ARC Group, Inc. - FORM 10-Q/A

Attached files

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EX-31.1 - EXHIBIT 31.1 - ARC Group, Inc.	t1600392_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - ARC Group, Inc.	t1600392_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - ARC Group, Inc.	t1600392_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

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

For the quarterly period ended: March 31, 2016

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

For the transition period from ___________ to ______________

Commission File No. 000-54226

ARC GROUP, INC.

(Exact name of registrant as specified in its charter)

Nevada

59-3649554

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

212 Guilbeau Road
Lafayette, Louisiana 70506

(Address of principal executive offices)

(904) 741-5500

(Registrant’s telephone number, including area code)

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

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

Yes x No ¨

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

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 Exchange Act).

Yes ¨ No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN

BANKRUPTCY PROCEEDINGS DURING THE

PRECEDING FIVE YEARS

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

Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: There were 6,592,464 shares of the issuer’s Class A common stock, $0.01 par value per share, issued and outstanding on May 12, 2016.

EXPLANATORY NOTE

ARC Group, Inc. is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to its quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2016, which was originally filed on May 13, 2016 (the “Original Filing”), solely to amend Part I, Item 4 entitled “Controls and Procedures” of the Original Filing to revise our conclusions regarding the effectiveness of our disclosure controls and procedures.

Except with respect to the above change, this Amendment does not modify or update any other disclosures set forth in the Original Filing. The remaining Items contained within this Form 10-Q/A consist of all other Items originally contained in the Original Filing and are included for the convenience of the reader.

In accordance with applicable SEC rules, this Form 10-Q/A includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.

Except as provided in this Explanatory Note, or as indicated in the applicable disclosure, this Amendment has not been updated to reflect other events occurring after the filing of the Original Filing and does not modify or update information and disclosures in the Original Filing affected by subsequent events. Accordingly, this Amendment should be read in conjunction with the filings that we have made with the SEC subsequent to the date on which we filed the Original Filing, together with any amendments to those filings.

TABLE OF CONTENTS

		Page

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Balance Sheets at March 31, 2016 (unaudited) and December 31, 2015	1

	Statements of Operations for the three-month periods ended March 31, 2016 and March 31, 2015 (unaudited)	2

	Statement of Stockholders’ Deficit for the three-month period ended March 31, 2016 (unaudited)	3

	Statements of Cash Flows for the three-month periods ended March 31, 2016 and March 31, 2015 (unaudited)	4

	Notes to Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 4.	Controls and Procedures	29

PART II – OTHER INFORMATION

Item 2.	Unregistered Sales of Securities and Use of Proceeds	29

Item 6.	Exhibits	29

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

ARC Group, Inc.

Balance Sheets

	March 31,			December 31,
	2016			2015
	(Unaudited)
Assets

Cash and cash equivalents	$	65,219		$	6,775
Accounts receivable, net		21,372			11,724
Accounts receivable, net – related party		122,177			65,083
Notes receivable – related party		150,323			121,638
Interest receivable – related party		11,380			11,380
Other current assets		2,827			-

Total current assets		373,298			216,600

Deposits		1,806			1,806
Notes receivable, net of current portion		5,154			6,404
Equity investment in Paradise on Wings		546,505			570,828

Total assets	$	926,763		$	795,638

Liabilities and stockholders' deficit

Accounts payable and accrued expenses	$	514,441		$	504,037
Accrued expenses – related party		6,882			29,733
Accrued interest		2,279			2,173
Advertising fund liabilities		27,581			-
Settlement agreements payable		455,232			452,421
Accrued legal settlement		194,181			194,181
Notes payable – in default		7,000			7,000
Other current liabilities		2,172			2,172

Total current liabilities		1,209,768			1,191,717

Total liabilities		1,209,768			1,191,717

Stockholders' deficit:

Class A common stock – $0.01 par value: 100,000,000 shares authorized, 6,592,464 and 6,521,035 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively		65,925			65,211
Additional paid-in capital		3,687,752			3,638,466
Stock subscriptions payable		162,295			199,863
Accumulated deficit		(4,198,977	)		(4,299,619	)

Total stockholders' deficit		(283,005	)		(396,079	)

Total liabilities and stockholders' deficit	$	926,763		$	795,638

The accompanying notes are an integral part of these financial statements

ARC Group, Inc.

