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ARC Group, Inc. – ‘10-Q’ for 6/30/19

On:  Wednesday, 8/14/19, at 4:17pm ET   ·   For:  6/30/19   ·   Accession #:  1493152-19-12537   ·   File #:  0-54226

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 8/14/19  ARC Group, Inc.                   10-Q        6/30/19   88:6.3M                                   M2 Compliance/FA

Document/Exhibit                   Description                      Pages   Size 

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                Obligations (Details)                                            
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended: June 30, 2019

or

For the transition period from ___________ to ______________

Commission File No. 000-54226

 
ARC GROUP, INC.

(Exact name of registrant as specified in its charter)

1409 Kingsley Ave., Ste. 2

Orange Park, FL 32073

(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)

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

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 [  ] No [X]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

APPLICABLE ONLY TO ISSUERS INVOLVED IN

BANKRUPTCY PROCEEDINGS DURING THE

PRECEDING FIVE YEARS

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

Yes [X] 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 7,080,771 shares of the issuer’s Class A common stock, $0.01 par value per share, issued and outstanding on August 9, 2019.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

ARC Group, Inc.

Condensed Consolidated Balance Sheets

The accompanying notes are an integral part of these financial statements

ARC Group, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

The accompanying notes are an integral part of these financial statements

ARC Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

The accompanying notes are an integral part of these financial statements

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1. Description of Business

ARC Group, Inc., a Nevada corporation (the “Company”), was incorporated in April 2000. The Company’s business is focused primarily on the development of the Dick’s Wings & Grill^® franchise (“Dick’s Wings”) and Fat Patty’s^® concept (“Fat Patty’s”) and the acquisition of financial interests in other restaurant brands. The Dick’s Wings concept is currently comprised of its traditional Dick’s Wings restaurants and non-traditional units like the Dick’s Wings concession stands that the Company has at TIAA Bank Field (formerly EverBank Field) and Jacksonville Veterans Memorial Arena in Jacksonville, Florida. The Fat Patty’s concept is currently comprised of its traditional Fat Patty’s restaurants.

On August 30, 2018, the Company closed upon an asset purchase agreement for Fat Patty’s. Fat Patty’s is comprised of four company-owned restaurants located at 1442 Winchester Avenue, Ashland, Kentucky 41101, 5156 WV 34, Hurricane, West Virginia 25526, 3401 Rt. 60 East, Barboursville, West Virginia 25504, and 1935 Third Avenue, Huntington, West Virginia 25702 (collectively, the “Fat Patty’s Restaurants”). A description of the Company’s acquisition of Fat Patty’s is set forth herein under Note 4. – Acquisition of Fat Patty’s.

On October 30, 2018, the Company entered into an agreement to acquire the Tilted Kilt Eatery and Pub^® restaurant franchise (“Tilted Kilt”). At June 30, 2018, the Tilted Kilt franchise was comprised of 28 restaurants operating in 14 states and Canada, of which two were company owned and operated and the remaining 26 were franchise locations. A description of the transaction is set forth herein under Note 5. Agreement to Acquire Tilted Kilt.

On November 7, 2018, the Company became a franchisee of a Tilted Kilt restaurant located in Gonzales, Louisiana.

At June 30, 2019, the Company had 20 Dick’s Wings restaurants and three Dick’s Wings concession stands. Of the 20 restaurants, 16 were located in Florida and four were located in Georgia. The Company’s concession stands were also located in Florida. Four of the Company’s restaurants were owned by the Company, and the remaining 16 restaurants were owned and operated by franchisees. The Company’s concession stands were also owned by the Company. In addition, the Company had four Fat Patty’s restaurants at June 30, 2019. Of the four restaurants, three were located in West Virginia and one was located in Kentucky. All four of the restaurants were owned by the Company. The Company also had its Tilted Kilt restaurant in Louisiana for which it serves as a franchisee.

Note 2. Basis of Presentation and Significant Accounting Policies

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 subsidiaries. All intercompany accounts and transactions were eliminated in consolidation.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

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 six-month periods ended June 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.

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.

Restatement

The Company has restated its previously issued condensed consolidated statement of operations for the three- and six-month periods ended June 30, 2018. The impact of the restatement is more specifically described herein under Note 20. Restatement of Previously Issued Condensed Consolidated Financial Statements.

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.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

While the Company generated a net loss of $705,804 during the six-month period ended June 30, 2019 and had a working capital deficit of $3,480,288 at June 30, 2019, the Company generated cash flow from operating activities of $328,627 during the six-month period ended June 30, 2019 and received continued financial support from related parties during the six-month period ended June 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 June 30, 2019.

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.

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.

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 $1,884 of amortization expense for the non-compete agreement during the three- and six-month periods ended June 30, 2019.

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.

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.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

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.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

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 $3,625 and $7,250 of deferred franchise fees as income during the three- and six-month periods ended June 30, 2019, and recognized $7,125 and $12,750 of deferred franchise fees as income during the three- and six-month periods ended June 30, 2018, respectively. The carrying value of the Company’s deferred franchised fees was $57,984 at June 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 $31,645 and $63,868 during the three- and six-month periods ended June 30, 2019, and recognized contributions to and expenditures by the fund of $45,029 and $98,260 during the three- and six-month periods ended June 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.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Disaggregation of Revenue

The following table disaggregate revenue by primary geographical market and source:

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 six-month period ended June 30, 2019:

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

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 June 30, 2019:

Recent Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”), establishing 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.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The Company elected the package of practical expedients available for implementation, which allows for the following:

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.

