The following management's discussion and analysis ("MD&A") should be read in
conjunction with West Coast Ventures Group Corp. ("WCVC") financial statements
for the six months ended June 30, 2020 and 2019, and the notes thereto.
Additional information relating to WCVC is available through its brand websites:
www.illegalburger.com
www.illegalbrands.com
www.illegalpizza.restaurant
www.kalakamexicankitchen.com
www.westcoastventuresgroupcorp.com
https://franchise.illegalburger.com
Safe Harbor for Forward-Looking Statements
Certain statements in this report, including the potential future impact of
COVID-19 on our results of operations or liquidity, the potential impact of
actions we have taken to mitigate the impact of COVID-19, the expected benefit
of the CARES Act on our liquidity and the period of time during which our cash
and short-term investment will fund our operations are forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.
We use words such as "anticipate," "believe," "could," "should," "estimate,"
"expect," "intend," "may," "predict," "project," "target," and similar terms and
phrases, including references to assumptions, to identify forward-looking
statements. These forward-looking statements are based on information available
to us as of the date any such statements are made, and we assume no obligation
to update these forward-looking statements. These statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those described in the statements. These risks and uncertainties include,
but are not limited to, the risk factors described in our annual report on
Form 10-K for the year ended December 31, 2019, as updated in this Form 10-Q and
other reports filed subsequently with the SEC. WCVC disclaims any obligation to
publicly update or to revise any such statements to reflect any change in the
Company's expectations or in events, conditions, or circumstances on which any
such statements may be based, or that may affect the likelihood that actual
results will differ from those set forth in the forward-looking statements.
Overview
West Coast Ventures Group Corp. ("our", "us", "we", "WCVC" or the "Company") was
originally incorporated as Energizer Tennis, Corp. on June 16, 2011 in the State
of Nevada. On October 4, 2017, effective for accounting purposes on June 30,
2017, WCVC entered into an agreement to acquire Nixon Restaurant Group, Inc. in
a transaction accounted for as a reverse acquisition.
Nixon Restaurant Group, Inc. ("us", "we" NRG or "our") was formed on October 12,
2015, under the laws of the State of Florida. On October 19, 2015, we issued 20
million shares of common stock to acquire 100% of the ownership interests in J&F
Restaurants, LLC, Illegal Burger, LLC and Illegal Burger Writer Square LLC,
Colorado Limited Liability Companies controlled by our founder, James Nixon. As
a result of the transaction, J&F Restaurants, LLC, Illegal Burger, LLC and
Illegal Burger Writer Square LLC became our wholly-owned subsidiaries.
·
We own and operate the following seven (7) restaurant locations and other
entities:
·
J&F Restaurants, LLC was formed in Colorado on March 12, 2011 and owns and
operates Kalaka Mexican Kitchen (f/k/a El Senor Sol), a casual full service
Mexican restaurant located at 29017 Hotel Way, Unit 103B Evergreen, Colorado
80439-8235 which opened in June 2011.
·
J&F Restaurants, LLC also owns and operates Illegal Burger, an upscale fast
casual restaurant located at 29017 Hotel Way, Unit 102B, Evergreen, Colorado
80439-8235 which opened in August 2013.
·
Illegal Burger, LLC was formed in Colorado on May 31, 2013 and owns and operates
Illegal Burger, an upscale fast food restaurant located at 15400 W 64th Avenue,
Unit E1A, Arvada, Colorado 80007-6876which opened in January 2013,
·
Illegal Burger Writer Square LLC was formed in Colorado on April 19, 2015, and
owns and operates an
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Illegal Burger location at 1512 Larimer Street, Suite R, Denver, Colorado
80202-1690 which opened in January 2016.
·
Illegal Burger Capital Hill, LLC was formed in Colorado on March 4, 2016 and
owns and operates an Illegal Burger location at 609 North Grant Street, Denver,
Colorado 80202-3506 which opened in June 2016.
·
Illegal Burger CitiSet, LLC was formed in Colorado on June 21, 2018 and owns and
operates an Illegal Burger location at 652 South Colorado Boulevard, Unit A,
Denver, Colorado 80246 which opened in October 2018.
·
Illegal Burger Franchising, LLC was formed in Colorado on January 17, 2019 to be
the entity to sell franchises, filing and offering documents for such are being
prepared.
·
Illegal Brands, LLC was formed in Colorado on April 1, 2019 and is the entity to
sell CBD products.
