Exhibit 99.1
Certain information to be disclosed in connection with the Offering dated January 29, 2019
This document incudes certain information that ARC Group, Inc. (the “Company”, “we” or “us”) will be disclosing to potential investors in the Company’s proposed private offering (the “Offering”) of up to 5,000,000 units (“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 minimum amount of proceeds that may be raised in the Offering is $500,000 (the “Minimum Offering Amount”) and the maximum amount of proceeds that may be raised in the Offering is $7,000,000 (the “Maximum Offering Amount”), subject to increase by up to an additional $1,000,000.
This document is not an offer to sell nor a solicitation of an offer to buy securities. Any offer or sale of securities will be made by means of an offering memorandum containing detailed information about the Company, management and the securities. In addition, no offer, sale or solicitation is being made in any jurisdiction in which such offer, sale or solicitation would be prohibited.
RECENT DEVELOPMENTS
Agreement to Acquire Tilted Kilt
The Tilted Kilt concept is comprised of 30 restaurants located in 14 states and Canada. The Titled Kilt restaurants offer dinner entrees, traditional pub food, hamburgers, and salads made with fresh, quality ingredients, accompanied by full bar service, served up by uniquely kilt-clad wait staff in lively, Celtic-themed atmosphere.The restaurants feature dozens of large, HDTVs and big screens to deliver a premium sports viewing experience. Every restaurant has 30+ draught and bottled beers along with excellent tasting, high quality menu items served to customers by theKilt Girls®. The brand’s sloganA Cold Beer Never Looked So Good®personifies the fun, food, spirits and sports that the Tilted Kilt brings to its customers.
We recently opened a Tilted Kilt restaurant in Gonzales, Louisiana for which we serve as a franchisee.
Tilted Kilt generated revenue of $5,016,912 and $13,998,931 during the six months ended June 30, 2018 and the year ended December 31, 2017, respectively, and a net profit of $47,817 and a net loss of $1,184,480 during the six-month period ended June 30, 2018 and the year ended December 31, 2017, respectively.
Tilted Kilt was originally owned by Tilted Kilt Franchise Operating, LLC (“TKFO”) and Tilted Kilt Franchise Ltd. Liability Company (“TKFL”). TKFO owned all of the restaurants and business operations of Tilted Kilt, and TKFL owned all of the trademarks, service marks and other intellectual property associated with Tilted Kilt.
On June 26, 2018, SDA Holdings, LLC, a Louisiana limited liability company owned by Fred D. Alexander, a member of our board of directors (“SDA Holdings”), purchased all of the issued and outstanding membership interests of TKFO and TKFL. SDA Holdings purchased 60% of the ownership interests (the “Majority Ownership Interests”) from Lynch Restaurant Investments, LLC (“LRI”) and the remaining 40% of the ownership interests (the “Minority Ownership Interests”, and together with the Majority Ownership Interests, the “Interests”) from Let’s Eat Inc., the Reilly Group, LLC and John Reynaud (collectively the “Minority Interest Owners”).
The purchase price for the Majority Ownership Interest consisted of $3,000,000 in cash and 666,667 shares of our common stock that were owned by Seenu G. Kasturi, who is our Chief Executive Officer, Chief Financial and Chairman of our Board of Directors. The shares of common stock are subject to a lock up agreement which prohibits the sale or transfer of such shares for a period of 180 days after the closing. $1,250,000 of the cash portion of the purchase price was paid at closing and the remaining $1,750,000 was paid pursuant to a secured promissory note issued by SDA and Mr. Kasturi to the Majority Interest Owner (the “Tilted Kilt Note”). The Tilted Kilt Note does not accrue interest and the principal amount due and payable is as follows: $250,000 was paid in August 2018, $750,000 was paid in January 2019, and the remaining $750,000 is due and payable on January 1, 2020. The Tilted Kilt Note is secured by SDA’s pledge of the Majority Ownership Interest pursuant to the terms of a security agreement by and between SDA Holdings and the Majority Interest Owners. The current outstanding balance of the Tilted Kilt Note is $750,000.
The purchase price for the Minority Ownership Interest consisted of $1,500,000 of which $300,000 was paid at closing with the balance to be paid twenty-four (24) months after closing (the “Determination Date”) through the transfer by Mr. Kasturi of 718,563 shares of our common stock (the “Minority Interest Escrow Shares”) that were owned by Mr. Kasturi. The Minority Interest Escrow Shares were valued at $1,200,000 based upon the 30-day volume weighted average sale price of our common on the OTCQB marketplace maintained by the OTC Markets Group, Inc. (the “OTCQB”) during the 30dayspreceding the closing of the transaction. The Minority Interest Escrow Shares were placed in escrow under the terms of a Custodian Agreement (the “Custodian Agreement”). In the event that the value of the Minority Interest Escrow Shares is less than $1,900,000based upon theVWAP of the common stock on the OTCQB during the 30-day period ending on the 24th month anniversary of the closing date, each of the Minority Interest Owners will have the option to require SDA Holdings and/or Mr. Kasturi to purchase their portion of the Minority Interest Escrow Shares at a purchase price based upon the $1,900,000 valuation.
In connection with the foregoing transactions, SDA Holdings and Mr. Kasturi entered into an Agreement to Deliver Shares (the “Share Agreement”). The Share Agreement provides that in the event of the sale of all or substantially all of the assets or a majority of the ownership interests of SDA Holdings to us, one of our wholly-owned subsidiaries, or one of our affiliates, as a condition to and concurrently with the closing of any such transaction, SDA Holdings will cause to be delivered: (i) to Mr. Kasturi, 666,667 shares of our common stock, and (ii) to the custodian under the Custodian Agreement, 718,563 shares of our common stock to replace the Minority Interest Escrow Shares which will in turn be returned to Mr. Kasturi. In the event that SDA Holdings is unable to make the foregoing deliveries, SDA Holdings is required to deliver or cause to be delivered to Mr. Kasturi that number of shares of our common stock equal to the number of Minority Interest Escrow Shares that are not returned to Mr. Kasturi under the Custodian Agreement.
In connection with the purchase of the Majority Ownership Interest, SDA Holdings agreed to enter into an employment agreement with Mark Hanby to serve as Senior Vice President of Franchise Operations of TKFO for a period of one year at an annual base salary of $150,000 and an employment agreement with Michael Lynch to serve as General Counsel of TKFO for a period of one year at an annual salary of $216,062. In addition, SDA Holdings agreed to enter into a consulting agreement with Mr. Lynch to provide management consulting services for a period of one year in consideration of an annual consulting fee of $240,000.
In order to fund the purchase price of the Interests, SDA Holdings has borrowed $2,050,000 from Mr. Kasturi pursuant to the terms of a demand promissory note in the principal amount of up to $2,500,000 (the “Kasturi Note”). The Kasturi Note accrues interest at the rate of 6% per annum and is unsecured.
On October 30, 2018, we entered into a membership interest purchase agreement with Fred D. Alexander and SDA Holdings (“SDA Purchase Agreement”) pursuant to which we agreed to purchase all of the issued and outstanding membership interests in SDA Holdings for $10.00. Closing of the SDA Purchase Agreement is conditioned upon: (i) completion of the transactions contemplated by the Share Agreement, which will require us to issue 666,667 shares of common stock to Mr. Kasturi and deliver 718,563 shares of common stock to the custodian under the Custodian Agreement to replace the Minority Interest Escrow Shares; (ii) the execution of an amendment to the Custodian Agreement to remove Mr. Kasturi as a party and add SDA Holdings as a party; and (iii) us raising gross proceeds of at least $2,000,000 through the sale of debt or equity securities. The closing of this acquisition, which provides that we raise at least $2,000,000 as a condition to closing the acquisition unless otherwise waived, is also one of the conditions to closing this Offering. Upon closing of the transaction, SDA Holdings will become one of our wholly-owned subsidiaries.
Since June 2018, Mr. Kasturi has served as Vice President and Controller of TKFO, Richard Akam, our COO and Secretary, has served as President of TKFO, and Ketan Pandya, one of our directorsand ourVice President of Marketing, has served as Vice President of Franchise Relations of TKFO.
DIRECTOR INDEPENDENCE
Pursuant to Item 407(a)(1)(ii) of Regulation S-K promulgated under the Securities Act, we have adopted the definition of “independent director” as set forth in Rules 5000(a)(19), 5605(a)(2) and 5605(c)(2) of the rules of the Nasdaq Stock Market. Our board of directors is comprised of Seenu G. Kasturi, Fred D. Alexander and Ketan B. Pandya. Due to, among other things, Messrs. Kasturi and Pandya’s employment with the Company and various transactions between the Company and our directors, none of our directors qualify as an “independent director” under the rules of the Nasdaq Stock market.
CAPITALIZATION
The following table sets forth the beneficial ownership of our common stock as of the date hereof:
Shares of Common Stock Beneficially Owned(1) | ||
Number of Shares and Percentage | ||
Stockholder Name | Number of Shares | Percentage Ownership |
Seenu G. Kasturi | 2,421,711(2) | 30.3%(3) |
Richard W. Akam | 242,720 | 3.4% |
Daniel Slone | 758 | * |
Fred D. Alexander | 50,000 | * |
Ketan B. Pandya | 81,400 | 1.1% |
Kasturi Children’s Trust(4) | 533,206 | 7.5% |
Lynch Restaurants Investments, LLC(5) | 493,332 | 7.0% |
All officers and directors as a group (5 persons) | 2,796,589 | 35.0% |
__________________________
* Less than one percent.
(1) This table has been prepared based on 7,080,771 shares of our common stock outstanding on January 15, 2019
(2) Includes: (i) 911 shares of common stock held by Blue Victory Holdings, Inc., a company for which Mr. Kasturi serves as the President, Treasurer, Secretary and sole director and of which he owns 90% of the outstanding equity interests, (ii) 458,037 shares of common stock underlying the Fat Patty’s Note, (iii) 449,581 shares of common stock underlying the Series A convertible preferred stock held by Mr. Kasturi, and (iv) 390,000 shares of common stock underlying a restricted stock award.
(3) Mr. Kasturi beneficially owns 30.3% of our common stock and 100% of our Series A convertible preferred stock, collectively representing approximately 89.4% of the voting power of our capital stock.
(4) The Kasturi Children’s Trust has an address of 3909 I Ambassador Caffery Pkwy, Lafayette, LA 70503.
(5)Lynch Restaurants Investments, LLC has an address of 5630 Gail Drive, Chandler, AZ 85284.
Report of Independent Registered Public Accounting Firm
Board of Directors and Members of
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Results of Review of Interim Financial Statements
We have reviewed the accompanying balance sheet of Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries as of June 30, 2018, and the related statements of operations and cash flows of Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries (Company) as of June 30, 2018 and 2017, and for the six month periods ended, and the related notes (collective referred to as the “interim financial statements”). Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
The consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of operations, equity (deficit), and cash flows for the year then ended (not presented herein) (collectively referred to as “consolidated financial statements”); were audited by other auditors in accordance with auditing standards generally accepted in the United States of America and in their report dated March 23, 2018, expressed an unmodified opinion on those consolidated financial statements
Basis for Review Results
These interim financial statements are the responsibility of the entity’s management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
We have served as Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries accountant since 2018.