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.

Note 3. Net Loss Per Share

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

All of the shares of common stock underlying exercisable or convertible securities that were outstanding at June 30, 2019 and 2018 were excluded from the computation of diluted net loss per share for the three- and six-month periods ended June 30, 2019 and 2018, respectively, because they were anti-dilutive. As a result, basic net loss per share was equal to diluted net loss per share for the three- and six-month periods ended June 30, 2019 and 2018, respectively.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 4. Acquisition of Fat Patty’s

On August 3, 2018, the Company entered into an asset purchase agreement with CSA, Inc., a West Virginia corporation (“CSA”), CSA Investments, LLC, a West Virginia limited liability company (“CSA Investments”), CSA of Teays Valley, Inc., a West Virginia corporation (“CSA Teays Valley”), CSA, Inc. of Ashland, a Kentucky corporation (“CSA Ashland”), Fat Patty’s, LLC, a West Virginia limited liability company (“FPLLC”), and Clint Artrip, an individual (“Artrip”; together with CSA, CSA Investments, CSA Teays Valley, and CSA Ashland, FPLLC, the “Sellers”), pursuant to which the Company agreed to acquire all of the assets associated with Fat Patty’s (the “Fat Patty’s Acquisition”). The Company agreed to pay the Sellers $12,352,000 for the assets, of which $12,000,000 was to be paid to the Sellers at closing, $40,000 was to be paid to the Sellers within 10 days after the closing and the remaining $312,000 will be paid to the Sellers on the first anniversary of the closing. The closing of the Fat Patty’s Acquisition occurred on August 30, 2018, however, as discussed below, the Company entered into a separate related agreement with a third party that resulted in a direct transfer of the Properties (as defined below) from the Sellers to the third party. Accordingly, in substance, the Company only acquired the net assets detailed below for a purchase price of $852,000.

In connection with the Fat Patty’s Acquisition, the Company entered into a secured convertible promissory note with Seenu G. Kasturi on August 30, 2018 pursuant to which the Company borrowed $622,929 from Mr. Kasturi to help finance the Fat Patty’s Acquisition. All principal and accrued but unpaid interest is due and payable by the Company in full on the earlier of (i) the fifth (5^th) anniversary of the date of the note, or (ii) the date that Mr. Kasturi demands repayment in full by providing written notice thereof to the Company. Interest accrues at the rate of six percent (6%) per annum and is payable in full on the maturity date. Mr. Kasturi has the right, at any time during the term of the note and from time to time, to convert all of any portion of the outstanding principal of the note, together with accrued and unpaid interest payable thereon, into shares of the Company’s common stock at a conversion rate of $1.36 per share. The note is secured by all of the assets of the Company.

Also on August 3, 2018, the Company entered into a purchase and sale agreement with Store Capital Acquisitions, LLC, a Delaware limited liability company (“Store Capital”), pursuant to which the Company agreed to sell all of the real property acquired in the Fat Patty’s Acquisition to Store Capital (the “Property Acquisition”). The real property consists of the four properties upon which the restaurants acquired in the Asset Acquisition are located (collectively, the “Properties”). Store Capital agreed to pay the Company $11,500,000 for the Properties at closing. Title to the Properties was transferred directly from the applicable Sellers to Store Capital, and the purchase price for the Properties was paid by Store Capital directly to Sellers. Accordingly, the Company never took title to, or ownership of, the Properties. As a result, the ultimate purchase price paid by the Company was $852,000, which was the difference between the $12,352,000 purchase price for the assets that the Company agreed to pay to the Sellers and the $11,500,000 purchase price for the Properties that was paid by Store Capital. The closing of the Property Acquisition occurred on August 30, 2018.

In connection with the Property Acquisition, the Company entered into a master lease agreement (the “Master Lease”) with Store Capital on August 30, 2018 pursuant to which the Company leased each of the Properties from Store Capital. The initial term of the lease expires on August 31, 2038. The Company has the option to extend the term of the lease for four additional successive periods of five years each. The aggregate base annual rent is $876,875 and is subject to annual increases commencing September 1, 2019 in an amount equal to the lesser of: (i) 1.75%, or (ii) 1.25 times the change in the Consumer Price Index. The Company is responsible for all costs and obligations relating to the Properties.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The acquisition of Fat Patty’s was accounted for as a business combination using the acquisition method of accounting in accordance with Accounting Standard Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), with the Company considered the acquirer of Fat Patty’s. In accordance with ASC 805, the assets acquired and the liabilities assumed have been measured at fair value based on a report issued by a third-party valuation firm with the remaining purchase price, if any, recorded as goodwill.

For purposes of measuring the estimated fair value, where applicable, of the assets acquired and the liabilities assumed as reflected in the Company’s condensed consolidated financial statements, the guidance in ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) has been applied, which establishes a framework for measuring fair value. In accordance with ASC 820, fair value is an exit price and is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company incurred $82,929 of acquisition-related transaction costs. Under ASC 805, acquisition-related transaction costs and acquisition-related restructuring charges are not included as components of consideration transferred but are accounted for as expenses in the period in which the costs are incurred. Accordingly, the Company recognized $82,929 of acquisition-related transaction costs during the year ended December 31, 2018. The acquisition-related transaction costs were recorded in general and administrative expenses.