Statements of Operations (Unaudited)

	For the Three Months Ended
	March 31, 2016			March 31, 2015

Revenue:
Net revenue	$	134,833		$	142,609
Net revenue – related party		173,782			80,407

Total net revenue		308,615			223,016

Operating expenses:
Professional fees		36,160			61,307
Employee compensation expense		130,408			124,870
General and administrative expenses		20,861			44,310

Total operating expenses		187,429			230,487

Income / (loss) from operations		121,186			(7,471	)

Other income / (expense):
Interest income / (expense)		2,915			(7,402	)
Income / (loss) from investment in Paradise on Wings		(24,323	)		15,073
Losses on litigation		-			(27,142	)
Interest income — related party		-			2,578
Other income		864			-

Total other income / (expense)		(20,544	)		(16,893	)

Net income / (loss)	$	100,642		$	(24,364	)

Net income (loss) per share – basic and fully diluted	$	0.02		$	(0.00	)

Weighted average number of shares outstanding – basic and fully diluted		6,591,679			6,486,580

The accompanying notes are an integral part of these financial statements

ARC Group, Inc.

Statement of Stockholders' Deficit (Unaudited)

					Additional		Stock
	Common Stock				Paid-in		Subscriptions			Accumulated
	Shares		Par Value		Capital		Payable			Deficit			Total
Balance at December 31, 2015		6,521,035	$	65,211	$	3,638,466	$	199,863		$	(4,299,619	)	$	(396,079	)

Common stock issued for services		71,429		714		49,286		(37,568	)		-			12,432

Net income		-		-		-		-			100,642			100,642

Balance at March 31, 2016	$	6,592,464	$	65,925	$	3,687,752	$	162,295		$	(4,198,977	)	$	(283,005	)

The accompanying notes are an integral part of these financial statements

ARC Group, Inc.

Statements of Cash Flows (Unaudited)

	For the Three Months Ended
	March 31, 2016			March 31, 2015

Cash flows from operating activities

Net income / (loss)	$	100,642		$	(24,364	)
Adjustments to reconcile net income / (loss) to net cash provided by operating activities:
Stock issued for compensation and amortization of stock compensation expense		12,432			14,740
Losses on litigation		-			27,142
Changes in operating assets and liabilities:
Accounts receivable		(9,648	)		(15,838	)
Accounts receivable – related party		(57,094	)		(2,063	)
Notes receivable		1,250			834
Interest receivable – related party		-			(2,578	)
Deposits		-			(706	)
Equity investment in Paradise on Wings		24,323			(15,073	)
Other current assets		(2,827	)		-
Accounts payable and accrued liabilities		(12,447	)		29,057
Accrued liabilities – related party		106			56
Advertising fund liabilities		27,581			(8,097	)
Settlement agreements payable		2,811			(13,795	)
Other current liabilities		-			16,438

Net cash provided by operating activities		87,129			5,753

Cash flows from investing activities

Issuance of notes receivable – related party		(107,643	)		(1,900	)
Repayment of notes receivable – related party		78,958			-

Net cash used by investing activities		(28,685	)		(1,900	)

Cash flows from financing activities

Proceeds from issuance of notes payable – related party		283,798			161,417
Repayments of notes payable – related party		(283,798	)		(144,052	)
Proceeds from stock subscriptions receivable		-			85,000

Net cash provided by financing activities		-			102,365

Net increase in cash and cash equivalents		58,444			106,218
Cash and cash equivalents, beginning of period		6,775			-