·
Illegal Pizza Lauderhill, LLC was formed in Florida on February 5, 2019 and owns
and operates our first Illegal Pizza location at 5401 N. University Dr.,
Lauderhill, Florida 33351 opened in June 2019.
·
Illegal Brands IP, LLC was formed in Colorado on April 9, 2019 to own all
registered trademarks and word marks, etc. for Illegal Burger, Illegal Pizza and
Illegal Brands, and as such will not have any operations other than applying for
such IP.
Each of our Illegal Burger restaurants offers a full bar. Each of our
restaurants offers a full menu and alcoholic beverages including liquor. Our
Illegal Burger restaurants offer consumers a practical alternative to the over-
commercialized healthy dining craze by offering a variety of burgers made with
all never frozen, hormone-free beef, french fries, cheesy taters and adult and
virgin milk shares including Nutella, peanut butter, caramel, Oreo, vanilla,
chocolate and strawberry as well as a full bar. Our Kalaka Mexican Kitchen
restaurant offers a different take on traditional Mexican food and a full bar
including tequila menu. Our new Illegal Pizza concept offers consumers a
practical alternative to the over-commercialized healthy dining craze by
offering a variety of pizzas made with all never frozen, natural toppings.
Our principal executive office is located at 6610 Holman St. Suite 301, Arvada,
Colorado 80004. Our telephone number is 303-537-7022. Our websites are:
www.illegalburger.com
www.illegalbrands.com
www.illegalpizza.restaurant
www.kalakamexicankitchen.com
www.westcoastventuresgroupcorp.com
https://franchise.illegalburger.com
Overview of the Impact of COVID-19
The COVID-19 pandemic has adversely affected, and will continue to adversely
affect, our operations and financial results for the foreseeable future. In
response to COVID-19, we temporarily closed some restaurants and closed the
dining rooms in all our restaurants. All our restaurants provided only take out,
digital order ahead and delivery services. Where and when permitted we have
reopened some of our restaurants for dine-in meals, though at extremely limited
capacity. We have been in regular contact with our major suppliers and while to
date we have not experienced significant disruptions in our supply chain, we
could see future disruptions should the impacts of COVID-19 extend for a
considerable amount of time. To support our employees, we have eliminated
non-essential travel, implemented work from home where possible, increased
sanitization of high touch, high traffic areas in our restaurants, provided
personal protective equipment for our restaurant employees and increased the
frequency of personal hygiene practices.
The analysis that follows provides more specific details about how the COVID-19
outbreak has impacted specific financial statement items.
Sales Trends. Restaurant sales for the six months ended June 30, 2020 were
negatively impacted by COVID-19, resulting in a decrease of 15.8% when compared
to the six months ended June 30, 2019.
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Restaurant Operating Costs. The sudden change to our business due to COVID-19 in
March resulted in a short term, outsized impact to labor and food costs. Labor
costs were elevated as we accommodated crew needs, shifted hours to support our
growing pick up/delivery business. Similarly, our food costs were elevated as we
worked to right size food purchases to align with the new sales level. We also
stocked our restaurant with additional cleaning and sanitation supplies, gloves,
hand sanitizers, and masks for contactless mobile pickup and delivery orders.
Restaurant Development. As of March 31, 2020, we preemptively delayed all plans
for expansion and opening new restaurants. As of June 30, 2020 we have continued
to leave in place the delay for expansion and opening new restaurants.
Food, Beverage and Packaging Costs. COVID-19 increased food, beverage and
packaging costs as a percentage of revenue for the six months ended June 30,
2020, as we worked to right size food purchases to align with the new sales
level.
Labor Costs. Labor costs stayed the same as a percentage of revenue for the six
months ended June 30, 2020, with a lower head count of employees primarily due
to wage inflation, which includes minimum wage increases, fair work week
legislation, and temporary assistance pay for our crew working during COVID-19,
as well as normal wage growth. Some of this wage growth is a result of the $600
weekly additional COVID-19 unemployment benefit.
Lease Costs. COVID-19 had an immaterial impact on occupancy costs for the six
months ended June 30, 2020. We are in discussions with our landlords about rent
deferrals and abatements. However, we cannot predict the results of those
discussions and the impact on our future lease costs. In April 2020, the FASB
issued guidance allowing entities to make a policy election whether to account
for lease concessions related to the COVID-19 pandemic as lease modifications.
The election applies to any lessor-provided lease concession related to the
impact of the COVID-19 pandemic, provided the concession does not result in a
substantial increase in the rights of the lessor or in the obligations of the
lessee. During the six months ended June 30, 2020, we have not received any
concessions from landlords in the form of rent deferrals or abatements, though
we are negotiating same. As such, the recognition of rent concessions did not
have a material impact on our condensed consolidated financial statements as of
June 30, 2020.