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

The estimates of fair values recorded are Level 3 inputs that have been determined by management based upon various market and income analyses and recent asset appraisals. The Company made certain adjustments to the amounts initially allocated to intangible assets and gift card liabilities after evaluating additional information that was present on the date the acquisition was completed.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The fair value of the identifiable assets acquired and liabilities assumed of $1,476,952 exceeded the purchase price of Fat Patty’s by $624,952. Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. As a result, the Company recognized a gain of $624,952 during the year ended December 31, 2018 in connection with the acquisition. The Sellers of Fat Patty’s received cash without any earnouts or indemnification holdbacks, which was the primary motivation for the sale of Fat Patty’s. This was the primary reason the acquisition resulted in a bargain purchase. The gain was recorded in the other income in the Company’s condensed consolidated statements of operations.

The following table summarizes certain financial information for the three- and six-month periods ended June 30, 2019 contained in the Company’s condensed consolidated financial statements and certain unaudited pro forma financial information for the three- and six-month periods ended June 30, 2018 as if the acquisition of Fat Patty’s had occurred on January 1, 2018:

The results of operations for Fat Patty’s were included in the Company’s results of operations beginning August 30, 2018. The actual amounts of revenue and net income for Fat Patty’s that were included in the Company’s condensed consolidated statements of operations for the three-month period ended June 30, 2019 were $1,959,728 and $475,452, respectively, and the actual amounts of revenue and net income for Fat Patty’s that were included in the Company’s condensed consolidated statements of operations for the six-month period ended June 30, 2019 were $4,630,375 and $610,488, respectively.

The unaudited pro forma financial information has been presented for informational purposes only and is not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on January 1, 2018 or of the future results of the combined entities. For additional information about the Company’s acquisition of Fat Patty’s, please refer to the Company’s Current Reports on Form 8-K filed with the SEC on August 9, 2018 and September 5, 2018.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 5. Agreement to Acquire Tilted Kilt

On October 30, 2018, the Company entered into a Membership Interest Purchase Agreement with SDA Holdings, LLC, a Louisiana limited liability company (“SDA Holdings”), and Fred D. Alexander pursuant to which the Company agreed to acquire all of the issued and outstanding membership interests in SDA Holdings for $10. SDA Holdings is the owner of the Tilted Kilt Pub & Eatery^® restaurant franchise. SDA Holdings is owned by Mr. Alexander, who is a member of the Company’s board of directors.

The closing of the transaction is conditioned upon SDA Holdings, Trustee Services Group (the “Custodian”), Seenu G. Kasturi, who served as the Company’s President and Chief Financial Officer and the Chairman of its board of directors as of December 31, 2018, Let’s Eat Incorporated (“Let’s Eat”), the Reilly Group, LLC (the “Reilly Group”) and John Reynauld entering into an amendment to that certain Custodian Agreement, dated June 7, 2018, by an among the parties to add SDA Holdings as a party to the agreement and remove Mr. Kasturi as a party to the agreement, in which event SDA Holdings will be required to deliver 718,563 shares of the Company’s common stock to the Custodian. The closing of the transaction is also conditioned upon the Company raising gross proceeds of at least $2,000,000 through the sale of debt or equity securities, as well as other customary closing conditions. Upon closing of this acquisition, the Company will issue 666,667 shares of common stock to Mr. Kasturi, place 718,563 shares of common stock into escrow to replace a like number of shares placed in escrow by Mr. Kasturi, and through a wholly-owned subsidiary, be the obligor under a demand promissory note in favor of Mr. Kasturi in the principal amount of up to $2,500,000.

As of June 30, 2019, the conditions to closing had not yet been satisfied or waived by the parties. There is no set closing date for the transaction.

Note 6. Inventory

Inventory was comprised of the following at June 30, 2019 and December 31, 2018, respectively:

Note 7. Property and Equipment, Net

Property and equipment was comprised of the following at June 30, 2019 and December 31, 2018, respectively:

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The land, buildings and improvements of $11,500,000 included within property and equipment at December 31, 2018 consisted of gross assets acquired on the capital lease. On January 1, 2019, in connection with the adoption of ASC Topic 842, the Company determined that the lease was a financing lease and recorded a right-of-use asset and lease liability for the lease, reversing the capital lease asset and capital lease obligation previously recognized.

Depreciation expense was $50,438 and $101,979 during the three- and six-month periods ended June 30, 2019, respectively, and was $13,648 and $19,207 during the three- and six-month periods ended June 30, 2018, respectively.

Note 8. Intangible Assets

The Company acquired various intangible assets in connection with the acquisition of Fat Patty’s. Intangible assets include a tradename valued at $770,000 and a non-compete agreement valued at $18,840 for a total of $788,840 on August 30, 2018, which is the date the acquisition of Fat Patty’s was completed. 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 $2,275 of amortization expense on the non-compete agreement during the year ended December 31, 2018. Accordingly, the Company had total intangible assets of $786,565 at December 31, 2018. The Company recognized $942 and $1,884 of amortization expense on the non-compete agreement during the three- and six-month periods ended June 30, 2019. Accordingly, the Company had total intangible assets of $784,681 at June 30, 2019.

