Item 1. Financial Statements
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
June 26, 2016
|
|
December 27, 2015
|
|
|
(unaudited)
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,537,822
|
|
|
$
|
14,200,528
|
|
Accounts receivable
|
|
508,245
|
|
|
620,942
|
|
Inventory
|
|
1,872,057
|
|
|
1,934,584
|
|
Prepaid assets
|
|
1,307,165
|
|
|
1,618,429
|
|
Total current assets
|
|
9,225,289
|
|
|
18,374,483
|
|
|
|
|
|
|
Deferred income taxes
|
|
14,630,653
|
|
|
13,320,177
|
|
Property and equipment, net
|
|
81,162,442
|
|
|
79,189,661
|
|
Intangible assets, net
|
|
3,388,585
|
|
|
3,638,716
|
|
Goodwill
|
|
50,097,081
|
|
|
50,097,081
|
|
Other long-term assets
|
|
1,141,900
|
|
|
1,152,377
|
|
Total assets
|
|
$
|
159,645,950
|
|
|
$
|
165,772,495
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
5,601,690
|
|
|
$
|
7,807,552
|
|
Accrued compensation
|
|
2,763,165
|
|
|
3,087,883
|
|
Other accrued liabilities
|
|
3,153,133
|
|
|
3,663,211
|
|
Current portion of long-term debt
|
|
9,843,746
|
|
|
9,891,825
|
|
Current portion of deferred rent
|
|
334,637
|
|
|
396,113
|
|
Total current liabilities
|
|
21,696,371
|
|
|
24,846,584
|
|
|
|
|
|
|
Deferred rent, less current portion
|
|
3,036,979
|
|
|
2,826,210
|
|
Unfavorable operating leases
|
|
631,400
|
|
|
671,553
|
|
Other long-term liabilities
|
|
6,186,273
|
|
|
4,463,631
|
|
Long-term debt, less current portion
|
|
112,461,267
|
|
|
116,364,165
|
|
Total liabilities
|
|
144,012,290
|
|
|
149,172,143
|
|
|
|
|
|
|
Commitments and contingencies (Notes 9 and 10)
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
Common stock - $0.0001 par value; 100,000,000 shares authorized; 26,619,811 and 26,298,725, respectively, issued and outstanding
|
|
2,586
|
|
|
2,584
|
|
Additional paid-in capital
|
|
36,335,496
|
|
|
36,136,332
|
|
Accumulated other comprehensive loss
|
|
(2,420,504
|
)
|
|
(1,006,667
|
)
|
Accumulated deficit
|
|
(18,283,918
|
)
|
|
(18,531,897
|
)
|
Total stockholders' equity
|
|
15,633,660
|
|
|
16,600,352
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
159,645,950
|
|
|
$
|
165,772,495
|
|
The accompanying notes are an integral part of these interim consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 26, 2016
|
|
June 28, 2015
|
|
June 26, 2016
|
|
June 28, 2015
|
Revenue
|
|
$
|
46,391,046
|
|
|
$
|
36,871,838
|
|
|
$
|
94,803,845
|
|
|
$
|
76,312,170
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
|
|
|
|
|
|
|
|
|
Food, beverage, and packaging costs
|
|
13,058,782
|
|
|
10,561,270
|
|
|
26,754,325
|
|
|
22,009,173
|
|
Compensation costs
|
|
12,378,780
|
|
|
9,754,171
|
|
|
24,890,721
|
|
|
19,908,963
|
|
Occupancy costs
|
|
3,051,165
|
|
|
2,432,350
|
|
|
6,221,920
|
|
|
4,804,817
|
|
Other operating costs
|
|
9,684,253
|
|
|
7,811,480
|
|
|
19,723,097
|
|
|
15,772,029
|
|
General and administrative expenses
|
|
2,814,979
|
|
|
5,674,963
|
|
|
5,477,737
|
|
|
8,171,850
|
|
Pre-opening costs
|
|
649,119
|
|
|
576,390
|
|
|
921,483
|
|
|
1,669,890
|
|
Depreciation and amortization
|
|
4,402,183
|
|
|
3,250,701
|
|
|
8,709,900
|
|
|
6,408,023
|
|
Impairment and loss (gain) on asset disposal
|
|
(609,751
|
)
|
|
2,320,059
|
|
|
(543,623
|
)
|
|
2,468,467
|
|
Total operating expenses
|
|
45,429,510
|
|
|
42,381,384
|
|
|
92,155,560
|
|
|
81,213,212
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
961,536
|
|
|
(5,509,546
|
)
|
|
2,648,285
|
|
|
(4,901,042
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(1,440,562
|
)
|
|
(559,035
|
)
|
|
(2,885,502
|
)
|
|
(991,258
|
)
|
Other income, net
|
|
39,633
|
|
|
727,258
|
|
|
84,905
|
|
|
744,261
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(439,393
|
)
|
|
(5,341,323
|
)
|
|
(152,312
|
)
|
|
(5,148,039
|
)
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
(256,967
|
)
|
|
(2,022,980
|
)
|
|
(400,291
|
)
|
|
(2,092,338
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(182,426
|
)
|
|
$
|
(3,318,343
|
)
|
|
$
|
247,979
|
|
|
$
|
(3,055,701
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.12
|
)
|
Fully diluted earnings per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
26,379,065
|
|
|
26,151,853
|
|
|
26,338,549
|
|
|
26,150,518
|
|
Diluted
|
|
26,379,065
|
|
|
26,151,853
|
|
|
26,338,549
|
|
|
26,150,518
|
|
The accompanying notes are an integral part of these interim consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 26, 2016
|
|
June 28, 2015
|
|
June 26, 2016
|
|
June 28, 2015
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(182,426
|
)
|
|
$
|
(3,318,343
|
)
|
|
$
|
247,979
|
|
|
$
|
(3,055,701
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Unrealized changes in fair value of interest rate swaps, net of tax of $188,044, $51,980, $728,340 and $109,713, respectively
|
|
(365,027
|
)
|
|
100,900
|
|
|
(1,413,837
|
)
|
|
(212,973
|
)
|
Unrealized changes in fair value of investments, net of tax of $0, $0 $0 and $1,959, respectively
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,804
|
|
Total other comprehensive income (loss)
|
|
(365,027
|
)
|
|
100,900
|
|
|
(1,413,837
|
)
|
|
(209,169
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(547,453
|
)
|
|
$
|
(3,217,443
|
)
|
|
$
|
(1,165,858
|
)
|
|
$
|
(3,264,870
|
)
|
The accompanying notes are an integral part of these interim consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Accumulated
Other
|
|
Retained
Earnings
|
|
Total
|
|
Common Stock
|
|
Paid-in
|
|
Comprehensive
|
|
(Accumulated
|
|
Stockholders'
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income (Loss)
|
|
Deficit)
|
|
Equity
|
Balances - December 28, 2014
|
26,149,824
|
|
|
$
|
2,582
|
|
|
$
|
35,668,001
|
|
|
$
|
(175,156
|
)
|
|
$
|
(2,339,405
|
)
|
|
$
|
33,156,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares
|
47,502
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures of restricted shares
|
(3,586
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan
|
10,205
|
|
|
—
|
|
|
40,360
|
|
|
—
|
|
|
—
|
|
|
40,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
162,563
|
|
|
—
|
|
|
—
|
|
|
162,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock repurchase
|
(24,500
|
)
|
|
(2
|
)
|
|
(98,250
|
)
|
|
—
|
|
|
—
|
|
|
(98,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(209,169
|
)
|
|
—
|
|
|
(209,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,055,701
|
)
|
|
(3,055,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances - June 28, 2015
|
26,179,445
|
|
|
$
|
2,580
|
|
|
$
|
35,772,674
|
|
|
$
|
(384,325
|
)
|
|
$
|
(5,395,106
|
)
|
|
$
|
29,995,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances - December 27, 2015
|
26,298,725
|
|
|
$
|
2,584
|
|
|
$
|
36,136,332
|
|
|
$
|
(1,006,667
|
)
|
|
$
|
(18,531,897
|
)
|
|
$
|
16,600,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares
|
335,831
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures of restricted shares
|
(22,351
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares effectively repurchased for required employee withholding taxes
|
(5,940
|
)
|
|
—
|
|
|
(9,326
|
)
|
|
—
|
|
|
—
|
|
|
(9,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan
|
13,546
|
|
|
2
|
|
|
20,780
|
|
|
—
|
|
|
—
|
|
|
20,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
187,710
|
|
|
—
|
|
|
—
|
|
|
187,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,413,837
|
)
|
|
—
|
|
|
(1,413,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
247,979
|
|
|
247,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances - June 26, 2016
|
26,619,811
|
|
|
$
|
2,586
|
|
|
$
|
36,335,496
|
|
|
$
|
(2,420,504
|
)
|
|
$
|
(18,283,918
|
)
|
|
$
|
15,633,660
|
|
The accompanying notes are an integral part of these interim consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 26, 2016
|
|
June 28, 2015
|
Cash flows from operating activities
|
|
|
|
|
Net income (loss)
|
|
$
|
247,979
|
|
|
$
|
(3,055,701
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities
|
|
|
|
|
Depreciation and amortization
|
|
8,709,900
|
|
|
6,408,023
|
|
Amortization of debt discount and loan fees
|
|
117,238
|
|
|
14,214
|
|
Amortization of gain on sale-leaseback
|
|
(78,604
|
)
|
|
(78,604
|
)
|
Impairment and loss (gain) on asset disposals
|
|
(543,623
|
)
|
|
2,468,467
|
|
Share-based compensation, net
|
|
187,710
|
|
|
162,563
|
|
Deferred income taxes
|
|
(582,136
|
)
|
|
(1,929,924
|
)
|
Changes in operating assets and liabilities that provided (used) cash
|
|
|
|
|
Accounts receivable
|
|
112,697
|
|
|
1,187,273
|
|
Inventory
|
|
62,527
|
|
|
(135,234
|
)
|
Prepaid assets
|
|
311,264
|
|
|
(369,353
|
)
|
Intangible assets
|
|
(394,483
|
)
|
|
(129,426
|
)
|
Other long-term assets
|
|
10,477
|
|
|
(778,071
|
)
|
Accounts payable
|
|
(1,201,271
|
)
|
|
(955,715
|
)
|
Accrued liabilities
|
|
(1,175,727
|
)
|
|
1,780,743
|
|
Deferred rent
|
|
149,293
|
|
|
17,169
|
|
Net cash provided by operating activities
|
|
5,933,241
|
|
|
4,606,424
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
Proceeds from sale of investments
|
|
—
|
|
|
2,952,302
|
|
Proceeds from sale of property and equipment, net of fees
|
|
1,134,717
|
|
|
—
|
|
Purchases of property and equipment
|
|
(11,716,557
|
)
|
|
(12,646,471
|
)
|
Net cash used in investing activities
|
|
(10,581,840
|
)
|
|
(9,694,169
|
)
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
7,109,154
|
|
|
7,551,319
|
|
Repayments of long-term debt
|
|
(11,134,717
|
)
|
|
(4,000,000
|
)
|
Repurchase of stock
|
|
—
|
|
|
(98,252
|
)
|
Proceeds from employee stock purchase plan
|
|
20,782
|
|
|
40,360
|
|
Tax withholdings for restricted stock units
|
|
(9,326
|
)
|
|
—
|
|
Net cash (used in) provided by financing activities
|
|
(4,014,107
|
)
|
|
3,493,427
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(8,662,706
|
)
|
|
(1,594,318
|
)
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
14,200,528
|
|
|
18,688,281
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
5,537,822
|
|
|
$
|
17,093,963
|
|
The accompanying notes are an integral part of these interim consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Diversified Restaurant Holdings, Inc. (“DRH”) is a restaurant company operating two complementary concepts: Buffalo Wild Wings
®
Grill & Bar (“BWW”) and Bagger Dave’s Burger Tavern
®
(“Bagger Dave’s”). As the largest franchisee of BWW and the creator, developer, and operator of Bagger Dave’s, we provide a unique guest experience in a casual and inviting environment. We were incorporated in 2006 and are headquartered in the Detroit metropolitan area. As of
June 26, 2016
, we had
83
locations in Florida, Illinois, Indiana, Michigan, Missouri and Ohio.
