Pandya earned a B.S. in Electrical Engineering from the Louisiana State University and a MBA with a concentration in marketing from the University of Texas at Austin.

 

We believe Mr. Pandya is qualified to serve as a director due to his strong leadership, business acumen and analytical skills, and the more than 20 years of experience he acquired in senior sales and marketing positions at a number of multinational corporations.

 

Executive Officers

 

Richard Akam has served as our Chief Executive Officer and Secretary since July 2013 and as our Chief Operating Officer since January 2013. Mr. Akam also served as our Chief Financial Officer from July 2013 to August 2013. Prior to joining us, Mr. Akam served as the Chief Operating Officer of Ker’s Winghouse from September 2012 to January 2013.  From May 2011 to July 2012, he served as the Chief Operating Officer of Twin Peaks Restaurants.  Mr. Akam served as the Chief Operating Officer of First Watch Restaurants from February 2005 to December 2008 and as the Chief Operating Officer of Raving Brands from October 2003 to February 2005.  Prior to that, he served in various roles with Hooters of America for approximately 20 years, including serving as its President and Chief Executive Officer from 1995 to 2003.  Mr. Akam is also the founding member of Akam & Associates, LLC, a restaurant consulting firm that has provided consulting services to the restaurant industry since 2009.  Mr. Akam earned a Bachelor of Arts degree from the University of Louisville.

 

Daniel Slone has served as our Chief Financial Officer since August 2013. He also serves as the Controller of Blue Victory Holdings, a private equity firm focused primarily on the development and management of national restaurant franchises and other assets, a position he has held since July 2012. Prior to joining Blue Victory Holdings, Mr. Slone served as the Director of Operations of LCS Corrections Services, a privatized corrections company, from September 2007 to April 2012. Prior to that, he served as the Vice President and Director of Franchise Operations for the franchisor of Pop-A-Lock, a national professional locksmithing franchise, from April 2000 to April 2003, and subsequently served as the Chief Financial Officer for the company’s largest franchisee from April 2003 to August 2007. Mr. Slone earned a B.A. in political science and international relations from the University of Mississippi, and an MBA with a concentration in management from the University of Phoenix.

 

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Stockholder Communications

 

We have not implemented any formal procedures for stockholder communication with our board of directors. Any matter intended for our board of directors, or for any individual member or members of our board of directors, should be directed to our corporate secretary at ARC Group, Inc., 6327-4 Argyle Forest Boulevard, Jacksonville, FL 32244. In general, all stockholder communication delivered to the corporate secretary for forwarding to the Board of Directors or specified members of the Board of Directors will be forwarded in accordance with the stockholder’s instructions. However, the corporate secretary reserves the right to not forward to members of the Board of Directors any abusive, threatening or otherwise inappropriate materials.

 

Audit Committee and Audit Committee Financial Expert

 

Our board of directors has not created a separately-designated standing audit committee or a committee performing similar functions. Accordingly, our full Board of Directors acts as our audit committee. In addition, we do not have an “audit committee financial expert,” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act, serving on our board of directors. We currently have a small number of employees and have generated only a small amount of revenue to date. In light of the foregoing, our board of directors concluded that the benefits of retaining an individual who qualifies as an “audit committee financial expert” would be outweighed by the costs of retaining such a person. As a result, no member of our board of directors is an “audit committee financial expert.” Additionally, our board of directors, acting as our audit committee, has the ability to retain independent accountants or consultants whenever it deems appropriate.

 

Code of Business Conduct and Ethics

 

We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Our Code of Business Conduct and Ethics is designed to deter wrongdoing and promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications that we make; (iii) compliance with applicable governmental laws, rules and regulations; (iv) prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (v) accountability for adherence to the code. A copy of our Code of Business Conduct and Ethics is available without charge upon written request directed to our corporate secretary at ARC Group, Inc., 6327-4 Argyle Forest Boulevard, Jacksonville, FL 32244.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires that our officers and directors and persons who beneficially own more than 10% of our common stock file initial reports of ownership and reports of changes in beneficial ownership of our common stock with the SEC. They are also required to furnish us with copies of all Section 16(a) forms that they file with the SEC. Based solely on our review of the copies of such forms received by us, or written representations from such persons that no reports were required for those persons, we believe that all Section 16(a) filing requirements were satisfied in a timely fashion during our fiscal year ended December 31, 2015.

 

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Item 11. Executive Compensation.

 

Summary Compensation Table

 

The following table provides certain summary information concerning compensation earned by the executive officers named below during the fiscal years ended December 31, 2015 and December 28, 2014.

 

Name and

Principal Position

  Year   Salary ($)   Bonus ($)  

Stock

Awards ($) (1)

  

All Other

Compensation (4)

   Total ($) 
                         
Richard W. Akam   2015    168,366    48,600    50,411(2)   12,000    279,377 
Chief Executive Officer, Chief Operating Officer and Secretary   2014    163,800    32,400    50,373(3)   12,000    258,573 
                               
Daniel Slone   2015    1    -0-    -0-    -0-    1 
Chief Financial Officer   2014    1    -0-    -0-    -0-    1 

 

(1) Represents the grant date fair value of the awards, calculated in accordance with ASC 718. A summary of the assumptions made in the valuation of these awards is provided herein under Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Item 11. Executive Compensation – Employment Agreements and Arrangements, and in our notes to financial statements beginning on page F-1 of this report.

 

(2) Consists of $548 recognized in connection with the partial vesting of a stock award that was made on January 1, 2014 and that vested in full on January 1, 2015, and $49,863 recognized in connection with the partial vesting of a stock award that was made on January 1, 2015. The stock award that was made on January 1, 2015 vested in full on January 1, 2016.

 

(3) Consists of $920 recognized in connection with the partial vesting of a stock award that was made on July 22, 2013 and that vested in full on January 1, 2014, and $49,453 recognized in connection with the partial vesting of a stock award that was made on January 1, 2014 and that vested in full on January 1, 2015.

 

(4) Consists of a car allowance of $12,000.

 

Employment Agreements and Arrangements

 

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

 

The employment agreement provides for the issuance of shares of our common stock to Mr. Akam in the event that he satisfies certain conditions. On July 22, 2013, Mr. Akam earned shares of our common stock equal in value to $50,000 for satisfying the condition that he be continuously employed by us through that date. The number of shares of common stock was calculated based on the last sales price of our common stock as reported on the Over-the-Counter Bulletin Board (the “OTC Bulletin Board”) on July 22, 2013.  

 

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The employment agreement also provides that Mr. Akam will earn additional shares of our common stock equal in value to $50,000 on January 1st of each year if he is continuously employed by us on that date. The number of shares of common stock that we will issue to Mr. Akam for each applicable year is calculated based on the average of the last sales price of shares of our common stock as reported on the OTC Bulletin Board for the month of January of the applicable year.  

 

Mr. Akam agreed that the number of shares that may be earned by him under his employment agreement in connection with any particular grant shall 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 our common stock on the day immediately preceding the date he earns the shares. Mr. Akam also agreed that in the event we are unable to fulfill our obligation to issue all of the shares earned by him due to us not having enough shares of common stock authorized and available for issuance, (i) Mr. Akam will not require us to issue more shares of common stock than are then authorized and available for issuance by us, and (i) we may settle any liability to Mr. Akam created as a result thereof in cash.

 

Accordingly, on July 22, 2013, February 1, 2014, February 1, 2015 and February 1, 2016, we issued 71,429, 28,433, 71,429 and 71,429 shares of our common stock, respectively, to Mr. Akam pursuant to the terms of the employment agreement.

 

In the event we terminate Mr. Akam’s employment without “cause,” Mr. Akam will be entitled to receive the following severance compensation from us: (i) if we terminate Mr. Akam’s employment during the first year of his employment with us, that amount of compensation equal to the salary payable to Mr. Akam during that year, (ii) if we terminate Mr. Akam’s employment during the second year of his employment with us, that amount of compensation equal to nine months of the salary payable to Mr. Akam during that year, (iii) if we terminate Mr. Akam’s employment during the third year of his employment with us, that amount of compensation equal to six months of the salary payable to Mr. Akam during that year, and (iv) if we terminate Mr. Akam’s employment after the third year of his employment with us, 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 us if we terminate his employment for “cause” or as a result of his disability, or if Mr. Akam resigns from his employment with us.

 

Under the terms of Mr. Akam’s employment agreement, “cause” includes, but is not limited to: (i) embezzlement, theft, larceny, material fraud or other acts of dishonesty, (ii) intentional disregard of duties under the employment agreement, or any other material violation of the employment agreement, (iii) conviction of or entrance of a plea of guilty or no contest to a felony or other crime which has or may have a material adverse effect on his ability to carry out his duties under the employment agreement or upon our reputation, (iv) conduct involving moral turpitude, (v) gross insubordination or repeated insubordination after written warning by us, (vi) unauthorized disclosure of our confidential information, (vii) material and continuing failure to perform his duties in a quality and professional manner for a period of at least 30 days after written warning by us, (viii) the issuance of an injunction or any other court order or judgment by a court of competent jurisdiction or arbitrator upholding the provisions of the confidentiality agreement signed by us and Mr. Akam on September 10, 2012, and (ix) the addition of us as a party in any proceeding in connection with the confidentiality agreement.

 

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

 

On July 31, 2013, we appointed Richard Akam as our Chief Executive Officer, Chief Financial Officer and Secretary. We did not amend his employment agreement in connection with the above appointments, and Mr. Akam is not receiving any additional compensation in connection with the above appointments.

 

On August 19, 2013, we appointed Daniel Slone as our Chief Financial Officer. We agreed to pay Mr. Slone an annual base salary of $1.00 in connection with his appointment. We did not enter into an employment agreement with Mr. Slone. In connection therewith, on August 19, 2013, Richard Akam resigned as our Chief Financial Officer. Mr. Akam retained his positions as our Chief Executive Officer, Chief Operating Officer and Secretary.

