Basis of Presentation and Significant Accounting Policies

3 Months Ended

Mar. 31, 2019

Accounting Policies [Abstract]

Basis of Presentation and Significant Accounting Policies

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 wholly-owned subsidiary, Seediv, LLC. 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-month period ended March 31, 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.

Reclassifications

Certain amounts in the Company’s consolidated financial statements for the 2018 fiscal year have been reclassified to conform to the 2019 fiscal year presentation. These reclassifications did not result in any change to the previously reported total assets, net income or stockholders’ deficit.

Restatement

The Company has restated its previously issued condensed consolidated statement of operations for the three-month period ended March 31, 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.

While the Company generated a net loss of $414,243 and cash used by operating activities of $85,931 during the three-month period ended March 31, 2019 and had a working capital deficit of $3,208,122 at March 31, 2019, the Company has received continued financial support from related parties during the three-month period ended March 31, 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 March 31, 2019 and December 31, 2018 and 2017.

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 of amortization expense for the non-compete agreement during the three-month period ended March 31, 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

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 a total of $3,625 and $8,625 of deferred franchise fees as income during the three-month periods ended March 31, 2019 and 2018, respectively. The carrying value of the Company’s deferred franchised fees was $61,609 at March 31, 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 $32,224 and $53,232 during the three-month periods ended March 31, 2019 and 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:

	Three Months Ended March 31, 2019		Three Months Ended March 31, 2018
Primary Geographic Markets
Florida	$	1,316,555	$	1,138,870
Georgia		299,044		50,294
Kentucky		639,811		—
Louisiana		302,276		—
West Virginia		2,031,135		—
Total revenue	$	4,588,821	$	1,189,164
Sources of Revenue
Restaurant sales	$	4,378,791	$	927,277
Royalties		174,182		200,030
Franchise fees		3,625		8,625
Advertising fund fees		32,223		53,232
Total revenue	$	4,588,821	$	1,189,164

Contract Balances

The following table presents changes in deferred franchise fees as of and for the three-month period ended March 31, 2019:

	Total Liabilities
Deferred franchise fees at December 31, 2018	$	65,234
Revenue recognized during the period		(3,625	)
New deferrals due to cash received		—
Deferred franchise fees at March 31, 2019	$	61,609

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 March 31, 2019:

Year	Franchise Fees Recognized
2019	$	10,093
2020		12,000
2021		10,926
2022		9,000
2023		6,637
Thereafter		12,953
Total	$	61,609

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, upon the adoption of ASC Topic 842 on January 1, 2019.

The Company determines whether a contract is or contains a lease at inception of the contract based on whether an identified asset exists and whether the Company has the right to obtain substantially all of the benefit of the assets and to control its use over the full term of the agreement. When available, the Company uses the rate implicit in the lease to discount lease payments to present value. However, none of our leases provide a readily determinable implicit rate. Therefore, the Company estimated its incremental borrowing rate considering both the revolving credit rates and a credit notching approach to discount the lease payments based on information available at lease commencement. There are no material residual value guarantees and no restrictions or covenants included in the Company’s lease agreements. Certain of the Company’s leases include provisions for variable payments. These variable payments are typically determined based on a measure of throughput or actual days or another measure of usage and are not included in the calculation of lease liabilities and right-of-use assets.

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

● An entity need not reassess whether any expired or existing contracts are or contain leases;

● An entity need not reassess the lease classification for any expired or existing leases; and

● An entity need not reassess initial indirect costs for any existing leases.

Furthermore, the Company elected the optional transition method to make January 1, 2019 the initial application date of the standard. This package of practical expedients allows entities to account for their existing leases for the remainder of their respective lease terms following the previous accounting guidance.

The Company also elected to adopt the optional transition practical expedient provided in ASU 2018-01 to not evaluate under ASC Topic 842 for existing or expired land easements prior to the application date to determine if they meet the definition of a lease.

The impact of ASC Topic 842 is more specifically described herein under Note 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.