Cash and cash equivalents, end of period	$	65,219		$	106,218

Supplemental disclosure of cash flow information

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

Schedule of non-cash financing activities

Stock issued for stock subscriptions payable	$	-		$	49,452
Stock issued for settlement of litigation	$	-		$	90,000

The accompanying notes are an integral part of these financial statements

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

Note 1. Description of Business

ARC Group, Inc., a Nevada corporation (the “Company”), was incorporated in April 2000. The Company’s business is focused on the development of the Dick’s Wings^® franchise and the acquisition of financial interests in other restaurant brands. The Dick’s Wings concept is currently comprised of traditional restaurants like its Dick’s Wings & Grill^® restaurants and non-traditional units like the Dick’s Wings concession stands that the Company has at EverBank Field. 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 March 31, 2016, the Company had 22 restaurants and two Dick’s Wings concession stands. Of the 22 restaurants, 17 are located in Florida and five are 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.

Note 2. Basis of Presentation

Interim Financial Information

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and in conformity with the instructions to Form 10-Q and Article 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the disclosures included in these financial statements are adequate to make the information presented not misleading.

The unaudited financial statements included in this report have been prepared on the same basis as the annual financial statements and in management’s opinion, reflect all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The unaudited financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K. The results of operations for the three-month period ended March 31, 2016 are not necessarily indicative of the results that the Company will have for any subsequent quarter or full fiscal year.

Estimates

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

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

Reclassifications

Certain amounts in the Company’s financial statements for 2015 have been reclassified to conform to the 2016 presentation. These reclassifications did not result in any change to the previously reported total assets, net loss or stockholders’ deficit.

Going Concern

As shown in the accompanying financial statements, the Company has working capital deficits of $836,470 and $975,117 at March 31, 2016 and December 31, 2015, respectively. At March 31, 2016, the Company’s accumulated deficit was $4,198,977. During the years ended December 31, 2015 and December 28, 2014, the Company experienced negative cash flows from operating activities. 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 it 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.

Significant Accounting Policies

As of March 31, 2016, the Company’s significant accounting policies and estimates, and applicable recent accounting pronouncements, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, had not changed materially.

Note 3. Net Loss Per Share

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

The Company did not have any exercisable or convertible securities outstanding at March 31, 2016. As a result, basic net income per share was equal to diluted net income per share for the three-month period ended March 31, 2016.

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

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

Note 4. Investment in Paradise on Wings

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

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).

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

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 three-month periods ended March 31, 2016 and March 31, 2015 provided to the Company by Paradise on Wings.

Statement of Operations	Three Months Ended March 31, 2016			Three Months Ended March 31, 2015
Revenue	$	69,188		$	94,367
Operating expenses		(84,023	)		(64,221	)
Income / (loss) from operations		(14,835	)		30,146
Other income / (expense)		(33,811	)		-0-
Net income / (loss)	$	(48,646	)	$	30,146

Company’s share of net income / (loss)	$	(24,323	)	$	15,073

Set forth below is a summary of the unaudited balance sheet of Paradise on Wings at March 31, 2016 and December 31, 2015 provided to the Company by Paradise on Wings.

Balance Sheet	March 31, 2016		December 31, 2015
Current assets	$	92,177	$	62,460
Equity investment		129,262		141,168
Total assets	$	221,439	$	203,628

Total liabilities	$	157,126	$	101,023
Equity		64,313		102,605
Total liabilities and equity	$	221,439	$	203,628

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.

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

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 March 31, 2016 and December 31, 2015:

	Level 1		Level 2		Level 3
Equity investments – March 31, 2016	$	-0-	$	546,505	$	-0-
Equity investments – December 31, 2015	$	-0-	$	570,828	$	-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.

Note 6. Commitments and Contingencies

Employment & Consulting Agreements

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.