The following table presents the future amortization expense to be recognized from the Company’s intangible assets at June 30, 2019:

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 9. Fair Value Measurements

On December 19, 2016, the Company acquired all of the issued and outstanding membership interests of Seediv, LLC, a Louisiana limited liability company (“Seediv”), from Seenu G. Kasturi for $600,000 and an earn-out payment. Seediv is the owner and operator of the Dick’s Wings & Grill restaurant located at 100 Marketside Avenue, Suite 301, in the Nocatee development in Ponte Vedra, Florida (the “Nocatee Restaurant”) and the Dick’s Wings & Grill restaurant located at 6055 Youngerman Circle in Argyle Village in Jacksonville, Florida (the “Youngerman Circle Restaurant”; together with the Nocatee Restaurant, the “Nocatee and Youngerman Circle Restaurants”).

In connection with the acquisition of Seediv, the Company agreed to pay contingent consideration in the form of an earn-out payment. The Company determined that the fair value of the liability for the contingent consideration was estimated to be $20,897 at the acquisition date. The Company determined the fair value of the contingent consideration based on a probability-weighted approach derived from earn-out criteria estimates and a probability assessment with respect to the likelihood of achieving the earn-out criteria. The measurement was based upon significant inputs not observable in the market, including internal projections and an analysis of the target markets. The resultant probability-weighted contingent consideration was discounted using a discount rate based upon the weighted-average cost of capital.

As of December 31, 2017, the Company calculated the earnout payment in accordance with the provisions of the membership interest purchase agreement and determined that the earnout payment was $199,682. The Company recognized additional Seediv compensation expense in the amount of $178,785 during the year ended December 31, 2017 in connection with the earnout payment and the liability for the contingent consideration was increased by $178,785 to $199,682 at December 31, 2017. The Company made payments in the amount of $144,326 to Mr. Kasturi with respect to the earnout payment during the year ended December 31, 2018. The Company did not make any payments to Mr. Kasturi during the six-month period ended June 30, 2019. Accordingly, the outstanding balance of contingent consideration was $55,356 at June 30, 2019 and December 31, 2018, respectively.

The following table presents the contingent consideration recorded by the Company in connection with the acquisition of Seediv within the fair value hierarchy utilized to measure fair value on a recurring basis at June 30, 2019 and December 31, 2018, respectively:

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The earnout payment was to be calculated based on the earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the Nocatee and Youngerman Circle Restaurants during the year ended December 31, 2017. As of December 31, 2017, the EBITDA for the Nocatee and Youngerman Circle Restaurants was utilized to compute the ending contingent consideration liability. As a result, the fair value measurement of the contingent consideration represented a Level 2 fair value measurement at June 30, 2019 and December 31, 2018 because it was based on other significant observable inputs.

The Company’s other financial instruments consist of cash and cash equivalents, accounts and ad fund receivables, notes receivable, operating and financing lease right-of-use assets and liabilities, accounts payable, accrued expenses and notes payable. The estimated fair values of the cash and cash equivalents, accounts and ad fund receivables, notes receivable, accounts payable, accrued expenses and notes payable (and the related beneficial conversion feature associated with the notes payable) approximate their respective carrying amounts due to the short-term maturities of these instruments. The estimated fair value of the financing and operating lease right-of-use assets and liabilities approximated their respective carrying amounts as the interest rate used in calculating the right-of-use-assets and liabilities approximated the interest rate on the outstanding debt.

Note 10. Notes Receivable

In June 2016, the Company made a loan to one of its franchisees under a promissory note in the aggregate original principal amount of $25,000. In July 2016, the Company made an additional loan to the same franchisee under a line of credit agreement for an aggregate original principal amount of up to $28,136. In September 2016, the Company made an additional loan to the same franchisee under a second line of credit agreement for an aggregate original principal amount of up to $25,000. The loan under the promissory note is for a term of two years, is payable in monthly installments beginning January 1, 2017, and accrues interest at a rate of 5% per annum beginning September 1, 2016. The loan under the $28,136 line of credit agreement was for a term of two years, was payable in monthly installments beginning January 1, 2017, and did not require the payment of any interest. The loan was repaid in full during the year ended December 31, 2017. The loan under the $25,000 line of credit agreement is for a term of two years, is payable in monthly installments beginning January 1, 2017 and accrues interest at a rate of 5% per annum beginning October 1, 2016. A total of $414 was outstanding under the loan at December 31, 2018. The loan was repaid in full during the six-month period ended June 30, 2019. Interest in the aggregate amount of $2 accrued and was paid in full under the loans during the three- and six-month periods ended June 30, 2018. Interest in the aggregate amount of $219 and $517 accrued and was paid in full under the loans during the three- and six-month periods ended June 30, 2018, respectively. No accrued interest was outstanding under the loans at June 30, 2019 and December 31, 2018.

In October 2017, the Company made a loan to one of its franchisees in the aggregate original principal amount of $7,659. The loan is due and payable in full on December 1, 2020, is payable in monthly installments beginning January 1, 2018, and does not require the payment of any interest. A total of $3,617 and $5,106 of principal was outstanding under the loan at June 30, 2019 and December 31, 2018, respectively.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

In June 2019, the Company made a loan to one of its franchisees in the aggregate original principal amount of $15,000. The loan is due and payable in monthly installments with an initial payment of $2,000 due July 1, 2019, followed by six monthly payments of $2,000 due on the 27^th day of each month thereafter beginning July 27^th, with a final payment of $1,000 due on January 27, 2020. The loan does not require the payment of any interest. The entire $15,000 principal amount of the loan was outstanding on June 30, 2019.

