| Significant Accounting Policies | Note 2. Significant Accounting Policies This summary of significant accounting policies is provided to assist the reader in understanding the Company’s financial statements. The financial statements and notes thereto are representations of the Company’s management. The Company’s management is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and have been consistently applied in the preparation of the financial statements. Basis of Presentation The Company’s financial statements have been prepared using GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. All intercompany accounts and transactions were eliminated in consolidation. Going Concern The Company incurred net losses of $813,713 for the year ended December 31, 2016 and experienced negative cash flows from operations for that year. The Company also had an accumulated deficit of $5,113,332 and a working capital deficit of $1,259,231 at December 31, 2016. Those facts 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 for the year ended December 31, 2017. The improvement was due primarily to its acquisition of two Company-owned restaurants in December 2016. In addition, the Company has received continued financial support from related parties. As a result of these factors, the Company believes that the substantial doubt about its ability to continue as a going concern had been alleviated as of December 31, 2017. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Certain amounts in the Company’s financial statements for the 2016 fiscal year have been reclassified to conform to the 2017 fiscal year presentation. These reclassifications did not result in any change to the previously reported total assets, net loss or stockholders’ deficit. Segment Disclosure The Company has a single brand, all of the restaurants 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 Franchise Operations The Company enters into franchise agreements with each of its franchisees to build and operate restaurants using the Dicks Wings brand within a defined geographic area. The agreements have a 10-year term and can be renewed for one additional 10-year term. The Company provides the use of its Dick’s Wings trademarks and Dick’s Wings system, which includes uniform operating procedures, standards for consistency and quality of products, technical knowledge, and procedures for accounting, inventory control and management, in return for the royalty payments, franchise fees and area development fees. Franchisees are required to operate their restaurants in compliance with their franchise agreements, which includes adherence to operating and quality control procedures established by the Company. The Company is not required to provide loans, leases, or guarantees to franchisees or the franchisees’ employees and vendors. If a franchisee becomes financially distressed, the Company is not required to provide financial assistance. If financial distress leads to insolvency of the franchisee or the filing of a petition by or against the franchisee under bankruptcy laws, the Company has the right, but not the obligation, to acquire the franchise at fair value as determined by an independent appraiser selected by the Company. Franchisees generally remit royalty payments weekly for the prior week’s sales. Franchise and area development fees are paid upon the signing of the related franchise agreements. Cash Equivalents The Company considers all highly liquid investments with an original maturity of 90 days or less on the date of purchase to be cash equivalents in accordance with ASC Topic 305, Cash and Cash Equivalents Accounts Receivable Accounts receivable are recorded in accordance with ASC Topic 310, Receivables of contractually-determined receivables primarily for Accounts receivable, net of the allowance for doubtful accounts, represents the estimated net realizable value of the Company’s accounts receivable. Provisions for doubtful accounts are recorded based on historical collection experience, the age of the receivables and current economic conditions. The accounts receivable balance at December 31, 2017 was comprised primarily of credit card sales by Company-owned restaurants, royalties due from the Company’s franchisees, and sales proceeds due from the concessionaire of the Company’s concessions stands, all of which the Company collected in full in January 2018. Accordingly, the allowance for doubtful accounts was zero at December 31, 2017. The accounts receivable balance at December 31, 2016 was comprised primarily of credit card sales by Company-owned restaurants and unpaid royalties due from one of the Company’s franchisees that was behind in its payments, all of which the Company collected in full in early 2017. Accordingly, the allowance for doubtful accounts was zero at December 31, 2016. Inventory Inventory consists primarily of food and beverage products and is accounted for at the lower of cost or net realizable value using the first in, first out method of inventory valuation in accordance with ASC Topic 330, Inventory Property and Equipment Property and equipment is recorded at cost, less accumulated depreciation and amortization, in accordance with ASC Topic 360, Property, Plant and Equipment The Company reviews property and equipment for impairment at least quarterly and whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable in accordance with ASC 360. Recoverability is measured by comparison of the carrying amount of the assets to the future undiscounted net cash flows that the assets are expected to generate. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Long-Lived Assets The Company reviews long-lived assets for impairment at least quarterly or whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable in accordance with ASC 360. Assets are reviewed at the lowest level for which cash flows can be identified, which is at the individual restaurant level. The Company evaluates the recoverability of a restaurant’s long-lived assets, including buildings, intangibles, leasehold improvements, furniture, fixtures, and equipment over the remaining life of the primary asset in the asset group, after considering the potential impact of planned operational improvements, marketing programs, and anticipated changes in the trade area. In determining future cash flows, significant estimates are made by management with respect to future operating results for each restaurant over the remaining life of the primary asset in the asset group. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value based on the Company’s estimate of discounted future cash flows. The Company accounts for exit or disposal activities, including restaurant closures, in accordance with ASC Topic 420, Exit or Disposal Cost Obligations Financial Instruments The Company accounts for its financial instruments in accordance with ASC Topic 825, Financial Instruments Fair Value Measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in the Company’s principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In accordance with ASC Topic 820, Fair Value Measurements and Disclosures The levels of fair value hierarchy are: Level 1: Quoted prices in active markets for identical assets and liabilities at the measurement date; Level 2: Observable inputs other than quoted prices included in Level 1, such as: (i) quoted prices for similar assets and liabilities in active markets, (ii) quoted prices for identical or similar assets and liabilities in markets that are not active, and (iii) other inputs that are observable or can be corroborated by observable market data; and Level 3: Unobservable inputs for which there is little or no market data available. A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. In contrast, the Company considers unobservable data to be data that reflects the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Investment in Paradise on Wings On January 20, 2014, the Company purchased a 50% ownership interest in Paradise on Wings Franchise Group, LLC, a Utah limited liability company that is the franchisor of the Wing Nutz ® Note 4. Investment in Paradise on Wings The Company accounted for its investment in Paradise on Wings under the equity method of accounting in accordance with ASC Topic 323 Investments – Equity Method and Joint Ventures The Company reviews its investment in Paradise on Wings for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable in accordance with ASC 323. The standard for determining whether an impairment must be recorded under ASC 323 is whether an “other-than-temporary” decline in value of the investment has occurred. The evaluation and measurement of impairments under ASC 323 involves Acquisition of Seediv On December 19, 2016, the Company acquired all of the issued and outstanding membership interests of Seediv. A description of the Company’s acquisition of Seediv is set forth herein under Note 5. Acquisition of Seediv. The Company determined that the acquisition of Seediv constituted a business combination as defined by ASC Topic 805, Business Combinations Note 5. Acquisition of Seediv Fair Value Measurements and Disclosures General Advertising Fund The Company has established a general advertising fund that it uses to pay for advertising costs, sales promotions, market research and other support functions intended to maximize general public recognition and acceptance of the Dick’s Wings brand. Company-owned and franchised restaurants are required to contribute at least 1%, but not more than 2%, of their gross revenue to the Company’s general advertising fund. Contributions made by franchisees to the general advertising fund and marketing and advertising expenses paid by the general advertising fund are not recognized as revenues and expenses. They instead constitute agency transactions. These contributions are recorded as a liability against which specific costs are charged. The Company accounts for the cash and cash equivalents held by the general advertising fund as restricted cash on its accompanying consolidated balance sheets. The restricted cash of this fund is classified as current as it is expected to be utilized to fund short-term obligations of the general advertising fund. The Company did not have any restricted cash at December 31, 2017 and 2016. Revenue Recognition The Company’s revenue consists primarily of proceeds from the sale of food and beverage products at its Company-owned restaurants and concession stands, and royalty payments, franchise fees and area development fees that it receives from its franchisees. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed and determinable, and collectability is reasonably assured in accordance with ASC Topic 605, Revenue Recognition The Company records gift cards under a Dick’s Wings system-wide program. Gift cards sold are recorded as a gift card liability. When redeemed, the gift card liability account is offset by recording the transaction as revenue. Breakage income represents the value associated with the portion of gift cards sold that will most likely never be redeemed. Based on the Company’s historical gift card redemption patterns and the fact that the Company’s gift cards have no expiration dates or dormancy fees, the Company can reasonably estimate the amount of gift card balances for which redemption is remote and record breakage income based on this estimate. The Company updates its estimate of the breakage rate periodically and, if necessary, adjusts the gift card liability balance accordingly. Revenue from restaurant sales was $3,612,951 for the year ended December 31, 2017 and was comprised of $3,502,080 in sales generated by the Company’s two Company-owned restaurants and $110,871 in sales generated by the Company’s two concession stands. Revenue