Denver, Colorado
October 11, 2018
What inspires you, inspires us. Let’s talk. | eidebailly.com
7001 E. Belleview Ave., Ste. 700 | Denver, CO 80237-2733 | TF 866.740.4100 | T 303.770.5700 | F 303.770.7581 | EOE
1
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Condensed Combined and Consolidated Balance Sheets
June 30, 2018 | December 31, 2017 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and cash equivalents | $ | 641,848 | $ | 1,407,400 | ||||
Cash, restricted | 229,655 | 200,150 | ||||||
Accounts receivable, net | 246,938 | 206,221 | ||||||
Prepaid expense | 139,977 | 148,666 | ||||||
Inventory | 73,114 | 76,842 | ||||||
Income tax receivable | 9,320 | 110,361 | ||||||
Total current assets | 1,340,852 | 2,149,640 | ||||||
Property and equipment, net | 994,679 | 1,069,704 | ||||||
Other Assets | ||||||||
Deposits | 63,416 | 74,643 | ||||||
Development rights and other intangible assets | 1,477,226 | 1,477,226 | ||||||
1,540,642 | 1,551,869 | |||||||
Total assets | $ | 3,876,173 | $ | 4,771,213 | ||||
Liabilities and Members Equity | ||||||||
Accounts payable | $ | 608,585 | $ | 853,591 | ||||
Accrued liabilities | 232,811 | 294,339 | ||||||
Current portion of long-term debt | 461,116 | 483,601 | ||||||
Current portion of deferred revenue, rent and deposits | 207,084 | 231,785 | ||||||
Total current liabilities | 1,509,596 | 1,863,316 | ||||||
Long-term debt | 386,109 | 407,661 | ||||||
Deferred revenue, rent and deposits | 413,890 | 481,479 | ||||||
Deferred compensation | - | 2,636,332 | ||||||
Total long-term liabilities | 799,999 | 3,525,472 | ||||||
Non-controlling interest | 1,666 | (7,982 | ) | |||||
Controlling interest | 1,564,912 | (609,593 | ) | |||||
Total Member's equity (deficit) | 1,566,578 | (617,575 | ) | |||||
Total liabilities and members equity | $ | 3,876,173 | $ | 4,771,213 |
The accompanying notes are an integral part of these financial statements
2
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Condensed Combined and Consolidated Statements of Operations (Unaudited)
For the Six Months ended June 30, | ||||||||
2018 | 2017 | |||||||
Revenue: | ||||||||
Continuing franchise fees and royalties | $ | 1,914,206 | $ | 3,121,217 | ||||
Sales revenue net | 2,800,290 | 1,962,557 | ||||||
Other operating revenues | 302,416 | 766,632 | ||||||
Total net revenue | 5,016,912 | 5,850,406 | ||||||
Operating expenses: | ||||||||
Cost of sales | 706,303 | 591,448 | ||||||
General and administrative expenses | 3,565,118 | 4,276,780 | ||||||
Franchise operating expenses | 519,373 | 1,174,469 | ||||||
Depreciation and amortization expense | 75,025 | 82,827 | ||||||
Total operating expenses | 4,865,819 | 6,125,524 | ||||||
Income (loss) from operations before impairment | 151,093 | (275,118 | ) | |||||
Goodwill impairment | - | 302,253 | ||||||
Income (loss) from operations | 151,093 | (577,371 | ) | |||||
Other income / (expense): | ||||||||
Interest expense | (17,584 | ) | (20,151 | ) | ||||
Interest income | 1,078 | 1,263 | ||||||
Other income | 21,817 | 101,775 | ||||||
Total other income / (expense) | 5,311 | 82,887 | ||||||
Net income / (loss) | 156,404 | (494,484 | ) | |||||
Income tax provision (benefit) | 108,587 | 27,187 | ||||||
Condensed combined and consolidated net income (loss) | 47,817 | (521,671 | ) | |||||
Less: Gain/(loss) attributable to non-controlling interest in subsidiary | 9,647 | - | ||||||
Condensed combined and consolidated net income (loss) attributable to controlling interests | $ | 38,170 | $ | (521,671 | ) |
The accompanying notes are an integral part of these financial statements
3
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Condensed Combined and Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30 | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities | ||||||||
Net income / (loss) | $ | 47,817 | $ | (521,671 | ) | |||
Adjustments to reconcile net income / (loss) to net cash provided / (used) by operating activities: | ||||||||
Depreciation and amortization expense | 75,025 | 82,827 | ||||||
Goodwill impairment | - | 302,253 | ||||||
Decrease (increase) in assets | ||||||||
Restricted cash | (29,505 | ) | 113,934 | |||||
Accounts receivable | (40,717 | ) | 334,311 | |||||
Prepaid expenses | 8,689 | (704 | ) | |||||
Inventory | 3,728 | 21,303 | ||||||
Income taxes receivable | 101,041 | 27,187 | ||||||
Deposits | 11,227 | 6,201 | ||||||
Increase (decrease) in liabilities | ||||||||
Accounts payable and accruals | (306,534 | ) | (596,062 | ) | ||||
Deferred revenue and deposits | (92,291 | ) | (121,278 | ) | ||||
Net cash used by operating activities | (221,520 | ) | (351,699 | ) | ||||
Cash flows from investing activities | ||||||||
Purchases of fixed assets | - | (17,719 | ) | |||||
Advance on notes receivable | - | (5,462 | ) | |||||
Net cash used by investing activities | - | (23,181 | ) | |||||
Cash flows from financing activities | ||||||||
Distribution paid to related party | (500,000 | ) | - | |||||
Repayments of notes payable | (44,032 | ) | (424,749 | ) | ||||
Net cash used by financing activities | (544,032 | ) | (424,749 | ) | ||||
Net decrease in cash and cash equivalents | (765,552 | ) | (799,629 | ) | ||||
Cash and cash equivalents, beginning of period | 1,407,400 | 1,943,688 | ||||||
Cash and cash equivalents, end of period | $ | 641,848 | $ | 1,144,059 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 17,584 | $ | 20,151 | ||||
Non-cash investing and financing transactions | ||||||||
Development rights acquired through debt financing | $ | - | $ | 530,000 | ||||
Related party deferred compensation write-off | $ | 2,636,332 | $ | - |
The accompanying notes are an integral part of these financial statements
4
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
Note 1. Description of Business
Tilted Kilt Franchise Operating, LLC (TKFO) was organized October 13, 2005 under the laws of the State of Wyoming. TKFO is engaged in the business of franchising Tilted Kilt Pub & Eatery restaurants. TKFO uses franchise agreements to sell, operate, and develop these restaurants.
Tilted Kilt Franchise Ltd. Liability Company (LTD) was organized October 13, 2005 under the laws of the State of Wyoming and owns the Tilted Kilt concept and related intellectual property.
Tilted Kilt National Advertising and Marketing Fund (NAMF) was incorporated November 17, 2010. NAMF develops and executes advertising and marketing materials and programs that benefit Tilted Kilt restaurants located in the United States.
Tilted Kilt NAMF Canada (NAMF Canada) was incorporated December 9, 2011 in the State of Arizona. NAMF Canada develops and executes advertising and marketing materials and programs that benefit Tilted Kilt Restaurants located in Canada.
Tempe Kilt Group, LLC (TKG) was organized November 1, 2006 under the laws of the State of Arizona. The Subsidiary was acquired December 1, 2006 and operated a restaurant, Tilted Kilt Pub & Eatery, in Tempe, Arizona, until July 2016. TKG was succeeded by Warner Kilt, LLC (WK) when operations for the restaurant were relocated to a nearby site.
TKFO Land Company LLC (TK Land) was organized on May 22, 2013 under the laws of the State of Arizona. The Subsidiary was intended to own and develop land for the TKFO corporate office and restaurant for TKG. Management modified these plans which suspended TK Land’s operations in 2016.
BAL TK, LLC (BAL) was organized on January 22, 2014 under the laws of the State of Arizona. The Subsidiary was acquired February 20, 2014 and operated a restaurant, Tilted Kilt Pub & Eatery, in Birmingham, Alabama until April 2017.
TK Franchising International LLC (TKI) was organized on June 19, 2014 under the laws of the State of Arizona. The Subsidiary was engaged in franchising restaurants outside of North America.
TK Training LLC (Training) was organized on December 24, 2013 under the laws of the State of Arizona. The Subsidiary facilitates training services provided to franchisees.
Warner Kilt, LLC (WK) was organized on April 14, 2015 under the laws of the State of Arizona. The Subsidiary began operating a restaurant in Tempe, Arizona in August 2016.
PDT TK, LLC (PDT) was organized on February 16, 2010 under the laws of the State of Arizona. TKFO acquired 70% of the membership of PDT in October 2017, which operates a restaurant in Phoenix, Arizona.
The Company establish franchise restaurants by entering into franchise agreements with qualified parties. It generates revenue from franchisees by granting them the right to use the name “Tilted Kilt” and offer their product line in exchange for royalty payments, franchise fees and area development fees. The Company generates revenue through its Company-owned restaurants by selling the “Tilted Kilt” product line to the restaurants’ customers.
5
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
At June 30, 2018, the Company had 40 restaurants. Of the 40 restaurants, two were Company owned restaurants, one located in Tempe and the other in Phoenix, Arizona, and the remaining 38 restaurants were owned and operated by franchisees. The Company had 54 restaurants at December 31, 2017 of which 14 closed during the first half of 2018. The Company has not opened or acquired any Company-owned or franchised restaurants during the first half of 2018.
Note 2. Basis of Presentation and Significant Accounting Policies
Interim Financial Information
The accompanying unaudited condensed combined and 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 combined and consolidated financial statements include the accounts of the Company, the affiliates and subsidiaries; Tilted Kilt Franchise Operating, LLC (TKFO), Tilted Kilt Franchise Ltd. Liability Company (LTD), Tilted Kilt National Advertising and Marketing Fund (NAMF), Tilted Kilt NAMF Canada (NAMF Canada), TKFO Land Company LLC (TK Land), BAL TK, LLC (BAL), TK Franchising International, LLC (TKI), TK Training ,LLC (Training),Warner Kilt, LLC (WK) and PDT TK, LLC (PDT). All intercompany accounts and transactions were eliminated in consolidation.
The accompanyingunaudited condensed combined and 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, we believe that the disclosures herein are adequate to make the information presented not misleading.
The unaudited condensed combined and consolidated financial statements should be read in conjunction with the audited combined and consolidated financial statements and the notes thereto for the year ended December 31, 2017. Information presented as of December 31, 2017 is derived from the audited combined consolidated financial statements. The results of operations for the six-month period ended June 30, 2018 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.
6
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
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.
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 (“ASC 280”), the Company’s Chief Executive Officer and President, who comprise the Company's Chief Operating Decision Maker function for the purposes of ASC 280, concluded that the Company operates as a single segment for reporting purposes.
