v3.19.3
Basis of Presentation and Significant Accounting Policies (Policies)
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9 Months Ended |
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| Accounting Policies [Abstract] |
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| Interim Financial Information |
Interim Financial Information
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) applicable to a going concern which contemplates
the realization of assets and liquidation of liabilities in the normal course of business. The unaudited condensed consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions
were eliminated in consolidation.
The
accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the instructions
to Form 10-Q and Article 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission
(the “SEC”). Accordingly, they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. Certain information and footnotes disclosures
normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to SEC rules and regulations. Notwithstanding this, the Company believes that the disclosures herein are adequate
to make the information presented not misleading.
The unaudited condensed
consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes
thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K. Information presented
as of December 31, 2018 is derived from the audited consolidated financial statements. The results of operations for the three-
and nine-month periods ended September 30, 2019 are not necessarily indicative of the results that the Company will have for any
subsequent quarter or full fiscal year.
This summary of significant
accounting policies is provided to assist the reader in understanding the Company’s financial statements. The financial
statements and notes thereto are representations of the Company’s management. The Company’s management is responsible
for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United
States of America (“GAAP”) and have been consistently applied in the preparation of the financial statements.
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| Estimates |
Estimates
The preparation of condensed
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial
statements and accompanying notes. Actual results could differ from those estimates.
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| Restatement |
Restatement
The Company has restated
its previously issued condensed consolidated statement of operations for the three- and nine-month periods ended September 30,
2018. The impact of the restatement is more specifically described herein under Note 20. Restatement of Previously Issued Condensed
Consolidated Financial Statements.
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| Going Concern |
Going Concern
The
company concluded that facts existed that created an uncertainty about the Company’s ability to continue as a going concern
as of December 31, 2016. The Company generated net income of $344,740 and cash flows from operations of $248,345 during
the year ended December 31, 2017. While the Company had a working capital deficit of $2,784,844 at December 31, 2018 and a net
loss of $282,483 during the year ended December 31, 2018, it generated cash flows from operations of $478,238 during the year ended
December 31, 2018. The improvement in cash flows during the year ended December 31, 2017 was due primarily to the Company’s
acquisition of two Company-owned Dick’s Wings restaurants in December 2016. The improvement in cash flows during the year
ended December 31, 2018 was due primarily to the Company’s acquisition of Fat Patty’s in August 2018.
While the Company generated
a net loss of $1,303,318 during the nine-month period ended September 30, 2019 and had a working capital deficit of $4,100,874
at September 30, 2019, the Company generated cash flow from operating activities of $565,856 during the nine-month period ended
September 30, 2019 and received continued financial support from related parties during the nine-month period ended September
30, 2019 and the years ended December 31, 2018 and 2017. As a result of these factors, the Company concluded that the substantial
doubt about its ability to continue as a going concern had been alleviated as of September 30, 2019.
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| Segment Disclosure |
Segment Disclosure
The Company has both Company-owned
restaurants and franchised restaurants, all of which operate in the full-service casual dining industry in the United States.
Pursuant to the standards of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 280, Segment Reporting (“ASC 280”), the Company’s Chief Executive Officer, who comprises the Company’s
Chief Operating Decision Maker function for the purposes of ASC 280, concluded that the Company has two segments for reporting
purposes, which are Company-owned restaurants and franchise operations.
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| Other Receivables |
Other Receivables
Other receivables was
comprised primarily of receipts from credit card sales by Company-owned Fat Patty’s restaurants that occurred after the
Company completed the acquisition of Fat Patty’s that were held by the former owner of Fat Patty’s, all of which are
expected to be collected in full by the Company during the next 12 months.
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| Intangible Assets, Net |
Intangible Assets, Net
The Company acquired various
intangible assets in connection with the acquisition of Fat Patty’s. The intangible assets were comprised of a tradename
and a non-compete agreement. The Company amortizes the non-compete agreement on a straight-line basis over the expected period
of benefit, which is five years. The tradename has an indefinite life and is not subject to amortization but tested for impairment
on an annual basis. The Company recognized $942 and $2,826 of amortization expense for the non-compete agreement during the three-
and nine-month periods ended September 30, 2019.
