Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies

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Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2017
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany accounts and transactions have been eliminated in consolidation.

 

The Company consolidates entities in which it has a controlling financial interest, the usual condition of which is ownership of a majority voting interest. The Company also considers for consolidation an entity in which it has certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. The principal entities in which the Company possesses a variable interest include its equity method investees.

 

The Company evaluates its equity method investments for impairment whenever an event or change in circumstances occurs that may have a significant adverse impact on the fair value of the investment. If a loss in value has occurred and is deemed to be other than temporary, an impairment loss is recorded. Several factors are reviewed to determine whether a loss has occurred that is other than temporary, including the absence of an ability to recover the carrying amount of the investment, the length and extent of the fair value decline, and the financial condition and future prospects of the investee.

 

Certain reclassifications have been made to conform prior period information to the current presentation. The reclassifications did not have a material effect on our consolidated financial position, results of operations or cash flows.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions for the reporting period and as of the reporting date. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingencies. Actual results could differ from those estimates.

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP requires fair value measurement to be classified and disclosed in one of the following three categories:

 

· Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
· Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
· Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

Cash and Cash Equivalents

 

Cash and cash equivalents are defined as cash on hand and highly liquid instruments with original maturities of three months or less when purchased. The Company’s cash and cash equivalents consist of cash in banks and at the restaurants as of December 31, 2017 and 2016.

 

Accounts Receivable

 

The majority of the Company’s receivables arise primarily from credit cards, management agreements, trade customers and other reimbursable amounts due from hotel operators where the Company operates a food and beverage service. The Company determines an allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss and payment history, the customer’s current ability to pay its obligation to the Company and the condition of the general economy and industry as a whole. The Company has not reserved any trade receivables as of December 31, 2017 and 2016.

 

Inventory

 

Inventories, which consist of food, liquor and other beverages, are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out method. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs to sell. The Company has not reserved any inventory as of December 31, 2017 and 2016.

 

Property and Equipment

 

Property and equipment (including leasehold improvements) are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of their useful lives or the non-cancelable lease term. In circumstances where failure to exercise a renewal option would result in the Company incurring an economic penalty, those option periods are included when determining the depreciation period. In either case, the Company’s policy requires consistency when calculating the depreciation period, in classifying the lease and in computing straight-line rent expense. Costs incurred to repair and maintain the Company’s operations and equipment are expensed as incurred. The estimated useful lives used for financial statement purposes are:

 

Computer and equipment 5-7 years
Furniture and fixtures 5-7 years

 

Restaurant smallwares are capitalized during the initial year of operation of a particular restaurant. All restaurant supplies purchased subsequent to the first year are expensed as incurred.

 

Impairment of Long-Lived Assets

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values of long-lived assets may not be recoverable. The impairment evaluation is generally performed at the individual venue asset group level. Recoverability of restaurant assets is measured by a comparison of the carrying amount of an individual venue’s assets to the estimated identifiable undiscounted future cash flows expected to be generated by those restaurant assets. If the carrying amount of an individual venue’s long-lived assets exceeds its estimated identifiable undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the assets exceeds its fair value. Fair value is determined by discounting a venue’s identifiable future cash flows. The Company determined that there were impairments, net of related liabilities, of $0.6 million and $0.1 million for the years ended December 31, 2017 and 2016, respectively.

 

Debt Issuance Costs

 

Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense based on the related debt agreement using the straight-line method, which approximates the effective interest method. The Company has recorded debt issuance costs as an offset to long term debt, net of current portion on the consolidated balance sheets.

 

Income Taxes

 

The Company computes income taxes using the asset and liability method. Under this method, deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes, using the enacted statutory rate in effect for the year these differences are expected to be taxable or refunded. Deferred income tax expenses or credits are based on the changes in the asset or liability, respectively, from period to period. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carry forwards. If the Company determines that a deferred tax asset could be realized in a greater or lesser amount than recorded, the asset’s recorded amount is adjusted and the consolidated statement of operations is either credited or charged, respectively, in the period during which the determination is made.

 

The Company reduces its deferred tax assets by a valuation allowance if it determines that it is more likely than not that some portion or all of these tax assets will not be realized. In making this determination, the Company considers various qualitative and quantitative factors, such as:

 

· the level of historical taxable income;
· the projection of future taxable income over periods in which the deferred tax assets would be deductible;
· events within the restaurant industry;
· the health of the economy; and
· historical trending.