DRH is the largest BWW franchisee and currently operates
64
DRH-owned BWW restaurants (
20
in Michigan,
17
in Florida,
seven
in Illinois,
five
in Indiana and
15
in Missouri), including the nation’s largest BWW, based on square footage, in downtown Detroit, Michigan. We remain on track to fulfill our area development agreement (“ADA”) with Buffalo Wild Wings International, Inc. (“BWLD”) and expect to operate
77
DRH-owned BWW restaurants by the end of 2020, exclusive of potential additional BWW restaurant acquisitions.
DRH originated the Bagger Dave’s concept with our first restaurant opening in January 2008 in Berkley, Michigan. Currently, there are
19
Bagger Dave’s,
16
in Michigan and
one
in Indiana and
two
in Ohio.
Basis of Presentation
The consolidated financial statements as of
June 26, 2016
and
December 27, 2015
, and for the three and six-month periods ended
June 26, 2016
and
June 28, 2015
, have been prepared by DRH and its wholly-owned subsidiaries (collectively, the "Company") pursuant to accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission. The financial information as of
June 26, 2016
and for the three and six-month periods ended
June 26, 2016
and
June 28, 2015
is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods.
The consolidated financial information as of
December 27, 2015
is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended
December 27, 2015
, which is included in Item 8 in the Fiscal
2015
Annual Report on Form 10-K, and should be read in conjunction with such consolidated financial statements.
The results of operations for the three and six-month periods ended
June 26, 2016
are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending
December 25, 2016
.
Segment Reporting
During the First Quarter 2016, the Company reorganized segment reporting from one reportable segment to
two
reportable segments, BWW and Bagger Dave's, due to differences that have developed in the economic characteristics between the two concepts. All prior period information was recast to reflect this change. The Company’s reportable segments are organized based on restaurant concept. Resources are allocated and performance is assessed for the concepts by the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operating Officer whom the Company has determined to be its Chief Operating Decision Makers. See Note
15
for additional information.
Goodwill
Goodwill is not amortized and represents the excess of cost over the fair value of identified net assets of businesses acquired. Goodwill is subject to an annual impairment analysis or more frequently if indicators of impairment exist. At
June 26, 2016
and
December 27, 2015
, we had goodwill of
$50.1 million
, that was assigned to our BWW operating segment.
The impairment analysis, if necessary, consists of a two-step process. The first step is to compare the fair value of the reporting unit to its carrying value, including goodwill. We estimate fair value using market information (market approach) and discounted cash flow projections (income approach). The income approach uses the reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects market conditions. The projection uses management’s best estimates of projected revenue, costs and cash expenditures, including an estimate of new restaurant openings and related capital expenditures. Other significant estimates also include terminal growth rates and working capital requirements.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
We supplement our estimate of fair value under the income approach by using a market approach which estimates fair value by applying multiples to the reporting unit’s projected operating performance. The multiples are derived from comparable publicly traded companies with similar characteristics to the reporting unit. If the fair value of the reporting unit is less than its carrying value, the second step of the impairment analysis must be performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of goodwill with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. As of December
December 27, 2015
, based on our quantitative analysis, goodwill was considered recoverable. At
June 26, 2016
, there were
no
impairment indicators warranting an analysis.
Impairment or Disposal of Long-Lived Assets
We review long-lived assets quarterly to determine if triggering events have occurred which would require a test to determine if the carrying amount of these assets may not be recoverable based on estimated future cash flows. Assets are reviewed at the lowest level for which cash flows can be identified, which is at the individual restaurant level. In the absence of extraordinary circumstances, restaurants are included in the impairment analysis after they have been open for two years. We evaluate 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 our estimate of discounted future cash flows. The determination of asset fair value is also subject to significant judgment.
No
impairment was recognized for quarter-ended
June 26, 2016
. During the quarter-ended June 28, 2015, the Company recorded an impairment loss of
$1.2 million
related to
three
Bagger Dave's locations. We continue to monitor several other restaurants for potential impairment of long-lived assets while we continue to develop plans to improve operating results. As such, based on our current estimates of the future operating results of these restaurants, we believe that the assets at these restaurants are not impaired. As we periodically refine our estimated future operating results, changes in our estimates and assumptions may cause us to realize impairment charges in the future that could be material. For additional details refer to the 2015 10-K filed on March 11, 2015.
We account for exit or disposal activities, including restaurant closures, in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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 we cease using a property under an operating lease, we record 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. During fiscal 2015, the Company decided to close
12
underperforming locations,
eight
in Indiana,
three
in Michigan and
one
in Florida. The Company closed the restaurants during the third and fourth quarters of 2015. In connection with the 2015 closures, the Company recorded a liability of
$1.3 million
, for the net present value of any remaining lease obligations, net of estimated sublease income. As of
June 26, 2016
, a liability of
$417,599
remains on our Consolidated Balance Sheet and is classified as Other accrued liabilities. For additional details refer to the 2015 10-K filed on March 11, 2015.
Indefinite-Lived Intangible Assets
Liquor licenses, also a component of intangible assets, are deemed to have an indefinite life and, accordingly, are not amortized. Management reviews liquor license assets on an annual basis (at year-end) to determine whether carrying values have been impaired. We identify potential impairments for liquor licenses by comparing the fair value with its carrying amount. If the fair value exceeds the carrying amount, the liquor licenses are not impaired. If the carrying amount exceeds the fair value, an impairment loss is recorded for the difference. If the fair value of the asset is less than the carrying amount, an impairment is recorded.
No
impairments were recognized for quarter-ended
June 26, 2016
or fiscal year ended
December 27, 2015
.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP 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 consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Swap Agreements
The Company utilizes interest rate swap agreements with Citizens Bank, N.A. (“Citizens”) to fix interest rates on a portion of the Company’s portfolio of variable rate debt, which reduces exposure to interest rate fluctuations. The Company does not use any other types of derivative financial instruments to hedge such exposures, nor does it use derivatives for speculative purposes. The Company’s interest rate swap agreements qualify for hedge accounting. As such, the Company records the change in the fair value of its swap agreements as a component of accumulated other comprehensive income (loss), net of tax. The Company records the fair value of its interest swaps on the Consolidated Balance Sheet in other long-term assets or other long-term liabilities depending on the fair value of the swaps. See Note
6
and Note
13
for additional information on the interest rate swap agreements.
Recent Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, Topic 718:
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 simplifies several aspects of accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company is in the process of assessing the impact of adoption of ASU 2016-09 on its consolidated financial statements.
In February 2016, FASB issued ASU 2016-02,
Leases
("ASU 2016-02"). ASU 2016-02 requires that lease arrangements longer than 12 months result in a 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. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact of the updated guidance on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein. We are currently evaluating the impact of our pending adoption of ASU 2014-09, although based on the nature of our business we do not expect the standard will have a significant impact on our consolidated financial statements.
We reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to our operations or that no material effect is expected on our consolidated financial statements as a result of future adoption.
Recently Adopted Accounting Standards
In November 2015, the FASB issued ASU 2015-17,
Topic 740: Balance Sheet Classification of Deferred Taxes
(“ASU No. 2015-17”), which simplifies the presentation of deferred income taxes. ASU No. 2015-17 provides presentation requirements to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. The Company adopted this standard as of December 27, 2015, with prospective application. The adoption of ASU No. 2015-17 had no impact on the Company’s Consolidated Statements of Operations and Comprehensive Loss.
In August 2015, the FASB issued ASU 2015-15,
Interest - Imputation of Interest
(
Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.
This ASU adds paragraphs pursuant to the Securities and Exchange Commission's ("SEC") Staff Announcement at the June 18, 2015 Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. ASU 2015-15 states that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. The Company has historically recorded and will continue to record, debt issuance costs associated with the line-of-credit as an asset and subsequently amortize the deferred costs over the term of the line-of-credit, with there being no impact on previously issued financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In April 2015, the FASB issued ASU No. 2015-03,
Interest-Imputation of Interest,
which updates guidance on the presentation of debt issuance costs. The guidance requires debt issuance costs to be presented as a direct deduction of debt balances on the statement of financial position, similar to the presentation of debt discounts. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We retrospectively adopted this guidance in First Quarter 2016. This resulted in a reclassification of the December 27, 2015 Consolidated Balance Sheet of
$345,317
from Intangible assets, net to Current portion of long-term debt and Long-term debt,
$27,002
and
$318,315
, respectively.
2. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following assets:
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2016
|
|
December 27, 2015
|
Land
|
|
$
|
—
|
|
|
$
|
37,500
|
|
Building
|
|
3,932,646
|
|
|
2,339,219
|
|
Equipment
|
|
35,275,081
|
|
|
32,912,992
|
|
Furniture and fixtures
|
|
8,989,084
|
|
|
8,194,060
|
|
Leasehold improvements
|
|
77,382,253
|
|
|
72,148,545
|
|
Restaurant construction in progress
|
|
700
|
|
|
1,768,027
|
|
Total
|
|
125,579,764
|
|
|
117,400,343
|
|
Less accumulated depreciation
|
|
(44,417,322
|
)
|
|
(38,210,682
|
)
|
Property and equipment, net
|
|
$
|
81,162,442
|
|
|
$
|
79,189,661
|
|
At
June 26, 2016
and December 27, 2015,
$66,925
and
$0.9 million
, respectively, of fixed and intangible assets for the closed locations are held for sale, which are recorded in Property and equipment and Intangible assets on the Consolidated Balance Sheets. On June 8, 2016 we sold the Detroit Bagger Dave's building and land net of fees for approximately
$1.1 million
in proceeds, of which were used to pay down our term loan. We recorded a gain of $
884,717
, which is recorded in Impairment and loss (gain) on asset disposal on the Consolidated Statements of Operations. We anticipate selling the remaining assets held for sale in Third Quarter 2016.
3. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2016
|
|
December 27, 2015
|
Amortized intangibles:
|
|
|
|
|
Franchise fees
|
|
$
|
1,278,142
|
|
|
$
|
1,278,142
|
|
Trademark
|
|
70,576
|
|
|
66,826
|
|
Non-compete agreement
|
|
76,560
|
|
|
76,560
|
|
Favorable lease
|
|
351,344
|
|
|
351,344
|
|
Loan fees - Revolving line of credit and DLOC
|
|
368,084
|
|
|
368,084
|
|
Total
|
|
2,144,706
|
|
|
2,140,956
|
|
Less accumulated amortization
|
|
(640,537
|
)
|
|
(519,858
|
)
|
Amortized intangibles, net
|
|
1,504,169
|
|
|
1,621,098
|
|
|
|
|
|
|
Unamortized intangibles:
|
|
|
|
|
Liquor licenses
|
|
1,884,416
|
|
|
2,017,618
|
|
Total intangibles, net
|
|
$
|
3,388,585
|
|
|
$
|
3,638,716
|
|
Amortization expense for the
three-month periods ended June 26, 2016
and
June 28, 2015
and
six-month periods ended June 26, 2016
and
June 28, 2015
was
$22,831
,
$17,322
,
$45,621
and
$43,064
respectively. Amortization of favorable leases and loan fees are reflected as part of occupancy and interest expense, respectively.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The aggregate weighted-average amortization period for intangible assets is
10.6 years
at
June 26, 2016
.
4. RELATED PARTY TRANSACTIONS
Fees for monthly accounting and financial statement services are paid to an entity owned by a member of the DRH Board of Directors and a stockholder of the Company. Fees paid during the
three-month periods ended June 26, 2016
and
June 28, 2015
and
six-month periods ended June 26, 2016
and
June 28, 2015
were
$18,481
,
$139,270
,
$60,163
and
$277,890
, respectively.
5. OTHER ACCRUED LIABILITES
|
|
|
|
|
|
|
|
|
|
June 26, 2016
|
|
December 27, 2015
|
Sales tax payable
|
$
|
862,795
|
|
|
$
|
987,795
|
|
Accrued interest
|
446,946
|
|
|
495,365
|
|
Closure liability - current
|
417,599
|
|
|
1,008,707
|
|
Accrued property taxes
|
389,331
|
|
|
349,131
|
|
Other
|
1,036,462
|
|
|
822,213
|
|
Total other accrued liabilities
|
$
|
3,153,133
|
|
|
$
|
3,663,211
|
|
6. LONG-TERM DEBT
Long-term debt consists of the following obligations:
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2016
|
|
December 27, 2015
|
Note payable - $120.0 million term loan; payable to Citizens with a senior lien on all the Company’s personal property and fixtures. Scheduled monthly principal payments are approximately $833,333 plus accrued interest through maturity in June 2020. Interest is charged based on one-month LIBOR plus an applicable margin, which ranges from 2.25% to 3.5%, depending on the lease adjusted leverage ratio defined in the terms of the agreement. The rate at June 26, 2016 was approximately 3.95%.
|
|
$
|
104,698,616
|
|
|
$
|
115,833,333
|
|
|
|
|
|
|
Note payable - $30.0 million development line of credit; payable to Citizens with a senior lien on all the Company’s personal property and fixtures. Payments are due monthly once fully drawn and matures in June 2020. Interest is charged based on one-month LIBOR plus an applicable margin, which ranges from 2.25% to 3.5%, depending on the lease adjusted leverage ratio defined in the terms of the agreement. The rate at June 26, 2016 was approximately 3.95%.
|
|
18,199,476
|
|
|
11,090,323
|
|
|
|
|
|
|
Unamortized discount and debt issuance costs
|
|
(593,079
|
)
|
|
(667,666
|
)
|
|
|
|
|
|
Total debt
|
|
122,305,013
|
|
|
126,255,990
|
|
|
|
|
|
|
Less current portion
|
|
(9,843,746
|
)
|
|
(9,891,825
|
)
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
112,461,267
|
|
|
$
|
116,364,165
|
|
On June 29, 2015, the Company entered into a
$155.0 million
senior secured credit facility with Citizens (the “June 2015 Senior Secured Credit Facility”). The June 2015 Senior Secured Credit Facility consists of a
$120.0 million
term loan (the “June 2015 Term Loan”), a
$30.0 million
development line of credit (the “June 2015 DLOC”) and a
$5.0 million
revolving line of credit (the “June 2015 RLOC”). The Company used approximately
$65.5 million
of the June 2015 Term Loan to refinance existing outstanding debt and used approximately
$54.0 million
of the June 2015 Term Loan to refinance an acquisition occurring in second quarter 2015. The remaining balance of the June 2015 Term Loan, approximately
$0.5 million
, was used to pay the fees, costs, and expenses associated with the closing of the June 2015 Senior Secured Credit Facility. The June 2015 Term Loan is for a period of
five years
. Payments of principal are based upon an
12
-month straight-line amortization schedule, with monthly principal payments of
$833,333
plus accrued interest. The interest rate for the June 2015 Term Loan is LIBOR plus an applicable margin, which ranges from
2.25%
to
3.5%
, depending on the lease adjusted leverage ratio defined in the terms of the agreement. The
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
entire remaining outstanding principal and accrued interest on the June 2015 Term Loan is due and payable on the maturity date of June 29, 2020. The June 2015 DLOC is for a term of
two years
and is convertible upon maturity into a term note based on the terms of the agreement at which time monthly principal payments will be due based on a
12
-month straight-line amortization schedule, plus interest, through maturity on June 29, 2020. The June 2015 RLOC is for a term of
two years
and
no
amounts were outstanding as of
June 26, 2016
.
Fees related to the term debt are recorded as debt discount and fees related to the DLOC and RLOC are capitalized as intangible assets. Debt issuance costs represents legal, consulting and financial costs associated with debt financing. Debt discount and debt issuance cost related to term debt totaled
$593,079
, net of accumulated amortization at
June 26, 2016
. Unamortized debt issuance costs related to the DLOC and RLOC totaled
$286,987
at
June 26, 2016
. Debt discount and debt issuance cost are amortized over the life of the debt and are recorded in interest expense using the effective interest method.
For the
three-month periods ended June 26, 2016
and
June 28, 2015
and
six-month periods ended June 26, 2016
and
June 28, 2015
, interest expense was
$1.4 million
,
$0.6 million
,
$2.9 million
and
$1.0 million
respectively.
The current debt agreement contains various customary financial covenants generally based on the performance of the specific borrowing entity and other related entities. The more significant covenants consist of a minimum debt service coverage ratio and a maximum lease adjusted leverage ratio, both of which we are in compliance with as of
June 26, 2016
.
At
June 26, 2016
, the Company has
six
interest rate swap agreements to fix a portion of the interest rates on its variable rate debt. The swap agreements all qualify for hedge accounting and are included in Other long-term liabilities on the Balance Sheet. Under the swap agreements, the Company receives interest at the one -month LIBOR and pays a fixed rate. Since these swap agreements qualify for hedge accounting, the changes in fair value are recorded in other comprehensive income (loss), net of tax. See Note
1
and Note
13
for additional information pertaining to interest rate swaps.