The carrying value of the Company’s outstanding notes receivable was $18,617 and $5,520 at June 30, 2019 and December 31, 2018, respectively, all of which was due from unrelated third parties. Of these amounts, $17,344 and $1,273 were classified as short-term and long-term notes receivable, respectively, at June 30, 2019, and $2,967 and $2,553 were classified as short-term and long-term notes receivable, respectively, at December 31, 2018. The Company generated interest income of $2 during the three- and six-month periods ended June 30, 2019, and generate interest income of $219 and $517 during the three- and six-month periods ended June 30, 2018, respectively. The Company did not have any interest receivable outstanding at June 30, 2019 and December 31, 2018.

Note 11. Debt Obligations

In September 2013, the Company entered into a loan agreement with Blue Victory Holdings, Inc., a Nevada corporation (“Blue Victory”), pursuant to which Blue Victory agreed to extend a revolving line of credit facility to the Company for up to $1,000,000. In March 2017, the Company entered into an amendment to the loan agreement with Blue Victory to reduce the maximum amount of funds available under the credit facility from $1,000,000 to $50,000. The credit facility is unsecured, accrues interest at a rate of 6% per annum, and will terminate upon the earlier to occur of the fifth anniversary of the loan agreement or the occurrence of an event of default. The outstanding principal balance of the credit facility and any accrued and unpaid interest thereon are payable in full on the termination date. All loan requests are subject to approval by Blue Victory. Loans may be prepaid by the Company without penalty and borrowed again at any time prior to the termination date. Blue Victory has the right to convert all or any portion of the outstanding principal of the credit facility, together with accrued interest payable thereon, into shares of common stock at a conversion rate equal to: (i) the closing price of the common stock on the date immediately preceding the conversion date if the common stock is then listed on the OTCQB or a national securities exchange, (ii) the average of the most recent bid and ask prices on the date immediately preceding the conversion date if the common stock is then listed on any of the tiers of the OTC Markets Group, Inc., or (iii) in all other cases, the fair market value of the common stock as determined by the Company and Blue Victory. The Company did not borrow any funds under the credit facility during the six-month period ended June 30, 2019 and the year ended December 31, 2018, and there was no principal outstanding under the credit facility at June 30, 2019 and December 31, 2018.

The Company entered into an unsecured loan with Blue Victory during the year ended December 31, 2017. The amount of principal outstanding under the loan was $30,503 at December 31, 2017. The Company borrowed $277,707 and repaid $71,877 under the loan during the year ended December 31, 2018. Accordingly, the amount of principal outstanding under the loan was $236,333 at December 31, 2018. The Company borrowed $1,075,893 and repaid $1,206,271 under the loan during the six-month period ended June 30, 2019. Accordingly, the amount of principal outstanding under the loan was $105,955 at June 30, 2019. The Company recognized $3,080 and $6,984 of interest expense under the loan during the three- and six-month periods ended June 30, 2019, and recognized $877 and $1,650 of interest expense under the loan during the three- and six-month periods ended June 30, 2018.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

On August 30, 2018, the Company entered into a secured convertible promissory note with Seenu G. Kasturi pursuant to which the Company borrowed $622,929 to help finance the Fat Patty’s Acquisition. A description of the note is set forth herein under Note 4. Acquisition of Fat Patty’s. At the date of the financing, because the effective conversion rate of the convertible note was less than the market value of the Company’s common stock, a beneficial conversion feature of $155,732 was recorded as a discount to the convertible note and an increase to additional paid in capital. The Company recorded a total of $16,648 for amortization of the discount to the convertible note during the year ended December 31, 2018. Accordingly, the amount of unamortized debt discount outstanding was $139,084 at December 31, 2018. The Company recorded $7,762 and $15,438 for amortization of the discount to the convertible note during the three- and six-month periods ended June 30, 2019. Accordingly, the amount of unamortized debt discount outstanding was $123,646 at June 30, 2019, and the principal balance of the note net of unamortized debt discount outstanding was $499,283 at June 30, 2019. The Company recognized $9,216 and $18,432 of interest expense under the convertible note during the three- and six-month periods ended June 30, 2019.

The carrying value of the Company’s outstanding promissory notes, net of unamortized discount of $123,646 and $139,084 at June 30, 2019 and December 31, 2018, respectively, and excluding financing and operating lease liabilities, was $605,238 and $720,178 at June 30, 2019 and December 31, 2018, respectively.

Note 12. Leases

The Company leases certain office space, land, buildings and equipment. The Company’s lease agreements for equipment are immaterial in amount, both individually and collectively. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants, and none of the Company’s lease agreements include options to purchase the leased property. The Company does not have any significant leases that have not yet commenced that create significant rights and obligations for the Company. The Company elected the practical expedient under ASC 842 to not separate lease and non-lease components. A description of the Company’s operating and financing leases is set forth herein under Note 16. Commitments and Contingencies – Operating Leases and – Financing Leases.

Most of the Company’s lease agreements have fixed rental payments. Certain of the Company’s lease agreements include fixed rental payments that are adjusted periodically based on rate or are based in part on a percentage of sales. Payments based on a percentage of sales is not considered in the determination of lease payments for purposes of measuring the related lease liability.