Pushdown Accounting
Accounting Standard ASC 805-50-25,Business Combinations (Topic 805): Pushdown Accounting, requires that in business combinations an “acquirer” establish a new basis of accounting in its books for assets acquired and liabilities assumed when it obtains control of a business. Afterwards, the acquiree adopts the newly established acquirer’s basis of reporting its own assets and liabilities in its stand-alone financial statement presentations.
With Accounting Standard ASC 805-50-25, an acquired entity has the option to apply push down accounting in its separate financial statements upon the occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event.
On June 26, 2018, SDA Holdings, LLC purchased Tilted Kilt Franchise LTD Liability Company (TKFLLC), Tilted Kilt Franchise Operating, LLC (TKFO) parent and franchisor; respective subsidiaries which include Warner Kilt, LLC, and 70% of PDT, LLC as well as controlled affiliates NAMF and NAMFC. Upon closing, a total of $1,550,000 in cash was paid, a promissory note in the principal amount of $1,750,000 was executed, and 1,385,230 shares of ARC Group, Inc. common stock, par value of $ 0.01 per share, were transferred to the selling parties. In accordance with ASC 805-50-25,Business Combinations (Topic 850): Pushdown Accounting, the Company has elected not to apply pushdown accounting for the above transaction.
7
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
Franchise Operations
The Company enters into franchise agreements with each of its franchisees to build and operate restaurants using the Tilted Kilt brand within a defined geographic area. The agreements have a 20-year term and at the end of the initial term the franchisee will have the option to renew for a term which could be more or less than 20 years. The Company provides the use of its Tilted Kilt trademarks and Tilted Kilt 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. Accounts receivable consistsof royalties and franchise fees due from the Company’s franchisees, and vendor allowances.Accounts receivable, net of the allowance for doubtful accounts, represents the estimated net realizable value of the Company’s accounts receivable. The allowance for doubtful accounts is the estimate of the probable credit losses in the Company’s accounts receivable based on a review of account balances.Provisions for doubtful accounts are recorded based on historical collection experience, the age of the receivables and current economic conditions.Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recoverability is considered remote.
The accounts receivable balance at June 30, 2018 was comprised primarily of royalties due from the Company’s franchisees. Of the receivables billed some were returned as uncollected. Accordingly, an allowance for doubtful accounts was set up for $57,520 at June 30, 2018. The accounts receivable balance at December 31, 2017 was comprised of unpaid royalties from the Company’s franchisees, all of which the Company collected in full in early 2018. Accordingly, no allowance for doubtful accounts was deemed necessary.
8
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
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.Cash flows related to inventory sales are classified in net cash used by operating activities in the Statements of Cash Flows.
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 (“ASC 360”). Depreciation and amortization are calculated using the straight-line basis over the estimated useful lives of the assets. Leasehold improvements, which include the cost of improvements funded by landlord incentives or allowances, are amortized using the straight-line method over the lesser of the term of the lease, with consideration of renewal options if renewals are reasonably assured because failure to renew would result in an economic penalty, or the estimated useful lives of the assets. Furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The cost of major improvements to the Company’s property and equipment are capitalized. The cost of maintenance and repairs that do not improve or extend the life of the applicable assets is expensed as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reported in the period realized.
The Company reviews property and equipment for impairment at least annual 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.
Development Rights and Other Intangible Assets
Management evaluates the carrying value of development rights and other intangible assets annually to determine whether impairment may exist by considering relevant cash flows and profitability, including estimated future operating results, trends, and other available information. If management determines that the carrying value cannot be recovered, management will consider the carrying value impaired and will report an impairment loss to operations by the amount of the impairment. Impairment is measured as the carrying value of an intangible asset less the amount of recoverable estimated undiscounted further cash flows.
Long-Lived Assets
The Company reviews long-lived assets for impairment annual 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.
9
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
The Company accounts for exit or disposal activities, including restaurant closures, in accordance with ASC Topic 420, Exit or Disposal Cost Obligations. Such costs include the cost of disposing of the assets as well as other facility-related expenses from previously closed restaurants. These costs are generally expensed as incurred. Additionally, at the date the Company ceases using a property under an operating lease, it records a liability for the net present value of any remaining lease obligations, net of estimated sublease income. Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred.
Financial Instruments
The Company accounts for its financial instruments in accordance with ASC Topic 825,Financial Instruments, which requires the disclosure of fair value information about financial instruments when it is practicable to estimate that value.
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 Tilted Kilt brand. Company-owned and franchised restaurants are required to contribute up to 2%, of their gross sales 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 combined and 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 had restricted cash of $229,655 and $200,150 at June 30, 2018 and December 31, 2017, respectively.
Revenue Recognition
The Company’s revenue consists primarily of proceeds from the sale of food and beverage products at its Company-owned restaurants, 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 revenue from the sale of food and beverages as products are sold. Royalties are accrued as earned and are calculated each period based on restaurant sales. Franchise fees from individual franchise sales is recognized upon the opening of the franchised restaurant when all material obligations and initial services to be provided by the Company have been performed. Area development fees are dependent upon the number of restaurants in the territory, as are the Company’s obligations under the area development agreement. Consequently, as obligations are met, area development fees are recognized proportionally with expenses incurred with the opening of each new restaurant and any royalty-free periods.
10
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
The Company uses a third-party vendor to process all gift card transactions. Gift cards sold are recorded as a gift card liability and included in deferred revenue, rent and deposits on the accompanying condensed combined and consolidated balance sheets. 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 was $5,016,912 for the six months ended June 30, 2018 and was comprised of $2,800,290 in sales generated by the Company’s two Company-owned restaurants. Revenue was $5,850,406 for the six months ended June 30, 2017 and was comprised of $1,962,557 in sales generated by one Company-owned restaurant.
Gift Cards
Revenue is recognized by the franchisee when the gift card is redeemed or by TKFO when the likelihood of redemption by the customer is remote and it is determined that there is no legal obligation to remit the value of unredeemed gift cards to the relevant jurisdiction. Management estimates and recognizes gift card breakage based on historical redemption activity, with the likelihood of a gift card remaining unredeemed can be determined 24 months after issued. The unused balance of approximately $207,000 at June 30, 2018 and $200,000 at December 31, 2017, is included in deferred revenue, rent and deposits on the condensed combined and consolidated balance sheets.
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.
11
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
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 six months of the lease is accrued as deferred rent liability and reduced in later six months 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.
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 (“ASC 450”).
Income Taxes
The Company uses the liability method of accounting for income taxes in accordance with ASC Topic 740,Income Taxes, under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the six months in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as part of the provision for income taxes in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that all or a portion of a deferred tax asset will not be realized in the future.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 no valuation allowance has been established for the six months ended June 30, 2018 and June 30, 2017, respectively.
12
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
Areconciliation of the difference between the provision for income taxes and income taxes at the statutory U.S. federal income tax rate for the six months ended June 30, 2018 and June 30, 2017 is as follows:
June 30, 2018 | June 30, 2017 | |||||||
Income tax provision at statutory rate | $ | 98,102 | $ | 23,345 | ||||
State income taxes | 10,485 | 3,842 | ||||||
Effect of change in federal tax rate | -0- | -0- | ||||||
Other | -0- | -0- | ||||||
Change in valuation allowance | -0- | -0- | ||||||
Net tax provision | $ | 108,587 | $ | 27,187 |
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.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,Revenue From Contracts With Customers (“ASU 2014-09”). ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 introduces a five-step model to achieve its core principle of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14,Revenue From Contracts With Customers – Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 deferred by one six months the effective date of ASU 2014-09 by making ASU 2014-09 effective for annual reporting periods beginning after December 15, 2017, including interim period within that reporting period for public business entities. All other entities are required to adopt ASC Topic 606 for annual periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption is not permitted. The Company is a private business entity which is not required to adopt ASC Topic 606 until the following year.
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 2019. Upon adoption, the Company will recognize a deferral in revenue from franchise fees on its balance sheet of approximately $1,000,000 and an increase in the Company’s accumulated deficit by the same amount.
13
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
The following table presents changes in deferred franchise fees for the six-month period ended June 30, 2019:
Total Liabilities | ||||
Deferred franchise fees at January 1, 2019 | $ | 1,000,000 | ||
Revenue recognized during the period | (50,000 | ) | ||
New deferrals due to cash received | — | |||
Deferred franchise fees at June 30, 2019 | $ | 950,000 |
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:
Year | Franchise Fees Recognized | |||
2019 | $ | 50,000 | ||
2020 | 100,000 | |||
2021 | 100,000 | |||
2022 | 100,000 | |||
Thereafter | 600,000 | |||
Total | $ | 950,000 |
The estimated franchise fees for 2019 represent the fees to be recognized during the 2019 fiscal year.
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.
In February 2016, the FASB issued ASU 2016-02, Leases(“ASU 2016-02”). ASU 2016-02 requires that lease arrangements longer than 12 months result in the lessee recognizing a lease asset and liability. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements.
14
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
In November 2016, the FASB issued ASU 2016-18,Statement of Cash Flows: Restricted Cash (“ASU 2016-18”). ASU 2016-18 provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the impact of ASU 2016-18, but believes that ASU 2016-18 will not have a material impact on the Company’s financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 provides a more robust framework to use in determining when a set of assets and activities is considered a business. ASU 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for certain transactions. The Company is currently assessing the impact that ASU 2017-01will have on its financial statements.
The Company reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to the Company’s operations or that no material effect is expected on the Company’s financial statements as a result of future adoption.
Note 3. Inventory
Inventory was comprised of the following at June 30, 2018 and December 31, 2017, respectively:
June 30, 2018 | December 31, 2017 | ||||||||
Food | $ | 28,701 | $ | 27,332 | |||||
Beverages | 44,413 | 49,510 | |||||||
Total | $ | 73,114 | $ | 76,842 |
Note 4. Property and Equipment, Net
Property and equipment were comprised of the following at June 30, 2018 and December 31, 2017, respectively:
June 30, 2018 | December 31, 2017 | |||||||
Leasehold improvements | $ | 333,650 | $ | 333,650 | ||||
Furniture, fixtures and equipment | 1,428,717 | 1,428,717 | ||||||
Automobile | 90,471 | 90,471 | ||||||
Subtotal | 1,852,838 | 1,852,838 | ||||||
Less: accumulated depreciation | (858,159 | ) | (783,134 | ) | ||||
Total | $ | 994,679 | $ | 1,069,704 |
15
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
Depreciation expense was $75,025 and $82,827 for the six months ended June 30, 2018 and 2017, respectively.
Note 5. Notes Payable
Notes payable were comprised of the following at June 30, 2018 and December 31, 2017, respectively.