Other Operating Costs. As a result of COVID-19, we are adapting our restaurant
operations to the changing environment and are reducing non-essential
controllable costs. After we temporarily closed our dining rooms to help control
the spread of COVID-19, we reprioritized marketing efforts by focusing on
delivery and take-out.
General and Administrative Expenses. COVID-19 had an immaterial impact on
general and administrative expenses costs for the six months ended June 30,
2020. During the pandemic we halted all non-essential travel and expenses and
will continue to assess additional planned general and administrative
investments as we better understand the length and severity of the impact of
COVID-19.
Through June 30, 2020 we have not had any of our employees contract the COVID-19
virus. Should we have a significant number of our employees contract the
COVID-19 virus it could have a negative impact on our ability to serve customers
in a timely fashion.
CARES Act
The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was
enacted on March 27, 2020. There are several different provisions with the CARES
Act that impact income taxes for corporations. While we continue to evaluate the
tax implications, we believe these provisions will not have a material impact to
the financial statements.
Additionally, the Company has applied for, and in April, 2020 received, funds
under the Paycheck Protection Program (the "PPP Loan") after the period covered
in these financial statements in the amount of $298,700. The
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receipt of these funds, and the forgiveness of the loan attendant to these
funds, is dependent on our having initially qualified for the loan and
qualifying for the forgiveness of such loan based on our future adherence to the
forgiveness criteria.
The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum.
Monthly principal and interest payments are deferred for six months after the
date of disbursement. The PPP Loan may be prepaid at any time prior to maturity
with no prepayment penalties. The promissory note issued in connection with the
PPP Loan contains events of default and other provisions customary for a loan of
this type. The PPP Loan is being used to retain our employees, as well as for
other permitted uses under the terms and conditions of the PPP Loan.
In May 2020, the Company, through one of its operating LLC subsidiaries,
received a SBA Economic Injury Disaster Loan, ("EIDL") in the amount of $21,900.
In June 2020, the Company, through five of its operating LLC subsidiaries
received five SBA EIDL in the total amount of $747,500 and EIDL Grants totaling
$36,000. The EIDL are 30 year loans carrying a 3.75% interest rate with the
first payment due in June 2021. The Grants do not get repaid.
Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30,
2019
Revenue
For the three months ended June 30, 2020, revenue generated was $712,527, as
compared to $944,424 for the three months ended June 30, 2019. The year over
year decrease of approximately 24.6% was mainly attributable to the arrival of
the COVID-19 pandemic and the State of Colorado mandate to close all
restaurants, except for pick up/delivery orders. As a result of the lack of pick
up/delivery orders at our Mexican restaurant location, this location was closed
from late March until the end of June. We took this time period to rebrand this
location into our new Kalaka Mexican Kitchen concept. It reopened in July 2020.
The decline in revenue is principally from this location and our downtown
location. The downtown location suffered the largest decline as a result of the
lock down because people were not going to downtown offices; the two university
campus' within walking distance of the location closed; the 16th Street mall (a
significant tourist draw) - 1 block away - closed; Coors Field (4 blocks away)
closed and the Colorado Rockies suspended play; all downtown events normally
held in the spring and summer were cancelled; all other draws to downtown such
as theatre, opera, symphony, museums, etc. closed.
Cost of Sales
Restaurant cost of sales decreased to $710,091 from $894,787, or 20.6%. This
decrease was primarily due to the COVID-19 pandemic. Our ongoing restaurant cost
of sales, as a percentage of sales, was approximately 99.7% and 94.7% for the
three months ended June 30, 2020 and 2019, respectively. This percentage
increase is a direct result of two inter-related factors. First, was the arrival
of the COVID-19 pandemic and the State of Colorado mandate to close all
restaurants except for pick up/delivery orders and second was the ongoing fixed
costs of all our locations.
Gross Profit
Our restaurant operations gross profit was $2,436 and $49,637 for the three
months ended June 30, 2020 and 2019, respectively. Our restaurant gross profit,
as a percentage of sales, was approximately 0.3% and 5.3% for the three months
ended June 30, 2020 and 2019, respectively.
Our ongoing restaurant gross profit, as a percentage of gross sales was lower in
2020 because of the COVID-19 pandemic and the State of Colorado mandate to close
all restaurants except for pick up/delivery orders and the ongoing fixed costs
of all our locations.