The following summarizes the fair values of derivative instruments designated as cash flow hedges which were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2016
|
|
|
|
Notional amounts
|
|
Derivative assets
|
|
Derivative liabilities
|
Interest rate swaps
|
Rate
|
Expires
|
|
|
|
|
|
April 2012
|
1.4%
|
April 2019
|
$
|
6,476,191
|
|
|
$
|
—
|
|
|
$
|
82,105
|
|
October 2012
|
0.9%
|
October 2017
|
2,785,714
|
|
|
—
|
|
|
11,958
|
|
July 2013
|
1.4%
|
April 2018
|
9,904,762
|
|
|
—
|
|
|
64,273
|
|
May 2014
|
1.5%
|
April 2018
|
10,357,143
|
|
|
—
|
|
|
158,834
|
|
January 2015
|
1.8%
|
December 2019
|
20,833,333
|
|
|
—
|
|
|
942,461
|
|
August 2015
|
2.3%
|
June 2020
|
49,696,875
|
|
|
—
|
|
|
2,407,801
|
|
Total
|
|
|
$
|
100,054,018
|
|
|
|
$
|
—
|
|
|
$
|
3,667,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2015
|
|
|
|
Notional amounts
|
|
Derivative assets
|
|
Derivative liabilities
|
Interest rate swaps
|
Rate
|
Expires
|
|
|
|
|
April 2012
|
1.4%
|
April 2019
|
$
|
7,619,048
|
|
|
$
|
—
|
|
|
$
|
56,280
|
|
October 2012
|
0.9%
|
October 2017
|
3,214,286
|
|
|
—
|
|
|
3,027
|
|
July 2013
|
1.4%
|
April 2018
|
8,190,476
|
|
|
—
|
|
|
60,164
|
|
May 2014
|
1.5%
|
April 2018
|
11,428,571
|
|
|
—
|
|
|
122,716
|
|
January 2015
|
1.8%
|
December 2019
|
20,547,619
|
|
|
|
—
|
|
|
|
415,459
|
|
August 2015
|
2.3%
|
June 2020
|
49,696,875
|
|
|
—
|
|
|
867,609
|
|
Total
|
|
|
$
|
100,696,875
|
|
|
|
$
|
—
|
|
|
$
|
1,525,255
|
|
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK-BASED COMPENSATION
Restricted stock awards
In
First
and
Second
Quarter
2016
, restricted shares were granted to certain team members and Board members at a weighted-average fair value of
$1.52
per share and in
Second
quarter
2015
restricted shares were granted to certain team members and board members at a weighted-average fair value of
$4.21
. Restricted shares are granted with a per share purchase price at
100.0%
of the fair market value on the date of grant. Based on the Stock Award Agreement, shares vest ratably over a
three
year period,
one
year period or upon the
three
year anniversary of the granted shares. The vesting terms are determined by the Compensation Committee of the Board of Directors. Unrecognized stock-based compensation expense of
$790,242
at
June 26, 2016
will be recognized over the remaining weighted-average vesting period of
2.2 years
. The total fair value of shares vested during the
six-month periods ended June 26, 2016
and
June 28, 2015
was
$108,671
and
$104,947
, respectively. Under the Stock Incentive Plan, there are
95,775
shares available for future awards at
June 26, 2016
.
The following table presents the restricted shares transactions during the
six-month periods ended June 26, 2016
:
|
|
|
|
|
Number of
Restricted
Stock Shares
|
Unvested, December 27, 2015
|
241,124
|
|
Granted
|
335,831
|
|
Vested
|
(63,106
|
)
|
Vested shares tax portion
|
(5,940
|
)
|
Expired/Forfeited
|
(22,351
|
)
|
Unvested, June 26, 2016
|
485,558
|
|
The following table presents the restricted shares transactions during the
six-month periods ended June 28, 2015
:
|
|
|
|
|
Number of
Restricted
Stock Shares
|
Unvested, December 28, 2014
|
164,867
|
|
Granted
|
47,502
|
|
Vested
|
(22,751
|
)
|
Expired/Forfeited
|
(3,586
|
)
|
Unvested, June 28, 2015
|
186,032
|
|
On July 30, 2010, DRH granted options for the purchase of
210,000
shares of common stock to the then-members of its Board of Directors . These options are fully vested and expire
six years
from issuance, July 30, 2016. On July 28, 2016, the Stock Option Agreement of 2010 was amended and extends the expiration date of the agreement to July 31, 2019. The options can be exercised at a price of
$2.50
per share. On August 13, 2015,
30,000
shares were exercised at a price of
$2.50
per share The intrinsic value of options exercised is
$6,300
. At
June 26, 2016
,
180,000
shares of authorized common stock are reserved for issuance to provide for the exercise of these options. The intrinsic value of outstanding options is
$0
and
$273,000
as of
June 26, 2016
and
June 28, 2015
, respectively.
Employee stock purchase plan
The Company has also reserved
250,000
shares of common stock for issuance under the Employee Stock Purchase Plan (“ESPP”). The ESPP is available to team members subject to employment eligibility requirements. Participants may purchase common stock at
85.0%
of the lesser of the start or end price for the offering period. The ESPP has
four
offering periods, each start/end dates coincide with the fiscal quarter and are awarded on the last day of the offering period. During the
six-month periods ended June 26, 2016
and
June 28, 2015
, we issued
13,546
and
10,205
shares, respectively. Under the ESPP, there are
199,043
shares available for future awards at
June 26, 2016
.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Share Repurchase Program
In March 2015, the Board of Directors authorized a program to repurchase up to
$1.0 million
of the Company's common stock in open market transactions at market prices or otherwise. In April 2015, we repurchased
$98,252
in outstanding shares, representing
24,500
shares. The weighted average purchase price per share was
$4.01
. Upon receipt, the repurchased shares were retired and restored to authorized but unissued shares of common stock.
Stock-Based Compensation
Stock-based compensation of
$90,284
and
$106,770
, $
187,710
and $
162,563
was recognized during the
three-month periods ended June 26, 2016
and
June 28, 2015
and
six-month periods ended June 26, 2016
and
June 28, 2015
respectively, as compensation cost in the Consolidated Statements of Operations and as additional paid-in capital on the Consolidated Statement of Stockholders' Equity to reflect the fair value of shares vested.
The Company has authorized
10,000,000
shares of preferred stock at a par value of
$0.0001
.
No
preferred shares are issued or outstanding as of
June 26, 2016
. Any preferences, rights, voting powers, restrictions, dividend limitations, qualifications, and terms and conditions of redemption shall be set forth and adopted by a Board of Directors' resolution prior to issuance of any series of preferred stock.
8. INCOME TAXES
The effective income tax rate for the
three-month periods ended June 26, 2016
and
June 28, 2015
and
six-month periods ended June 26, 2016
and
June 28, 2015
was
(58.5)%
,
(37.8)%
,
(262.8)%
and
(40.6)%
, respectively. The change in the effective income tax rate for
June 26, 2016
as compared to the
six
months ended
June 28, 2015
is primarily attributable to the decrease in loss before income taxes.
9. OPERATING LEASES
Base lease terms range from
five
to
24 years
, generally include renewal options, and frequently require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds.
Total rent expense was
$2.4 million
,
$1.9 million
,
$4.9 million
and
$3.8 million
for the
three-month periods ended June 26, 2016
and
June 28, 2015
and
six-month periods ended June 26, 2016
and
June 28, 2015
, respectively.
Scheduled future minimum lease payments for each of the
five years
and thereafter for non-cancelable operating leases with initial or remaining lease terms in excess of
one year
at
June 26, 2016
are summarized as follows:
|
|
|
|
|
Year
|
Amount
|
Remainder of 2016
|
$
|
5,509,766
|
|
2017
|
11,007,937
|
|
2018
|
10,535,524
|
|
2019
|
9,688,037
|
|
2020
|
9,423,851
|
|
2021 and thereafter
|
49,035,777
|
|
Total
|
$
|
95,200,892
|
|
10. COMMITMENTS AND CONTINGENCIES
The Company’s ADA requires DRH to open
42
BWW restaurants designated "development territory” by April 1, 2021. As of
June 26, 2016
we have opened
29
of the
42
restaurants required by the ADA. With the remaining
13
restaurants, we expect the Company will operate
77
BWW restaurants by
2020
, exclusive of potential additional BWW restaurant acquisitions.
The Company is required to pay BWLD royalties (
5.0%
of net sales) and advertising fund contributions (between
3.15%
and
3.25%
of net sales globally) for the term of the individual franchise agreements. The Company incurred royalty fees of
$2.0
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
million
,
$1.5 million
,
$4.2 million
and
$3.1 million
for the
three-month periods ended June 26, 2016
and
June 28, 2015
and
six-month periods ended June 26, 2016
and
June 28, 2015
, respectively. Advertising fund contribution expenses were
$1.3 million
,
$1.0 million
$2.8 million
and
$1.9 million
for the
three-month periods ended June 26, 2016
and
June 28, 2015
and
six-month periods ended June 26, 2016
and
June 28, 2015
, respectively.
The Company is required by its various BWLD franchise agreements to modernize the restaurants during the term of the agreements. The individual agreements generally require improvements between the
fifth
and
tenth
year to meet the most current design model that BWLD has approved. The modernization costs for a restaurant can range from approximately
$50,000
to approximately
$1.3
million depending on an individual restaurant's needs.
On December 18, 2015, a collective action was filed against AMC Wings, Inc., and the Company in the U.S. District Court for the Southern District of Illinois (the "Court") by plaintiffs, David, et. al. A Sure Wing, LLC, the seller of the 18 St. Louis BWW restaurants acquired by the Company on June 29, 2015, was also named as a defendant. Plaintiffs primarily allege that former and current tipped workers at the above-mentioned companies were assigned to perform tasks outside the scope of their tipped positions, in violation of Illinois and federal law. On July 6, 2016, the parties filed a joint Notice of Settlement, stating that the parties had reached an agreement in principle to resolve plaintiffs’ class and collective action claims through June 29, 2015, for
$600,000
and intend to seek Court approval of their settlement. On July 8, 2016, following a status conference with the parties, the Court gave leave to plaintiffs to file an amended complaint in light of the settlement discussions. Plaintiffs did so on July 8, 2016. At this stage in the proceedings, the parties are drafting a joint motion for preliminary Court approval of the terms of their settlement.
The Company has filed an indemnity claim against A Sure Wing, LLC and has received a reciprocal indemnity claim from A Sure Wing, LLC. A Sure Wing, LLC and the Company previously agreed to toll their respective indemnity claims pending resolution of the matter. A Sure Wing has agreed to fund the settlement in return for DRH releasing their indemnity claim.
Additionally, the Company is subject to ordinary and routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the ordinary course of its business. The ultimate outcome of any litigation is uncertain. While unfavorable outcomes could have adverse effects on the Company's business, results of operations, and financial condition, management believes that the Company is adequately insured and does not believe an unfavorable outcome of any pending or threatened proceedings is probable or reasonably possible. Therefore,
no
separate reserve or disclosure has been established for these types of legal proceedings.