 

In 2016, the Company established a valuation allowance of $12.0 million on its deferred tax assets as a result of accumulated losses (excluding derivative income) incurred for the three-year period ended December 31, 2016 and the Company’s belief that it was more likely than not that the net deferred tax assets in the United States may not fully be realized in the future. As of December 31, 2017, the Company had a valuation allowance of approximately $11.6 million established against its deferred tax assets.

 

The Company recognizes the tax benefit from an uncertain tax position when it determines that it is more-likely-than-not that the position would be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If the Company derecognizes an uncertain tax position, the Company’s policy is to record any applicable interest and penalties within the provision for income taxes in the consolidated statements of operations and comprehensive loss.

 

Revenue Recognition

 

Revenue is derived from restaurant sales, management services and license related operations.

 

The Company recognizes restaurant revenues, net of discounts, when goods and services are provided. Sales tax amounts collected from customers that are remitted to governmental authorities are excluded from net revenue.

 

Revenue for management services are recognized when services are performed and fees are earned. The Company’s management agreements typically call for a management fee based on a percentage of revenue, a monthly marketing fee based on a percentage of revenues and an incentive fee based on a managed venue’s net profits.

 

Initial fees collected from a licensed operator to establish a new location are recognized as income over the life of the related license agreement. In cases where initial license fees are tied to specific performance obligations for which the Company is obligated to perform, such as preopening training and opening dates, the Company will record the revenue at the time the obligation is met. Royalties are recognized as revenue in the period the managed or licensed location’s revenues are earned. Royalties from the licensee are based on a percentage of the licensed restaurant’s revenue.

 

Gift Certificates

 

Proceeds from the sale of gift certificates are recorded as deferred revenue and recognized as revenue when redeemed by the holder. There are no expiration dates on the Company’s gift certificates and the Company does not charge any service fees that would result in a decrease to a customer’s available balance.

 

Although the Company will continue to honor all gift certificates presented for payment, it may determine the likelihood of redemption to be remote for certain gift certificates due to, among other things, long periods of inactivity. In these circumstances, to the extent the Company determines there is no requirement for remitting balances to government agencies under unclaimed property laws, outstanding gift certificate balances may then be recognized as breakage in the consolidated statements of operations and comprehensive loss as a component of owned unit net revenues.

 

The Company recorded no revenue from gift card breakage for the years ended December 31, 2017 and 2016.

 

Pre-opening Costs

 

Pre-opening costs for Company owned restaurants are expensed as incurred prior to a restaurant opening for business. The Company recorded pre-opening costs of $3.4 million in 2017, of which $1.8 million was recorded as lease termination expenses and asset write-offs on the consolidated statement of operations and comprehensive loss. Pre-opening costs for 2016 were $6.0 million.

 

Advertising Costs

 

The Company expenses the cost of advertising and promotions as incurred. Advertising expense amounted to $3.6 million and $3.2 million in 2017 and 2016, respectively.

 

Leases and Deferred Rent

 

The Company leases all of its restaurant properties under operating leases. The Company also leases equipment under operating leases.

 

For a lease that contains rent escalations, the Company records the total rent payable during the lease term on a straight-line basis over the expected term of the lease and records the difference between rent paid and the straight-line rent expense as deferred rent payable. Rent expense is recognized when the Company obtains control of the leased property. The expected term of the lease includes optional renewal periods that are reasonably assured to be exercised and where failure to exercise such renewal options would result in an economic penalty to the Company. Incentive payments received from landlords are recorded as an increase to deferred rent payable and are amortized on a straight-line basis over the lease term as a reduction of rent. As of December 31, 2017 and 2016, the Company had $17.0 million and $16.2 million, respectively, of deferred rent payable, net of landlord incentives.

 

Stock-Based Compensation

 

The Company maintains an equity incentive compensation plan under which it may grant options, warrants, restricted stock or other stock-based awards to directors, officers, key employees and other key individuals performing services to the Company. Restricted stock and restricted stock units (“RSUs”) are valued using the closing stock price on the date of grant. The fair value of an option award or warrant is determined using the Black-Scholes option pricing model, which incorporates ranges of assumptions for inputs. The Company’s assumptions are as follows:

 

· Expected Term – The expected term of options is based upon evaluations of historical and expected future exercise behavior, with consideration of both the vesting period and contractual terms of the instruments.
· Risk Free Interest Rate – The risk-free rate interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date.
· Implied Volatility – Implied volatility is based upon an average of the volatilities of an industry peer group who are publicly traded.
· Dividend Yield – The Company has historically not paid dividends and does not plan to do so in the foreseeable future.