June 30, 2018 | December 31, 2017 | |||||||
Note payable to Arizona Business Bank (ABB), monthly installments of $505 through March 2018, interest of 3.9% and secured by a vehicle. | $ | -0- | $ | 1,500 | ||||
Note payable in monthly installments of $5,551 through August 2019, including interest of 6%. A balloon payment of $384,613, due August 2019. | 428,374 | 448,475 | ||||||
Note payable for AD rights in monthly installments of $10,000, including interest of 4%. A balloon payment of $339,000 was due June 2017. The Company and the seller of the AD rights are in arbitration to resolve payment of the remaining balance, which would be due on demand. Secured by intangible property. | 396,417 | 396,417 | ||||||
Note payable for AD rights in monthly installments of $3,739 through December 2018. Secured by intangible property. | 22,434 | 44,870 | ||||||
Subtotal | 847,225 | 891,262 | ||||||
Less: current portion of long-term debt | (461,116 | ) | (483,601 | ) | ||||
Total | $ | 386,109 | $ | 407,661 |
Future principal payments required for these agreements as of June 30, 2018 are as follows:
2018 | $ | 461,116 | ||
2019 | 386,109 | |||
Total | $ | 847,225 |
Note 6. Commitments and Contingencies
Operating Leases
TKFO leases a facility under the terms of an operating lease, and pays all applicable taxes, insurance and common area expenses. The subsidiaries (WK and PDT) lease or have leased restaurant facilities and equipment under the terms of operating leases. The subsidiaries pay all applicable taxes, insurance, and common area expenses related to facility leases.
16
Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries
Notes to Condensed Combined and Consolidated Financial Statements
Future minimum annual payments under the leases as of June 30, 2018 are as follows:
Lease Payment | ||||
2018 | $ | 537,000 | ||
2019 | 876,000 | |||
2020 | 880,000 | |||
2021 | 775,000 | |||
2022 | 626,000 | |||
Thereafter | 5,833,000 | |||
Total | $ | 9,527,000 |
Rent expense for the six months ended June 30, 2018 and 2017 was approximately $458,000 and $394,000, respectively.
Contingencies
At times, TKFO may have pending legal proceedings that are, in the opinion of management, ordinary routine matters incidental to the normal business conducted by a restaurant franchisor. In the opinion of management and TKFO’s outside legal counsel, such proceeding are substantially covered by insurance, and the ultimate disposition of such proceedings are not expected to have a materially adverse effect on TKFO’s financial position, results of operations or cash flows as of June 30, 2018.
Note 7. Deferred Compensation
Deferred compensation was previously recorded on TKFO’s books which represented amounts due from TKFO to the President under terms of an existing operating agreement for periods covering 2013 through 2015. The deferred compensation due to the President under that agreement was written off pursuant to a release that was executed that waived any and all compensation or other consideration owed to Lynch and LRI and any of their respective affiliates or assignees by TKFO or TKFLLC and their respective subsidiaries or affiliates from any and all claims on or prior to the closing date of the transaction with SDA Holdings, LLC as of May 2018. The write off of deferred compensation was made to equity as this was a transaction with a related party.
Note 8. Related Party Transactions
During June 2018, the Company made a distribution in the amount of $500,000 to SDA Holdings, LLC.
17
CONTENTS
Page | |
INDEPENDENT AUDITOR’S REPORT | 1 |
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS | |
Combined and consolidated balance sheets | 2 |
Combined and consolidated statements of operations | 3 |
Combined and consolidated statements of equity (deficit) | 4 |
Combined and consolidated statements of cash flows | 5 |
Notes to combined and consolidated financial statements | 7 |
COMBINING AND CONSOLIDATING INFORMATION | |
INDEPENDENT AUDITOR'S REPORT ON COMBINING AND CONSOLIDATING INFORMATION | 19 |
Combining and consolidating balance sheet | 20 |
Combining and consolidating statement of operations | 21 |
Combining and consolidating statement of equity (deficit) | 22 |
INDEPENDENT AUDITOR’S REPORT
To the Members
Tilted Kilt Franchise Operating, LLC
Tempe, Arizona
We have audited the accompanying combined and consolidated financial statements of Tilted Kilt Franchise Operating, LLC (a Wyoming limited liability company) and Affiliates and Subsidiaries, which comprise the combined and consolidated balance sheets as of December 31, 2017, 2016 and 2015, and the related combined and consolidated statements of operations, equity (deficit), and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined and consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined and consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these combined and consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined and consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined and consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the combined and consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the combined and consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined and consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined and consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tilted Kilt Franchise Operating, LLC and Affiliates and Subsidiaries as of December 31, 2017, 2016 and 2015, and the results of their operations and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Scottsdale, Arizona | |
March 23, 2018 |
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED BALANCE SHEETS |
December 31, 2017, 2016 and 2015 |
2017 | 2016 | 2015 | ||||||||||
ASSETS | ||||||||||||
CURRENT ASSETS | ||||||||||||
Cash and cash equivalents | $ | 1,407,400 | $ | 1,943,688 | $ | 2,144,536 | ||||||
Restricted cash | 200,150 | 308,319 | 525,865 | |||||||||
Accounts receivable | 206,221 | 397,928 | 258,809 | |||||||||
Prepaid expenses | 148,666 | 127,594 | 234,347 | |||||||||
Current portion of notes receivable, trade | - | 20,126 | 136,818 | |||||||||
Inventories | 76,842 | 60,538 | 58,427 | |||||||||
Income taxes receivable | 110,361 | 39,435 | 8,300 | |||||||||
Total current assets | 2,149,640 | 2,897,628 | 3,367,102 | |||||||||
PROPERTY AND EQUIPMENT, net | 1,069,704 | 1,112,461 | 1,201,585 | |||||||||
OTHER ASSETS | ||||||||||||
Deposits | 74,643 | 81,443 | 22,824 | |||||||||
Notes receivable, trade, less current | - | 14,755 | 8,918 | |||||||||
Development rights and other intangible assets | 1,477,226 | 2,156,318 | 601,315 | |||||||||
Property held for sale | - | - | 325,119 | |||||||||
1,551,869 | 2,252,516 | 958,176 | ||||||||||
$ | 4,771,213 | $ | 6,262,605 | $ | 5,526,863 | |||||||
LIABILITIES AND EQUITY | ||||||||||||
CURRENT LIABILITIES | ||||||||||||
Current portion of long-term debt and capital lease obligation | $ | 483,601 | $ | 725,169 | $ | 52,324 | ||||||
Accounts payable | 853,591 | 698,409 | 393,557 | |||||||||
Accrued liabilities | 294,339 | 317,553 | 434,086 | |||||||||
Income taxes payable | - | - | 59,710 | |||||||||
Current portion of deferred revenue, rent, and deposits | 231,785 | 444,954 | 418,447 | |||||||||
Total current liabilities | 1,863,316 | 2,186,085 | 1,358,124 | |||||||||
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION, | ||||||||||||
less current | 407,661 | 449,971 | 1,360,699 | |||||||||
DEFERRED REVENUE, RENT, AND DEPOSITS, less current | 481,479 | 429,707 | - | |||||||||
DEFERRED COMPENSATION | 2,636,332 | 2,636,332 | 2,636,332 | |||||||||
Total non-current liabilities | 3,525,472 | 3,516,010 | 3,997,031 | |||||||||
COMMITMENTS and CONTINGENCIES(Notes 10, 13 and 15) | ||||||||||||
EQUITY (DEFICIT) | ||||||||||||
Non-controlling interest (NCI) in PDT | (7,982 | ) | - | - | ||||||||
Equity (deficit) in controlling interests | (609,593 | ) | 560,510 | 171,708 | ||||||||
(617,575 | ) | 560,510 | 171,708 | |||||||||
$ | 4,771,213 | $ | 6,262,605 | $ | 5,526,863 |
See Notes to Combined and Consolidated Financial Statements
2
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS |
Years Ended December 31, 2017, 2016 and 2015 |
2017 | 2016 | 2015 | ||||||||||
Revenues: | ||||||||||||
Initial franchise and area developer fees | $ | 305,000 | $ | 255,000 | $ | 1,065,000 | ||||||
Continuing franchise fees and royalties | 8,539,622 | 11,709,043 | 13,469,257 | |||||||||
Sales revenue | 4,047,309 | 4,058,663 | 3,484,128 | |||||||||
Other operating revenues | 1,107,000 | 1,673,909 | 548,865 | |||||||||
13,998,931 | 17,696,615 | 18,567,250 | ||||||||||
Expenses: | ||||||||||||
Cost of sales | 1,102,055 | 1,222,210 | 1,059,729 | |||||||||
General and administrative expenses | 10,246,932 | 10,982,232 | 11,139,142 | |||||||||
Franchise operating expenses | 2,823,157 | 4,171,215 | 5,440,212 | |||||||||
Depreciation and amortization expense | 189,560 | 181,710 | 155,536 | |||||||||
14,361,704 | 16,557,367 | 17,794,619 | ||||||||||
Income (loss) from operations before impairment | (362,773 | ) | 1,139,248 | 772,631 | ||||||||
Development rights and goodwill impairment | 1,011,851 | - | - | |||||||||
Income (loss) from operations | (1,374,624 | ) | 1,139,248 | 772,631 | ||||||||
Other income (expense): | ||||||||||||
Other income | 199,953 | 57,872 | 1,761 | |||||||||
Other expenses | - | - | (2,207 | ) | ||||||||
Loss on abandonment of construction in progress | - | - | (116,580 | ) | ||||||||
Loss on disposal of assets | (8,997 | ) | (35,780 | ) | (9,756 | ) | ||||||
Interest income | 2,228 | 7,165 | 3,113 | |||||||||
Interest expense | (36,597 | ) | (22,585 | ) | (33,316 | ) | ||||||
156,587 | 6,672 | (156,985 | ) | |||||||||
Income (loss) before tax provision (benefit) | (1,218,037 | ) | 1,145,920 | 615,646 | ||||||||
Income tax provision (benefit) | (33,557 | ) | (35,382 | ) | 86,210 | |||||||
Combined and consolidated net income (loss) | (1,184,480 | ) | 1,181,302 | 529,436 | ||||||||
Less: loss attributable to NCI in subsidiary | 14,377 | - | - | |||||||||
Combined and consolidated net income (loss) attributable to controlling interests | $ | (1,170,103 | ) | $ | 1,181,302 | $ | 529,436 |
See Notes to Combined and Consolidated Financial Statements
3
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) |
Years Ended December 31, 2017, 2016 and 2015 |
2017 | 2016 | 2015 | ||||||||||
Equity, beginning of year | $ | 560,510 | $ | 171,708 | $ | 680,242 | ||||||
Acquisition of PDT (Note 16) | 6,395 | - | - | |||||||||
Contributions | 11,000 | 13,200 | 36,000 | |||||||||
Distributions | (11,000 | ) | (805,700 | ) | (1,073,970 | ) | ||||||
566,905 | (620,792 | ) | (357,728 | ) | ||||||||
Loss from NCI in PDT | (14,377 | ) | - | - | ||||||||
Net income (loss) attributable to controlling interests | (1,170,103 | ) | 1,181,302 | 529,436 | ||||||||
Combined and consolidated net income (loss) | (1,184,480 | ) | 1,181,302 | 529,436 | ||||||||
Equity (deficit), end of year | $ | (617,575 | ) | $ | 560,510 | $ | 171,708 |
See Notes to Combined and Consolidated Financial Statements
4
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS |
Years Ended December 31, 2017, 2016 and 2015 |
2017 | 2016 | 2015 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Combined and consolidated net income (loss) | $ | (1,184,480 | ) | $ | 1,181,302 | $ | 529,436 | |||||
Reconcilation of net cash provided by (used in) operations to Combined and consolidated net income (loss) | ||||||||||||
Depreciation and amortization | 189,560 | 181,710 | 155,536 | |||||||||
Net bad debt expense | 973,399 | 203,011 | 128,266 | |||||||||