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| Other Payables |
Other
Payables
Other
payables was comprised primarily of accounts payable owed to the former owner of Fat Patty’s for alcohol and other items
purchased by him in connection with the operation of the concept.
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| Revenue Recognition |
Revenue Recognition
The
Company generates revenue from two primary sources: (a) retail sales at company-operated restaurants; and (b) franchise revenue,
which consists of royalties based on a percentage of sales reported by franchised restaurants, funds contributed by franchisees
to the Company’s general advertising fund, and initial and renewal franchise license fees.
Revenue From Company-Owned
Restaurants
Revenue
from company-owned restaurants is primarily recognized as customers pay for products at the point of sale. The Company reports
Company-owned restaurant revenues net of sales and use taxes collected from customers and remitted to governmental taxing authorities.
Revenue From Franchised
Restaurants
The
Company grants individual restaurant franchises to operators in exchange for initial franchise license fees and continuing royalty
payments.
Initial
and renewal franchise license fees are payable by the franchisee upon a new restaurant opening or renewal of an existing franchise
agreement. Under franchise agreements, the Company provides franchisees with: (a) a franchise license, which includes a non-exclusive
license to our intellectual property for the duration of the franchise agreement and where the Company manages a marketing or co-op
advertising fund, advertising and promotion management; (b) pre-opening services, such as training and inspections; and (c) ongoing
services, such as development of training materials and menu items and restaurant monitoring and inspections. The services that
the Company provides are highly interrelated and dependent on the franchise license so the Company does not consider the services
to be individually distinct and therefore accounts for them as a single performance obligation. The performance obligation is satisfied
by providing a right to use the Company’s intellectual property over the term of each franchise agreement. Accordingly, initial
and renewal franchise fees are recognized as revenue on a straight-line basis over the term of the respective agreement.
The
Company’s performance obligation under area development agreements generally consists of an obligation to grant exclusive
development rights for a particular geographic region over a stated term. These development rights are not distinct from franchise
agreements and are creditable towards the initial franchise license fee, so upfront fees paid by franchisees for exclusive development
rights are deferred and allocated to the appropriate franchise restaurant when the franchise agreement is executed.
Franchise
royalty revenues represents sales-based royalties that are related entirely to the Company’s performance obligation under
the franchise agreement. Continuing franchise royalty revenues are based on a percentage of monthly sales and are recognized on
the accrual basis as franchise sales occur. In certain circumstances, the Company may reduce or waive franchise license fees and/or
the franchise royalty percentage for a period of time.
Franchises
contributions to the Company’s general advertising funds are calculated as a percentage of monthly sales. Contributions to
the fund generally represent sales-based or fixed monthly fee amounts that are related entirely to the Company’s performance
obligation under the franchise agreement and are recognized as franchise sales occur.
ASC Topic 606
On January 1, 2018, the
Company adopted the provisions of ASC Topic 606, Revenue From Contracts With Customers (“ASC 606”). ASC 606
supersedes the current revenue recognition guidance, including industry-specific guidance. ASC 606 provides a single framework
in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect
the consideration to which a company expects to be entitled in exchange for those goods or services. The Company adopted this new
guidance effective the first day of fiscal year 2018, using the modified retrospective method of adoption. Under this method, the
cumulative effect of initially adopting the guidance was recognized as an adjustment to the opening balance of equity at January
1, 2018.
Franchise Fees
ASC 606 impacted the timing
of recognition of franchise fees. Under previous guidance, these fees were typically recognized upon the opening of restaurants.
Under ASC 606, the fees are deferred and recognized as revenue over the term of the individual franchise agreements. The effect
of the required deferral of fees received in a given year will be mitigated by the recognition of revenue from fees retrospectively
deferred from prior years. The Company recognized $4,718 and $11,968 of deferred franchise fees as income during the three- and
nine-month periods ended September 30, 2019, and recognized $7,250 and $45,264 of deferred franchise fees as income during the
three- and nine-month periods ended September 30, 2018, respectively. The carrying value of the Company’s deferred franchised
fees was $103,266 at September 30, 2019.