 

Director Compensation

 

We do not provide any compensation to our employee directors and have not adopted a standard compensation package for non-employee directors serving as members of our board of directors. We appointed Fred Alexander and Ketan B. Pandya as non-employee directors to our board of directors in November 2012 and August 2013, respectively. We intend to add additional non-employee directors to our board of directors in the future. We intend to provide our non-employee directors with remuneration that may consist of one or more of the following: (i) an annual retainer, (ii) a fee paid for each board meeting attended, (iii) an annual grant of equity compensation, and (iv) reimbursement for reasonable travel expenses incurred to attend meetings of our board of directors. We may provide additional remuneration to board members participating on committees of our board of directors.

 

Outstanding Equity Awards at Fiscal Year End

 

The following table sets forth, for each named executive officer, information regarding stock that had not vested as of the end of our fiscal year ended December 31, 2015. We did not have any stock options or equity incentive plan awards outstanding as of the end of our fiscal year ended December 31, 2015.

 

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   Stock Awards
Name  Grant Date  Number of
Shares or Units
of Stock That
Have Not
Vested (#)
   Market Value
of Shares or
Units of Stock
That Have Not
Vested ($) (1)
 
            
Richard W. Akam 1/1/15   *    50,000 
Daniel Slone     -0-    -0- 
              

(1) This stock award vested in full on January 1, 2016.

 

* The number of shares of our common stock is calculated based on the average of the last sales price of shares of our common stock as reported on the OTC Bulletin Board for the month of January 2016. In connection therewith, on February 1, 2016, we issued 71,429 shares of our common stock to Mr. Akam.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table and the notes thereto set forth, as of April 11, 2016, certain information with respect to the beneficial ownership of: (i) each of our named executive officers, (ii) each of our directors, (iii) each of our named executive officers and directors as a group, and (iv) each person or group that is known to us to be the beneficial owner of more than five percent of our common stock. This table is based upon information supplied by our officers, directors and principal stockholders and Schedules 13D and 13G filed with the SEC. Where information regarding stockholders is based on Schedules 13D and 13G, the number of shares owned is as of the date for which information was provided in such schedules. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the persons named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.

 

The beneficial owners and amount of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Exchange Act and, in accordance therewith, includes all shares of our common stock that may be acquired by such beneficial owners within 60 days of April 11, 2016 upon the exercise or conversion of any options, warrants or other convertible securities. Unless otherwise indicated, each person or entity named below has sole voting and investment power with respect to all shares of common stock beneficially owned by that person or entity, subject to the matters set forth in the footnotes to the table below, and has an address of 6327-4 Argyle Forest Boulevard, Jacksonville, FL 32244.

 

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Name and Address of Beneficial Owner  Amount and Nature
of Beneficial
Ownership (1)
   Percentage
of Class (1)
 
         
Richard W. Akam   242,720    3.7%
           
Daniel Slone   758    *
           
Fred D. Alexander   -0-    *
           
Ketan B. Pandya   45,700    *
           
William D. Leopold II   2,256,072    34.2%
           
Seenu G. Kasturi   572,688 (2)    8.7%
           
All officers and directors as a group (4 persons)  289,178    3.4%

 

 

* Less than one percent.

 

(1) This table has been prepared based on 6,592,464 shares of our common stock outstanding on April 11, 2016.

 

(2) Includes 911 shares of common stock held by Blue Victory Holdings, a company for which Mr. Kasturi serves as the President, Treasurer, Secretary and sole director and of which he owns 90% of the outstanding equity interests.

 

Equity Compensation Plan Information

 

The following table sets forth information regarding the number of options, warrants, rights and similar securities that were outstanding at December 31, 2015 under equity compensation plans that have not been approved by our stockholders. None of our securities were outstanding at December 31, 2015 under plans that have been approved by our stockholders.

 

Plan Category    Number of
securities to
be issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
   Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
(b)
   Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities reflected
in column (a))
(c)
 
                
Equity compensation plans approved by security holders:    -0-    N/A    -0- 
                
Equity compensation plans not approved by security holders:    -0-    N/A    1,214,287 
                
Total      -0-    N/A    1,214,287 

 

Our equity compensation plans consisted of the American Restaurant Concepts, Inc. 2011 Stock Incentive Plan and our employment agreement with Richard W. Akam. Neither of these plans was approved by our stockholders. We have not adopted any equity compensation plans that have been approved by our stockholders.

 

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A description of each of our equity compensation plans is set forth below.

 

American Restaurant Concepts, Inc. 2011 Stock Incentive Plan

 

In August 2011, we adopted the American Restaurant Concepts, Inc. 2011 Stock Incentive Plan. Under the plan, 1,214,286 shares of common stock may be granted to our employees, officers, directors, consultants and advisors 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 December 31, 2015, 142,858 shares of our common stock remained available for issuance under the plan.  The plan terminates in August 2021.  On August 18, 2011, we 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 2014 Stock Incentive Plan

 

In June 2014, we adopted the ARC Group, Inc. 2014 Stock Incentive Plan. Under the plan, 1,000,000 shares of common stock may be granted to our employees, officers, directors, consultants and advisors 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 December 31, 2015, all 1,000,000 shares of the Company’s common stock remained available for issuance under the plan.  The plan terminates in June 2024.

 

Employment Agreements

 

On January 22, 2013, we appointed Richard Akam to serve as our Chief Operating Officer and, in connection therewith, we entered into an employment agreement with him. The employment agreement provides in part that we will grant Mr. Akam additional shares of our common stock equal in value to $50,000 on January 1st of each year. The maximum number of shares of common stock that Mr. Akam can receive under each of these grants is 71,429 shares. Accordingly, as of December 31, 2015, a maximum of 71,429 shares of common stock were available for issuance under his employment Agreement. A summary of the terms of Mr. Akam’s employment agreement is set forth above under Item 11. Executive Compensation – Employment Agreements and Arrangements.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

Certain Relationships and Related Transactions

 

In July 2013, we entered into a consulting agreement with Michael Rosenberger pursuant to which Mr. Rosenberger assisted us with our prior business and future business during a term commencing July 31, 2013 and ending December 31, 2013. In return, we paid Mr. Rosenberger $70,000 on July 31, 2013 and made payments of $32,500 to Mr. Rosenberger on September 1, 2013, October 15, 2013, December 1, 2013 and December 31, 2013. The consulting agreement became effective on July 31, 2013 and terminated in accordance with its terms on December 31, 2013. Mr. Rosenberger served as our Chief Executive Officer, Chief Financial Officer and Secretary, and as a member of our board of directors, at the time the parties entered into the license agreement and throughout the duration of the license agreement.

 

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In July 2013, we 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 for a concession stand to be located at EverBank Field in Jacksonville, Florida. We subsequently assigned all of our 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, we extended our sponsorship agreement with the Jaguars by an additional two years and entered into a subcontractor concession agreement with Ovations Food Services, L.P. for a second concession stand at EverBank Field. We subsequently assigned all of our rights and obligations under the second concession agreement to DWG Acquisitions. The Company maintained the fee paid to DWG Acquisitions at $2,000 per month. Seenu G. Kasturi owns approximately 8.8% of our common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and as the sole member, of DWG Acquisitions. We generated revenue of $24,000 from DWG Acquisitions under the assignment agreements during the years ended December 31, 2015 and December 28, 2014.

 

In September 2013, we entered into a loan agreement with Blue Victory Holdings pursuant to which Blue Victory Holdings agreed to extend a revolving line of credit facility to us for up to $1 million. 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. Blue Victory Holdings 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 our common stock at a price per share equal to the closing price of our common stock on the OTCQB on the day immediately preceding the date the transaction is completed. Seenu G. Kasturi owns approximately 9% of our common stock and 90% of the equity interests in Blue Victory Holdings. He also serves as the President, Treasurer and Secretary, and sole member of the board of directors, of Blue Victory Holdings. Fred Alexander serves as a member of our board of directors and as an executive officer of Blue Victory Holdings, and Daniel Slone serves as our Chief Financial Officer and as the controller of Blue Victory Holdings.

 

The largest aggregate amount of principal outstanding under the credit facility during the years ended December 31, 2015 and December 28, 2014 was $55,867 and $567,662, respectively. We paid a total of $1,991,373 of outstanding principal and $10,312 of accrued interest under the note during the year ended December 31, 2015. We paid a total of $1,778,335 of outstanding principal and $2,867 of accrued interest under the note during the year ended December 28, 2014, of which $570,529 was paid on January 21, 2014 upon the conversion by Blue Victory Holdings of all of the then outstanding principal and interest into a total of 326,017 shares of our common stock, and the remaining $1,207,806 was paid in cash. We did not have any loans outstanding under the credit facility at December 31, 2015. We had total loans of $3,420 outstanding under the credit facility as of December 28, 2014. A description of the credit facility is set forth herein under Note 8. Debt Obligations in the footnotes to our financial statements beginning on page F-1 of this report.

 

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In October 2013, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located in the Nocatee development in Ponte Vedra, Florida. In connection therewith, DWG Acquisitions entered into a franchise agreement with us. The terms of the franchise agreement were identical to those of the franchise agreements that we enter into with unrelated franchisees, except that we did not require DWG Acquisitions to pay a franchise fee to us. Seenu G. Kasturi owns approximately 9% of our common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. We generated a total of $69,545 and $52,328 in royalties from DWG Acquisitions under this agreement during the years ended December 31, 2015 and December 28, 2014, respectively.

 

In February 2014, we entered into a securities purchase agreement with Seenu G. Kasturi pursuant to which Mr. Kasturi agreed to purchase 206,061 shares of our common stock for $340,000. The price per share of common stock paid by Mr. Kasturi was equal to the closing price of our common stock on the OTCQB on the day immediately preceding the date the transaction was completed. Mr. Kasturi paid for the shares through the issuance of a promissory note in favor of us in the amount of $340,000. The promissory note was unsecured, accrued interest at a rate of 6% per annum, and had a maturity date of March 31, 2015. The principal and interest were payable in four equal quarterly installments of $85,000 beginning June 30, 2014. Mr. Kasturi made payments of $170,000 to us under the promissory note during the year ended December 28, 2014. The promissory note was paid off in full by Mr. Kasturi during the year ended December 31, 2015. Mr. Kasturi owns approximately 8.8% of our common stock and 90% of the equity interests in Blue Victory Holdings. He also serves as the President, Treasurer and Secretary, and as the sole member of the board of directors, of Blue Victory Holdings. A description of the transaction is set forth herein under Note 9. Capital Stock in the footnotes to our financial statements beginning on page F-1 of this report.