Loss on abandonment of construction in progress | - | - | 116,580 | |||||||||
Loss on disposal of assets | 8,997 | 35,780 | 9,756 | |||||||||
Non-controlling interest of PDT | (14,922 | ) | - | - | ||||||||
Recognition of deferred gain | (20,945 | ) | (13,181 | ) | - | |||||||
Development rights and goodwill impairment | 1,011,851 | - | - | |||||||||
Changes in assets and liabilities: | ||||||||||||
Restricted cash | 108,169 | 217,546 | 471,388 | |||||||||
Accounts receivable | (781,692 | ) | (342,130 | ) | 443,342 | |||||||
Prepaid expenses | (18,067 | ) | 106,753 | 26,530 | ||||||||
Inventories | 19,643 | (2,111 | ) | (1,624 | ) | |||||||
Income taxes receivable | (70,926 | ) | (31,135 | ) | (6,000 | ) | ||||||
Notes receivable, trade | 34,881 | 110,855 | (145,736 | ) | ||||||||
Other assets | (83,818 | ) | (59,539 | ) | (3,862 | ) | ||||||
Accounts payable and accrued liabilities | (90,685 | ) | 188,319 | (645,833 | ) | |||||||
Income taxes payable | - | (59,710 | ) | 10,488 | ||||||||
Deferred revenue and deposits | (140,452 | ) | (39,988 | ) | (850,336 | ) | ||||||
Deferred compensation | - | - | 1,015,240 | |||||||||
Net cash provided by (used in) operating activities | (59,487 | ) | 1,677,482 | 1,253,171 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Proceeds from land held for sale | - | 375,000 | 653,839 | |||||||||
Proceeds on sale of property and equipment | - | - | 54,000 | |||||||||
Purchase of territory rights and investment | - | (815,003 | ) | - | ||||||||
Contribution of cash from business acquisition | 39,220 | - | - | |||||||||
Purchases of property and equipment | (71,360 | ) | (1,067,944 | ) | (45,133 | ) | ||||||
Net cash provided by (used in) investing activities | (32,140 | ) | (1,507,947 | ) | 662,706 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Proceeds from long-term debt | - | 500,000 | - | |||||||||
Payments on long-term debt | (444,661 | ) | (77,883 | ) | (113,007 | ) | ||||||
Distributions | - | (792,500 | ) | (1,037,970 | ) | |||||||
Net cash used in financing activities | (444,661 | ) | (370,383 | ) | (1,150,977 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | (536,288 | ) | (200,848 | ) | 764,900 | |||||||
Cash and cash equivalents: | ||||||||||||
Beginning | 1,943,688 | 2,144,536 | 1,379,636 | |||||||||
Ending | $ | 1,407,400 | $ | 1,943,688 | $ | 2,144,536 |
Continued
5
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued) |
Years Ended December 31, 2017, 2016 and 2015 |
2017 | 2016 | 2015 | ||||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW | ||||||||||||
INFORMATION | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 36,597 | $ | 22,585 | $ | 33,316 | ||||||
Income taxes | $ | 76,804 | $ | 55,463 | $ | 81,722 | ||||||
NON-CASH INVESTING AND FINANCING TRANSACTIONS | ||||||||||||
Exchange of related party obligations through a distribution by LTD and a capital contribution to TKFO | $ | 11,000 | $ | 13,200 | $ | 36,000 | ||||||
Payment of long-term debt with proceeds from sale of land | $ | - | $ | - | $ | 746,161 | ||||||
Sale and leaseback of land: | ||||||||||||
Land | $ | - | $ | - | $ | 975,358 | ||||||
Deferred gain | - | - | 424,642 | |||||||||
$ | - | $ | - | $ | 1,400,000 | |||||||
Reclassification of capital lease to operating lease: | ||||||||||||
Removal of leased land | $ | - | $ | (975,358 | ) | $ | - | |||||
Removal of capital lease obligation | - | 1,400,000 | - | |||||||||
Reclassification of capital lease obligation to deferred gain | $ | - | $ | 424,642 | $ | - | ||||||
Development rights acquired through debt financing | $ | 430,000 | $ | 740,000 | $ | - | ||||||
Development rights and note payable for same rights written-down | $ | 269,217 | $ | - | $ | - | ||||||
Acquisition of PDT: | ||||||||||||
Working capital | $ | (63,123 | ) | $ | - | $ | - | |||||
Property and equipment | 84,440 | - | - | |||||||||
Controlling interest | $ | 21,317 | $ | - | $ | - |
See Notes to Combined and Consolidated Financial Statements
6
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 1
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of operations:
Tilted Kilt Franchise Operating, LLC (TKFO) was organized October 13, 2005 under the laws of the State of Wyoming. TKFO is engaged in the business of franchising Tilted Kilt Pub & Eatery restaurants. TKFO uses franchise agreements to sell, operate, and develop these restaurants.
Tilted Kilt Franchise Ltd. Liability Company (LTD) was organized October 13, 2005 under the laws of the State of Wyoming and owns the Tilted Kilt concept and related intellectual property.
Tilted Kilt National Advertising and Marketing Fund (NAMF) was incorporated November 17, 2010. NAMF develops and executes advertising and marketing materials and programs that benefit Tilted Kilt restaurants located in the United States.
Tilted Kilt NAMF Canada (NAMF Canada) was incorporated December 9, 2011 in the State of Arizona. NAMF Canada develops and executes advertising and marketing materials and programs that benefit Tilted Kilt Restaurants located in Canada.
Tempe Kilt Group, LLC (TKG) was organized November 1, 2006 under the laws of the State of Arizona. The Subsidiary was acquired December 1, 2006 and operated a restaurant, Tilted Kilt Pub & Eatery, in Tempe, Arizona, until July 2016. TKG was succeeded by Warner Kilt, LLC (WK) when operations for the restaurant were relocated to a nearby site.
TKFO Land Company LLC (TK Land) was organized on May 22, 2013 under the laws of the State of Arizona. The Subsidiary was intended to own and develop land for the TKFO corporate office and restaurant for TKG. Management modified these plans (Note 15) which suspended TK Land’s operations in 2016.
BAL TK, LLC (BAL) was organized on January 22, 2014 under the laws of the State of Arizona. The Subsidiary was acquired February 20, 2014 and operated a restaurant, Tilted Kilt Pub & Eatery, in Birmingham, Alabama until April 2017.
TK Franchising International LLC (TKI) was organized on June 19, 2014 under the laws of the State of Arizona. The Subsidiary was engaged in franchising restaurants outside of North America.
TK Training LLC (Training) was organized on December 24, 2013 under the laws of the State of Arizona. The Subsidiary facilitates training services provided to franchisees.
Warner Kilt, LLC (WK) was organized on April 14, 2015 under the laws of the State of Arizona. The Subsidiary began operating a restaurant in Tempe, Arizona in August 2016.
PDT TK, LLC (PDT) was organized on February 16, 2010 under the laws of the State of Arizona. TKFO acquired 70% of the membership of PDT in October 2017, which operates a restaurant in Phoenix, Arizona.
The Company, Affiliates, and Subsidiaries are collectively referred to as “the Companies” throughout the notes to the combined and consolidated financial statements.
7
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 1 (Continued)
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Principles of combination and consolidation:
The combined and consolidated financial statements include the accounts of the Company, the Affiliates and the Subsidiaries. TKFO owns 100% of TKG, WK, TK Land, BAL, Training, and TKI and 70% of PDT. TKFO and LTD share identical ownership. NAMF and NAMF Canada are incorporated as non-profit organizations. LTD’s significant assets are the Tilted Kilt concept and related intellectual property. All material intercompany balances and transactions are eliminated in combination and consolidation.
Deconsolidation of subsidiaries:
As of December 31, 2017, the operations of TKG, TK Land, and TKI, subsidiaries of TKFO, were suspended and the subsidiaries were deconsolidated from the combined and consolidated financial statements with a distribution from TKFO and contribution to each subsidiary for any amounts owed to TKFO. There was a loss from the deconsolidation of TKG of approximately $26,000. All related party transactions with those entities are eliminated in consolidation.
A summary of the Companies’ significant accounting policies follows:
Cash and cash equivalents:
For purposes of the combined and consolidated statements of cash flows, the Companies consider all cash investments with original or purchased maturities of three months or less to be cash equivalents.
Restricted cash:
The Companies maintain certain bank accounts for which funds are restricted for various purposes that can include area developer (AD) agreement transfer payments, gift cards balances, and other custodial deposits.
Accounts, franchise fees, and notes receivable:
Accounts receivables primarily represent royalties due from franchisees as contracted in the respective franchise agreements. Management determines the allowance for doubtful accounts by evaluating individual franchisee receivables and considering a franchisee's financial condition, credit history, and current economic condition. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recognized when received or when adequate consideration is provided. Franchise fees are directly drafted from franchisees’ accounts on a weekly basis. No allowance for doubtful accounts was deemed necessary at December 31, 2017, 2016 or 2015. Bad debt expense including franchise fees receivable that were deemed uncollectible, net of unpaid AD royalties, totaled approximately $973,000, $203,000 and $143,000 for years ended December 31, 2017, 2016 and 2015, respectively. During the year ended December 31, 2015, the Company recovered $133,250 of bad debt, with a related note receivable for the unpaid portion, reported inNote 4. No bad debts were recovered during the years ended December 31, 2017 and 2016.
Inventories:
Inventories consist primarily of food, beverages, and supplies used in the operations of the restaurants. Inventories are stated at the lower of cost (first-in, first-out) or market.
8
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 1 (Continued)
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Property and equipment:
Property and equipment is recorded at cost less accumulated depreciation. Depreciation and amortization are charged on the straight-line method over estimated useful lives. Useful lives are three to seven years for vehicles, restaurant equipment, computer equipment, furniture, and fixtures, and the lesser of the estimated useful life or the lease term for leasehold improvements.
Development rights and other intangible assets:
Goodwill represents the minority members’ contribution of the Tilted Kilt concept and intellectual property and the excess of the purchase price over fair market value paid for tangible net assets and inventory in the acquisition of a Tilted Kilt restaurant. The value of the contributed goodwill equals the minority members’ pro rata ownership percentage of the majority members’ cash contributions to LTD.
Other intangible assets represent development rights in various states and other company assets listed atNote 5. Management regularly evaluates the carrying value of goodwill and other intangible assets to determine whether impairment may exist by considering relevant cash flows and profitability, including estimated future operating results, trends, and other available information. If management determines that the carrying value of goodwill and other intangible assets cannot be recovered, management will consider the carrying value of goodwill and other intangible assets as impaired and will report an impairment loss to operations by the amount of the impairment. Impairment is measured as the carrying value of an intangible asset less the amount of recoverable estimated undiscounted future cash flows.