11. EARNINGS PER SHARE
The following is a reconciliation of basic and fully diluted earnings per common share for the
three and six
month periods ended
June 26, 2016
and
June 28, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
June 26, 2016
|
|
June 28, 2015
|
Loss available to common stockholders
|
|
$
|
(182,426
|
)
|
|
$
|
(3,318,343
|
)
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
26,379,065
|
|
|
26,151,853
|
|
Effect of dilutive securities
|
|
—
|
|
|
—
|
|
Weighted-average shares outstanding - assuming dilution
|
|
26,379,065
|
|
|
26,151,853
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.13
|
)
|
Earnings per share - assuming dilution
|
|
$
|
(0.01
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
June 26, 2016
|
|
June 28, 2015
|
Income (loss) available to common stockholders
|
|
$
|
247,979
|
|
|
$
|
(3,055,701
|
)
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
26,338,549
|
|
|
26,150,518
|
|
Effect of dilutive securities
|
|
—
|
|
|
—
|
|
Weighted-average shares outstanding - assuming dilution
|
|
26,338,549
|
|
|
26,150,518
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
0.01
|
|
|
$
|
(0.12
|
)
|
Earnings per share - assuming dilution
|
|
$
|
0.01
|
|
|
$
|
(0.12
|
)
|
Potentially dilutive securities whose effect would have been antidilutive are excluded from the computation of diluted earnings per share.
12. SUPPLEMENTAL CASH FLOWS INFORMATION
Other Cash Flows Information
Cash paid for interest was
$1.4 million
,
$0.5 million
,
$2.8 million
and
$1.0 million
during the
three-month periods ended June 26, 2016
and
June 28, 2015
and
six-month periods ended June 26, 2016
and
June 28, 2015
, respectively.
Cash paid for income taxes was
$10,000
,
$34,290
,
$10,000
and
$94,290
during the
three-month periods ended June 26, 2016
and
June 28, 2015
and
six-month periods ended June 26, 2016
and
June 28, 2015
, respectively.
Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities
Noncash investing activities for property and equipment not yet paid during the
six
months ended
June 26, 2016
and
June 28, 2015
, was
$0.9 million
and
$1.3 million
, respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The guidance for fair value measurements, FASB ASC 820,
Fair Value Measurements and Disclosures
, establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:
|
|
|
|
●
|
Level 1
|
Quoted market prices in active markets for identical assets and liabilities;
|
|
|
|
●
|
Level 2
|
Inputs, other than level 1 inputs, either directly or indirectly observable; and
|
|
|
|
●
|
Level 3
|
Unobservable inputs developed using internal estimates and assumptions (there is little or no market data) which reflect those that market participants would use.
|
As of
June 26, 2016
and
December 27, 2015
, respectively, our financial instruments consisted of cash and cash equivalents, accounts receivable, accounts payable, and debt. The fair value of cash and cash equivalents, accounts receivable, and accounts payable approximate carrying value, due to their short-term nature.
The fair value of our interest rate swaps is determined based on valuation models, which utilize quoted interest rate curves to calculate the forward value and then discount the forward values to the present period. The Company measures the fair value using broker quotes which are generally based on market observable inputs including yield curves and the value associated with counterparty credit risk. Our interest rate swaps are classified as a Level 2 measurement as these securities are not actively traded in the market, but are observable based on transactions associated with bank loans with similar terms and maturities. See Note
1
and Note
6
for additional information pertaining to interest rates swaps.
As of
June 26, 2016
and
December 27, 2015
, our total debt was approximately
$122.3 million
and
$126.3 million
, respectively, which approximated fair value because the applicable interest rates are adjusted frequently based on short-term market rates (Level 2).
There were
no
transfers between levels of the fair value hierarchy during the three and six months ended
June 26, 2016
and the fiscal year ended
December 27, 2015
.
The following table presents the fair values for those assets and liabilities measured on a recurring basis as of
June 26, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAIR VALUE MEASUREMENTS
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Asset/(Liability)
Total
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
(3,667,432
|
)
|
|
$
|
—
|
|
|
$
|
(3,667,432
|
)
|
The following table presents the fair values for those assets and liabilities measured on a recurring basis as of
December 27, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAIR VALUE MEASUREMENTS
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Asset/(Liability)
Total
|
Cash equivalents
|
|
$
|
2,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,000,000
|
|
Interest rate swaps
|
|
—
|
|
|
(1,525,255
|
)
|
|
—
|
|
|
(1,525,255
|
)
|
Total
|
|
$
|
2,000,000
|
|
|
$
|
(1,525,255
|
)
|
|
$
|
—
|
|
|
$
|
474,745
|
|
14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes each component of Accumulated Other Comprehensive Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 26, 2016
|
|
Three Months Ended June 28, 2015
|
|
|
Interest Rate Swaps
|
|
Investments
|
|
Total
|
|
Interest Rate Swaps
|
|
Investments
|
|
Total
|
Beginning balance
|
|
$
|
(2,055,477
|
)
|
|
$
|
—
|
|
|
$
|
(2,055,477
|
)
|
|
$
|
(485,225
|
)
|
|
$
|
—
|
|
|
$
|
(485,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recorded to other comprehensive income
|
|
(553,071
|
)
|
|
—
|
|
|
(553,071
|
)
|
|
152,880
|
|
|
—
|
|
|
152,880
|
|
Tax benefit (expense)
|
|
188,044
|
|
|
—
|
|
|
188,044
|
|
|
(51,980
|
)
|
|
—
|
|
|
(51,980
|
)
|
Other comprehensive income (loss)
|
|
(365,027
|
)
|
|
—
|
|
|
(365,027
|
)
|
|
100,900
|
|
|
—
|
|
|
100,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated OCL
|
|
$
|
(2,420,504
|
)
|
|
$
|
—
|
|
|
$
|
(2,420,504
|
)
|
|
$
|
(384,325
|
)
|
|
$
|
—
|
|
|
$
|
(384,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 26, 2016
|
|
Six Months Ended June 28, 2015
|
|
|
Interest Rate Swaps
|
|
Investments
|
|
Total
|
|
Interest Rate Swaps
|
|
Investments
|
|
Total
|
Beginning balance
|
|
$
|
(1,006,667
|
)
|
|
$
|
—
|
|
|
$
|
(1,006,667
|
)
|
|
$
|
(171,352
|
)
|
|
$
|
(3,804
|
)
|
|
$
|
(175,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recorded to other comprehensive income
|
|
(2,142,177
|
)
|
|
—
|
|
|
(2,142,177
|
)
|
|
(322,686
|
)
|
|
5,763
|
|
|
(316,923
|
)
|
Tax benefit (expense)
|
|
728,340
|
|
|
—
|
|
|
728,340
|
|
|
109,713
|
|
|
(1,959
|
)
|
|
107,754
|
|
Other comprehensive income (loss)
|
|
(1,413,837
|
)
|
|
—
|
|
|
(1,413,837
|
)
|
|
(212,973
|
)
|
|
3,804
|
|
|
(209,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated OCL
|
|
$
|
(2,420,504
|
)
|
|
$
|
—
|
|
|
$
|
(2,420,504
|
)
|
|
$
|
(384,325
|
)
|
|
$
|
—
|
|
|
$
|
(384,325
|
)
|
15. SEGMENT REPORTING
During the First Quarter 2016, the Company reorganized segment reporting from one reportable segment to
two
reportable segments, BWW and Bagger Dave's, due to differences that have developed in the economic characteristics between the two concepts. All prior period information was recast to reflect this change. The Company’s reportable segments are organized based on restaurant concept. Resources are allocated and performance is assessed for the concepts by the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operating Officer whom the Company has determined to be its Chief Operating Decision Makers. See Note
1
for additional information.
Revenues for all segments include only transactions with customers and include no intersegment revenues. Excluded from net income from operations for BWW and Bagger Dave's are certain legal and corporate costs not directly related to the performance of the segments, interest and other expenses related to the Company’s credit agreements and derivative instruments, certain stock-based compensation expenses, certain bonus expense and certain insurance expenses managed centrally.
Segment activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
June 26, 2016
|
|
June 28, 2015
|
|
June 26, 2016
|
|
June 28, 2015
|
Revenue from external customers:
|
|
|
|
|
|
|
|
BWW
|
$
|
40,951,181
|
|
|
$
|
29,610,702
|
|
|
$
|
84,094,433
|
|
|
$
|
61,462,790
|
|
Bagger Dave's
|
5,439,865
|
|
|
7,261,136
|
|
|
10,709,412
|
|
|
14,849,380
|
|
Total
|
$
|
46,391,046
|
|
|
$
|
36,871,838
|
|
|
$
|
94,803,845
|
|
|
$
|
76,312,170
|
|
|
|
|
|
|
|
|
|
Segment operating profit (loss):
|
|
|
|
|
|
|
|
BWW
|
$
|
3,849,895
|
|
|
$
|
3,751,902
|
|
|
$
|
9,135,540
|
|
|
$
|
8,358,232
|
|
Bagger Dave's
|
(889,880
|
)
|
|
(2,810,306
|
)
|
|
(1,502,142
|
)
|
|
(4,268,941
|
)
|
Total segment operating profit
|
$
|
2,960,015
|
|
|
$
|
941,596
|
|
|
$
|
7,633,398
|
|
|
$
|
4,089,291
|
|
Closure-related items
|
928,153
|
|
|
—
|
|
|
583,142
|
|
|
—
|
|
Corporate expenses
|
(2,926,632
|
)
|
|
(6,451,142
|
)
|
|
(5,568,255
|
)
|
|
(8,990,333
|
)
|
Total consolidated operating profit (loss)
|
$
|
961,536
|
|
|
$
|
(5,509,546
|
)
|
|
$
|
2,648,285
|
|
|
$
|
(4,901,042
|
)
|
|
|
|
|
|
|
|
|
Interest expense
|
$
|
(1,440,562
|
)
|
|
$
|
(559,035
|
)
|
|
$
|
(2,885,502
|
)
|
|
$
|
(991,258
|
)
|
Other income
|
39,633
|
|
|
727,258
|
|
|
84,905
|
|
|
744,261
|
|
Net loss before income taxes
|
$
|
(439,393
|
)
|
|
$
|
(5,341,323
|
)
|
|
$
|
(152,312
|
)
|
|
$
|
(5,148,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2016
|
|
December 27, 2015
|
Total assets
|
|
|
|
|
|
|
|
BWW
|
|
|
|
|
$
|
116,669,017
|
|
|
$
|
115,044,166
|
|
Bagger Dave's
|
|
|
|
|
21,588,976
|
|
|
21,886,470
|
|
Corporate
|
|
|
|
|
21,387,957
|
|
|
28,841,859
|
|
Total assets
|
|
|
|
|
$
|
159,645,950
|
|
|
$
|
165,772,495
|
|
16. SUBSEQUENT EVENTS
On July 28, 2016, the Board of Directors approved the tax-free spinoff of AMC Burgers, which includes all
19
of the Bagger Dave's entities. The company will be formed as an independent, publicly-traded company on the over the counter market. DRH will continue to own and operate its
64
franchised BWW restaurants. DRH is currently developing a comprehensive separation plan for the spinoff. The separation plan, including transaction structure, timing, composition of senior management and the Boards of Directors, capital structure and other matters, will be subject to approval by the DRH Board of Directors, customary regulatory and other approvals. The Company expects to complete the spinoff in the fourth quarter of 2016.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated interim financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results from Operations contained in our Form 10-K, for the fiscal year ended
December 27, 2015
. Information included in this discussion and analysis includes commentary on company-owned restaurant, restaurant sales, and same store sales. Management believes such sales information is an important measure of our performance, and is useful in assessing Buffalo Wild Wings® Grill & Bar (“BWW”) concept and consumer acceptance of the Bagger Dave’s Tavern® (“Bagger Dave’s”) and the overall health of the concepts. However, same store sales information does not represent sales in accordance with accounting principles generally accepted in the United States of America (“GAAP”), should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP and may not be comparable to financial information as defined or used by other companies.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this “Quarterly Report on Form 10-Q” may contain information that includes or is based upon certain “forward-looking statements” relating to our business. These forward-looking statements represent management’s current judgment and assumptions, and can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are frequently accompanied by the use of such words as “anticipates,” “plans,” “believes,” “expects,” “projects,” “intends,” and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, while it is not possible to predict or identify all such risks, uncertainties, and other factors, those relating to our ability to secure the additional financing adequate to execute our business plan; our ability to locate and start up new restaurants; acceptance of our restaurant concepts in new market places; and the cost of food and other raw materials. Any one of these or other risks, uncertainties, other factors, or any inaccurate assumptions may cause actual results to be materially different from those described herein or elsewhere by us. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they were made. Certain of these risks, uncertainties, and other factors may be described in greater detail in our filings from time to time with the Securities and Exchange Commission ("SEC"), which we strongly urge you to read and consider. Subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above and elsewhere in our reports filed with the SEC. We expressly disclaim any intent or obligation to update any forward-looking statements.