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

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

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

On July 31, 2013, the Company appointed Richard Akam as its Chief Executive Officer, Chief Financial Officer and Secretary. The Company and Mr. Akam did not amend the employment agreement in connection with the above appointments, and Mr. Akam 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 each of January 1, 2015 and January 1, 2016, 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.

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

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.

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 $723 and $482 were made against the loans during the three-month periods ended March 31, 2016 and March 31, 2015, 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 $527 and $352 were made against the loan during the three-month periods ended March 31, 2016 and March 31, 2015, respectively.

Notes Receivable - Related Parties

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 three-month period ended March 31, 2015. The loan was paid off in full by Blue Victory Holdings, Inc. (“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.

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 three-month period ended March 31, 2015. 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.

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

During the year ended December 31, 2015, the Company loaned a total of $121,638 to Racing QSR, LLC (“Racing QSR”). The Company loaned an additional $107,643 to Racing QSR during the three-month period ended March 31, 2016, of which $78,958 was repaid to the Company by Racing QSR during the three-month period ended March 31, 2016. The loan accrues interest at a rate of 6% per year and is payable on demand. Racing QSR did not make any payments under the loan during the three-month period ended March 31, 2016. The outstanding balance of the loan was $150,323 and $121,638 at March 31, 2016 and December 31, 2015, respectively.

The carrying value of the Company’s outstanding notes receivable was $155,477 at March 31, 2016. A total of $5,154 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 $150,323 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 $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.

Note 8. Debt Obligations

The carrying value of the Company’s outstanding promissory notes, net of unamortized discount, was $7,000 at March 31, 2016 and December 31, 2015, all of which was in default. Accrued interest under the Company’s outstanding promissory notes was $2,279 and $2,174 at March 31, 2016 and December 31, 2015, respectively.

A summary of the terms of the promissory notes that were outstanding during the three-month period ended March 31, 2016 and the year ended December 31, 2015 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, a total original principal balance of $7,000 was outstanding under the two remaining notes at March 31, 2016 and December 31, 2015. These notes are currently in default.

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

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

The credit facility is unsecured, accrues interest at a rate of 6% per annum, and will terminate upon the earlier to occur of the fifth anniversary of the loan agreement or the occurrence of an event of default (the “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.

At 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. Accordingly, no principal was outstanding under the credit facility at December 31, 2015.

During the three-month period ended March 31, 2016, the Company borrowed an additional $283,798 under the credit facility, all of which was repaid by the Company during the three-month period ended March 31, 2016. Accordingly, no principal was outstanding under the credit facility at March 31, 2016.

The carrying value of the Company’s outstanding promissory notes, net of unamortized discount, was $7,000 at March 31, 2016 and December 31, 2015, respectively, as follows:

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

	March 31,		December 31,
	2016		2015
Notes payable – related party	$	-0-	$	-0-
Notes payable – in default		7,000		7,000
Total notes payable, net	$	7,000	$	7,000

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 March 31, 2016 and December 31, 2015, respectively, of which 6,592,464 and 6,521,035 shares of common stock were outstanding at March 31, 2016 and December 31, 2015, respectively.

Stock Issuances

In January 2013, the Company entered into an employment agreement with Richard W. 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.

In each of January 2015 and January 2016, Mr. Akam earned 71,429 shares of common stock under the terms of his employment agreement with the Company. The shares were valued at a price per share equal to the closing price of the Company’s common stock on the OTCQB on the date the transaction was completed. The Company recognized $137 and $17,691 of stock compensation expense in connection therewith during the three-month periods ended March 31, 2016 and March 31, 2015, respectively. The Company also recognized $12,295 of stock compensation expense during the three-month period ended March 31, 2016 in connection with the vesting of the shares of common stock to be earned to Mr. Akam on January 1, 2017 under the terms of his employment agreement with the Company.

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 promissory note was paid off in full by Mr. Kasturi during the year ended December 31, 2015.

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

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 during the three-month period ended March 31, 2015, 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.