Our ongoing restaurant gross profit, as a percentage of gross sales was higher
in 2019 as a result of the COVID-19 pandemic and the State of Colorado mandate
to close all restaurants except for pick up/delivery orders and the ongoing
fixed costs of all our locations.
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General and Administrative Expenses
General and administrative expenses for the three months ended June 30, 2020
were $241,176 compared to $558,409 for the three months ended June 30, 2019.
Net Loss
Net loss for the three months ended June 30, 2020 was $626,761 compared to a net
loss of $1,185,514 for the three months ended June 30, 2019.
Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019
Revenue
For the six months ended June 30, 2020, revenue generated was $1,501,971, as
compared to $1,784,039 for the six months ended June 30, 2019. The year over
year decrease of approximately 15.8% was mainly attributable to the arrival of
the COVID-19 pandemic and the State of Colorado mandate to close all
restaurants, except for pick up/delivery orders. As a result of the lack of pick
up/delivery orders at our Mexican restaurant location, this location was closed
from late March until the end of June. We took this time period to rebrand this
location into our new Kalaka Mexican Kitchen concept. It reopened in July 2020.
The decline in revenue is principally from this location and our downtown
location. The downtown location suffered the largest decline as a result of the
lock down because people were not going to downtown offices; the two university
campus' within walking distance of the location closed; the 16th Street mall (a
significant tourist draw) - 1 block away - closed; Coors Field (4 blocks away)
closed and the Colorado Rockies suspended play; all downtown events normally
held in the spring and summer were cancelled; all other draws to downtown such
as theatre, opera, symphony, museums, etc. closed.
Cost of Sales
Ongoing restaurant cost of sales decreased to $1,533,644 from $1,752,439, or
12.5%. This decrease was primarily due to the COVID-19 pandemic. Our ongoing
restaurant cost of sales, as a percentage of sales, was approximately 102.1% and
98.2% for the six months ended June 30, 2020 and 2019, respectively. Our
restaurant fixed costs drove up our cost of sales.
Gross Profit
Our ongoing restaurant operations gross profit was ($31,673) and $31,600 for the
six months ended June 30, 2020 and 2019, respectively. Our ongoing restaurant
gross profit, as a percentage of sales, was approximately (2.1%) and 1.8% for
the six months ended June 30, 2020 and 2019, respectively.
Our ongoing restaurant gross profit, as a percentage of gross sales was lower in
2020 because of the COVID-19 pandemic and our restaurant fixed costs.
General and Administrative Expenses
General and administrative expenses for the six months ended June 30, 2020 were
$481,249 compared to $902,241 for the six months ended June 30, 2019.
Net Loss
Net income for the six months ended June 30, 2020, was $474,671 compared to a
net loss of $2,307,995 for the six months ended June 30, 2019. The $1,897,020
gain in the change of derivative fair value resulted in our net income for the
six months ended June 30, 2020.
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Liquidity and Capital Resources
Cash Flow Activities
Cash increased $634,007 for the six months ended June 30, 2020.
Financing Activities
During the six months ended June 30, 2020, we received proceeds of $61,036 from
issuance of notes payable and $247,548 in stockholder advances and repaid
$31,928 of third party loans. We received a $298,700 loan under the SBA PPP
program and $771,400 in loans and $36,000 in grants under the SBA EIDL program.
During the six months ended June 30, 2019, we received proceeds of $1,009,000
from issuance of convertible notes and repaid $604,992 of convertible debt;
$375,000 from the issuance of third party debt and repaid $118,596 of third
party debt and $1,800 of our officer loan; $67,124 from the sale of shares of
common stock and $250,000 for shares of common stock to be issued.
US Small Business Administration Paycheck Protection Program (PPP)
In April 2020, the Company received a loan of $298,700 under the SBA's PPP.
Depending upon the final determination of the requirements for forgiveness under
this program, the Company expects its PPP loan to be substantially to wholly
forgiven. Any amount not forgiven becomes a two year loan at 1% interest.
US Small Business Administration Economic Injury Disaster Loans (EIDL)
In May 2020, the Company, through one of its operating LLC subsidiaries,
received a SBA EIDL in the amount of $21,900. In June 2020, the Company, through
five of its operating LLC subsidiaries received five SBA EIDL in the total
amount of $771,400 and EIDL Grants totaling $36,000. The EIDL are 30 year loans
carrying a 3.75% interest rate with the first payment due in June 2021. The
Grants do not get repaid.