Franchise fees:
Initial fees related to sales of franchises are recognized as revenue upon substantial performance by TKFO of all material conditions relating to the initial fee. Continuing franchise royalties are based on a defined percentage of franchise or license store revenues and are recognized when earned. AD fees are recognized when earned.
Gift cards:
In 2008, TKFO established a bank account to facilitate gift cards and began to utilize a third party vendor to process all gift card transactions. There are no administrative fees on unused gift cards and the majority of gift cards in circulation have no expiration date. Revenue is recognized by the franchisee when the gift card is redeemed or by TKFO when the likelihood of redemption by the customer is remote and it is determined that there is no legal obligation to remit the value of unredeemed gift card to the relevant jurisdiction. Management estimates and recognizes gift card breakage based on historical redemption activity, with the likelihood of a gift card remaining unredeemed can be determined 24 months after issued. The Company recognized gift card breakage of approximately $80,000, $80,000, and $162,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The unused balance of approximately $200,000, $308,000, and $363,000 at December 31, 2017, 2016 and 2015, respectively, is included in deferred revenue and deposits and restricted cash on the combined and consolidated balance sheets.
9
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 1 (Continued)
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Advertising:
The Companies expense non-direct response advertising as incurred. For the years ended December 31, 2017, 2016 and 2015, advertising and promotion expense totaled approximately $2,800,000, $2,900,000 and $2,300,000, respectively.
Income taxes:
Under the provisions of the Internal Revenue Code, TKFO, LTD, TKG, TK Land, BAL, TKI, Training, WK, and PDT have elected to be taxed as partnerships. Under such election, the Companies’ taxable income, credits, and preferences are passed through to individual members. Therefore, there is no provision for income taxes in the accompanying combined and consolidated financial statements related to these entities, except for entity level taxes imposed by certain states. Due to requirements of the Internal Revenue Code, certain items may be treated differently for income tax reporting than for the financial statements. Therefore, the members' shares of taxable income and deductions may vary from the amounts reported in these combined and consolidated financial statements.
NAMF and NAMF Canada have elected to be treated as C corporations for income tax purposes. Provisions for (benefits from) income taxes represent the estimated current tax payable (receivable) and any over (under) accrual of income taxes from the prior year for the years ended December 31, 2017, 2016 and 2015. If assessed, the Companies would classify any interest and penalties associated with a tax position as an income tax provision in the combined and consolidated statements of operations.
Use of estimates:
Management uses estimates and assumptions in preparing these combined and consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used.
Compensated absences:
Employees of the Companies are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. Management has determined that it is impractical to estimate the amount of compensation for future absences and accordingly, no liability has been recorded in the accompanying financial statements. The Companies’ policy is to recognize the costs of compensated absences when paid to employees.
Accounting standards updates:
Management understands early-adopting certain ASUs, at times, may materially change the Companies’ results of operations or financial position. If the Company had early-adopted ASU 2016-02Leases, management believes the Company’s non-current assets and capital lease liabilities would have materially changed as of December 31, 2017 and 2016. Management plans to adopt ASU 2016-02 when it becomes effective in 2020.
10
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 1 (Continued)
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Reclassifications:
Certain amounts in 2016 and 2015 were reclassified to conform with the 2017 presentation.
Subsequent events:
Management has evaluated subsequent events through March 23, 2018, which is the date the combined and consolidated financial statements were available to be issued.
NOTE 2
FRANCHISE REVENUE
TKFO's franchise revenue consists of royalty income and franchise fees, initial AD fees, and management fee income from managing prior Tilted Kilt license agreements. The following is a summary of changes in the number of franchise stores in operation during the years ended December 31:
2017 | 2016 | 2015 | ||||||||||
In operation, beginning of year | 90 | 97 | 99 | |||||||||
Franchises opened during the year | 9 | 11 | 16 | |||||||||
Franchises closed during the year | (45 | ) | (18 | ) | (18 | ) | ||||||
In operation, end of year | 54 | 90 | 97 |
Royalty income earned from franchisees for the years ended December 31, 2017, 2016 and 2015 was approximately $8,540,000, $11,800,000 and $13,500,000, respectively, reduced in consolidation of the subsidiaries by approximately $79,000, $66,000, and $69,000, respectively, from intercompany transactions. TKG, an operating franchise, was a subsidiary of TKFO for the years ended December 31, 2017, 2016 and 2015. BAL, an operating franchise, became a subsidiary of TKFO in 2014 and remains a subsidiary of TKFO through the year ended December 31, 2017. WK, the operating franchise that succeeded TKG, became a subsidiary in 2016. PDT, an operating franchise, became a subsidiary of TKFO in 2017.
TKFO has agreements with ADs to sell and develop Tilted Kilt restaurants in specific geographic areas. Certain agreements require ADs to pay an initial fee. AD fees are recognized when earned. The following is a summary of TKFO AD agreements and fees recognized and deferred during 2017, 2016 and 2015:
Ads | Agreements | Initial fee | ||||||||||
at year-end | at year-end | Recognized | ||||||||||
Agreements as of and for the year ended December 31, 2017 | 8 | 12 | $ | - | ||||||||
Agreements as of and for the year ended December 31, 2016 | 13 | 22 | $ | - | ||||||||
Agreements as of and for the year ended December 31, 2015 | 19 | 35 | $ | 15,000 |
Management fees earned from minority interest members for restaurant operational assistance with a franchise license agreement for the years ended December 31, 2017, 2016 and 2015 were $0, $0 and $24,453, respectively.
11
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 3
PROPERTY AND EQUIPMENT
Property and equipment were as follows at December 31: | 2017 | 2016 | 2015 | |||||||||
Land (Note 15) | $ | - | $ | - | $ | 975,358 | ||||||
Vehicles | 38,721 | 37,814 | 37,814 | |||||||||
Furniture, fixtures and equipment | 1,096,043 | 948,252 | 752,088 | |||||||||
Leasehold improvements | 331,002 | 300,575 | 813,080 | |||||||||
1,465,766 | 1,286,641 | 2,578,340 | ||||||||||
Less accumulated depreciation and amortization | 396,062 | 174,180 | 1,376,755 | |||||||||
$ | 1,069,704 | $ | 1,112,461 | $ | 1,201,585 |
NOTE 4
NOTES RECEIVABLE, TRADE
Notes receivable were as follows at December 31: | 2017 | 2016 | 2015 | |||||||||
Notes receivable from franchisees, unsecured and at various interest rates up to 6%. Collected in 2017. | $ | - | $ | 34,881 | $ | 145,736 | ||||||
Less current portion | - | 20,126 | 136,818 | |||||||||
$ | - | $ | 14,755 | $ | 8,918 |
12
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 5
DEVELOPMENT RIGHTS AND OTHER INTANGIBLE ASSETS
Intangible assets were as follows at December 31: | 2017 | 2016 | 2015 | |||||||||
Development rights: | ||||||||||||
Nevada and 5% partnership interest in entity formed to operate a Tilted Kilt restaurant in Las Vegas | $ | - | $ | 75,000 | $ | 75,000 | ||||||
Central Illinois | 40,000 | 40,000 | 40,000 | |||||||||
New York, New Jersey, and Pennsylvania (Note 6) | 396,417 | 990,000 | - | |||||||||
Northern Illinois, Northwest Indiana, and Southeast Wisconsin (Note 6) | 550,000 | 550,000 | - | |||||||||
San Diego | 116,087 | - | - | |||||||||
Orange County (Note 6) | 144,696 | - | - | |||||||||
Washington, Oregon, Idaho, and Montana. Agreement calls for additional payments equal to fifty percent of future area developer royalty payments that would have been made to seller prior to purchase through August 2021, not to exceed $190,000 | - | 15,003 | - | |||||||||
Other intangible assets: | 1,247,200 | 1,670,003 | 115,000 | |||||||||
Minority members’ contribution of the Tilted Kilt concept and intellectual property | 184,062 | 184,062 | 184,062 | |||||||||
Franchisee agreement for PDT, net of $35,394 accumulated amortization | 45,964 | - | - | |||||||||
Goodwill from the excess of the purchase price over fair market value paid for tangible net assets and inventory in the acquisition of a Tilted Kilt restaurant | - | 302,253 | 302,253 | |||||||||
$ | 1,477,226 | $ | 2,156,318 | $ | 601,315 |
Management evaluates development rights, goodwill, and other intangible assets for impairment, at least annually, or if a triggering event occurs. As of December 31, 2017, the remaining development rights, goodwill, and other intangible assets listed above were determined to be recoverable. There were total impairment losses recognized in the year ended December 31, 2017 of approximately $1 million attributable to the closure of certain franchises. These amounts were determined by management using undiscounted future cash flows. There were no impairment losses recognized in the years ended December 31, 2016 and 2015.
13
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 6
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
Long-term debt consisted of the following at December 31: | 2017 | 2016 | 2015 | |||||||||
TKFO: | ||||||||||||
Note payable to Arizona Business Bank (ABB) in monthly installments of $505 through March 2018, including interest at 3.9%, and secured by a vehicle. | $ | 1,500 | $ | 7,378 | $ | 13,023 | ||||||
Note payable in monthly installments of $5,551 through August 2019, including interest at 6%. A balloon payment of $384,613 is due in August 2019. | 448,475 | 486,918 | - | |||||||||
Note payable for AD rights (Note 5) in monthly installments of $10,000, including interest at 4%. A balloon payment of approximately $389,000 was due in June 2017. The Company and the seller of the AD rights are in arbitration to resolve payment of the remaining balance, which would be due on- demand. Secured by intangible property. | 396,417 | 430,844 | - | |||||||||
Note payable to an AD in monthly installments of $15,000 through November 2017. Secured by intangible property. Repaid in 2017. | - | 250,000 | - | |||||||||
Note payable for AD rights (Note 5) in monthly installments of $3,739 through December 2018. Secured by intangible property. | 44,870 | - | - | |||||||||
891,262 | 1,175,140 | 13,023 | ||||||||||
WK: | ||||||||||||
Capital lease obligation (Note 15) | - | - | 1,400,000 | |||||||||
891,262 | 1,175,140 | 1,413,023 | ||||||||||
Less current portion of capital lease obligation | - | - | 46,666 | |||||||||
Less current portion of long-term debt | 483,601 | 725,169 | 5,658 | |||||||||
483,601 | 725,169 | 52,324 | ||||||||||
$ | 407,661 | $ | 449,971 | $ | 1,360,699 |
Annual principal payments required for these agreements at December 31, 2017 were:
2018 | $ | 483,601 | ||
2019 | 407,661 | |||
$ | 891,262 |
14
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 7
INCOME TAXES
The Company recorded the following provisions for (benefit from) income taxes based on estimated taxable income (loss) of NAMF and NAMF Canada and TKFO, as required for partnerships by certain taxing authorities at the state level, for the years ended December 31:
2017 | 2016 | 2015 | ||||||||||
Estimated NAMF income tax provision (benefit): | ||||||||||||
Federal | $ | (31,000 | ) | $ | (46,125 | ) | $ | 11,900 | ||||
State | (8,000 | ) | (19,692 | ) | 4,300 | |||||||
(39,000 | ) | (65,817 | ) | 16,200 | ||||||||
Estimated NAMF Canada income tax provision (benefit): | ||||||||||||
Federal | (1,950 | ) | 6,075 | (6,000 | ) | |||||||
State | 50 | 50 | 50 | |||||||||
(1,900 | ) | 6,125 | (5,950 | ) | ||||||||
TKFO entity-level income taxes | 7,343 | 24,410 | 75,960 | |||||||||
Total income tax provision (benefit) | $ | (33,557 | ) | $ | (35,382 | ) | $ | 86,210 |
There were no deferred income tax assets or liabilities at December 31, 2017, 2016 and 2015. Differences between the income tax provision (benefit) and income taxes computed using the statutory income tax rate for NAMF and NAMF Canada relate to certain non-deductible expenses, graduated income tax rates, state income taxes, and actual provisions (benefits) from the Companies’ tax returns. In 2016, NAMF changed its year end from June 30 to December 31.