 

In May 2014, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located on Youngerman Circle in Argyle Village in Jacksonville, Florida. In connection therewith, DWG Acquisitions entered into a franchise agreement with us. The terms of the franchise agreement were identical to those of the franchise agreements that we enter into with unrelated franchisees, except that we did not require DWG Acquisitions to pay a franchise fee to us. Seenu G. Kasturi owns approximately 8.8% of our common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. We generated a total of $98,802 and $54,611 in royalties from DWG Acquisitions under this agreement during the years ended December 31, 2015 and December 28, 2014, respectively.

 

Between April and June 2014, we loaned $17,952 to DWG Acquisitions. The loan accrued interest at a rate of 6% per year and was payable on demand. The loan was paid off in full by Blue Victory Holdings during the year ended December 28, 2014. Seenu G. Kasturi owns approximately 8.8% of our common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. A description of the loan is set forth herein under Note 7. Notes Receivable in the footnotes to our financial statements beginning on page F-1 of this report.

 

57 

 

 

In November and December 2014, we loaned a total of $16,800 to Quantum Leap QSR, LLC (“Quantum Leap”). The loan accrued interest at a rate of 6% per year and was payable on demand. The loan was paid off in full by Quantum Leap during the year ended December 31, 2015. Ketan Pandya is one of our directors and owned approximately 70% of the equity interests in Quantum Leap. He also serves as the managing member of Quantum Leap. A description of the loan is set forth herein under Note 7. Notes Receivable in the footnotes to our financial statements beginning on page F-1 of this report.

 

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 us. The terms of the franchise agreement were identical to those of the franchise agreements that we enter into with unrelated franchisees. Seenu G. Kasturi owns approximately 8.8% of our common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. We generated a total of $58,180 and $1,502 in royalties from DWG Acquisitions under this agreement during the years ended December 31, 2015 and December 28, 2014, respectively.

 

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 us. The terms of the franchise agreement were identical to those of the franchise agreements that we enter into with unrelated franchisees. Seenu G. Kasturi owns approximately 8.8% of our common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. We generated a total of $44,901 in royalties from DWG Acquisitions under this agreement during the year ended December 31, 2015.

 

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 us. The terms of the franchise agreement were identical to those of the franchise agreements that we enter into with unrelated franchisees. Seenu G. Kasturi owns approximately 8.8% of our common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. We generated a total of $32,819 in royalties from DWG Acquisitions under this agreement during the year ended December 31, 2015.

 

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 owns approximately 8.8% of the Company’s common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. We generated a total of $16,372 in royalties from DWG Acquisitions under this agreement during the year ended December 31, 2015.

 

During the year ended December 31, 2015, we loaned a total of $121,638 to Racing QSR, LLC (“Racing QSR”). The loan accrued interest at a rate of 6% per year and was payable on demand. Seenu G. Kasturi owns approximately 8.8% of our common stock and all of the equity interests in Racing QSR. He also serves as the President, Treasurer and Secretary, and sole member, of Racing QSR. A description of the loan is set forth herein under Note 7. Notes Receivable in the footnotes to our financial statements beginning on page F-1 of this report.

 

58 

 

 

Director Independence

 

Pursuant to Item 407(a)(1)(ii) of Regulation S-K promulgated under the Securities Act, we have adopted the definition of “independent director” as set forth in Rules 5000(a)(19) and 5605(a)(2) of the rules of the Nasdaq Stock Market. Our board of directors is comprised of Fred D. Alexander and Ketan B. Pandya. Mr. Alexander serves as an officer for Blue Victory Holdings, a company that loaned us $17,365 and $448,310 during the years ended December 31, 2015 and December 28, 2014, respectively. Mr. Ketan owned 70% of the outstanding equity interests of Quantum Leap QSR, LLP, a Louisiana limited liability company that we loaned $16,800 to during the year ended December 28, 2014. Accordingly, Messrs. Alexander and Pandya do not qualify as “independent directors” under these rules, and Messrs. Alexander and Pandya are not “independent” for purposes of Rule 5605(c)(2) of the rules of the Nasdaq Stock Market. Our board of directors has not created separately-designated standing committees. Officers are elected annually by our board of directors and serve at the discretion of our board of directors.

 

Item 14. Principal Accountant Fees and Services.

 

The following table presents fees for professional audit services performed by M&K CPAS, PLLC (“M&K CPAS”) for the audit of our financial statements for our fiscal years ended December 31, 2015 and December 28, 2014, and fees billed for other services rendered by M&K CPAS during such years.

 

   2015   2014 
         
Audit Fees:  $27,250   $24,250 
Audit-Related Fees:   ---    --- 
Tax Fees:  $2,400   $2,400 
All Other Fees:   ---    --- 
Total:  $29,650   $26,650 

 

Audit Fees consist of fees billed for professional services rendered by our principal accountant for the audit of our annual financial statements, the review of our interim financial statements included in our quarterly reports, and services that are normally provided by our principal accountant in connection with statutory and regulatory filings or engagements.

 

Audit-Related Fees consist of fees billed for assurance and related services rendered by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.”

 

Tax Fees consists of fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning. These services included assistance regarding federal and state tax compliance and filings.

 

All Other Fees consist of fees billed for products and services provided by our principal accountant, other than those services described above.

 

59 

 

 

Our board of directors serves as our audit committee. It approves the engagement of our independent auditors, and meets with our independent auditors to approve the annual scope of accounting services to be performed and the related fee estimates. It also meets with our independent auditors prior to the completion of our annual audit and reviews the results of their audit and review of our annual and interim consolidated financial statements, respectively. During the course of the year, our chairman has the authority to pre-approve requests for services that were not approved during the annual pre-approval process. The chairman reports any interim pre-approvals at the following quarterly meeting. At each of the meetings, management and our independent auditors update our board of directors regarding material changes to any service engagement and related fee estimates as compared to amounts previously approved. During 2015 and 2014, all audit and non-audit services performed by our independent accountants were pre-approved by our board of directors in accordance with the foregoing procedures.

 

60 

 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

Financial Statements

 

The following financial statements and report of our independent registered public accounting firm are filed as part of this report and incorporated by reference in Item 8. Financial Statements and Supplementary Data of this report:

 

·Report of Independent Registered Public Accounting Firm.

 

·Balance Sheets at December 31, 2015 and December 28, 2014.

 

·Statements of Operations for the Years Ended December 31, 2015 and December 28, 2014.

 

·Statements of Stockholders’ Equity / (Deficit) for the Years Ended December 31, 2015 and December 28, 2014.

 

·Statements of Cash Flows for the Years Ended December 31, 2015 and December 28, 2014.

 

·Notes to Financial Statements.

 

Financial Statement Schedules

 

All financial statement schedules have been omitted because the required information is either not applicable or has been presented in the financial statements.

 

Exhibits

 

The documents set forth below are filed as exhibits to this report. Where so indicated, exhibits that were previously filed with the SEC are incorporated by reference herein.

 

Exhibit No.     Exhibit Description  
     
2.1   Agreement and Plan of Merger, dated June 13, 2014, by and between the Company and ARC Group, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K12G3 filed with the SEC on June 19, 2015)
     
3.1   Articles of Incorporation of ARC Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K12G3 filed with the SEC on June 19, 2015)
     
3.2   Bylaws of ARC Group Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K12G3 filed with the SEC on June 19, 2015)
     
4.1   Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K12G3 filed with the SEC on June 19, 2015)
     
10.1+   Employment Agreement, dated January 22, 2013, between the Company and Richard W. Akam (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on January 28, 2013)

 

61 

 

 

10.2   Consulting Agreement For Term, dated July 12, 2013, by and between the Company and Michael P. Rosenberger (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on July 18, 2013)
     
10.3   Loan Agreement, dated September 13, 2013, by and between the Company and Blue Victory Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on September 19, 2013)
     
10.4   Promissory Note, dated September 13, 2013, issued by the Company in favor of Blue Victory Holdings, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on September 19, 2013)
     
10.5   Consulting Agreement, dated September 13, 2013, by and between the Company and Blue Victory Holdings, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the SEC on September 19, 2013)
     
10.6   Contribution Agreement, dated January 20, 2014, by and between the Company and Paradise on Wings Franchise Group, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on January 24, 2014)
     
10.7   Amended and Restated Operating Agreement of Paradise on Wings Franchise Group, LLC, dated January 20, 2014, by and among the Company and the other members thereto (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on January 24, 2014)
     
10.8   Securities Purchase Agreement, dated February 27, 2014, by and between the Company and Seenu G. Kasturi (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on March 5, 2014)
     
10.9   Promissory Note, dated February 27, 2014, issued by Seenu G. Kasturi in favor of the Company (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on March 5, 2014)
     
10.10+   Summary of Compensation for Daniel Slone (incorporated by reference to Exhibit 10.13 to the Company Form 10-K filed with the SEC on March 31, 2014)
     
10.11   Settlement Agreement and Release, dated January 8, 2015, by and between the Company and J. David Eberle (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2015)
     
23.1   Consent of M&K CPAS, PLLC
     
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

 

62 

 

 

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

 

 

 

+ Management contract or compensatory plan or arrangement.

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files included within Exhibit 101 hereto are furnished and not filed herewith, are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability under those sections.

 

63 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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:  April 14, 2016 By: /s/ Richard W. Akam
    Richard W. Akam
    Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature     Title     Date  
         
/s/ Richard W. Akam   Chief Executive Officer, Chief   April 14, 2016
Richard W. Akam   Operating Officer and Secretary (Principal Executive Officer)    
         
/s/ Daniel Slone   Chief Financial Officer (Principal   April 14, 2016
Daniel Slone   Financial Officer and Principal Accounting Officer)    
         
/s/ Ketan Pandya   Director   April 14, 2016
Ketan Pandya        
         
/s/ Fred D. Alexander   Director   April 14, 2016
Fred D. Alexander        

 

 

 

 

ARC GROUP, Inc.