Advertising Funds
ASC 606 also impacted the
accounting for transactions related to the Company’s general advertising fund. Under previous guidance, franchisee contributions
to and expenditures by the fund were not included in the Company’s condensed consolidated financial statements. Under ASC
606, the Company records contributions to and expenditures by the fund as revenue and expenses within the Company’s condensed
consolidated financial statements. The Company recognized contributions to and expenditures by the fund of $33,255 and $97,123
during the three- and nine-month periods ended September 30, 2019, and recognized contributions to and expenditures by the fund
of $46,816 and $145,076 during the three- and nine-month periods ended September 30, 2018, respectively.
Gift Card Funds
Additionally, ASC 606 impacted
the accounting for transactions related to the Company’s gift card program. Under previous guidance, estimated breakage income
on gift cards was deferred until it was deemed remote that the unused gift card balance would be redeemed. Under ASC 606, breakage
income on gift cards is recognized as gift cards are utilized. The effect of this change on the Company’s condensed consolidated
financial statements was negligible.
Disaggregation of Revenue
The following table disaggregate
revenue by primary geographical market and source:
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Three Months Ended
September 30, 2019 |
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Three Months Ended
September 30, 2018 |
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Nine Months Ended
September 30, 2019 |
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Nine Months Ended
September 30, 2018 |
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Primary
Geographic Markets |
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| Florida |
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$ |
1,587,413 |
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$ |
1,285,038 |
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$ |
4,239,126 |
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$ |
3,489,830 |
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| Georgia |
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256,430 |
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47,050 |
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824,190 |
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146,009 |
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| Kentucky |
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616,417 |
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232,744 |
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1,907,793 |
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232,744 |
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| Louisiana |
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95,884 |
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— |
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625,227 |
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— |
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| North Carolina |
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625 |
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|
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— |
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625 |
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— |
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| Texas |
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625 |
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— |
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625 |
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— |
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| West Virginia |
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1,485,250 |
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795,232 |
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5,222,846 |
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795,232 |
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| Total revenue |
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$ |
4,042,644 |
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$ |
2,360,064 |
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$ |
12,820,432 |
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$ |
4,663,815 |
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| Sources of Revenue |
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| Restaurant sales |
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$ |
3,803,609 |
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$ |
2,104,825 |
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$ |
12,150,290 |
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$ |
3,871,929 |
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| Royalties |
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193,010 |
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197,369 |
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547,548 |
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591,847 |
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| Franchise fees |
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4,718 |
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7,250 |
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11,968 |
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45,264 |
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| Advertising fund fees |
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33,255 |
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46,816 |
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97,123 |
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145,077 |
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| Other revenue |
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8,052 |
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3,804 |
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13,503 |
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9,698 |
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| Total revenue |
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$ |
4,042,644 |
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$ |
2,360,064 |
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$ |
12,820,432 |
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$ |
4,663,815 |
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Deferred Revenue
Deferred
revenue consists of contract liabilities resulting from initial and renewal franchise license fees paid by franchisees, which are
generally recognized on a straight-line basis over the term of the underlying franchise agreement, as well as upfront development
fees paid by franchisees, which are generally recognized on a straight-line basis over the term of the underlying franchise agreement
once it is executed or if the development agreement is terminated.