OVERVIEW
Diversified Restaurant Holdings, Inc. (“DRH”) is a restaurant company operating two complementary concepts: BWW and Bagger Dave’s. As the largest franchisees of BWW and the creator, developer, and operator of Bagger Dave’s, we provide a unique guest experience in a casual and inviting environment. We were incorporated in 2006 and are headquartered in the Detroit metropolitan area. As of
June 26, 2016
, we had
83
locations in Florida, Illinois, Indiana, Michigan, Missouri and Ohio.
DRH is the largest BWW franchisee and currently operates
64
DRH-owned BWW restaurants (
20
in Michigan,
17
in Florida,
seven
in Illinois,
five
in Indiana and
15
in Missouri), including the nation’s largest BWW, based on square footage, in downtown Detroit, Michigan. We remain on track to fulfill our area development agreement (“ADA”) with Buffalo Wild Wings International, Inc. (“BWLD”) and expect to operate
77
DRH-owned BWW restaurants by the end of 2020, exclusive of potential additional BWW restaurant acquisitions.
DRH originated the Bagger Dave’s concept with our first restaurant opening in January 2008 in Berkley, Michigan. Currently, there are
19
Bagger Dave’s,
16
in Michigan and
one
in Indiana and
two
in Ohio.
RESTAURANT OPENINGS
The following table outlines the restaurant unit information for each fiscal year from 2012 through 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 (estimate)
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
Summary of restaurants open at the beginning of year
|
|
|
|
|
|
|
|
|
|
|
DRH-owned BWW
|
|
62
|
|
|
42
|
|
|
36
|
|
|
33
|
|
|
22
|
|
Bagger Dave’s
|
|
18
|
|
|
24
|
|
|
18
|
|
|
11
|
|
|
6
|
|
Total
|
|
80
|
|
|
66
|
|
|
54
|
|
|
44
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
Openings:
|
|
|
|
|
|
|
|
|
|
|
DRH-owned BWW
|
|
2
|
|
|
3
|
|
|
3
|
|
|
3
|
|
|
3
|
|
Bagger Dave’s
|
|
1
|
|
|
5
|
|
|
6
|
|
|
7
|
|
|
5
|
|
BWW Acquisitions
|
|
—
|
|
|
18
|
|
|
3
|
|
|
—
|
|
|
8
|
|
Closures - DRH-owned BWW
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Closures - Bagger Dave's
|
|
—
|
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total restaurants
|
|
83
|
|
|
80
|
|
|
66
|
|
|
54
|
|
|
44
|
|
RESULTS OF OPERATIONS
For the three-month period ended
June 26, 2016
("
Second
Quarter
2016
") and six-month period ended
June 26, 2016
("Year to Date 2016") , revenue was generated from the operations of
64
BWW restaurants and
19
Bagger Dave’s restaurants. For the three-month period ended
June 28, 2015
("
Second
Quarter
2015
") and six-month period ended
June 28, 2015
("Year to Date 2015), revenue was generated from the operations of
42
BWW restaurants and
26
Bagger Dave’s restaurants. Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including the timing and number of new restaurant openings and related expenses, increases or decreases in same store sales, changes in commodity prices, general economic conditions, and seasonal fluctuations. As a result, our quarterly results of operations are not necessarily indicative of the results that may be achieved for any future period. Same store sales is defined as a restaurants comparable sales in the first full month after the 18th month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Our comparable restaurant base consisted of 70 and 50 restaurants at
June 26, 2016
and
June 28, 2015
, respectively.
Results of Operations for the Three Months Ended
June 26, 2016
and
June 28, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 26, 2016
|
|
Percent of sales
|
|
June 28, 2015
|
|
Percent of sales
|
BWW
|
|
$
|
40,951,181
|
|
|
88.3
|
%
|
|
$
|
29,610,702
|
|
|
80.3
|
%
|
Bagger Dave's
|
|
5,439,865
|
|
|
11.7
|
%
|
|
7,261,136
|
|
|
19.7
|
%
|
Total revenue
|
|
46,391,046
|
|
|
100.0
|
%
|
|
36,871,838
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, beverage, and packaging costs
|
|
|
|
|
|
|
|
|
BWW
|
|
11,419,464
|
|
|
27.9
|
%
|
|
8,324,900
|
|
|
28.1
|
%
|
Bagger Dave's
|
|
1,639,318
|
|
|
30.1
|
%
|
|
2,236,370
|
|
|
30.8
|
%
|
Food, beverage, and packaging costs
|
|
13,058,782
|
|
|
28.1
|
%
|
|
10,561,270
|
|
|
28.6
|
%
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
|
|
|
|
|
|
BWW
|
|
10,283,942
|
|
|
25.1
|
%
|
|
7,064,960
|
|
|
23.9
|
%
|
Bagger Dave's
|
|
2,094,838
|
|
|
38.5
|
%
|
|
2,689,211
|
|
|
37.0
|
%
|
Compensation costs
|
|
12,378,780
|
|
|
26.7
|
%
|
|
9,754,171
|
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
|
Occupancy costs
|
|
|
|
|
|
|
|
|
BWW
|
|
2,774,108
|
|
|
6.8
|
%
|
|
1,728,997
|
|
|
5.8
|
%
|
Bagger Dave's
|
|
277,057
|
|
|
5.1
|
%
|
|
703,353
|
|
|
9.7
|
%
|
Occupancy costs
|
|
3,051,165
|
|
|
6.6
|
%
|
|
2,432,350
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
Other operating costs
|
|
|
|
|
|
|
|
|
BWW
|
|
8,397,035
|
|
|
20.5
|
%
|
|
6,241,037
|
|
|
21.1
|
%
|
Bagger Dave's
|
|
1,326,490
|
|
|
24.4
|
%
|
|
1,570,443
|
|
|
21.6
|
%
|
Closure-related items
|
|
(39,272
|
)
|
|
(0.1
|
)%
|
|
—
|
|
|
—
|
%
|
Other operating costs
|
|
9,684,253
|
|
|
20.9
|
%
|
|
7,811,480
|
|
|
21.2
|
%
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
2,814,979
|
|
|
6.1
|
%
|
|
5,674,963
|
|
|
15.4
|
%
|
Pre-opening costs
|
|
649,119
|
|
|
1.4
|
%
|
|
576,390
|
|
|
1.6
|
%
|
Depreciation and amortization
|
|
4,402,183
|
|
|
9.5
|
%
|
|
3,250,701
|
|
|
8.8
|
%
|
Impairment and loss (gain) on asset disposal
|
|
(609,751
|
)
|
|
(1.3
|
)%
|
|
2,320,059
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
45,429,510
|
|
|
97.9
|
%
|
|
42,381,384
|
|
|
114.9
|
%
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
961,536
|
|
|
2.1
|
%
|
|
$
|
(5,509,546
|
)
|
|
(14.9
|
)%
|
Revenue for
Second
Quarter
2016
was
$46.4 million
, an increase of
$9.5 million
, or
25.8%
, over the
$36.9 million
of revenue generated during
Second
Quarter
2015
. The increase was attributable to the following: $10.2 million increase from the acquisition of 18 BWW locations; $3.6 million increase from nine new restaurant openings consisting of five BWW restaurants and four Bagger Dave's restaurants; $2.5 million decrease from the closure of 11 Bagger Dave's restaurants and one BWW restaurant; $1.1 million decrease in DRH-Owned BWW same store sales; $0.5 million decrease from impact of restaurants not falling in the sales comp-base because the restaurants have not been open for 18 months and lower Bagger Dave's average unit volumes.
With regard to the costs and expenses discussed below, results and trends that are unique and material within our individual reporting segments have been highlighted. Otherwise, the trends and results for the individual segments are consistent with our discussion of the composite trends and results.