 

Under the plan, vesting of awards can either be based on the passage of time or on the achievement of performance goals. For awards that vest on the passage of time, compensation cost is recognized over the vesting period. For performance based awards, the Company will recognize compensation costs over the requisite service period when conditions for achievement become probable. The Company also estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ or are expected to differ. These estimates, which are currently at 10%, are based on historical forfeiture behavior exhibited by employees of the Company.

 

Net Income (Loss) per Common Share

 

Basic net income per common share is computed using the weighted average number of common shares outstanding during the applicable period. Diluted net income per common share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of shares issuable pursuant to stock options and warrants. At December 31, 2017 and 2016, respectively, all equivalent shares underlying options and warrants were excluded from the calculation of diluted loss per share as the Company was in a net loss position.

 

Net income (loss) per share accounts for continuing operations and discontinued operations are computed independently. As a result, the sum of per share amount may not equal the total.

 

Concentrations of Credit Risk

 

The Company maintains cash and cash equivalent balances with financial institutions that, at times, may exceed federally insured limits. As of December 31, 2017, the Company has $1.6 million of cash deposited that is in excess of federally insured limits. The Company has not experienced any losses related to these balances and management believes its credit risk to be minimal.

 

The Company’s accounts receivable balance includes credit card receivables. Management believes that concentrations of credit risk with respect to these credit card receivables are limited. Credit card receivables are anticipated to be collected within three business days of the transaction.

 

Segment Reporting

 

The Company operates in three segments: owned restaurants, owned food, beverage and other operations and managed and licensed operations. These reportable segments are supported by the Company’s corporate unit. The Company’s owned restaurant segment consists of leased restaurant locations that compete in the full service dining industry and have similar investment criteria and economic and operating characteristics. The Company’s owned food, beverage and other operations segment includes entities where the Company leases a restaurant and provides additional ancillary food and beverage services, such as managing pool bars and providing full hospitality services for a hotel. The Company’s managed and licensed operations segment consists of management agreements in which the Company operates the food and beverage services in hotels or casinos and could include an STK, which the Company refers to as managed units. Revenues within the managed and licensed operations segment are generated from management fees based on the net revenue at each location, incentive fees based on profitability at each location and license fees. Information regarding the revenues and costs for each business segment has been reported in Note 19 for the years ended December 31, 2017 and 2016.

 

Foreign Currency Translation

 

Assets and liabilities of foreign operations are translated into U.S. dollars at the balance sheet date. Revenues and expenses are translated at average monthly exchange rates. Gains or losses resulting from the translation of foreign subsidiaries represent other comprehensive income (loss) and are accumulated as a separate component of stockholders’ equity. Currency translation gains or (losses) are recorded in accumulated other comprehensive loss within stockholders' equity and amounted to approximately $(12,000) and $(1.1) million during the years ended December 31, 2017 and 2016, respectively.

  

Comprehensive Income (Loss)

 

Comprehensive income (loss) consists of two components: net income (loss) and other comprehensive income (loss). The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments. All of the Company’s foreign currency translation adjustments relate to wholly-owned subsidiaries of the Company.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) and has subsequently issued a number of clarifying amendments to ASU 2014-09. The new standard, as amended, provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, amount, timing and uncertainty of revenues and cash flows from customer contracts, including significant judgments, changes in judgments and identification of assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017 and provides for two methods of adoption: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. The Company plans to adopt the requirements of ASU 2014-09 using the modified retrospective method. To prepare for the adoption of ASU 2014-09, the Company has:

 

· Identified its key revenue streams;
· Identified key factors from the five step process to recognize revenue as prescribed by ASU 2014-09 that may be applicable to each key revenue stream;
· Reviewed contracts within each key revenue stream to identify differences in the timing of recognizing revenues between current GAAP and ASU 2014-09; and
· Evaluated the Company’s historical accounting policies and practices to the requirements of ASU 2014-09.

 

The Company believes that the primary areas affected by ASU 2014-09 are revenues associated with licensing agreements and gift cards which in the aggregate accounted for less than 2% of total revenues in 2017. The Company concluded that the adoption of ASU 2014-09 will not have a material effect on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. ASU 2016-02 also requires certain disclosures about the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company’s restaurants operate under lease agreements that provide for material future lease payments. These leases comprise the majority of the Company’s material lease agreements. The Company is currently evaluating the effect of this standard, but expects the adoption of ASU 2016-02 will have a material effect on its consolidated financial statements by increasing both total assets and total liabilities.

 

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments" (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides clarity and reduces complexity when an entity has changes to the terms or conditions of a share-based payment award, and when an entity should apply modification accounting. The amendments in ASU 2017-09 are effective for annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the effect of ASU 2017-09 on its consolidated financial statements, but does not expect it to have a material impact.