Index to Financial Statements

 

  Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Balance Sheets at December 31, 2015 and December 28, 2014 F-3
   
Statements of Operations for the Years Ended December 31, 2015 and December 28, 2014 F-4
   
Statements of Stockholders’ Deficit for the Years Ended December 31, 2015 and December 28, 2014 F-5
   
Statements of Cash Flows for the Years Ended December 31, 2015 and December 28, 2014 F-6
   
Notes to Financial Statements F-7

 

F-1 

 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

ARC Group, Inc.

Lafayette, Louisiana

 

We have audited the accompanying balance sheets of ARC Group, Inc. (the “Company”) as of December 31, 2015 and December 28, 2014, and the related statements of operations, changes in stockholders’ equity / (deficit), and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ARC Group, Inc. as of December 31, 2015 and December 28, 2014, and the results of its operations and cash flows for the periods described above in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has insufficient working capital and reoccurring losses from operations, all of which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/S/ M&K CPAS, PLLC

 

www.mkacpas.com

Houston, Texas

April 14, 2016

 

F-2 

 

 

ARC Group, Inc.

Balance Sheets

 

   December 31,   December 28, 
   2015   2014 
         
Assets          
           
Cash and cash equivalents  $6,775   $- 
Accounts receivable, net   11,724    - 
Accounts receivable, net – related party   65,083    43,033 
Notes receivable – related party   121,638    18,600 
Interest receivable – related party   11,380    5,063 
           
Total current assets   216,600    66,696 
           
Deposits   1,806    1,100 
Notes receivable, net of current portion   6,404    10,990 
Equity investment in Paradise on Wings   570,828    818,545 
           
Total assets  $795,638   $897,331 
           
Liabilities and stockholders' deficit          
           
Accounts payable and accrued expenses  $504,037   $495,765 
Accrued expenses – related party   29,733    17,898 
Accrued interest   2,173    11,480 
Advertising fund liabilities   -    31,474 
Settlement agreements payable   452,421    441,056 
Accrued legal settlement   194,181    - 
Notes payable – related party   -    3,420 
Notes payable – in default   7,000    11,000 
Other current liabilities   2,172    4,741 
           
Total current liabilities   1,191,717    1,016,834 
           
Total liabilities   1,191,717    1,016,834 
           
Stockholders' deficit:          
           
Class A common stock – $0.01 par value: 100,000,000 shares authorized, 6,521,035 and 6,362,464 shares issued and outstanding at December 31, 2015 and December 28, 2014, respectively   65,211    63,625 
Additional paid-in capital   3,638,466    3,564,309 
Stock subscriptions receivable   -    (170,000)
Stock subscriptions payable   199,863    289,452 
Accumulated deficit  $(4,299,619)   (3,866,889)
           
Total stockholders' deficit   (396,079)   (119,503)
           
Total liabilities and stockholders' deficit  $795,638   $897,331 

 

The accompanying notes are an integral part of these financial statements

 

F-3 

 

  

ARC Group, Inc.

Statements of Operations

 

   For the Year Ended 
   December 31, 2015   December 28, 2014 
         
Revenue:          
Net revenue  $499,231   $426,415 
Net revenue – related party   467,700    162,441 
           
Total net revenue   966,931    588,856 
           
Operating expenses:          
Professional fees   160,178    184,644 
Employee compensation expense   585,128    418,519 
General and administrative expenses   175,179    185,648 
           
Total operating expenses   920,485    788,811 
           
Income / (loss) from operations   46,446    (199,955)
           
Other income / (expense):          
Interest expense   (16,452)   (24,408)
Income (loss) from investment in Paradise on Wings   (247,717)   18,545 
Losses on litigation   (221,323)   - 
Interest income — related party   6,316    11,938 
Other income   -    47 
           
Total other income / (expense)   (479,176)   6,122 
           
Net loss  $(432,730)  $(193,833)
           
Net loss per share – basic and fully diluted  $(0.07)  $(0.03)
           
Weighted average number of shares outstanding – basic and fully diluted   6,500,294    6,255,668 

 

The accompanying notes are an integral part of these financial statements

 

F-4 

 

  

ARC Group, Inc.

Statement of Stockholders' Equity / (Deficit)

 

       Additional   Stock   Stock         
   Common Stock   Paid-in   Subscriptions   Subscriptions   Accumulated     
   Shares   Par Value   Capital   Receivable   Payable   Deficit   Total 
Balance at December 29, 2013    5,659,418   $ 56,594   $ 2,340,736   $ -   $ 139,080   $ (3,673,056)  $ (1,136,646)
                             
Common stock issued for note receivable – related party   206,061    2,061    337,939    (170,000)   -    -    170,000 
Common stock issued for services   78,433    784    69,216    -    372    -    70,372 
Common stock issued upon conversion of promissory notes – related party   326,017    3,260    567,269    -    -    -    570,529 
Imputed interest on no-interest loans   -    -    75    -    -    -    75 
Common stock issued for investment in Paradise on Wings   235,295    2,353    397,647    -    -    -    400,000 
Common stock reclassified to unissued shares   (142,857)   (1,428)   (148,572)   -    150,000    -    - 
Common stock issued for reverse stock split   97    1    (1)   -    -    -    - 
Net loss   -    -    -    -    -    (193,833)   (193,833)
                                    
Balance at December 28, 2014   6,362,464   $63,625   $3,564,309   $(170,000)  $289,452   $(3,866,889)  $(119,503)
                                    
Common stock issued for services   101,429    1,015    57,586    -    411    -    59,012 
Common stock issued for settlement of litigation   57,142    571    16,571    -    (90,000)   -    (72,858)
Common stock issued for note receivable – related party   -    -    -    170,000    -    -    170,000 
Net loss   -    -    -    -    -    (432,730)   (432,730)
                                    
Balance at December 31, 2015   6,521,035   $65,211   $3,638,466   $-   $199,863   $(4,299,619)  $(396,079)

 

The accompanying notes are an integral part of these financial statements

 

F-5 

 

   

ARC Group, Inc.

Statements of Cash Flows

 

   For the Years Ended 
   December 31, 2015   December 28, 2014 
         
Cash flows from operating activities          
           
Net loss  $(432,730)  $(193,833)
Adjustments to reconcile net loss to net cash used by operating activities:          
Stock issued for compensation and amortization of stock compensation expense   59,012    70,373 
Imputed interest on no-interest loans   -    75 
Losses on litigation   221,323    - 
Changes in operating assets and liabilities:          
Accounts receivable   (11,724)   8,147 
Accounts receivable – related party   (22,051)   (25,655)
Notes receivable   -    (10,990)
Interest receivable – related party   (6,316)   (5,063)
Deposits   (706)   - 
Equity investment in Paradise on Wings   247,717    (18,545)
Accounts payable and accrued liabilities   (1,183)   (70,613)
Accrued liabilities – related party   8,439    (22,168)
Advertising fund liabilities   (31,474)   31,474 
Settlement agreements payable   (88,635)   11,241 
Other current liabilities   975    3,940 
           
Net cash used by operating activities   (57,353)   (221,617)
           
Cash flows from investing activities          
           
Equity investment in Paradise on Wings   -    (400,000)
Issuance of notes receivable – related party   (297,918)   (18,600)
Repayments of notes receivable   4,586    16,845 
Repayments of notes receivable – related party   194,880    - 
           
Net cash used by investing activities   (98,452)   (401,755)
           
Cash flows from financing activities          
           
Proceeds from issuance of notes payable – related party   1,987,953    1,656,116 
Repayments of notes payable   (4,000)   - 
Repayments of notes payable – related party   (1,991,373)   (1,207,806)
Proceeds from stock subscriptions receivable   170,000    170,000 
           
Net cash provided by financing activities   162,580    618,310 
           
Net decrease in cash and cash equivalents   6,775    (5,062)
Cash and cash equivalents, beginning of period   -    5,062 
           
Cash and cash equivalents, end of period  $6,775   $- 
           
Supplemental disclosure of cash flow information          
           
Cash paid for interest  $-   $- 
Cash paid for income taxes  $-   $- 
           
Schedule of non-cash financing activities          
           
Equity investment in Paradise on Wings  $-   $400,000 
Stock issued upon conversion of notes payable – related party  $-   $570,529 
Stock issued for stock subscriptions payable  $49,452   $49,080 
Stock issued for settlement of litigation  $90,000   $- 

 

The accompanying notes are an integral part of these financial statements

 

F-6 

 

  

ARC Group, Inc.

Notes to Financial Statements

 

Note 1. Description of Business

 

ARC Group, Inc., formerly American Restaurant Concepts, 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. The Company establishes restaurants by entering into franchise agreements with qualified parties and generates revenue by granting franchisees the right to use the name “Dick’s Wings” and offer the Dick’s Wings product line in exchange for royalty payments, franchise fees and area development fees.

 

At December 31, 2015, the Company had 20 restaurants and two Dick’s Wings concession stands. Of the 20 restaurants, 16 were located in Florida and four were located in Georgia. The Company’s concession stands at EverBank Field are also located in Florida. All of the Company’s restaurants are owned and operated by franchisees, and the Company’s concession stands at EverBank Field is licensed to a third-party operator.

 

On June 13, 2014, the Company’s shareholders approved proposals to change the name of the Company from “American Restaurant Concepts, Inc. to “ARC Group, Inc.” and change the Company’s state of incorporation from Florida to Nevada. The changes became effective on July 16, 2014.

 

Note 2. Significant Accounting Policies

 

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

 

Basis of Presentation

 

The Company’s financial statements have been prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

 

Going Concern 

 

As shown in the accompanying financial statements, the Company incurred net losses of $432,730 and $193,833 for the years ended December 31, 2015 and December 28, 2014, respectively. As of December 31, 2015, the Company's accumulated deficit was $4,299,619. During the years ended December 31, 2015 and December 28, 2014, the Company experienced negative cash flows from operations. Those facts create an uncertainty about the Company's ability to continue as a going concern.