Food, beverage, and packaging costs
increased
by
$2.5 million
, or
23.6%
, to
$13.1 million
in
Second
Quarter
2016
from
$10.6 million
in
Second
Quarter
2015
. The increase was primarily due to an increased number of restaurants operating in
2016
. Food, beverage, and packaging costs as a percentage of revenue
decreased
to
28.1%
in
Second
Quarter
2016
from
28.6%
in
Second
Quarter
2015
primarily due to commodity price relief and menu price increases. Average cost per pound for bone-in chicken wings,
our most significant input cost for our BWW concept, increased to $1.92 in
Second
Quarter
2016
compared to $1.77 in
Second
Quarter
2015
. For Bagger Dave's, we experienced commodity cost relief for beef which was offset by an increase in potato costs and a price decrease resulting from our plattering initiative in the latter half of 2015.
Compensation costs increased by
$2.6 million
, or
26.9%
, to
$12.4 million
in
Second
Quarter
2016
from
$9.8 million
in
Second
Quarter
2015
. The increase was primarily due to an increased number of restaurants operating in
2016
. Compensation costs as a percentage of sales
increased
to
26.7%
in
Second
Quarter
2016
from
26.5%
in
Second
Quarter
2015
due to higher average hourly wages.
Occupancy costs
increased
by
$0.6 million
, or
25.4%
, to
$3.1 million
in
Second
Quarter
2016
from
$2.4 million
in
Second
Quarter
2015
. This increase is primarily due to the increased number of restaurants operating in
2016
. Occupancy as a percentage of sales remained flat at
6.6%
in
Second
Quarter
2016
and
Second
Quarter
2015
.
Other operating costs
increased
by
$1.9 million
, or
24.0%
, to
$9.7 million
in
Second
Quarter
2016
from
$7.8 million
in
Second
Quarter
2015
. The increase was primarily due to an increased number of restaurants operating in
2016
. Other operating costs as a percentage of sales
decreased
to
20.9%
in
Second
Quarter
2016
from
21.2%
in
Second
Quarter
2015
.
General and administrative expenses
decreased
by
$2.9 million
, or
50.4%
, to
$2.8 million
in
Second
Quarter
2016
from
$5.7 million
in
Second
Quarter
2015
. This decrease was primarily due to settlement and expenses related to a wage-claim litigation occurring in Second Quarter 2015 and additional salaries and marketing expense directly related to the acquisition of 18 locations, partially offset by the decrease in salaries and marketing expenses directly related to closures. General and administrative expenses as a percentage of sales
decreased
to
6.1%
in
Second
Quarter
2016
from
15.4%
in
Second
Quarter
2015
.
Pre-opening costs
increased
by
$72,729
, or
12.6%
, to
$649,119
in
Second
Quarter
2016
from
$576,390
in
Second
Quarter
2015
. DRH and its wholly-owned subsidiaries (collectively, the "Company") opened three new restaurants in the Second Quarter
2016
(one Bagger Dave's and two BWW) and opened one Bagger Dave's restaurant and one BWW relocation in
Second
Quarter
2015
. Pre-opening costs as a percentage of sales
decreased
to
1.4%
in
Second
Quarter
2016
from
1.6%
in
Second
Quarter
2015
.
Depreciation and amortization
increased
by
$1.2 million
, or
35.4%
, to
$4.4 million
in
Second
Quarter
2016
from
$3.3 million
in
Second
Quarter
2015
. This increase was primarily due to an increased number of restaurants operating in
2016
driven by the acquisition of 18 BWW locations. Depreciation and amortization as a percentage of sales
increased
to
9.5%
in
Second
Quarter
2016
from
8.8%
in
Second
Quarter
2015
primarily due to the impact of the 18 acquired locations which had higher average depreciation and amortization expense as a percentage of sales.
Impairment and loss (gain) on asset disposal
decreased
by
$2.9 million
, or
126.3%
, to a gain of
$0.6 million
in
Second
Quarter
2016
from a loss of
$2.3 million
in
Second
Quarter
2015
due to the sale of the Detroit Bagger Dave's building in the Second Quarter 2016 and the asset impairment associated with the closure of three Bagger Dave's locations in Second Quarter 2015. Impairment and loss (gain) on asset disposal as a percentage of sales was
1.3%
in
Second
Quarter
2016
versus
6.3%
in
Second
Quarter
2015
.
Results of Operations for the Six Months Ended
June 26, 2016
and
June 28, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 26, 2016
|
|
Percent of sales
|
|
June 28, 2015
|
|
Percent of sales
|
BWW
|
|
$
|
84,094,433
|
|
|
88.7
|
%
|
|
$
|
61,462,790
|
|
|
80.5
|
%
|
Bagger Dave's
|
|
10,709,412
|
|
|
11.3
|
%
|
|
14,849,380
|
|
|
19.5
|
%
|
Total revenue
|
|
94,803,845
|
|
|
100.0
|
%
|
|
76,312,170
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, beverage, and packaging costs
|
|
|
|
|
|
|
|
|
BWW
|
|
23,480,217
|
|
|
27.9
|
%
|
|
17,508,564
|
|
|
28.5
|
%
|
Bagger Dave's
|
|
3,274,108
|
|
|
30.6
|
%
|
|
4,500,609
|
|
|
30.3
|
%
|
Food, beverage, and packaging costs
|
|
26,754,325
|
|
|
28.2
|
%
|
|
22,009,173
|
|
|
28.8
|
%
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
|
|
|
|
|
|
BWW
|
|
20,796,263
|
|
|
24.7
|
%
|
|
14,498,208
|
|
|
23.6
|
%
|
Bagger Dave's
|
|
4,094,458
|
|
|
38.2
|
%
|
|
5,410,755
|
|
|
36.4
|
%
|
Compensation costs
|
|
24,890,721
|
|
|
26.3
|
%
|
|
19,908,963
|
|
|
26.1
|
%
|
|
|
|
|
|
|
|
|
|
Occupancy costs
|
|
|
|
|
|
|
|
|
BWW
|
|
5,540,567
|
|
|
6.6
|
%
|
|
3,460,345
|
|
|
5.6
|
%
|
Bagger Dave's
|
|
681,353
|
|
|
6.4
|
%
|
|
1,344,572
|
|
|
9.1
|
%
|
Occupancy costs
|
|
6,221,920
|
|
|
6.6
|
%
|
|
4,804,917
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
Other operating costs
|
|
|
|
|
|
|
|
|
BWW
|
|
16,788,991
|
|
|
20.0
|
%
|
|
12,660,074
|
|
|
20.6
|
%
|
Bagger Dave's
|
|
2,178,454
|
|
|
20.3
|
%
|
|
3,111,955
|
|
|
21.0
|
%
|
Closure-related items
|
|
755,652
|
|
|
0.8
|
%
|
|
—
|
|
|
—
|
%
|
Other operating costs
|
|
19,723,097
|
|
|
20.8
|
%
|
|
15,772,029
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
5,477,737
|
|
|
5.8
|
%
|
|
8,171,850
|
|
|
10.7
|
%
|
Pre-opening costs
|
|
921,483
|
|
|
1.0
|
%
|
|
1,669,890
|
|
|
2.2
|
%
|
Depreciation and amortization
|
|
8,709,900
|
|
|
9.2
|
%
|
|
6,408,023
|
|
|
8.4
|
%
|
Impairment and loss (gain) on asset disposal
|
|
(543,623
|
)
|
|
(0.6
|
)%
|
|
2,468,467
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
92,155,560
|
|
|
97.2
|
%
|
|
81,213,312
|
|
|
106.4
|
%
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
$
|
2,648,285
|
|
|
2.8
|
%
|
|
$
|
(4,901,142
|
)
|
|
(6.4
|
)%
|
Revenue for Year to Date
2016
was
$94.8 million
, an increase of
$18.5 million
, or
24.2%
, over the
$76.3 million
of revenue generated during Year to Date
2015
. The increase was attributable to the following: $20.9 million increase from the acquisition of 18 BWW locations; $7.7 million increase from nine new restaurant openings consisting of five BWW restaurants and four Bagger Dave's restaurants; $5.0 million decrease from the closure of 11 Bagger Dave's restaurants and one BWW restaurant; $2.9 million decrease in DRH-Owned BWW same store sales; $2.2 million decrease from impact of restaurants not falling into the sales comp-base because the restaurants have not been open for 18 months.
With regard to the costs and expenses discussed below, results and trends that are unique and material within our individual reporting segments have been highlighted. Otherwise, the trends and results for the individual segments are consistent with our discussion of the composite trends and results.
Food, beverage, and packaging costs
increased
by
$4.7 million
, or
21.6%
, to
$26.8 million
in Year to Date
2016
from
$22.0 million
in Year to Date
2015
. The increase was primarily due to an increased number of restaurants operating in
2016
. Food, beverage, and packaging costs as a percentage of revenue
decreased
to
28.2%
in Year to Date
2016
from
28.8%
in Year to Date
2015
primarily
due to commodity price relief and menu price increases. Average cost per pound for bone-in chicken wings, our most significant input cost for our BWW concept, increased to $1.92 in Year to Date
2016
compared to $1.84 in Year to Date
2015
. For Bagger Dave's, we experienced commodity cost relief for beef which was offset by an increase in potato costs and a price decrease resulting from our plattering initiative in the latter half of 2015.
Compensation costs increased by
$5.0 million
, or
25.0%
, to
$24.9 million
in Year to Date
2016
from
$19.9 million
in Year to Date
2015
. The increase was primarily due to an increased number of restaurants operating in
2016
. Compensation costs as a percentage of sales
increased
to
26.3%
in Year to Date
2016
from
26.1%
in Year to Date
2015
due to higher average hourly wages.
Occupancy costs
increased
by
$1.4 million
, or
29.5%
, to
$6.2 million
in Year to Date
2016
from
$4.8 million
in Year to Date
2015
. This increase is primarily due to the increased number of restaurants operating in
2016
. Occupancy as a percentage of sales
increased
to
6.6%
in Year to Date
2016
from
6.3%
in Year to Date
2015
primarily due to the impact of the 18 acquired BWW locations, which had higher average occupancy costs as a percentage of sales and lower comparable sales over the same period last year. This was partially offset by lower occupancy costs as a percentage of sales for Bagger Dave's due to the recent closure of underperforming locations.
Other operating costs
increased
by
$4.0 million
, or
25.1%
, to
$19.7 million
in Year to Date
2016
from
$15.8 million
in Year to Date
2015
. The increase was primarily due to an increased number of restaurants operating in
2016
. Other operating costs as a percentage of sales remained relatively flat at
20.8%
for Year to Date
2016
and
20.7%
in Year to Date
2015
.