from restaurants sales was $130,861 for the year ended December 31, 2016 and was comprised entirely of sales generated by the Company’s two Company-owned restaurants. Franchise and other revenue was $832,712 for the year ended December 31, 2017 and was comprised of $829,069 in royalties and $3,643 in sales of merchandise. Franchisee and other revenue was $1,144,587 for the year ended December 31, 2016 and was comprised of $1,004,587 in royalties, $105,000 in franchise fees and $35,000 in licensing fees associated with its concession stands. Payments Received From Vendors Vendor allowances include allowances and other funds that the Company receives from vendors. Certain of these funds are determined based on various quantitative contract terms. The Company also receives vendor allowances from certain manufacturers and distributors calculated based upon purchases made by franchisees. Vendor allowances are not recognized as revenue. Instead, they are recognized as a reduction in costs. The Company generally receives payment from vendors approximately 30 days from the end of a month for that month’s purchases. Stock-Based Compensation The Company accounts for employee stock-based compensation in accordance with the fair value recognition provisions of ASC Topic 718, Compensation – Stock Compensation The Company accounts for non-employee stock-based compensation in accordance with ASC 718 and ASC Topic 505, Equity The Company uses the Black-Scholes pricing model to determine the fair value of the stock-based compensation that it grants to employees and non-employees. The Black-Scholes pricing model takes into consideration such factors as the estimated term of the securities, the conversion or exercise price of the securities, the volatility of the price of the Company’s common stock, interest rates, and the probability that the securities will be converted or exercised to determine the fair value of the securities. The selection of these criteria requires management’s judgment and may impact the Company’s net income or loss. The computation of volatility is intended to produce a volatility value that is representative of the Company’s expectations about the future volatility of the price of its common stock over an expected term. The Company used its share price history to determine volatility and cannot predict what the price of its shares of common stock will be in the future. As a result, the volatility value that the Company calculated may differ from the actual volatility of the price of its shares of common stock in the future. Operating Leases Rent expense for leases that contain scheduled rent increases is recognized on a straight-line basis over the lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty such that the renewal appears reasonably assured. The straight-line rent calculation and rent expense includes the rent holiday period, which is the period of time between taking control of a leased site and the rent commencement date. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the lease is accrued as deferred rent liability and reduced in later years when the actual cash payment requirements exceed the straight-line expense. Contingent rents are generally amounts due as a result of sales in excess of amounts stipulated in certain restaurant leases and are included in rent expense as they are incurred. Landlord contributions are recorded when received as a deferred rent liability and amortized as a reduction of rent expense on a straight-line basis over the lease term. Marketing and Advertising Contributions to the national advertising fund related to Company-owned restaurants are expensed as contributed and local advertising costs for Company-owned restaurants are expensed as incurred. All other marketing and advertising costs are expenses as incurred. The Company incurred $90,120 and $46,545 for marketing and advertising costs during the years ended December 31, 2017 and 2016, respectively. Start-Up Costs Start-up costs consists of costs associated with the opening of new Company-owned restaurants and varies based on the number of new locations opening and under construction. These costs are expensed as incurred in accordance with ASC Topic 720, Other Expenses Sales Taxes Sales taxes collected from customers are excluded from revenue. Sales taxes payable are included in accrued expenses until the taxes are remitted to the appropriate taxing authorities in accordance with ASC 450, Contingencies Income Taxes The Company uses the liability method of accounting for income taxes in accordance with ASC Topic 740, Income Taxes In determining whether a valuation allowance is required, the Company takes into account all evidence with regard to the utilization of a deferred tax asset including past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The Company has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets and has established a valuation allowance of $465,018 and $965,216 at December 31, 2017 and 2016, respectively. Net deferred tax assets were comprised of the following at December 31, 2017 and 2016, respectively:
December 31, 2017
December 31, 2016
Deferred tax assets:
Net operating loss carryforwards $ 465,018 $ 965,216
Deferred tax liabilities -0- -0-
Valuation allowance (465,018 ) (965,216 )