 

The Company's ability to continue as a going concern is dependent upon its successfully executing its plans to generate positive cash flows during fiscal year 2016. The Company's financial statements do not include any adjustments that might be necessary if it were unable to continue as a going concern.

 

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.

 

F-7 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

Reclassifications

 

Certain amounts in the Company’s financial statements for 2014 have been reclassified to conform to the 2015 presentation. These reclassifications did not result in any change to the previously reported total assets, net loss or stockholders’ deficit.

 

Fiscal Year

 

The Company utilizes a 52- or 53-week accounting period that ends on the last Sunday in December. Each of the fiscal years ended December 31, 2015 and December 28, 2014 were comprised of 52 weeks.

 

On June 18, 2014, the Company’s board of directors approved a resolution changing the Company’s fiscal year end from the last Sunday in December of the applicable calendar year to December 31st. The change became effective beginning with the Company’s 2015 fiscal year. Pursuant to Rules 13a-10 and 15d-10 of the Securities Exchange Act of 1934, as amended, the Company was not required to file a transition report in connection with the change of its fiscal year end.

 

Franchise Operations

 

The Company enters into franchise agreements with each of its franchisees to build and operate restaurants using the Dicks Wings brand within a defined geographic area. Franchisees are required to operate their restaurants in compliance with their franchise agreements, which includes adherence to operating and quality control procedures established by the Company. The Company is not required to provide loans, leases, or guarantees to franchisees or the franchisees’ employees and vendors. If a franchisee becomes financially distressed, the Company is not required to provide financial assistance. If financial distress leads to insolvency of the franchisee or the filing of a petition by or against the franchisee under bankruptcy laws, the Company has the right, but not the obligation, to acquire the franchise at fair value as determined by an independent appraiser selected by the Company. Franchisees generally remit royalty payments weekly for the prior week’s sales. Franchise and area development fees are paid upon the signing of the related agreements.

 

Revenue Recognition

 

The Company’s revenue consists primarily of royalty payments, franchise fees and area development fees that it receives from its franchisees.  The Company generates revenue by entering into franchise agreements with parties to build and operate restaurants using the Dick’s Wings® brand within a defined geographical area. The agreements have a 10-year term and can be renewed for one additional 10-year term. The Company provides the use of its Dick’s Wings trademarks and Dick’s Wings system, which includes uniform operating procedures, standards for consistency and quality of products, technical knowledge, and procedures for accounting, inventory control and management, in return for the royalty payments, franchise fees and area development fees.

 

F-8 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

The Company recognizes the royalties, franchise fees and area development fees that it receives as 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. Royalties are accrued as earned and are calculated each period based on restaurant sales. Franchise fee revenue 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 generated revenue of $966,931 and $588,856 during the years ended December 31, 2015 and December 28, 2014, respectively.

 

Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of 90 days or less on the date of purchase to be cash equivalents in accordance with ASC Topic 305, Cash and Cash Equivalents. The Company had cash and cash equivalents of $6,775 at December 31, 2015. The Company did not have any cash and cash equivalents at December 28, 2014.

 

Accounts Receivable

 

Accounts receivable consists primarily of contractually-determined receivables primarily for franchise fees and royalties due from, but not yet paid by, the Company’s franchisees. Accounts receivable, net of the allowance for doubtful accounts, represents the estimated net realizable value of the Company’s accounts receivable. Provisions for doubtful accounts are recorded based on historical collection experience, the age of the receivables and current economic conditions, and are written off when they are deemed uncollectible, all in accordance with ASC Topic 310, Receivables. The Company had accounts receivable, net of the allowance for doubtful accounts, from related parties of $65,083 and $43,033 at December 31, 2015 and December 28, 2014, respectively, and accounts receivable, net of the allowance for doubtful accounts, from unrelated third parties of $11,724 and $-0- at December 31, 2015 and December 28, 2014, respectively.

 

The accounts receivable balance at December 31, 2105 was comprised primarily of unpaid royalties, franchisee fees and licensing fees due from one of the Company’s franchisees that was behind in its payments, all of which the Company expects to collect in full in early 2016. Accordingly, the allowance for doubtful accounts was zero at December 31, 2015. The accounts receivable balance at December 28, 2014 was comprised primarily of unpaid royalties due from one of the Company’s franchisees that was behind in its payments, all of which the Company collected in full in early 2015. Accordingly, the allowance for doubtful accounts was zero at December 28, 2014.

 

F-9 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

Property and Equipment

 

Property and equipment is stated at cost, less accumulated depreciation and amortization, in accordance with ASC Topic 360, Property, Plant and Equipment (“ASC 360”). Depreciation and amortization are calculated using the straight-line basis over the estimated useful lives of the related assets. The cost of major improvements to the Company’s property and equipment are capitalized. The cost of maintenance and repairs that do not improve or extend the life of the applicable assets is expensed as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reported in the period realized.

 

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable in accordance with ASC 360. Recoverability is measured by comparison of the carrying amount of the assets to the future undiscounted net cash flows that the assets are expected to generate. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company had property and equipment of $4,674 and accumulated depreciation of $4,674 at December 31, 2015 and December 28, 2014.

 

Long-Lived Assets

 

The Company reviews long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable in accordance with ASC 360. Recoverability is measured by comparison of the carrying amount of the assets to the future undiscounted net cash flows that the assets are expected to generate. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company did not have any long-lived assets at December 31, 2015 and December 28, 2014.

 

Financial Instruments

 

The Company accounts for its financial instruments in accordance with ASC Topic 825, Financial Instruments, which requires the disclosure of fair value information about financial instruments when it is practicable to estimate that value. The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and other short-term liabilities approximates their respective fair values due to the short-term maturities of these instruments. The carrying amounts of the notes receivable and notes payable also approximates their respective fair values 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.

 

F-10 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

Debt Discounts, Deferred Financing Costs and Imputed Interest

 

The Company accounts for debt discounts and deferred financing costs in accordance with ASC Topic 470, Debt (“ASC 470”). Debt discounts and deferred financing costs are amortized through periodic charges to interest expense over the maximum term of the related financial instrument using the effective interest method. The Company did not incur any amortization of debt discounts and deferred financing costs during the years ended December 31, 2015 and December 28, 2014.

 

The Company accounts for imputed interest in accordance with ASC Topic 835, Interest.  During the years ended December 31, 2015 and December 28, 2014, the Company borrowed funds from related parties pursuant to loans that were interest free and payable on demand.  The loans did not have a definite term.  Based upon the interest rates charged to the Company for comparable loans made to the Company in the recent past, the Company applied an imputed interest rate of 6% to the loans.   In addition, since the loans did not have a definite term, the Company was unable to calculate a discount associated with the loans.  As a result, the Company accounted for imputed interest with respect to the loans by recording interest expense as it was incurred.  The Company incurred $75 of imputed interest during the year ended December 28, 2014, respectively, which was credited to additional paid-in capital since the interest was not payable. The Company did not incur any imputed interest during the year ended December 31, 2015.

 

Fair Value Measurements

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the Company’s principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company determines fair value using a fair value hierarchy that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the Company, and the Company’s own assumptions about market participant assumptions developed based on the best information available in the circumstances.

 

The levels of fair value hierarchy are:

 

Level 1:  Quoted prices in active markets for identical assets and liabilities at the measurement date;

 

Level 2:  Observable inputs other than quoted prices included in Level 1, such as: (i) quoted prices for similar assets and liabilities in active markets, (ii) quoted prices for identical or similar assets and liabilities in markets that are not active, and (iii) other inputs that are observable or can be corroborated by observable market data; and

 

Level 3:  Unobservable inputs for which there is little or no market data available.

 

A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. In contrast, the Company considers unobservable data to be data that reflects the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 

F-11 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

Investments

 

On January 20, 2014, the Company purchased a 50% ownership interest in Paradise on Wings Franchise Group, LLC, a Utah limited liability company that is the franchisor of the Wing Nutz® brand of restaurants (“Paradise on Wings”). A description of the investment in Paradise on Wings is set forth herein under Note 4. Investment in Paradise on Wings.

 

The Company accounted for its investment in Paradise on Wings under the equity method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 323Investments – Equity Method and Joint Ventures (“ASC 323”). ASC 323 provides that investments be accounted for under the equity method of accounting when the investor has the ability to exert significant influence, but not control, over the operating and financial policies of the investee. The determination of the level of influence that an investor has over each equity method investment involves consideration of such factors as the investor’s ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. Investments accounted for under the equity method are recorded at the fair value amount of the investor’s initial investment on the balance sheet and adjusted each period for the investor’s share of the investee’s income or loss. The investor’s share of the income or losses from equity investments is reported as a component of other income / (expense) in the statements of operations.   Contributions paid to, and distributions received from, equity investees are recorded as additions or reductions, respectively, to the respective investment balance.

 

The Company reviews its investment in Paradise on Wings for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable in accordance with ASC 323. The standard for determining whether an impairment must be recorded under ASC 323 is whether an “other-than-temporary” decline in value of the investment has occurred. The evaluation and measurement of impairments under ASC 323 involves quantitative and qualitative factors and circumstances surrounding the investment, such as recurring operating losses, credit defaults and subsequent rounds of financing. If an unrealized loss on the investment is considered to be other-than-temporary, the loss is recognized in the period the determination is made and the value of the investment is reduced by the amount of the loss.

 

Advertising Costs

 

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 one percent (1%), but not more than two percent (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. The instead constitute agency transactions. Related advertising obligations are accrued and the costs expensed at the same time the related contributions are recognized. These advertising fees are recorded as a liability against which specific costs are charged.

 

F-12 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

The Company’s advertising fund liability was $31,474 at December 28, 2014. The Company did not have any advertising fund liability at December 31, 2015.