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 three-month period ended March 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 three-month period ended March 31, 2016 or the year ended December 31, 2015, and no stock options or warrants were exercised or outstanding during the three-month period ended March 31, 2016 or the year ended December 31, 2015.

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 March 31, 2016, 142,858 shares of the Company’s common stock remained available for issuance under the plan. The plan terminates in August 2021. On August 18, 2011, the Company filed a registration statement on Form S-8, File No. 333-176383, with the SEC covering the public sale of all 1,214,286 shares of common stock available for issuance under the plan.

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

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 March 31, 2016, 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 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 $15,000 and $6,000 from DWG Acquisitions under the assignment agreements during the three-month periods ended March 31, 2016 and March 31, 2015, respectively.

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 did not have any loans outstanding under the credit facility at March 31, 2016 or December 31, 2015. A description of the credit facility is set forth herein under Note 8. Debt Obligations.

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

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 $17,749 and $17,326 in royalties from DWG Acquisitions under the agreement during the three-month periods ended March 31, 2016 and March 31, 2015, respectively.

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 $24,351 and $26,865 in royalties from DWG Acquisitions under the agreement during the three-month periods ended March 31, 2016 and March 31, 2015, respectively.

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.

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

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 $12,418 and $19,417 in royalties from DWG Acquisitions under the agreement during the three-month periods ended March 31, 2016 and March 31, 2015, 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 $10,641 in royalties from DWG Acquisitions under the agreement during the three-month period ended March 31, 2016, and generated a total of $216 in royalties and $30,000 in franchise fees from DWG Acquisitions under the agreement during the three-month period ended March 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 $12,370 in royalties from DWG Acquisitions under the agreement during the three-month period ended March 31, 2016.

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 $12,473 in royalties from DWG Acquisitions under the agreement during the three-month period ended March 31, 2016.

In March 2016, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located in Pensacola, Florida. In connection therewith, DWG Acquisitions entered into a franchise agreement with the Company. The terms of the franchise agreement were identical to those of the franchise agreements that the Company enters into with unrelated franchisees. Seenu G. Kasturi 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 $4,638 in royalties and $30,000 in franchise fees from DWG Acquisitions under the agreement during the three-month period ended March 31, 2016.

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

In March 2016, DWG Acquisitions became the franchisee of the Dick’s Wings restaurant located in Kingsland, Georgia. In connection therewith, DWG Acquisitions entered into a franchise agreement with the Company. The terms of the franchise agreement were identical to those of the franchise agreements that the Company enters into with unrelated franchisees. Seenu G. Kasturi 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 $4,142 in royalties and $30,000 in franchise fees from DWG Acquisitions under the agreement during the three-month period ended March 31, 2016.

During the year ended December 31, 2015, the Company loaned a total of $121,638 to Racing QSR, LLC (“Racing QSR”). The Company loaned an additional $107,643 to Racing QSR during the three-month period ended March 31, 2016, of which $78,958 was repaid to the Company by Racing QSR during the three-month period ended March 31, 2016. The loan accrues interest at a rate of 6% per year and is 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 three-months ended March 31, 2016 and March 31, 2015, the Company earned $173,782 and $80,407 from companies controlled by Seenu Kasturi. Additionally, during the three-month period ended March 31, 2016, the Company borrowed $283,798 and repaid $283,798 from Blue Victory, an entity controlled by Mr. Kasturi, and during the year ended December 31, 2015, the Company borrowed $1,987,953 and repaid $1,991,373 from Blue Victory.

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 March 31, 2016 and December 31, 2015.

ARC Group, Inc.

Notes to Financial Statements (Unaudited)

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 March 31, 2016 and December 31, 2015. Interest expense in the amount of $2,811 and $2,872 was accrued on the outstanding balance of the settlement agreement payable during the three-month periods ended March 31, 2016 and March 31, 2015, respectively. The interest expense was credited to settlement agreements payable.

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 three-month period ended March 31, 2015.