Management has determined that additional capital will be required in the form
of equity or debt securities. There is no assurance that management will be able
to raise capital on terms acceptable to the Company. We also continue to monitor
the effects COVID-19 could have on our operations and liquidity due to the
economic impacts COVID-19 could have on the general economy. If we are unable to
obtain sufficient amounts of additional capital, we may have to cease filing the
required reports and cease operations completely. If we obtain additional funds
by selling any of our equity securities or by issuing common stock to pay
current or future obligations, the percentage ownership of our shareholders will
be reduced, shareholders may experience additional dilution, or the equity
securities may have rights preferences or privileges senior to the common stock.
Critical Accounting Policies and Estimates
We consider our critical accounting policies to be those that require the more
significant judgments and estimates in the preparation of financial statements,
including the following:
Use of 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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, trade
receivables, prepaid expenses, payables, accrued expenses and notes payable.
Fair value estimates are made at a specific point in time, based
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on relevant market information about the financial instrument. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. We consider the
carrying values of our financial instruments in the condensed consolidated
financial statements to approximate fair value, due to their short-term nature.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided for using straight-line methods over the estimated
useful lives of the respective assets, usually three to seven years.
Valuation of Long-Lived Assets
We periodically evaluate long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. If the estimated future cash flows (undiscounted and without
interest charges) from the use of an asset were less than the carrying value, a
write-down would be recorded to reduce the related asset to its estimated fair
value. We do not believe that there has been any impairment to long-lived assets
as of June 30, 2020, and 2019, respectively.
Operating Leases
Effective January 1, 2019, we adopted Accounting Standards Update (ASU) 2016-02,
Leases (Topic 842) which supersedes the lease accounting requirements in
Accounting Standards Codification (ASC) 840, Leases (Topic 840). Under Topic
842, we applied a dual approach to all leases whereby we are a lessee and
classifies leases as either finance or operating leases based on the principle
of whether or not the lease is effectively a financed purchase by the Company.
Lease classification is evaluated at the inception of the lease agreement.
Regardless of classification, we record a right-of-use asset and a lease
liability for all leases with a term greater than 12 months. Our leases, for the
premises we occupy for the Illegal Burger Arvada, Illegal Burger Writer Square,
Illegal Burger Capital Hill and Illegal Burger CitiSet were classified as
operating leases as of June 30, 2020. Operating lease expense is recognized on a
straight-line basis over the term of the lease.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Regulation S-K
Item 303(a)(4).
Recent Accounting Pronouncements
(See "Recently Issued Accounting Pronouncements" in Note 3 of Notes to the
Financial Statements.)
COVID-19 pandemic
The short term impact of COVID-19 are the result of government directives, first
from the City of Denver, CO, and subsequently from the States of Colorado and
Florida requiring only pick-up and delivery orders of food and beverages. Under
these directives we were required to close our dining areas in all our
restaurants. This has caused a fall-off in business, which has been somewhat
offset by an increase in pick-up and delivery orders. We have been able to keep
our restaurants open for pick-up and delivery orders. This in turn has allowed
us to continue to employ our staff at the restaurants. We intend to continue to
pay our employees through this crisis in the hopes that once the crisis has
passed and we will be allowed to return to more normal operations we can do so
quickly by bringing our existing staff back in without having to train a large
number of new staff. Our Denver area locations were allowed to resume 50% of
dining facilities beginning on May 29, 2020.
The Company has had to develop and implement new policies and procedures for use
in all of it restaurants to foster continued customer confidence when they
purchase food from us during this crisis. The Company has had to develop and
implement procedures for "drive through" pick up orders as none of our
restaurants are equipped with drive through windows. We have expended
considerable time and effort developing multiple means to get the information
out to the buying public that all our restaurants are open for pick-up and
delivery orders.
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The Company temporarily closed our El Senor Sol - Evergreen, CO location because
it was not receiving sufficient take out/delivery orders to make sense remaining
open. The Company elected to re-brand this location during this period. The
Company had been seeking to complete a re-branding in a way that would cause the
least financial harm. The pandemic provided a perfect opportunity. The
location's new brand is Kalaka Mexican Kitchen, which reopened in July 2020.
The State of Colorado required all restaurants to cease seating patrons and go
to only pick up/delivery orders only beginning in mid-March 2020. This
requirement caused a 15.8% drop in revenue for the six months ended June 30,
2020 over the same period in 2019.
The future impact of the pandemic is highly uncertain and cannot be predicted,
and we cannot provide any assurance that the outbreak will not have a material
adverse impact on our operations or future results. The extent of the impact, if
any, will depend on future developments, including actions taken to contain the
corona virus.
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