The following table presents
changes in deferred franchise fees as of and for the nine-month period ended September 30, 2019:
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Total Liabilities |
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| Deferred franchise fees at December 31, 2018 |
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$ |
65,234 |
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| Revenue recognized during the period |
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(11,968 |
) |
| New deferrals due to cash received |
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50,000 |
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| Deferred franchise fees at September 30, 2019 |
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$ |
103,266 |
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Anticipated Future Recognition of Deferred
Franchise Fees
The following table presents
the estimated franchise fees to be recognized in the future related to performance obligations that were unsatisfied at September
30, 2019:
| Year |
|
Franchise
Fees to be Recognized |
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| 2019 (remaining three months) |
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$ |
4,250 |
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| 2020 |
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|
17,000 |
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| 2021 |
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|
15,925 |
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| 2022 |
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14,000 |
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| 2023 |
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11,637 |
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| Thereafter |
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|
40,454 |
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| Total |
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$ |
103,266 |
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| Recent Accounting Pronouncements |
Recent Accounting Pronouncements
In February 2016, the FASB
issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”), establishing Accounting
Standards Codification (“ASC”) Topic 842, Leases (“ASC Topic 842”), which modified and superseded
the guidance under ASC Topic 840, Leases (“ASC Topic 840”). The FASB subsequently issued several other Accounting
Standards Updates, including ASU 2018-11 and ASU 2018-12, which among other things provide for a practical expedient related to
the recognition of the cumulative effect on retained earnings resulting from the adoption of the pronouncements.
ASC Topic 842 modifies
the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e., lessees
and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases
based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines
whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease,
respectively. A lessee is also required to record a right-of-use asset and lease liability for all leases with a term of greater
than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted for in the same manner
as operating leases under ASC Topic 840.
The Company adopted ASC
Topic 842 effective January 1, 2019 applying the modified retrospective transition approach. Under this approach, results for reporting
periods beginning after January 1, 2019, are presented under Topic 842, while prior periods are not adjusted and continue to be
reported under the accounting standards in effect for those periods. The Company recognized $3,832,779 and $3,832,286 of additional
assets and liabilities, respectively, in connection with its operating leases upon the adoption of ASC Topic 842 on January 1,
2019. The Company did not recognize any additional assets or liabilities in connection with its financing lease upon the adoption
of ASC Topic 842 on January 1, 2019.
The Company determines
whether a contract is or contains a lease at inception of the contract based on whether an identified asset exists and whether
the Company has the right to obtain substantially all of the benefit of the assets and to control its use over the full term of
the agreement. When available, the Company uses the rate implicit in the lease to discount lease payments to present value. However,
none of our leases provide a readily determinable implicit rate. Therefore, the Company estimated its incremental borrowing rate
considering both the revolving credit rates and a credit notching approach to discount the lease payments based on information
available at lease commencement. There are no material residual value guarantees and no restrictions or covenants included in the
Company’s lease agreements. Certain of the Company’s leases include provisions for variable payments. These variable
payments are typically determined based on a measure of throughput or actual days or another measure of usage and are not included
in the calculation of lease liabilities and right-of-use assets.
The Company elected the
package of practical expedients available for implementation, which allows for the following:
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An entity need not reassess whether any expired or existing contracts are or contain leases; |
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● |
An entity need not reassess the lease classification for any expired or existing leases; and |
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An entity need not reassess initial indirect costs for any existing leases. |
Furthermore, the Company
elected the optional transition method to make January 1, 2019 the initial application date of the standard. This package of practical
expedients allows entities to account for their existing leases for the remainder of their respective lease terms following the
previous accounting guidance.
The Company also elected
to adopt the optional transition practical expedient provided in ASU 2018-01 to not evaluate under ASC Topic 842 for existing or
expired land easements prior to the application date to determine if they meet the definition of a lease.
The impact of ASC Topic
842 is more specifically described herein under Note 12. Leases.
In June 2018, the FASB
issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which expands
the scope of ASC Topic 718, Compensation – Stock Compensation, to include share-based payment transactions for acquiring
goods and services from nonemployees. ASU 2018-07 aligns the measurement and classification guidance for share-based payments to
nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the new guidance, the measurement
of equity-classified nonemployee awards is fixed at the grant date. The Company adopted ASU 2018-07 on January 1, 2019. The adoption
of ASU 2018-07 did not have a significant impact on the Company’s condensed consolidated financial statements.
The Company reviewed all
other significant newly-issued accounting pronouncements and concluded that they either are not applicable to the Company’s
operations or that no material effect is expected on the Company’s condensed consolidated financial statements as a result
of future adoption.
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