Most of the Company’s real estate leases include one or more options to renew, with renewal terms that can extend the lease term from three to five years or more. The exercise of lease renewal options is at the Company’s sole discretion. If the Company is reasonably certain that it will exercise such options, the periods covered by such options are included in the lease term and are recognized as part of the Company’s right-of-use assets and liabilities.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The Company determines discount rates based on the rates of its outstanding debt.

The following table sets forth information about the Company’s operating and financing lease assets and liabilities included in its condensed consolidated balance sheet as of June 30, 2019:

The following table sets forth the supplemental cash flow information related to the Company’s leases for the three- and six-month periods ended June 30, 2019:

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The following table sets forth the components of lease costs related to the Company’s leases for the three- and six-month periods ended June 30, 2019:

The following table shows certain information related to the weighted-average remaining lease terms and the weighted-average discount rates for our operating and financing leases:

The following table sets forth the maturity of our operating and financing leases liabilities as of June 30, 2019:

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 13. 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 June 30, 2019 and December 31, 2018, respectively, of which 7,080,771 and 6,680,065 shares of common stock were outstanding at June 30, 2019 and December 31, 2018, respectively, 1,000,000 shares of Series A convertible preferred stock, par value $0.01 per share, at June 30, 2019 and December 31, 2018, of which 449,581 shares were outstanding at June 30, 2019 and December 31, 2018, and 2,500,000 shares of Series B Convertible Preferred Stock, $0.01 par value per share, none of which was outstanding at June 30, 2019 and December 31, 2018.

In May 2018, the Company issued a stock option to an employee that is exercisable into 30,000 shares of common stock. The shares were valued on the date of grant by using the Black-Scholes pricing model. The Company recognized $10,002 of stock compensation expense during the year ended December 31, 2018 in connection with the vesting of the option. In February 2019, the stock option terminated in its entirety upon the termination of the employee’s employment with the Company. In connection therewith, the stock compensation previously recognized by the Company during the year ended December 31, 2018 was reversed during the six-month period ended June 30, 2019.

In May 2018, the Company provided an employee with the right to receive $33,000 in cash or 20,000 shares of shares of the Company’s common stock on May 15, 2021. The shares were valued at a price per share equal to the closing price of the Company’s common stock on the OTCQB on the date of grant and remeasured as of December 31, 2018. In accordance with ASC 718, as the employee is able to settle the right in either cash or common stock, the Company recognized $8,701 of stock compensation expense in connection therewith during the year ended December 31, 2018 and recorded a corresponding liability which has been recorded in accounts payable and accrued expenses within the Company’s consolidated balance sheet. In February 2019, the right terminated in its entirety upon the termination of the employee’s employment with the Company. In connection therewith, the stock compensation previously recognized by the Company during the year ended December 31, 2018 was reversed during the six-month period ended June 30, 2019.

In August 2018, the Company entered into an agreement with a firm to provide investor relations services to the Company. Under the terms of the agreement, the Company agreed to pay the firm $12,250 and issue 3,500 shares of common stock to the firm upon the execution of the agreement as compensation for services to be performed during the months of August and September 2018. The Company agreed to pay the firm $7,000 and issue 1,500 shares of common stock each month thereafter during the remainder of the term of the agreement. The Company recognized $5,775 and $11,145 of stock compensation expense under the agreement during the three- and six-month periods ended June 30, 2019.

The Company recognized $147 of stock compensation expense during the six-month period ended June 30, 2019 in connection with the vesting of 10,706 shares of common stock earned by Mr. Kasturi on January 1, 2019 under the employment agreement that he was then a party to with the Company.

In January 2019, the Company issued a restricted stock award to Mr. Kasturi pursuant to the terms of a new employment agreement that the Company entered into with him. The Company recognized $48,967 and $96,319 of stock compensation expense in connection therewith during the three- and six-month periods ended June 30, 2019. A description of the new employment agreement and restricted stock award is set forth herein under Note. 16 – Commitments and Contingencies – Employment Agreements – Seenu G. Kasturi.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

In January 2019, the Company commenced a private offering of up to 5,000,000 units, each unit comprised of one share of common stock and one warrant to purchase one share of common stock, at a purchase price of $1.40 per unit (the “Offering”). Each warrant is exercisable for a term of five years at an exercise price of $1.55 per share, subject to adjustment. The units are being offered without registration under the Securities Act of 1933, as amended (“Securities Act”), solely to persons who qualify as accredited investors, as that term is defined in Rule 501 of Regulation D under the Securities Act, in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D promulgated thereunder.

The Company retained Maxim Group, LLC (“Maxim”) to serve as its placement agent for the Offering. The Company agreed to pay the placement agent a placement fee equal to 7% of the aggregate gross proceeds raised in the Offering and warrants exercisable for a term of five years to purchase 4% of the number of shares of common stock included in the units sold in the Offering at an exercise price of $1.55 per share.

The Offering may be increased by up to an additional $1,000,000 at the mutual discretion of the Company and the placement agent. The initial closing of the Offering is conditioned, among other things, on the Company’s acceptance of subscriptions for at least $500,000 of units and the closing of the Company’s agreement to purchase all of the membership interests in SDA Holdings.

Net proceeds, if any, from the Offering will be used to fund the deferred portion of the purchase price for the Company’s acquisition of Fat Patty’s, future payments to the persons that owned Tilted Kilt prior to SDA Holdings, and the repayment of the loan made by Seenu G. Kasturi to help fund the acquisitions of Fat Patty’s and Tilted Kilt, and the balance for general corporate purposes.