 

Payments Received From Vendors

 

Vendor allowances include allowances and other funds that the Company receives from vendors. Certain of these funds are determined based on various quantitative contract terms. The Company also receives vendor allowances from certain manufacturers and distributors calculated based upon purchases made by franchisees. Vendor allowances are not recognized as revenue. Instead, they are recognized as a reduction in costs. The Company generally receives payment from vendors approximately 30 days from the end of a month for that month’s purchases. The Company received vendor allowances of $33,325 and $15,210 during the years ended December 31, 2015 and December 28, 2014, respectively.

 

Stock-Based Compensation

 

The Company accounts for employee stock-based compensation in accordance with the fair value recognition provisions of ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), using the modified prospective transition method. Under this method, compensation expense includes: (a) compensation expense for all stock-based payments granted, but not yet vested, as of January 1, 2006 based on the grant-date fair value, and (b) compensation expense for all stock-based payments granted subsequent to January 1, 2006 based on the grant-date fair value. Such amounts have been reduced to reflect the Company’s estimate of forfeitures of all unvested awards.

 

The Company accounts 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 the Company 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 non-employees.

 

The Company uses the Black-Scholes pricing model to determine the fair value of the stock-based compensation that it grants 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 the Company’s 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 the Company’s net income or loss. The computation of volatility is intended to produce a volatility value that is representative of the Company’s expectations about the future volatility of the price of its common stock over an expected term. The Company used its share price history to determine volatility and cannot predict what the price of its shares of common stock will be in the future. As a result, the volatility value that the Company calculated may differ from the actual volatility of the price of its shares of common stock in the future.

 

F-13 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

The Company recognized stock compensation expense of $59,012 and $70,372 during the years ended December 31, 2015 and December 28, 2014, respectively.

 

Income Taxes

 

The Company uses the liability method of accounting for income taxes in accordance with ASC Topic 740, Income Taxes, under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as part of the provision for income taxes in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized in the future.

 

Net deferred tax assets consisted of the following components at December 31, 2015 and December 28, 2014:

 

   December 31,   December 28, 
   2015   2014 
Deferred tax assets:        
Net operating loss carryforwards  $908,297   $831,768 
Deferred tax liabilities   ---    --- 
Valuation allowance   (908,297)   (831,768)
Net deferred tax asset  $---   $--- 

 

The Company had net operating loss carry-forwards of approximately $2,383,982 and $2,231,587 at December 31, 2015 and December 28, 2014, respectively, that may be offset against future taxable income between the years of 2023 and 2033. No tax benefit has been reported in the December 31, 2015 and December 28, 2014 financial statements because the potential tax benefit is offset by a valuation allowance of the same amount. The Company had no uncertain tax positions at December 31, 2015 and December 28, 2014.

 

Utilization of net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations contained in the Internal Revenue Code of 1986, as amended, as well as similar state and foreign provisions. These ownership changes may limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income and tax, respectively. On November 2, 2012, William D. Leopold purchased 2,218,572 shares of the Company’s common stock, which represented approximately 41.2% of the outstanding shares of the Company’s common stock on that date, from Michael Rosenberger, who was then serving as the Company’s Chief Executive Officer, Chief Financial Officer, Secretary and sole member of the Company’s board of directors. This transaction could be deemed to have resulted in a change in ownership of the Company. Subsequent ownership changes could further affect the limitation in future years. These annual limitation provisions may result in the expiration of certain net operating losses and credits before utilization.

 

F-14 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue with Contracts from Customers (“ASU 2014-09”). ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The guidance introduces a five-step model to achieve its core principal 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. The updated guidance is effective for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. The Company is currently evaluating the impact of the updated guidance but it does not believe the adoption of ASU 2014-09 will 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”). This update 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. This update is effective for the fiscal years ending after December 15, 2016 and for annual periods and interim periods thereafter. Early application is permitted. ASU 2014-15 did not have a material impact on the Company’s financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 modifies the analysis that must be performed to determine whether a reporting entity should consolidate certain types of legal entities. The updated guidance is effective for interim and annual periods beginning after December 15, 2015, and early adoption is permitted. The Company does not believe the adoption of ASU 2014-09 will have a material impact 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 Loss Per Share

 

The Company calculates basic and diluted net loss per share in accordance with ASC Topic 260, Earnings per Share. Basic net 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 loss for the applicable period by the weighted-average number of shares of common stock outstanding during the applicable period. Diluted net loss per share is calculated by dividing the reported net 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.

 

F-15 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

All of the shares of common stock underlying exercisable or convertible securities that were outstanding at December 31, 2015 and December 28, 2014 were excluded from the computation of diluted net loss per share for the years ended December 31, 2015 and December 28, 2014 because they were anti-dilutive. As a result, basic net loss per share was equal to diluted net loss per share for the years ended December 31, 2015 and December 28, 2014.

 

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”).

 

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.

 

F-16 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

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, is 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 accounts for its 50% ownership interest in Paradise on Wings using the equity method of accounting because the Company has 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 year ended December 31, 2015 and the period beginning January 21, 2014 and ending December 28, 2014 provided to the Company by Paradise on Wings.

 

Statement of Operations  Year
Ended
December 31,
2015
   Period From
January 21,
2014 Through
December 28,
2014
 
Revenue  $348,781   $313,087 
Operating expenses   (585,384)   (276,496)
Income (loss) from operations   (236,603)   36,591 
Other income (expense)   (258,832)   499 
Net income (loss)  $(495,435)  $37,090 
           
Company’s share of net income (loss)  $(247,717)  $18,545 

 

F-17 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

Set forth below is a summary of the unaudited balance sheet of Paradise on Wings at December 31, 2015 and December 28, 2014 provided to the Company by Paradise on Wings.

 

Balance Sheet  December 31,
2015
   December 28,
2014
 
Current assets  $62,460   $89,968 
Equity investment   141,168    400,000 
Note receivable   -    160,051 
Total assets  $203,628   $650,019 
           
Total liabilities  $101,023   $43,300 
Equity   102,605    606,719 
Total liabilities and equity  $203,628   $650,019 

 

Note 5. Fair Value Measurements

 

On January 20, 2014, the Company purchased a 50% ownership interest in Paradise on Wings. A description of the investment in Paradise on Wings is set forth herein under Note 4. Investment in Paradise on Wings.

 

The following table presents the Company’s equity investment in Paradise on Wings within the fair value hierarchy utilized to measure fair value on a recurring basis at December 31, 2015 and December 28, 2014:

 

   Level 1   Level 2   Level 3 
Equity investments – December 31, 2015  $-0-   $570,828   $-0- 
Equity investments – December 28, 2014  $-0-   $818,545   $-0- 

 

The Company’s other financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, accrued liabilities and notes payable. The estimated fair values of the cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and other short-term liabilities 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.

 

F-18 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

Note 6. Commitments and Contingencies

 

Employment & Consulting Agreements

 

On July 12, 2013, the Company entered into a consulting agreement with Michael Rosenberger, who then served as the Company’s Chief Executive Officer, Chief Financial Officer and Secretary, pursuant to which Mr. Rosenberger agreed to assist the Company with its prior business and future business during a term beginning July 31, 2013 and ending December 31, 2013. In return, the Company agreed to pay Mr. Rosenberger $70,000 on July 31, 2013 and to make payments of $32,500 to Mr. Rosenberger on September 1, 2013, October 15, 2013, December 1, 2013 and December 31, 2013. In the event the Company failed to make one or more of these payments to Mr. Rosenberger in the amounts and on the dates specified in the consulting agreement, ownership of the Trademarks would have reverted back to Moose River, Inc. and the License Agreement would have continued in full force and effect. The consulting agreement became effective on July 31, 2013. All payments to Mr. Rosenberger were made in the amounts and on the dates specified in the consulting agreement. The Company recognized $1,699 of consulting expense in connection therewith during the year ended December 28, 2014.

 

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 OTC Bulletin Board 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 OTC Bulletin Board for the month of January of the applicable year.  

 

Notwithstanding the above, and in connection therewith, Mr. Akam agreed that the number of shares that may be earned by him under his employment agreement in connection with any particular grant would be equal to the lesser of: (i) 71,429 shares of common stock, or (ii) the number of shares of common stock calculated by dividing $50,000 by the closing price of the Company’s common stock on the day immediately preceding the date the Company’s obligation to issue the shares to him fully accrues. Mr. Akam also agreed that in the event the Company 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.

 

F-19 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

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

 

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

 

On July 22, 2013, the Company issued 71,429 shares of its common stock to Richard Akam pursuant to the terms of the employment agreement.

 

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 is not receiving 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. 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. In connection therewith, on August 19, 2013, Richard Akam resigned as the Company’s Chief Financial Officer. Mr. Akam retained his positions as the Company’s Chief Executive Officer, Chief Operating Officer and Secretary.

 

On January 1, 2014, Richard Akam earned 28,433 shares of common stock under the terms of his employment agreement with the Company, and on January 1, 2015, Mr. Akam earned 71,429 shares of common stock under the terms of his employment agreement with the Company.

 

Operating Leases

 

In January 2013, the Company entered into a commercial lease with GGRD II, LLC for its corporate headquarters located at 13453 North Main Street, Jacksonville, Florida pursuant to which the Company leases approximately 1,800 square feet of space. The lease provided for a fixed monthly rent payment of $1,100 and expired on January 31, 2015.

 

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.

 

F-20 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

Future minimum annual payments under the leases as of December 31, 2015 are as follows:

 

Year 

Lease

Payment

 
2016  $22,871 
2017   22,069 
2018   -0- 
2019   -0- 
2020   -0- 
Thereafter   -0- 
Total  $44,940 

 

Note 7. 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 are for terms ranging from one year to three years in duration, are payable in monthly installments, and do not require the payment of any interest. Payments in the aggregate amount of $2,652 and $10,313 were made against the loans during the years ended December 31, 2015 and December 28, 2014, respectively.

 

In September 2014, the Company made a loan to one of its franchisees in the aggregate original principal amount of $6,329. 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 $1,934 and $503 were made against the loan during the years ended December 31, 2015 and December 28, 2014, respectively.