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 the potential legal settlement during the year ended December 31, 2015. This loss was reflected in accrued legal settlement at March 31, 2016 and December 31, 2015.

Note 14. Subsequent Events

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

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 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations below and Item 1A. Risk Factors of our Annual Report on Form 10-K for our fiscal year ended December 31, 2015. 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.

Item 2.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this report are based on information available to us on the date hereof and, except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth herein under Item 1A. Risk Factors of our Annual Report on Form 10-K for our fiscal year ended December 31, 2015 and elsewhere in this report. The following should be read in conjunction with our financial statements beginning on page 1 of this report.

Overview

We were formed in April 2000 to develop the Dick’s Wings concept, and are the 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 23 full-service restaurants and our two Dick’s Wings concession stands at EverBank Field. Of our 23 restaurants, 17 are located in Florida and six 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.

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 $308,615 for the three-month period ended March 31, 2016, compared to $223,016 for the three-month period ended March 31, 2015, representing an increase of approximately 38%. Our total operating expenses decreased $43,058 to $187,429 for the three-month period ended March 31, 2016, compared to $230,487 for the three-month period ended March 31, 2015. We achieved net income of $100,642 for the three-month period ended March 31, 2016, compared to a net loss of $24,364 for the three-month period ended March 31, 2015. Our total assets increased $131,125 to $926,763 at March 31, 2016 from $795,638 at December 31, 2015, and our stockholders’ deficit decreased $113,074 to $283,005 at March 31, 2016 from $396,079 at December 31, 2015. We generated positive cash flows from operations of $87,129 during the three-month period ended March 31, 2016 compared to $5,753 during the three-month period ended March 31, 2015, representing an increase of $81,376.

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.

Critical Accounting Policies

For information regarding our critical accounting policies, please refer to the discussion provided in our Annual Report on Form 10-K for our fiscal year ended December 31, 2015 under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies”.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements applicable to our business, please refer to the discussion provided in our Annual Report on Form 10-K for our fiscal year ended December 31, 2015 under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Accounting Pronouncements” and in our Notes to Financial Statements included therein.

Comparison of the Three-Month Periods Ended March 31, 2016 and March 31, 2015

Revenue

Revenue consists primarily of royalty payments and franchise fees that we receive from our franchisees. Revenue increased $85,599 to $308,615 for the three-month period ended March 31, 2016 from $223,016 for the three-month period ended March 31, 2015. The increase of $85,599 was due primarily to an increase of $47,138 for royalties and $30,000 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 $25,147 to $36,160 for the three-month period ended March 31, 2016 from $61,307 for the three-month period ended March 31, 2015. The decrease of $25,147 was due primarily to a decrease of $18,578 for consulting fees. We expect our professional fees 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 Securities and Exchange Commission (“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 $5,538 to $130,408 for the three-month period ended March 31, 2016 from $124,870 for the three-month period ended March 31, 2015. The increase of $5,538 was due primarily to an increase of $14,390 for salaries, partially offset by a decrease of $10,500 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.

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 $23,449 to $20,861 for the three-month period ended March 31, 2016 from $44,310 for the three-month period ended March 31, 2015. The decrease of $23,449 was due primarily to a decrease of $12,145 for shareholder meeting expenses. We expect general and administrative expenses to increase over the next 12 months as we incur increasing expenses for marketing and advertising, investor relations, travel, rent, office supplies, insurance and other miscellaneous items associated with the general growth of our business and operations.