The Offering was originally contemplated to terminate on March 31, 2019, unless extended by the Company and the placement agent to a date not later than May 31, 2019. On March 31, 2019, the Company extended the offering until May 31, 2019. No securities were sold in the offering during the three- and six-month periods ended June 30, 2019.

On April 8, 2019, the Company granted a restricted stock award to an employee for a total of 225,000 shares of the Company’s common stock. The shares vest in three equal annual installments commencing on April 30, 2020. The Company recognized $21,715 of stock compensation expense in connection therewith during the three- and six-month periods ended June 30, 2019.

On April 17, 2019, the Company revised the terms of the Offering. As revised, the Offering covers the sale of up to 1,785,715 units, each unit comprised of one share of Series B convertible preferred stock (the “Shares”) and one warrant to purchase one share of common stock at a purchase price of $1.40 per unit, for an aggregate offering price of $2,500,000. Each warrant is exercisable for a term of five years at an exercise price equal to the lesser of: (i) $1.70 per share, and the greater of: (ii) one hundred twenty percent (120%) of the conversion price of the Shares and $0.28 per share, subject to adjustment. The units are being offered without registration under the Securities Act solely to persons who qualify as accredited investors, as that term is defined in Rule 501 of Regulation D under the Securities Act, in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D promulgated thereunder.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The Company retained Maxim and Joseph Gunnar & Co., LLC to serve as its placement agents for the Offering. The Company agreed to pay the placement agents an aggregate placement fee equal to 7% of the aggregate gross proceeds raised in the Offering and warrants exercisable for a term of five years to purchase that number of shares of common stock equal to 7% of the number of Shares issued in the Offering and 7% of the number of shares of common stock underlying the warrants issued in the Offering at an exercise price of $1.70 per share.

The Offering may be increased by up to an additional $1,000,000 at the mutual discretion of the Company and Maxim. The Offering was set to terminate on April 30, 2019, unless extended by the Company and Maxim to a date not later than May 31, 2019. On April 30, 2019, the Company extended the Offering to May 31, 2019.

The initial closing of the Offering is conditioned, among other things, on the Company’s acceptance of subscriptions for at least $500,000 of Units and the closing of the Company’s agreement to purchase all of the membership interests in SDA Holdings, the sole owner of the entities which own Tilted Kilt.

The net proceeds, if any, from the Offering will be used to fund the partial repayment of the loan made by Seenu G. Kasturi, who is the Company’s Chief Executive Officer, Chief Financial Officer and Chairman of its board of directors, to SDA Holdings to help fund SDA Holding’s acquisition of Tilted Kilt.

In connection therewith, on April 17, 2019, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of the Series B Convertible Preferred Stock with the Secretary of State of Nevada designating 2,500,000 shares of the Company’s authorized but unissued shares of preferred stock, $0.01 par value per share, as Series B Convertible Preferred Stock (the “Series B Preferred Stock”).

The Series B convertible preferred stock has a stated value of $1.40 per share. In the event that the Company is liquidated, dissolved, effects certain mergers or consolidations, transfers all or substantially all of its assets, or completes certain other significant transactions, holders of the Series B convertible preferred stock are entitled to receive, in preference to holders of the Company’s common stock and the Company’s Series A convertible preferred stock, an amount per share equal to the greater of (i) $1.40 plus any declared and unpaid dividends thereon, and (ii) the amount per share such holder would receive if such holder converted such shares of Series B convertible preferred stock into shares of common stock at a conversion price of $1.40, subject to adjustment.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Upon the completion of a firm commitment underwritten public offering (a “Qualified Public Offering”) of the Company’s common stock and concurrent listing of the Company’s common stock on the Nasdaq Stock Market, NYSE or NYSE MKT within 12 months after the final closing of the Offering, each share of Series B convertible preferred stock will automatically convert into the securities issued by the Company in the Qualified Public Offering (the “Conversion Securities”) at a conversion price equal to the lesser of: (a) $1.40 per share, and (b) the greater of: (i) 70% of the public offering price of the Conversion Securities, and (ii) $0.28 per share (the “Conversion Price”), subject to adjustment. The Conversion Price is subject to adjustment for stock splits, stock dividends, or the reclassification of the common stock. In the event that the Company does not complete a Qualified Public Offering within 12 months after the final closing of the Offering or does not file with the SEC the audited financial statements and other financial information required to be filed in connection with the Company’s acquisition of the Fat Patty’s restaurant concept on August 30, 2018 or in connection with the Company’s proposed acquisition of the Tilted Kilt within four months after the final closing of the Offering, the Company will be required to repurchase all Shares issued in the Offering for a purchase price of $1.75 per share.

The Series B convertible preferred stock participates, on an as-converted to common stock basis, in any dividends declared or paid on common stock and votes together with holders of common stock, on an as-converted to common stock basis, on all matters presented to holders of common stock.

The Company cannot undertake certain corporate actions without approval of the holders of a majority of the issued and outstanding shares of Series B convertible preferred stock.

No securities were sold in the offering during the three- and six-month periods ended June 30, 2019.

The Company recognized a total of $76,457 and $110,623 for stock compensation expense during the three- and six-month periods ended June 30, 2019, respectively. The Company had a total of $34,960 and $15,453 of stock subscription payable outstanding at June 30, 2019 and December 31, 2018, respectively.