 

Notes Receivable - Related Parties

 

In December 2013, the Company loaned $6,000 to DWG Acquisitions, LLC, a Florida limited liability company (“DWG Acquisitions”). The loan accrued interest at a rate of 6% per year and was payable on demand. The loan was paid off in full by Blue Victory Holdings, Inc., a Nevada corporation (“Blue Victory”), during the three-month period ended March 30, 2014. The repayment was made by Blue Victory in the form of a reduction in the balance of the loans outstanding under the revolving line of credit facility that Blue Victory extended to the Company in September 2013. A description of the credit facility is set forth herein under Note 8. Debt Obligations.

 

Between April and June 2014, the Company loaned $17,952 to DWG Acquisitions.  The loan accrued interest at a rate of 6% per year and was payable on demand. The loan was paid off in full by Blue Victory during the year ended December 28, 2014. The repayment was made by Blue Victory in the form of a reduction in the balance of the loans outstanding under the revolving line of credit facility that Blue Victory extended to the Company in September 2013. A description of the credit facility is set forth herein under Note 8. Debt Obligations.

 

In October 2014, the Company loaned $3,700 to Yobe Acquisition, LLC (“Yobe Acquisition”). The loan accrued interest at a rate of 6% per year and was payable on demand. No payments were made under the loan during the year ended December 28, 2014. The loan was paid off in full by Blue Victory during the year ended December 31, 2015. The repayment was made by Blue Victory in the form of a reduction in the balance of the loans outstanding under the revolving line of credit facility that Blue Victory extended to the Company in September 2013. A description of the credit facility is set forth herein under Note 8. Debt Obligations.

 

F-21 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

In November and December 2014, the Company loaned a total of $16,800 to Quantum Leap QSR, LLC (“Quantum Leap”). The loan accrued interest at a rate of 6% per year and was payable on demand. No payments were made under the loan during the year ended December 28, 2014. The loan was paid off in full by Blue Victory during the year ended December 31, 2015. The repayment was made by Blue Victory in the form of a reduction in the balance of the loans outstanding under the revolving line of credit facility that Blue Victory extended to the Company in September 2013. A description of the credit facility is set forth herein under Note 8. Debt Obligations.

 

During the year ended December 31, 2015, the Company loaned a total of $121,638 to Racing QSR, LLC (“Racing QSR”). The loan accrued interest at a rate of 6% per year and was payable on demand. Racing QSR did not make any payments under the loan during the year ended December 31, 2015. Accordingly, the outstanding balance of the loan was $121,638 at December 31, 2015.

 

The carrying value of the Company’s outstanding notes receivable was $128,042 at December 31, 2015. A total of $6,404 of the notes receivable are reflected in cash flows from operating activities because the loans were made to assist the respective franchisees with the payment of franchisee fees owed to the Company. The remaining balance of $121,638 of the notes receivable are reflected in cash flows from investing activities because the loans were not made in connection with the payment of franchise fees, royalties or other revenue owed to the Company.

 

The carrying value of the Company’s outstanding notes receivable was $29,590 at December 28, 2014. A total of $10,990 of the notes receivable are reflected in cash flows from operating activities because the loans were made to assist the respective franchisees with the payment of franchisee fees owed to the Company. The remaining balance of $18,600 of the notes receivable are reflected in cash flows from investing activities because the loans were not made in connection with the payment of franchise fees, royalties or other revenue owed to the Company.

 

Note 8. Debt Obligations

 

The carrying value of the Company’s outstanding promissory notes, net of unamortized discount, was $7,000 and $14,420 at December 31, 2015 and December 28, 2014, respectively, of which $7,000 and $11,000 was in default on December 31, 2015 and December 28, 2014, respectively. Accrued interest under the Company’s outstanding promissory notes was $2,174 and $11,480 at December 31, 2015 and December 28, 2014, respectively.

 

A summary of the terms of the promissory notes that were outstanding during the years ended December 31, 2015 and December 28, 2014 is provided below.

 

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, on December 31, 2015, a total original principal balance of $7,000 was outstanding under the two remaining notes. These notes are currently in default.

 

F-22 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

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.

 

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 “Termination Date”). 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 OTC Bulletin Board 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.

 

F-23 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

On November 5, 2013, the Company had a total of $475,626 of principal and accrued but unpaid interest outstanding under the credit facility. On that date, Blue Victory converted all of the outstanding principal and accrued interest into a total of 243,911 shares of the Company’s common stock. No gain or loss was recognized in connection with the conversion because the conversion was made in accordance with the terms of the credit facility.

 

Between November 6, 2013 and January 21, 2014, the Company borrowed an additional $567,662 under the credit facility.

 

On January 21, 2014, the Company had a total of $570,529 of principal and accrued but unpaid interest outstanding under the credit facility. On that date, Blue Victory converted all of the outstanding principal and accrued interest into a total of 326,017 shares of the Company’s common stock. No gain or loss was recognized in connection with the conversion because the conversion was made in accordance with the terms of the credit facility.

 

In December 2013, the Company borrowed $5,000 from Star Brands II, a Louisiana limited liability company. The loan was interest free and payable on demand. The loan was paid off in full by Blue Victory during the three-month period ended March 30, 2014. The payment was made by Blue Victory in the form of a loan under the revolving line of credit facility that Blue Victory extended to the Company in September 2013. A description of the credit facility is set forth herein under Note 8. Debt Obligations.

 

Between January 22, 2014 and December 28, 2014, the Company borrowed an additional $1,445,216 under the credit facility, and between June 30, 2014 and December 28, 2014, the Company repaid $1,441,796 under the credit facility. Accordingly, as of December 28, 2014, the outstanding principal amount of the credit facility was $3,420.

 

Between December 29, 2014 and December 31, 2015, the Company borrowed an additional $1,987,953 under the credit facility. During the year ended December 31, 2015, repayments of $1,991,373 were made by the Company. The loan was paid off in full by the Company during the year ended December 31, 2015.

 

The carrying value of the Company’s outstanding promissory notes, net of unamortized discount, was $7,000 and $14,420 at December 31, 2015 and December 28, 2014, respectively, as follows:  

 

   December 31,   December 28, 
   2015   2014 
Notes payable – related party  $-0-   $3,420 
Notes payable – in default   7,000    11,000 
Total notes payable, net  $7,000   $14,420 

 

Note 9. 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 December 31, 2015 and December 28, 2014, respectively, of which 6,521,035 and 6,362,464 shares of common stock were outstanding at December 31, 2015 and December 28, 2014, respectively.

 

F-24 

 

 

ARC Group, Inc.

Notes to Financial Statements

  

Stock Issuances

 

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 OTC Bulletin Board for the month of January of the applicable year. A description of the employment agreement is set forth herein under Note 6. Commitments and Contingencies – Employment Agreements.

 

On January 1, 2014, Richard W. Akam, the Company’s Chief Executive Officer, Chief Operating Officer and Secretary, earned 28,433 shares of common stock under the terms of his employment agreement with the Company. The Company recognized $920 of stock compensation expense in connection therewith during the year ended December 28, 2014.

 

F-25 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

On January 20, 2014, the Company purchased a 50% ownership interest in Paradise on Wings in exchange for $400,000 in cash and 235,295 shares of common stock. A description of the investment in Paradise on Wings is set forth herein under Note 4. Investment in Paradise on Wings.

 

On January 21, 2014, the Company issued a total of 326,017 shares of common stock to a limited number of accredited investors upon Blue Victory’s conversion of $570,529 of principal and accrued but unpaid interest outstanding under the credit facility entered into between the Company and Blue Victory in September 2013. A description of the credit facility is set forth herein under Note 8. Debt Obligations.

 

On February 27, 2014, the Company entered into a securities purchase agreement with Seenu G. Kasturi pursuant to which Mr. Kasturi agreed to purchase 206,061 shares of the Company’s common stock for $340,000. The price per share of common stock paid by Mr. Kasturi was equal to the closing price of the Company’s common stock on the OTCQB on the day immediately preceding the date the transaction was completed. Mr. Kasturi paid for the shares through the issuance of a promissory note in favor of the Company in the amount of $340,000. The promissory note was unsecured, accrued interest at a rate of 6% per annum, and had a maturity date of March 31, 2015. The principal and interest were payable in four equal quarterly installments of $85,000 beginning June 30, 2014. The investment was reflected in stock subscriptions receivable at December 28, 2014. As of December 28, 2014, a total of $170,000 remained outstanding under the promissory note. The promissory note was paid off in full by Mr. Kasturi during the year ended December 31, 2015.

 

On September 30, 2014, the Company issued 50,000 shares of its common stock to a consultant as full payment for outstanding fees that were due and payable. 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 transaction was completed. The Company recognized $20,000 of stock compensation expense in connection therewith during the year ended December 28, 2014.

 

In January 2015, Richard 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 transaction was completed. The Company recognized $548 of stock compensation expense in connection therewith during the year ended December 31, 2015. The Company also recognized $49,863 of stock compensation expense during the year ended December 31, 2015 in connection with the vesting of the shares of common stock to be earned to Mr. Akam on January 1, 2016 under the terms of his employment agreement with the Company.

 

In January 2015, the Company issued 57,142 shares of its common stock to J. David Eberle pursuant to the terms of the settlement agreement and release that the Company entered into with him in connection with the settlement of the legal proceeding commenced by Mr. Eberle against the Company in April 2012. 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 transaction was completed, which valued the shares at $17,143. The Company recorded a loss on settlement of litigation of $27,143, comprised of the $100,000 settlement amount plus the $17,143 value of the shares, less the $90,000 stock payable recorded before the settlement of the legal proceeding. A description of the legal proceeding and settlement and release agreement is set forth herein under Note 13. Judgments in Legal Proceedings.

 

F-26 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

In February 2015, the Company issued 10,000 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 the transaction was completed. The Company recognized $2,000 of stock compensation expense in connection therewith during the year ended December 31, 2015.

 

In August 2015, 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 the transaction was completed. The Company recognized $6,600 of stock compensation expense in connection therewith during the year ended December 31, 2015.

 

Note 10. 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 years ended December 31, 2015 and December 28, 2014, and no stock options or warrants were exercised or outstanding during the years ended December 31, 2015 and December 28, 2014.