NOTE 8
DEFERRED REVENUE, RENT, AND DEPOSITS
Deferred revenue and deposits were as follows at December 31: | 2017 | 2016 | 2015 | |||||||||
Initial franchise fees | $ | - | $ | 105,000 | $ | 30,000 | ||||||
Deferred rent | 83,407 | - | - | |||||||||
Gift card and other custodial deposits | 200,150 | 308,319 | 388,447 | |||||||||
Deferred gains on sale leasebacks, net | 429,707 | 461,342 | - | |||||||||
713,264 | 874,661 | 418,447 | ||||||||||
Less current portion | 231,785 | 444,954 | 418,447 | |||||||||
$ | 481,479 | $ | 429,707 | $ | - |
15
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 9
DEFERRED COMPENSATION
Deferred compensation represents amounts due from TKFO to the President under the terms of the operating agreement. The President has provided terms to defer payment beyond 2018.
NOTE 10
COMMITMENTS
TKFO leases a facility under the terms of an operating lease, and pays all applicable taxes, insurance and common area expenses. The subsidiaries (TKG, WK, BAL, and PDT) lease or have leased restaurant facilities and equipment under the terms of operating leases. The subsidiaries pay all applicable taxes, insurance, and common area expenses related to facility leases. Minimum annual payments required under all operating leases at December 31, 2017 were approximately:
2018 | $ | 877,000 | ||
2019 | 876,000 | |||
2020 | 880,000 | |||
2021 | 775,000 | |||
2022 | 626,000 | |||
Thereafter | 5,833,000 | |||
$ | 9,867,000 |
Rent expense for the years ended December 31, 2017, 2016 and 2015 was approximately $882,000, $721,000, and $543,000, respectively.
NOTE 11
NATIONAL ADVERTISING FUNDS
TKFO maintains two national advertising funds for the purpose of developing advertising and marketing materials and programs to benefit Tilted Kilt restaurants. NAMF began maintaining a fund effective November 17, 2010, receiving all unspent advertising funds collected by TKFO, to benefit the franchises in the United States. NAMF Canada began maintaining a fund effective December 9, 2011 to benefit franchises in Canada. NAMF and NAMF Canada may charge up to 2% of a franchisee’s gross sales to fund national advertising activities.
The NAMF advertising fund collected approximately $2,004,000, $2,108,000, and $1,877,000 for the years ended December 31, 2017, 2016 and 2015, respectively, which is reduced in consolidation of the subsidiary by approximately $68,000,
$53,000 and $33,000, respectively by eliminating intercompany transactions. NAMF advertising and administrative expenses for the years ended December 31, 2017, 2016 and 2015 were approximately $2,525,000 $2,677,000, and
$2,083,000, respectively.
The advertising fund maintained by NAMF Canada collected approximately $93,000, $125,000, and $104,000 for the years ended December 31, 2017, 2016 and 2015, respectively. NAMF Canada advertising and administrative expenses for the years ended December 31, 2017, 2016 and 2015 were approximately $103,000, $106,000 and $131,000, respectively.
16
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 11 (Continued)
NATIONAL ADVERTISING FUNDS
NAMF and NAMF Canada maintain separate bank accounts and records for each respective national advertising fund. As of December 31, 2017, 2016 and 2015 the NAMF account balance was $246,767, $381,644 and $363,950, respectively. As of December 31, 2017, 2016 and 2015, the NAMF Canada account balance was $38,466, $88,539 and $60,158, respectively. TKFO maintains the right to terminate either fund after 30 days written notice to franchisees, at which point unspent monies from that fund would be returned to franchisees in proportion to their contributions to the fund.
NOTE 12
CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
NOTE 13
CONTINGENCIES
At times, TKFO may have pending legal proceedings that are, in the opinion of management, ordinary routine matters incidental to the normal business conducted by a restaurant franchisor. In the opinion of management and TKFO's outside legal counsel, such proceedings are substantially covered by insurance, and the ultimate disposition of such proceedings are not expected to have a materially adverse effect on TKFO's financial position, results of operations or cash flows as of December 31, 2017.
NOTE 14
RETIREMENT PLAN
The Company has a 401(k) profit sharing plan covering all employees who meet certain age and service requirements. Contributions, including a company match and profit sharing contributions subject to plan provisions, are made at the discretion of management. Company contributions to the plan for years ended December 31, 2017, 2016 and 2015 totaled
$29,813, $68,259 and $64,278, respectively.
17
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES |
Notes to Combined and Consolidated Financial Statements |
December 31, 2017, 2016 and 2015 |
NOTE 15
SALE-LEASEBACKS
In August 2013, TK Land purchased land with an ABB note payable to develop as the corporate restaurant, training facility, and office. In 2014, management revised the layout and design of the corporate restaurant, training facility, and office, leading to $116,580 of abandonment losses of construction in progress for the year ended December 31, 2015.
During 2015, the Company divided the undeveloped land into two parcels (A and B). The Company sold parcel A in 2015 for
$1,400,000, resulting in a $424,642 deferred gain, and repaid the note payable to ABB. The parcel was subsequently leased by WK, qualifying the transaction as a sale-leaseback. Management estimated the lease would qualify as a capital lease, recording “land” of $975,378 (Note 3), a “capital lease obligation” of $1.4 million (Note 6), and deferred income of $424,642 as of December 31, 2015. When the project was completed and the lease began in August 2016, management determined it qualified as an operating lease (included inNote 10) and reclassified it by disposing land and a capital lease obligation.
In 2016, the Company sold parcel B for $375,000, resulting in a $49,881 gain. The parcel was leased by TKFO as an operating lease (included inNote 10), qualifying the transaction as a sale-leaseback.
The deferred gains for parcel A and B are included in the deferred revenue and deposits on the combined and consolidated balance sheet and are amortized over the term of each lease. For the years ended December 31, 2017 and 2016, income recognized from amortization of the deferred gains totaled $20,945 and $13,181, respectively.
NOTE 16
BUSINESS ACQUISITION
On October 2, 2017, TKFO acquired a 70% membership interest of PDT. The results of operations of the acquired business have been included in the combined and consolidated financial statements of the Companies since the acquisition date. Consideration given from TKFO for the membership interest was a pro rata assumption of PDT’s commitments and the provision by TKFO of operations and other administrative support.
Among the primary reasons the Company entered into this acquisition and factors that contributed to the consideration given were PDT’s status as a franchisee in close proximity to TKFO, PDT’s marketplace presence, and historical operational performance. There were no substantial expenses related to the acquisition.
U.S. GAAP requires that assets and liabilities acquired in a business combination be recognized at their fair values at the acquisition date. Management’s estimation of those fair values as of October 1, 2017 was as follows:
Cash and cash equivalents | $ | 39,220 | ||
Inventory | 35,947 | |||
Prepaid expenses | 3,005 | |||
Property and equipment, net | 84,440 | |||
Other assets | 81,358 | |||
Accounts payable | (147,627 | ) | ||
Accrued expenses | (75,026 | ) | ||
$ | 21,317 |
18
COMBINING AND CONSOLIDATING INFORMATION
INDEPENDENT AUDITOR’S REPORT ON
COMBINING AND CONSOLIDATING INFORMATION
To the Members
Tilted Kilt Franchise Operating, LLC
Tempe, Arizona
We have audited the combined and consolidated financial statements of Tilted Kilt Franchise Operating, LLC (a Wyoming limited liability company) and Affiliates and Subsidiaries as of and for the years ended December 31, 2017, 2016 and 2015, and our report thereon dated March 23, 2018, which contained an unmodified opinion on those financial statements. Our audit was performed for the purpose of forming an opinion on the combined and consolidated financial statements as a whole.
The combining and consolidating information is presented for the purposes of additional analysis and is not a required part of the combined and consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the combined and consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined and consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined and consolidated financial statements or to the combined and consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the combined and consolidated financial statements as a whole.