The following table sets forth the changes in stockholders’ equity as of June 30, 2019:

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

The following table sets forth the changes in stockholders’ equity as of June 30, 2018:

Note 14. Stock Options and Warrants

The Company issued one stock option during the year ended December 31, 2018. The stock option was exercisable into 30,000 shares of common stock at an exercise price of $1.49 and vested in three equal annual installments commencing on the first anniversary of the date of issuance. The shares were valued on the date of grant by using the Black-Scholes pricing model in accordance with the provisions of ASC Topic 718. This stock option was the only stock option outstanding at December 31, 2018. In February 2019, the stock option terminated in its entirety. The Company did not issue any stock options or warrants exercisable into shares of the Company’s common stock during the three- and six-month periods ended June 30, 2019 and 2018, and no stock options or warrants were exercised during the three- and six-month periods ended June 30, 2019 and 2018. There were no stock options or warrants outstanding at June 30, 2019.

Note 15. 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 June 30, 2019, 142,858 shares of the Company’s common stock remained available for issuance under the plan. The plan terminates in August 2021. On August 18, 2011, the Company filed a registration statement on Form S-8, File No. 333-176383, with the SEC covering the public sale of all 1,214,286 shares of common stock available for issuance under the plan.

ARC Group, Inc. 2014 Stock Incentive Plan

In June 2014, the Company adopted the ARC Group, Inc. 2014 Stock Incentive Plan. Under the plan, 1,000,000 shares of common stock may be granted to employees, officers and directors of, and consultants and advisors to, the Company under awards that may be made in the form of stock options, warrants, stock appreciation rights, restricted stock, restricted units, unrestricted stock and other equity-based or equity-related awards. As of June 30, 2019, all 1,000,000 shares of the Company’s common stock remained available for issuance under the plan. The plan terminates in June 2024.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 16. Commitments and Contingencies

Employment Agreements

Seenu G. Kasturi

On January 18, 2017, the Company appointed Seenu G. Kasturi as its President, Chief Financial Officer and Chairman of its board of directors. In connection therewith, on January 18, 2017, the Company entered into an employment agreement with Mr. Kasturi to serve as the President and Chief Financial Officer of the Company. The employment agreement was for an initial term of three years with automatic one-year renewals thereafter unless earlier terminated or not renewed as provided therein. Under the terms of the employment agreement, Mr. Kasturi was paid annual compensation in the amount of $80,000 per year, consisting of: (i) an initial annual base salary of $26,000, and (ii) equity awards equal in value to $54,000 per year. Mr. Kasturi was eligible to receive increases in salary on January 1^st of each subsequent year in the discretion of the Company’s board of directors. He was also eligible to receive annual bonuses in the discretion of the Company’s board of directors beginning with the Company’s fiscal year ended December 31, 2017. The employment agreement contains customary confidentiality, non-competition and non-solicitation provisions in favor of the Company.

On January 2, 2019, the Company appointed Seenu G. Kasturi as its Chief Executive Officer. As a result of the appointment, Mr. Kasturi then served as the Company’s Chief Executive Officer, Chief Financial Officer and Chairman of the its board of directors. In connection therewith, on January 2, 2019, Mr. Kasturi resigned as the Company’s President and Richard W. Akam resigned as the Company’s Chief Executive Officer. Mr. Akam continues to serve as the Company’s Chief Operating Officer and Secretary.

On January 2, 2019, the Company entered into an amended and restated employment agreement with Mr. Kasturi to serve as the Chief Executive Officer and Chief Financial Officer of the Company. The agreement is for an initial term of three years with automatic one-year renewals thereafter unless earlier terminated or not renewed as provided therein. Under the terms of the agreement, Mr. Kasturi will be paid an initial annual base salary in the amount of $350,000. Mr. Kasturi will be eligible to receive increases in salary on January 1^st of each subsequent year in the discretion of the Company’s board of directors. He will also be eligible to receive annual bonuses in the discretion of the Company’s board of directors beginning with the Company’s fiscal year ended December 31, 2019. The employment agreement contains customary confidentiality, non-competition and non-solicitation provisions in favor of the Company.

ARC Group, Inc.

Notes to Condensed Consolidated Financial Statements

Pursuant to the terms of the new employment agreement, the Company entered into a restricted stock award agreement with Mr. Kasturi pursuant to which the Company granted 390,000 shares of the Company’s common stock to Mr. Kasturi. The shares vest in accordance with the following schedule: (i) 130,000 shares on March 31, 2019; (ii) 130,000 shares on March 31, 2020; and (iii) 130,000 shares on March 31, 2021. In the event the Company terminates the employment of Mr. Kasturi without “cause”, as such term is defined in the employment agreement, his restricted stock award will vest in full immediately. In the event Mr. Kasturi’s employment with the Company terminates by reason of death or “disability”, as such term is defined in the employment agreement, or if the Company terminates Mr. Kasturi’s employment for “cause”, as such term is defined in the employment agreement, or if Mr. Kasturi terminates his own employment with the Company, then any shares that have not yet vested shall be forfeited to the Company. In the event of certain “changes in control” as such term is defined in the Company’s 2014 Stock Incentive Plan adopted by the Company’s board of directors on June 16, 2014, all restrictions and conditions on any of the shares then outstanding shall automatically be deemed terminated or satisfied in full, as applicable, immediately prior to the consummation of the change in control event.