General and administrative expenses
decreased
by
$2.7 million
, or
33.0%
, to
$5.5 million
in Year to Date
2016
from
$8.2 million
in Year to Date
2015
. This decrease was primarily due to settlement and expenses related to a wage-claim litigation occurring in 2015 and additional salaries and marketing expense directly related to the acquisition of 18 locations, partially offset by the decrease in salaries and marketing expenses directly related to closures. General and administrative expenses as a percentage of sales
decreased
to
5.8%
in Year to Date
2016
from
10.7%
in Year to Date
2015
.
Pre-opening costs
decreased
by
$0.7 million
, or
44.8%
, to
$0.9 million
in Year to Date
2016
from
$1.7 million
in Year to Date
2015
. The Company opened three new restaurants in Second Quarter
2016
(one Bagger Dave's and two BWW) and opened one Bagger Dave's restaurant and one BWW relocation in
Second
Quarter
2015
. There were five openings in the previous year Fourth Quarter 2014, which contributed to carry-over costs in First Quarter 2015. Pre-opening costs as a percentage of sales
decreased
to
1.0%
in Year to Date
2016
from
2.2%
in Year to Date
2015
.
Depreciation and amortization
increased
by
$2.3 million
, or
35.9%
, to
$8.7 million
in Year to Date
2016
from
$6.4 million
in Year to Date
2015
. This increase was primarily due to an increased number of restaurants operating in
2016
driven by the acquisition of 18 BWW locations. Depreciation and amortization as a percentage of sales
increased
to
9.2%
in Year to Date
2016
from
8.4%
in Year to Date
2015
primarily due to the impact of the 18 acquired locations which had higher average depreciation and amortization expense as a percentage of sales.
Impairment and loss (gain) on asset disposal
decreased
by
$3.0 million
, or
122.0%
, to a gain of
$0.5 million
in Year to Date
2016
from a loss of
$2.5 million
in Year to Date
2015
due to the sale of the Detroit Bagger Dave's building in Second Quarter 2016 and the asset impairment associated with the closure of three Bagger Dave's location in Second Quarter 2015. Impairment and loss (gain) on asset disposal as a percentage of sales was
0.6%
in Year to Date
2016
versus
3.2%
in Year to Date
2015
.
INTEREST AND TAXES
Interest expense was
$1.4 million
and
$0.6 million
during
Second
Quarter
2016
and
Second
Quarter
2015
, respectively. Interest expense was
$2.9 million
and
$1.0 million
during Year to Date
2016
and Year to Date
2015
, respectively. The increase was primarily due to the increased debt related to the acquisition of 18 BWW locations occurring in the Second Quarter 2015 along with the building of new restaurants.
For
Second
Quarter
2016
, DRH had an income tax
benefit
of
$0.3 million
compared to
Second
Quarter
2015
income tax
benefit
of
$2.0 million
. For Year to Date
2016
and Year to Date
2015
, DRH had an income tax
benefit
of
$0.4 million
compared to
Second
Quarter
2015
income tax
benefit
of
$2.1 million
. The decrease in the income tax benefit is primarily related to the decrease in loss before income taxes.
LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS
On June 29, 2015, the Company, entered into a $155.0 million Senior Secured Credit Facility with Citizens Bank, N.A. (the “June 2015 Senior Secured Credit Facility”). The June 2015 Senior Secured Credit Facility consists of a $120.0 million Term Loan (the "June 2015 Term Loan"), a $30.0 million development line of credit (the "June 2015 DLOC") and a $5.0 million revolving line of credit (the "June 2015 RLOC"). The Company immediately used approximately $65.5 million of the June 2015 Term Loan to refinance existing outstanding debt and $54.0 million of the June 2015 Term Loan to finance an acquisition occurring in the second quarter 2015. The remaining balance of the June 2015 Term Loan, approximately $0.5 million, was used to pay the fees, costs and expenses arising in connection with the closing of the loans constituting the June 2015 Senior Secured Credit Facility. The June 2015 Term Loan is for a term of five years. Payments of principal shall be based upon a 12-year straight-line amortization schedule, with monthly principal payments of $833,333 plus accrued interest. The interest rate for the Term Loan is LIBOR plus an applicable margin which ranges from 2.25% to 3.5%. The entire remaining outstanding principal and accrued interest on the Term Loan is due and payable on the Term Loan maturity date of June 29, 2020. The June 2015 DLOC is for a term of two years and is convertible upon maturity into a term note based on the terms of the agreement at which time monthly principal payments will be due based on a 12-year straight-line amortization schedule, plus interest, through maturity on June 29, 2020. The June 2015 RLOC is for a term of five years and bears interest at LIBOR plus an applicable margin, no amount was outstanding as of
June 26, 2016
.
We believe that along with our current cash balance, the cash flow from operations and availability of credit will be sufficient to meet our operational, development and debt obligations for at least the next 12 months.
Our capital requirements are primarily dependent upon the pace of our new restaurant growth plan. The new restaurant growth plan is primarily dependent upon economic conditions, the real estate market and resources to both develop and operate new restaurants. In addition to new restaurants, our capital expenditure outlays are also dependent on the cost and potential obligation to invest in maintenance, facility upgrades, capacity enhancements, information technology and other general corporate capital expenditures.
The amount of capital required to open a new restaurant is largely dependent on whether we build-out an existing leased space or build from the ground up. Our preference is to find leased space for new restaurant locations, but depending on the availability of real estate in specific markets, we will take advantage of alternative strategies, which may include land purchases, land leases, and ground-up construction of a building to house our restaurant operation. We expect that a build-out of a new DRH-owned BWW restaurant will require an estimated cash investment of $1.7 million to $2.1 million (excluding potential tenant incentives). Excluding land and building, we expect the build-out of a new Bagger Dave’s restaurant will, on average, require a total cash investment of $1.1 million to $1.4 million (excluding potential tenant incentives). We expect to spend up to $0.3 million per restaurant for pre-opening expenses. Depending on individual lease negotiations, we may receive cash tenant incentives of up to $0.4 million. The projected cash investment per restaurant is based on recent opening costs and future projections and may fluctuate based on construction costs specific to new restaurant locations.
We target a cash on cash payback on our initial total capital investment of less than four years. The expected payback is subject to how quickly we reach our target sales volume and the cost of construction.
Cash flow from operations for Year to Date
2016
was
$5.9 million
compared with
$4.6 million
for Year to Date
2015
. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses.
For 2016, capital expenditures are anticipated to be between $14.0 million and $16.0 million. We plan to use the capital as follows: 50.0% for new restaurant openings; and the remaining 50.0% for restaurant remodels, upgrades and other general corporate purposes. Any excess cash from operations will be used to accelerate pay down of our debt. With planned capital expenditures significantly lower than historical and additional operating cash flows, both of which are due to the fact that we have just recently integrated 18 additional BWW locations and closed underperforming restaurants, we are targeting a net debt-to-adjusted EBITDA ratio of 3.0x by mid-2018.
Although investments in new restaurants are an integral part of our strategic and capital expenditures plan, we also believe that reinvesting in existing restaurants is an important factor and necessary to maintain the overall positive dining experience for our guests. Depending on the age of the existing restaurants, upgrades range from $50,000 (for minor interior refreshes) to $1.3 million (for a full extensive remodel of the restaurant), we target remodels of $0.6 to $0.7 million to upgrade a typical BWW restaurant to the new Stadia design. The Company's strategy is to fully remodel existing BWW restaurants to the new Stadia design at time of scheduled refresh or remodel typically within seven years or less of opening.
Mandatory Upgrades
In fiscal year
2016
, we will invest in seven mandatory remodels of existing DRH-owned BWW restaurants. Four of the seven remodels have been completed, one is near completion and we expect the remaining two will be completed by the end of fiscal 2016. These will primarily be funded through cash from operations, supplemented by drawing off our development line of credit.
Discretionary Upgrades and Relocations
In fiscal year
2016
, the Company plans to invest additional capital to provide minor upgrades to a number of its existing locations, all of which we expect to fund with cash from operations. These improvements will primarily consist of refreshing interior building finishes audio/visual equipment upgrades, and patio upgrades. In fiscal year
2016
, we do not have any planned relocations. The decision to relocate is typically driven by timing of our current lease agreements and the availability of real estate that we deem to be a better long-term investment. Relocations are funded by a combination of cash from operations and borrowing from our credit facility.
Inflation
Our profitability is dependent, among other things, on our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy, and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our restaurant guests. The impact of inflation on food, labor, energy, and occupancy costs can significantly affect the profitability of our restaurant operations.
All of our restaurant staff members are paid hourly rates based on the federal minimum wage. Certain operating costs, such as taxes, insurance, and other outside services continue to increase with the general level of inflation or higher and may also be subject to other cost and supply fluctuations outside of our control.
While we have been able to partially offset inflation and other changes in the costs of key operating resources by gradually increasing prices for our menu items, more efficient purchasing practices, productivity improvements, and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our menu pricing flexibility. In addition, macroeconomic conditions could make additional menu price increases imprudent. There can be no assurance that all future cost increases can be offset by increased menu prices or that increased menu prices will be fully absorbed by our restaurant guests without any resulting changes in their visit frequencies or purchasing patterns. There can be no assurance that we will continue to generate increases in comparable restaurant sales in amounts sufficient to offset inflationary or other cost pressures.
OFF-BALANCE SHEET ARRANGEMENTS
The Company’s ADA requires DRH to open
42
BWW restaurants within its designated "development territory” by April 1, 2021. As of
June 26, 2016
we have opened
29
of the
42
restaurants required by the ADA. With the remaining
13
restaurants, we expect the Company will operate
77
BWW restaurants by 2020, exclusive of potential additional BWW restaurant acquisitions.
Impact of New Accounting Standards
See Note 1, "Business and Summary of Significant Accounting Policies," included in Part 1, Item 1, "Notes to Interim Consolidated Financial Statements," of this Quarterly Report.
CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us 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 income and expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting policies have not changed materially from those previously reported in our Annual Report on Form 10-K for the fiscal year ended
December 27, 2015
.