Income / (Loss) From Investment in Paradise on Wings

Income / (loss) from investment in Paradise on Wings consists of our share of the income or loss from our 50% ownership interest in Paradise on Wings that we purchased on January 20, 2014. We generated a loss on our investment of $24,323 for the three-month period ended March 31, 2016 compared to income from our investment of $15,073 for the three-month period ended March 31, 2015. The difference of $39,396 was due primarily to a decrease in sales and an increase in operating expenses 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 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 the settlement of litigation consists of the loss that we incurred in connection with the settlement agreement that we entered into with J. David Eberle in January 2015. We recognized loss on the settlement of litigation of $27,142 during the three-month period ended March 31, 2015. We did not recognize any loss on the settlement of litigation during the three-month period ended March 31, 2016. A summary of the terms of our settlement agreement with Mr. Eberle is set forth under Note 13. Judgments in Legal Proceedings in our financial statements. We do not expect to incur any additional losses on the settlement of litigation during the next 12 months.

Net Income / (Loss)

We generated net income of $100,642 during the three-month period ended March 31, 2016 compared to a net loss of $24,364 during the three-month period ended March 31, 2015. The difference of $125,006 was due primarily to an increase of $85,599 for revenue and decreases of $25,147 for professional fees and $23,449 for general and administrative expenses. We expect net income to increase during the next 12 months as we continue to generate additional revenue through our new and existing restaurants and as our operating expenses continue to decrease as a percentage of revenue.

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 provided by operating activities was $87,129 during the three-month period ended March 31, 2016 compared to $5,753 during the three-month period ended March 31, 2015. The increase of $81,376 for cash provided by operating activities was due primarily to increases of $125,006 for net income, $39,396 for our equity investment in Paradise on Wings, and $35,684 for advertising fund liabilities. This was partially offset by an increase of $55,031 for accounts receivable and decreases of $27,142 for losses on litigation and $41,444 for accounts payable and accrued liabilities.

Net cash used by investing activities was $28,685 during the three-month period ended March 31, 2016 compared to $1,900 during the three-month period ended March 31, 2015. The increase of $26,785 was due to an increase of $105,743 for issuance of notes receivable to related parties, partially offset by an increase of $78,958 for repayments of notes receivable to related parties.

Net cash provided by financing activities was $102,365 during the three-month period ended March 31, 2015. We did not have any net cash flows from financing activities during the three-month period ended March 31, 2016. The decrease of $102,365 was due an increase of $139,746 for repayments of notes payable to related parties and a decrease of $85,000 for proceeds from stock subscriptions receivable. This was partially offset by an increase of $122,381 for proceeds from the issuance of notes payable to related parties.

Our primary sources of capital since December 29, 2014 are set forth below.

Between December 29, 2014 and December 31, 2015, we borrowed $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. 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.

Between January 1, 2016 and March 31, 2016, we borrowed an additional $283,798 from Blue Victory Holdings under the credit facility, all of which was repaid by us during the three-month period ended March 31, 2016. Accordingly, as of March 31, 2016, 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 and proceeds from our credit facility with Blue Victory Holdings 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.

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.

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 March 31, 2016, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, that had been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Item 4. Controls and Procedures.

As of March 31, 2016, we carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2016, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting identified in connection with this evaluation that occurred during our fiscal quarter ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

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

In January 2016, Richard Akam earned 71,429 shares of common stock under the terms of his employment agreement with us. The securities were issued to an accredited investor in a private placement transaction that was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of the Securities Act directly by us without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person. A description of Mr. Akam’s employment agreement is set forth herein under Note 6. Commitments and Contingencies.

Item 6. Exhibits.

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

Exhibit No.		Exhibit Description
31.1		Certification of Chief Executive Officer of the registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2		Certification of Chief Financial Officer of the registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1		Certification of Chief Executive Officer and Chief Financial Officer of the registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

* 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.

SIGNATURES

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

	ARC GROUP, INC.

Date: June 15, 2016	/s/ Daniel Slone
	Daniel Slone
	Chief Financial Officer
	(principal financial officer and duly authorized officer)

EXHIBIT INDEX

Exhibit No.		Exhibit Description
31.1		Certification of Chief Executive Officer of the registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2		Certification of Chief Financial Officer of the registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1		Certification of Chief Executive Officer and Chief Financial Officer of the registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

Attached files

ARC Group, Inc. Reports

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