Scottsdale, Arizona | |
March 23, 2018 |
19
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES
COMBINING AND CONSOLIDATING BALANCE SHEET |
December 31, 2017 |
NAMF | Combined and | |||||||||||||||||||||||||||||||||||
TKFO | LTD | NAMF | Canada | BAL | WK | PDT | Eliminations | consolidated | ||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||
CURRENT ASSETS | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 860,115 | $ | 809 | $ | 246,767 | $ | 38,466 | $ | - | $ | 127,489 | $ | 133,754 | $ | - | $ | 1,407,400 | ||||||||||||||||||
Restricted cash | 200,150 | - | - | - | - | - | - | - | 200,150 | |||||||||||||||||||||||||||
Accounts receivable | 261,117 | - | 91,687 | 608 | - | 1,951 | - | (149,142 | ) | 206,221 | ||||||||||||||||||||||||||
Prepaid expenses | 124,854 | - | 9,344 | - | - | 12,448 | 2,020 | - | 148,666 | |||||||||||||||||||||||||||
Inventories | - | - | - | - | - | 39,933 | 36,909 | - | 76,842 | |||||||||||||||||||||||||||
Income taxes receivable | 9,110 | - | 99,249 | 2,002 | - | - | - | - | 110,361 | |||||||||||||||||||||||||||
Total current assets | 1,455,346 | 809 | 447,047 | 41,076 | - | 181,821 | 172,683 | (149,142 | ) | 2,149,640 | ||||||||||||||||||||||||||
PROPERTY AND EQUIPMENT, net | 138,297 | - | 2,408 | - | - | 830,620 | 98,379 | - | 1,069,704 | |||||||||||||||||||||||||||
DUE FROM RELATED PARTY | 2,411,091 | - | - | - | - | - | - | (2,411,091 | ) | - | ||||||||||||||||||||||||||
OTHER ASSETS | ||||||||||||||||||||||||||||||||||||
Investment in subsidiaries | (1,424,487 | ) | - | - | - | - | - | - | 1,424,487 | - | ||||||||||||||||||||||||||
Deposits | 34,402 | - | - | - | - | 40,241 | - | - | 74,643 | |||||||||||||||||||||||||||
Development rights and other intangibles | 1,247,200 | 184,062 | - | - | - | - | 45,964 | - | 1,477,226 | |||||||||||||||||||||||||||
(142,885 | ) | 184,062 | - | - | - | 40,241 | 45,964 | 1,424,487 | 1,551,869 | |||||||||||||||||||||||||||
$ | 3,861,849 | $ | 184,871 | $ | 449,455 | $ | 41,076 | $ | - | $ | 1,052,682 | $ | 317,026 | $ | (1,135,746 | ) | $ | 4,771,213 | ||||||||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||||||||||||||||||||||
Current portion of long-term debt | $ | 483,601 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 483,601 | ||||||||||||||||||
Accounts payable | 516,841 | - | 115,714 | 35,010 | - | 117,116 | 218,052 | (149,142 | ) | 853,591 | ||||||||||||||||||||||||||
Accrued liabilities | 112,972 | - | 179,839 | - | - | 641 | 887 | - | 294,339 | |||||||||||||||||||||||||||
Current portion of deferred revenue and rent | 200,150 | - | - | - | - | - | - | 31,635 | 231,785 | |||||||||||||||||||||||||||
Total current liabilities | 1,313,564 | - | 295,553 | 35,010 | - | 117,757 | 218,939 | (117,507 | ) | 1,863,316 | ||||||||||||||||||||||||||
LONG-TERM DEBT, less current | 407,661 | - | - | - | - | - | - | - | 407,661 | |||||||||||||||||||||||||||
DUE TO RELATED PARTY | - | - | - | - | 1,134,761 | 1,151,638 | 124,692 | (2,411,091 | ) | - | ||||||||||||||||||||||||||
DEFERRED REVENUE AND RENT, less current | 29,014 | - | - | - | - | 54,393 | - | 398,072 | 481,479 | |||||||||||||||||||||||||||
DEFERRED COMPENSATION | 2,636,332 | - | - | - | - | - | - | - | 2,636,332 | |||||||||||||||||||||||||||
Total non-current liabilities | 3,073,007 | - | - | - | 1,134,761 | 1,206,031 | 124,692 | (2,013,019 | ) | 3,525,472 | ||||||||||||||||||||||||||
EQUITY (DEFICIT) | ||||||||||||||||||||||||||||||||||||
NCI in PDT | - | - | - | - | - | - | (7,982 | ) | - | (7,982 | ) | |||||||||||||||||||||||||
Equity (deficit) in controlling interests | (524,722 | ) | 184,871 | 153,902 | 6,066 | (1,134,761 | ) | (271,106 | ) | (18,623 | ) | 994,780 | (609,593 | ) | ||||||||||||||||||||||
(524,722 | ) | 184,871 | 153,902 | 6,066 | (1,134,761 | ) | (271,106 | ) | (26,605 | ) | 994,780 | (617,575 | ) | |||||||||||||||||||||||
$ | 3,861,849 | $ | 184,871 | $ | 449,455 | $ | 41,076 | $ | - | $ | 1,052,682 | $ | 317,026 | $ | (1,135,746 | ) | $ | 4,771,213 |
20
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES
COMBINING AND CONSOLIDATING STATEMENT OF OPERATIONS |
Year Ended December 31, 2017 |
NAMF | Combined and | |||||||||||||||||||||||||||||||||||||||
TKFO | LTD | NAMF | Canada | BAL | Training | WK | PDT* | Eliminations | consolidated | |||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||
Initial franchise and area developer fees | $ | 305,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 305,000 | ||||||||||||||||||||
Continuing franchise fees and royalties | 6,137,739 | 11,000 | 2,376,173 | 93,522 | - | - | - | - | (78,812 | ) | 8,539,622 | |||||||||||||||||||||||||||||
Sales revenue | - | - | - | - | 391,644 | - | 2,982,538 | 673,127 | - | 4,047,309 | ||||||||||||||||||||||||||||||
Other operating revenues | 1,107,000 | - | - | - | - | 48,827 | - | - | (48,827 | ) | 1,107,000 | |||||||||||||||||||||||||||||
7,549,739 | 11,000 | 2,376,173 | 93,522 | 391,644 | 48,827 | 2,982,538 | 673,127 | (127,639 | ) | 13,998,931 | ||||||||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||||||||||||
Cost of sales | - | - | - | - | 156,445 | - | 776,061 | 169,549 | - | 1,102,055 | ||||||||||||||||||||||||||||||
General and administrative expenses | 4,618,653 | - | 2,524,544 | 102,551 | 413,622 | 48,827 | 2,136,820 | 518,554 | (116,639 | ) | 10,246,932 | |||||||||||||||||||||||||||||
Franchise operating expenses | 2,834,157 | - | - | - | - | - | - | - | (11,000 | ) | 2,823,157 | |||||||||||||||||||||||||||||
Depreciation and amortization expense | 33,551 | - | 427 | - | - | - | 125,127 | 30,455 | - | 189,560 | ||||||||||||||||||||||||||||||
7,486,361 | - | 2,524,971 | 102,551 | 570,067 | 48,827 | 3,038,008 | 718,558 | (127,639 | ) | 14,361,704 | ||||||||||||||||||||||||||||||
Income (loss) from operations before impairment | 63,378 | 11,000 | (148,798 | ) | (9,029 | ) | (178,423 | ) | - | (55,470 | ) | (45,431 | ) | - | (362,773 | ) | ||||||||||||||||||||||||
Development rights and goodwill impairment | 709,598 | - | - | - | - | - | - | - | 302,253 | 1,011,851 | ||||||||||||||||||||||||||||||
Income (loss) from operations | (646,220 | ) | 11,000 | (148,798 | ) | (9,029 | ) | (178,423 | ) | - | (55,470 | ) | (45,431 | ) | (302,253 | ) | (1,374,624 | ) | ||||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||||||||||
Losses in subsidiaries | (275,567 | ) | - | - | - | - | - | - | - | 275,567 | - | |||||||||||||||||||||||||||||
Other income | 173,682 | - | - | - | 5,326 | - | - | - | 20,945 | 199,953 | ||||||||||||||||||||||||||||||
Other expenses | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Gain (loss) on disposal of assets | 4,280 | - | - | - | (13,277 | ) | - | - | - | - | (8,997 | ) | ||||||||||||||||||||||||||||
Interest income | 2,228 | - | - | - | - | - | - | - | - | 2,228 | ||||||||||||||||||||||||||||||
Interest expense | (33,928 | ) | - | - | - | - | - | (178 | ) | (2,491 | ) | - | (36,597 | ) | ||||||||||||||||||||||||||
(129,305 | ) | - | - | - | (7,951 | ) | - | (178 | ) | (2,491 | ) | 296,512 | 156,587 | |||||||||||||||||||||||||||
Income (loss) before tax provision (benefit) | (775,525 | ) | 11,000 | (148,798 | ) | (9,029 | ) | (186,374 | ) | - | (55,648 | ) | (47,922 | ) | (5,741 | ) | (1,218,037 | ) | ||||||||||||||||||||||
Income tax provision (benefit) | 7,343 | - | (39,000 | ) | (1,900 | ) | - | - | - | - | - | (33,557 | ) | |||||||||||||||||||||||||||
Net income (loss) | (782,868 | ) | 11,000 | (109,798 | ) | (7,129 | ) | (186,374 | ) | - | (55,648 | ) | (47,922 | ) | (5,741 | ) | (1,184,480 | ) | ||||||||||||||||||||||
Less: loss attributable to NCI in subsidiary | - | - | - | - | - | - | - | 14,377 | - | 14,377 | ||||||||||||||||||||||||||||||
Net income (loss) attributable to controlling interests | $ | (782,868 | ) | $ | 11,000 | $ | (109,798 | ) | $ | (7,129 | ) | $ | (186,374 | ) | $ | - | $ | (55,648 | ) | $ | (33,545 | ) | $ | (5,741 | ) | $ | (1,170,103 | ) |
*Activity for PDT represents October 2, 2017 (date of acquisition) to December 31, 2017.
21
TILTED KILT FRANCHISE OPERATING, LLC AND AFFILIATES AND SUBSIDIARIES
COMBINING AND CONSOLIDATING STATEMENT OF EQUITY (DEFICIT) |
Year Ended December 31, 2017 |
NAMF | Combined and | |||||||||||||||||||||||||||||||||||||||||||||||||||
TKFO | LTD | NAMF | Canada | TKG | TK Land | BAL TK | TKI | Training | WK | PDT* | Eliminations | consolidated | ||||||||||||||||||||||||||||||||||||||||
Equity (deficit), beginning of year | $ | 247,146 | $ | 184,871 | $ | 263,700 | $ | 13,195 | $ | (966,327 | ) | $ | (21,307 | ) | $ | (948,387 | ) | $ | (262,761 | ) | $ | - | $ | (215,458 | ) | $ | - | $ | 2,265,838 | $ | 560,510 | |||||||||||||||||||||
Acquisition of PDT (Note 16) | - | - | - | - | - | - | - | - | - | - | 21,317 | (14,922 | ) | 6,395 | ||||||||||||||||||||||||||||||||||||||
Contributions | 11,000 | - | - | - | - | - | - | - | - | - | - | - | 11,000 | |||||||||||||||||||||||||||||||||||||||
Contribution to deconsolidate VIE | - | - | - | - | 966,327 | 21,307 | - | 262,761 | - | - | - | (1,250,395 | ) | - | ||||||||||||||||||||||||||||||||||||||
Distributions | - | (11,000 | ) | - | - | - | - | - | - | - | - | - | - | (11,000 | ) | |||||||||||||||||||||||||||||||||||||
Net income (loss) | (782,868 | ) | 11,000 | (109,798 | ) | (7,129 | ) | - | - | (186,374 | ) | - | - | (55,648 | ) | (47,922 | ) | (5,741 | ) | (1,184,480 | ) | |||||||||||||||||||||||||||||||
Equity (deficit), end of year, before eliminations | (524,722 | ) | 184,871 | 153,902 | 6,066 | - | - | (1,134,761 | ) | - | - | (271,106 | ) | (26,605 | ) | 994,780 | (617,575 | ) | ||||||||||||||||||||||||||||||||||
Eliminations | - | - | - | - | - | - | 1,134,761 | - | - | 271,106 | 18,623 | (1,424,490 | ) | - | ||||||||||||||||||||||||||||||||||||||
Equity (deficit), end of year, after eliminations | (524,722 | ) | 184,871 | 153,902 | 6,066 | - | - | - | - | - | - | (7,982 | ) | (429,710 | ) | (617,575 | ) | |||||||||||||||||||||||||||||||||||
NCI, end of year | - | - | - | - | - | - | - | - | - | - | (7,982 | ) | - | (7,982 | ) | |||||||||||||||||||||||||||||||||||||
Controlling interests, end of year | (524,722 | ) | 184,871 | 153,902 | 6,066 | - | - | (1,134,761 | ) | - | - | (271,106 | ) | (18,623 | ) | 994,780 | (609,593 | ) | ||||||||||||||||||||||||||||||||||
Equity (deficit), end of year | $ | (524,722 | ) | $ | 184,871 | $ | 153,902 | $ | 6,066 | $ | - | $ | - | $ | (1,134,761 | ) | $ | - | $ | - | $ | (271,106 | ) | $ | (26,605 | ) | $ | 994,780 | $ | (617,575 | ) |
*Activity for PDT represents October 2, 2017 (date of acquisition) to December 31, 2017.
22