 

Note 11. 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 December 31, 2015, 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 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 December 31, 2015, 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 12. Related-Party Transactions

 

In July 2013, the Company entered into a consulting agreement with Mr. Rosenberger in connection with his resignation from all such positions with the Company and as a member of the Company’s board of directors. A description of the consulting agreement is set forth herein under Note 6. Commitments and Contingencies – Employment Agreements.

 

F-27 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

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 6. Commitments and Contingencies – Employment 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 for a concession stand to be located at EverBank Field in Jacksonville, Florida. The Company subsequently 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. for a second concession stand at EverBank Field. The Company subsequently 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. The Company maintained the fee paid to DWG Acquisitions at $2,000 per month. Seenu G. Kasturi owns approximately 8.8% of the Company’s common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. The Company generated revenue of $24,000 from DWG Acquisitions under the assignment agreements during the years ended December 31, 2015 and December 28, 2014.

 

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. 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. 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 price per share equal to the closing price of the Company’s common stock on the OTCQB on the day immediately preceding the date the transaction is completed. Seenu G. Kasturi owns approximately 8.8% of the Company’s common stock and 90% of the equity interests in Blue Victory. He also serves as the President, Treasurer and Secretary, and as the sole member of the board of directors, of Blue Victory. Fred Alexander serves as a member of the Company’s board of directors and as an executive officer of Blue Victory. The Company had total loans of $3,420 outstanding under the credit facility as of December 28, 2014. The Company did not have any loans outstanding under the credit facility at December 31, 2015. A description of the credit facility is set forth herein under Note 8. Debt Obligations.

 

F-28 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

In October 2013, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located in the Nocatee development in Ponte Vedra, 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, except that the Company did not require DWG Acquisitions to pay a franchise fee to the Company. Seenu G. Kasturi owns approximately 8.8% of the Company’s common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. The Company generated a total of $69,545 and $52,328 in royalties from DWG Acquisitions under the agreement during the years ended December 31, 2015 and December 28, 2014, respectively.

 

In December 2013, the Company loaned $6,000 to DWG Acquisitions. The loan accrued interest at a rate of 6% per year and was payable on demand. The loan was paid off in full by Blue Victory during the year ended December 28, 2014. Seenu G. Kasturi owns approximately 8.8% of the Company’s common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. A description of the loan is set forth herein under Note 7. Notes Receivable.

 

In December 2013, the Company borrowed $5,000 from Star Brands II, LLC, a Louisiana limited liability company (“Star Brands II”). The loan accrued interest at a rate of 6% per year and was payable on demand. The loan was paid off in full by Blue Victory during the year ended December 28, 2014. Seenu G. Kasturi owns approximately 8.8% of the Company’s common stock and 70% of the equity interests in Star Brands II. He also serves as the Manager of Star Brands II. A description of the loan is set forth herein under Note 8. Debt Obligations.

 

In February 2014, the Company entered into a securities purchase agreement with Seenu G. Kasturi pursuant to which Mr. Kasturi agreed to purchase 206,061 shares of the Company’s common stock for $340,000. The price per share of common stock paid by Mr. Kasturi was equal to the closing price of the Company’s common stock on the OTCQB on the day immediately preceding the date the transaction was completed. Mr. Kasturi paid for the shares through the issuance of a promissory note in favor of the Company in the amount of $340,000. The promissory note was unsecured, accrued interest at a rate of 6% per annum, and had a maturity date of March 31, 2015. The principal and interest were payable in four equal quarterly installments of $85,000 beginning June 30, 2014. Mr. Kasturi owns approximately 8.8% of the Company’s common stock and 90% of the equity interests in Blue Victory. He also serves as the President, Treasurer and Secretary, and as the sole member of the board of directors, of Blue Victory. A description of the transaction is set forth herein under Note 9. Capital Stock.

 

In May 2014, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located on Youngerman Circle in Argyle Village in Jacksonville, 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, except that the Company did not require DWG Acquisitions to pay a franchise fee to the Company. Seenu G. Kasturi owns approximately 8.8% of the Company’s common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. The Company generated a total of $98,802 and $54,611 in royalties from DWG Acquisitions under the agreement during the years ended December 31, 2015 and December 28, 2014, respectively.

 

F-29 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

Between April and June 2014, the Company loaned $17,952 to DWG Acquisitions. The loan accrued interest at a rate of 6% per year and was payable on demand. Seenu G. Kasturi owns approximately 8.8% of the Company’s common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. A description of the loan is set forth herein under Note 7. Notes Receivable.

 

In October 2014, the Company loaned $3,700 to Yobe Acquisition. The loan accrued interest at a rate of 6% per year and was payable on demand. Seenu G. Kasturi owns approximately 8.8% of the Company’s common stock and all of the equity interests in Yobe Acquisition. He also serves as the managing member of Yobe Acquisition. A description of the loan is set forth herein under Note 7. Notes Receivable.

 

In November and December 2014, the Company loaned a total of $16,800 to Quantum Leap. The loan accrued interest at a rate of 6% per year and was payable on demand. Ketan Pandya is a director of the Company and owns approximately 70% of the equity interests in Quantum Leap. He also serves as the managing member of Quantum Leap. A description of the loan is set forth herein under Note 7. Notes Receivable.

 

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 owns approximately 8.8% of the Company’s common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. The Company generated a total of $58,180 and $1,502 in royalties from DWG Acquisitions under the agreement during the years ended December 31, 2015 and December 28, 2014, respectively.

 

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. Seenu G. Kasturi owns approximately 8.8% of the Company’s common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. The Company generated a total of $44,901 in royalties and $30,000 in franchise fees from DWG Acquisitions under the agreement during the year ended December 31, 2015.

 

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. Seenu G. Kasturi owns approximately 8.8% of the Company’s common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. The Company generated a total of $32,819 in royalties and $30,000 in franchise fees from DWG Acquisitions under the agreement during the year ended December 31, 2015.

 

F-30 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

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 owns approximately 8.8% of the Company’s common stock and all of the equity interests in DWG Acquisitions. He also serves as the President, Treasurer and Secretary, and sole member, of DWG Acquisitions. The Company generated a total of $16,372 in royalties and $30,000 in franchise fees from DWG Acquisitions under the agreement during the year ended December 31, 2015.

 

During the year ended December 31, 2015, the Company loaned a total of $121,638 to Racing QSR, LLC (“Racing QSR”). The loan accrued interest at a rate of 6% per year and was payable on demand. Seenu G. Kasturi owns approximately 8.8% of the Company’s common stock and all of the equity interests in Racing QSR. He also serves as the President, Treasurer and Secretary, and sole member, of Racing QSR. A description of the loan is set forth herein under Note 7. Notes Receivable.

 

During the years ended December 31, 2015 and December 28, 2014 the Company earned $467,760 and $162,441 from companies controlled by Seenu Kasturi. Additionally, during the years ended December 31, 2015 and December 28, 2014 the Company borrowed $1,987,953 and $1,656,116 and repaid $1,991,373 and $1,207,806 from Blue Victory Holdings, an entity controlled by Seenu Kasturi.

 

Note 13. Judgments in Legal Proceedings

 

On October 28, 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. 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. In the complaint, the plaintiff 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. In early 2010, Cala breached the terms of the settlement agreement, relieving the Company of any further obligations under the settlement agreement. The Company made total payments of $40,000 under the settlement agreement prior to the breach by Cala. Accordingly, the remaining balance of $210,000 under the settlement agreement was reflected in settlement agreements payable at December 31, 2015 and December 28, 2014.

 

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. This loss was reflected in settlement agreements payable at December 31, 2015 and December 28, 2014. Interest expense in the amount of $11,365 and $10,440 was accrued on the outstanding balance of the settlement agreement payable during the years ended December 31, 2015 and December 28, 2014, respectively. The interest expense was credited to settlement agreements payable.

 

F-31 

 

 

ARC Group, Inc.

Notes to Financial Statements

 

In April 2012, a legal proceeding entitled J. David Eberle vs. American Restaurant Concepts, Inc. was filed with the Circuit Court, Fourth Judicial Circuit in and for Duval County, Florida. In the complaint, J. David Eberle, one of the Company’s former employees, alleged damages for breach of contract, unjust enrichment, promissory estoppel and unpaid wages pursuant to Florida Statute § 448.08.  In January 2015, the Company entered into a settlement agreement and release with Mr. Eberle pursuant to which the Company agreed to pay Mr. Eberle $100,000, such amount to be paid in six monthly payments of $16,667 beginning March 1, 2015, and agreed to issue 57,142 shares of its common stock to Mr. Eberle. In consideration thereof, Mr. Eberle agreed to release the Company from any and all claims that were asserted or that could have been asserted by Eberle in the legal proceeding, and the complaint was dismissed with prejudice. The Company recognized a loss on the settlement of litigation of $27,142 during the year ended December 31, 2015 in connection therewith.

 

In January 2014, a legal proceeding entitled Marcia L. Danzeisen, Larry Simpson and M&MSquared, LLC, vs. American Restaurant Concepts, Inc. was filed with the Circuit Court, Fourth Judicial Circuit in and for Duval County, Florida. In the complaint, one of the Company’s former franchisees alleged damages for breach of contract and unjust enrichment relating to a franchise agreement that the Company had entered into with them in September 2012.  In August 2014, the court granted the Company’s motion to dismiss the complaint.

 

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. This case is currently pending. The Company accrued $194,181 for potential legal settlement at December 31, 2015.

 

Note 14. Subsequent Events

 

In January 2016, Richard Akam earned 71,429 shares of common stock under the terms of his employment agreement with the Company. A description of Mr. Akam’s employment agreement is set forth herein under Note 6. Commitments and Contingencies.

 

There have been no other significant subsequent events through the date these financial statements were issued.

 

F-32 

 

 

Exhibit Index

 

Exhibit     Exhibit Description  
         
23.1 Consent of M&K CPAS, PLLC
   
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

 

 

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files included within Exhibit 101 hereto are furnished and not filed herewith, are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability under those sections.