Net deferred tax assets $ -0- $ -0- The Company had net operating loss carry-forwards of approximately $1,860,071 and $2,533,376 at December 31, 2017 and 2016, respectively, that may be offset against future taxable income. No tax benefit has been reported in the financial statements for the Company’s 2017 and 2016 fiscal years because the potential tax benefit is offset by a valuation allowance of the same amount. The Company had no uncertain tax positions at December 31, 2017 and 2016. Effective January 1, 2018, the federal corporate income tax rate was decreased from 34% to 21%. The effect of this change on deferred taxes and the valuation allowance at December 31, 2017 was $244,147. The valuation allowance as of December 31, 2017 includes $105,629 of net operating loss carry forwards that relate to stock compensation expense for income tax reporting purposes that upon realization, would be recorded as additional paid-in capital. There were no such net operating loss carry forwards as of December 31, 2016. The valuation allowance reduces deferred tax assets to an amount that management believes will more likely than not be realized. A reconciliation of the difference between the provision for income taxes and income taxes at the statutory U.S. federal income tax rate for the years ended December 31, 2017 and 2016 is as follows:
December 31, 2017
December 31, 2016
Income tax provision at statutory rate $ 123,612 $ 861,348
State income taxes 14,906 103,868
Stock compensation expense 105,629 -0-
Effect of change in federal tax rate 244,147 -0-
Other 11,904 -0-
Change in valuation allowance (500,198 ) (965,216 )
Net tax provision $ -0- $ -0- Utilization of net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations contained in the Internal Revenue Code of 1986, as amended, as well as similar state and foreign provisions. These ownership changes may limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income and tax, respectively. On November 2, 2012, William D. Leopold purchased 2,218,572 shares of the Company’s common stock, which represented approximately 41.2% of the outstanding shares of the Company’s common stock on that date, from Michael Rosenberger, who was then serving as the Company’s Chief Executive Officer, Chief Financial Officer, Secretary and sole member of the Company’s board of directors. This transaction could be deemed to have resulted in a change in ownership of the Company. On July 31, 2017, Seenu G. Kasturi, the Company’s President, Chief Financial Officer and Chairman of the Board of Directors, purchased 2,647,144 shares of the Company’s common stock, which represented approximately 38.4% of the outstanding shares of the Company’s common stock on that date, from William D. Leopold. This transaction could be deemed to have resulted in a change in ownership of the Company. Subsequent ownership changes could further affect the limitation in future years. These annual limitation provisions may result in the expiration of certain net operating losses and credits before utilization. Recent Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue From Contracts With Customers Revenue From Contracts With Customers – Deferral of the Effective Date The Company determined that the new revenue guidance will impact the timing of recognition of franchise fees. Under existing guidance, these fees are typically recognized upon the opening of restaurants. Under the new guidance, the fees will have to be deferred and recognized as revenue over the term of the individual franchise agreements. However, 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 presently expects to use the modified retrospective method of adoption when the new guidance is adopted in the first fiscal quarter of 2018. Upon adoption, the Company will recognize a deferral in revenue from franchise fees on its balance sheet of approximately $196,478 and an increase in the Company’s accumulated deficit by the same amount. The Company also determined that the new revenue guidance will impact the accounting for transactions related to the Company’s general advertising fund. Currently, franchisee contributions to and expenditures by the fund are not included in the Company’s Consolidated Statements of Operations. Under the new guidance, the Company will include contributions to and expenditures by the fund within the Company’s Consolidated Statements of Operations. While this change will materially impact the gross amount of reported franchise revenue and expenses, the impact will be an increase to both revenue and expense that, for the most part, will offset such that the impact on gross profit and net income, if any, will not be material. Additionally, the Company determined that the new revenue guidance will impact the accounting for transactions related to the Company’s gift card program. Estimated breakage income on gift cards will be recognized as gift cards are utilized instead of the Company’s current policy of deferring the breakage income until it is deemed remote that the unused gift card balance will be redeemed. The Company determined that this change will not have a material impact on its consolidated financial statements. The table below presents the expected effects these changes would have had on the Company’s consolidated financial statements in 2017 and 2016 had this guidance been adopted by the Company on January 1, 2016:
Fiscal Year 2017 Fiscal Year 2016
As
Effects of Upon As
Effects of Upon
Franchise and other revenue $ 832,712 $ 34,500 $ 867,212 $ 1,144,587 $ (73,622 ) $ 1,070,965
Advertising fund fees -0- 294,888 294,888 -0- 367,153 367,153
Advertising expenses -0- (294,888 ) (294,888 ) -0- (367,153 ) (367,153 )
Net income / (loss) $ 344,740 $ 34,500 $ 379,240 $ (813,713 ) $ (73,622 ) $ (887,335 )
Net income / (loss) per share – basic and fully diluted $ 0.05 $ 0.01 $ 0.06 $ (0.12 ) $ (0.01 ) $ (0.13 ) In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern Note 2. Significant Accounting Policies – Going Concern These facts created an uncertainty about the Company’s ability to continue as a going concern as of December 31, 2016. However, In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory In February 2016, the FASB issued ASU 2016-02, Leases In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business The Company reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to the Company’s operations or that no material effect is expected on the Company’s financial statements as a result of future adoption. |
