ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this document. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” and elsewhere in this document.
Overview
DRH is a single-concept restaurant company operating
64
BWW franchises. As the largest franchisee of BWLD, we provide a unique guest experience in a casual and inviting environment. We are committed to providing value to our guests by offering generous portions of flavorful food in an upbeat and entertaining atmosphere. We believe BWW is a uniquely positioned restaurant brand designed to maximize guest appeal, offering competitive price points and a family-friendly atmosphere, which we believe enables strong performance through economic cycles. We were incorporated in Nevada in 2006 and are headquartered in the Detroit metropolitan area. Our current
64
restaurants are located in Florida, Illinois, Indiana, Michigan, and Missouri.
Spin-Off of Bagger Dave’s
On December 25, 2016, DRH completed the Spin-Off of Bagger Dave’s into a new, independent publicly traded company. The Spin-Off was achieved through the distribution of 100 percent of the outstanding capital stock of Bagger Dave’s pro rata to holders of DRH common stock on a one-for-one basis. DRH decided to spin-off Bagger Dave's after considering all reasonable strategic and structural alternatives because of the disparity between the operating models of its two brands, BWW as franchisee, and Bagger Dave's as an owned concept. The management teams of Bagger Dave's and DRH agreed that the nature of the two concepts varied greatly, and that each will be more valuable and operate more effectively independently of one another. Bagger Dave's is a concept developed by the management team of DRH. In contrast to operating a franchised concept like BWW, it has no development restrictions and the flexibility to enhance brand attributes such as logos, trade dress and restaurant design, change its menu offering and improve its operational model in an effort to better align with guest expectations. To manage these functions effectively, specific resources are required that are not necessary for a franchisee. For example, menu development, purchasing and brand marketing are critical to the success of Bagger Dave's but not necessary for a BWW franchisee since these functions are managed by the franchisor. Additional considerations were contemplated with respect to growth potential. As a start-up brand, Bagger Dave's has a higher growth potential while BWW, being a mature brand and as a franchisee, has more limits to its organic growth potential due to its development rights.
As part of the Spin-Off transaction, DRH agreed to fund a one-time $2 million cash distribution to Bagger Dave's and agreed that, if deemed necessary within twelve months after the date of the Spin-Off, up to $1 million of additional cash funding may be considered upon approval by DRH and its lenders. The transaction was structured such that Bagger Dave's was released as a borrower under the DRH senior secured credit facility. Additionally, DRH retained substantially all of the tax benefits (net operating loss and tax credit carryforwards) generated prior to the date of the transaction.
Our Growth Strategies and Outlook
Our strategy is comprised of the following key growth components:
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pursue disciplined restaurant growth through a combination of both organic expansion and strategic acquisitions;
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deliver comparable restaurant sales growth by providing our guest with an exceptional experience and executing effective marketing and promotional strategies; and
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leverage our infrastructure to grow profit margins.
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We have a disciplined strategy for opening new restaurants. We also evaluate the potential for strategic acquisitions of Buffalo Wild Wings franchises where we have an opportunity to leverage our infrastructure and operational expertise.
We will continue to grow our restaurant base under our current ADA, but likely will have fewer new restaurant openings than previously agreed. We believe our historical track record of acquiring and integrating restaurants provides us with additional future growth opportunities and we will seek to take advantage of strategic acquisitions that may be available in the marketplace.
The Company opened two new restaurants in
2016
. Over the next five years, we expect to open 3-5 new BWW restaurants, including one in 2017 (for additional discussion of our growth strategies and outlook, see the section entitled “Business - Growth Strategy”).
Performance Indicators
We use several metrics to evaluate and improve each restaurant’s performance that include: sales growth, guest satisfaction, hourly compensation costs and food, beverage and packaging costs. We also use the following key performance indicators in evaluating restaurant performance:
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Comparable Restaurant Sales
. We consider a restaurant to be comparable following the eighteenth month of operation. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable sales can reflect changes in guest count trends, changes in average check size and changes in pricing.
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Restaurant-Level Contribution.
Also referred to as Restaurant-Level EBITDA, this metric presents a restaurant's on-going profit contribution and is defined as net revenue less costs of sales, labor, occupancy and operational expenses. It is representative of a restaurant's cash flow and is often times presented and measured as a percentage of sales in comparison to other restaurants.
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Restaurant Openings
The following table outlines the restaurant unit information for each fiscal year from 2012 through 2016, excluding Bagger Dave's restaurants.
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2016
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2015
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2014
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2013
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2012
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Restaurants open at the beginning of year
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62
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42
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36
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33
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22
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Openings/(Closures):
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New Restaurant Openings
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2
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3
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3
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3
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3
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Restaurant Acquisitions
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—
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18
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3
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—
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8
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Restaurant Closures
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—
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(1
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)
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—
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—
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—
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Total restaurants open at the end of year
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64
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62
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42
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36
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33
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Our Fiscal Year
The Company utilizes a 52- or 53-week accounting period that ends on the last Sunday in December. Fiscal year
2016
ended on
December 25, 2016
and fiscal year
2015
ended on
December 27, 2015
. Each fiscal year was comprised of 52 weeks.
Key Financial Definitions
Revenue.
Revenue primarily consists of food and beverage sales, and merchandise sales, such as BWW sauce. Revenue is presented net of discounts associated with each sale. Revenue in a given period is directly influenced by the number of operating weeks in such period, the number of restaurants we operate and changes in restaurant sales.
Food, Beverage, Packaging and Merchandise Related Costs.
The components of food, beverage packaging and merchandise related costs are variable in nature, change with sales volume and are subject to increases or decreases based on fluctuations in market prices and commodity costs.
Compensation Costs.
Compensation costs include restaurant management salaries, front- and back-of-house hourly wages, and restaurant-level manager bonuses, team member benefits and payroll taxes.
Occupancy Costs.
Occupancy costs include rent charges, both fixed and variable, as well as common area maintenance costs, property insurance and taxes, the amortization of tenant allowances and the adjustment to straight-line rent. These expenses are generally fixed, but a portion may vary with an increase in sales if the lease contains a percentage rent provision.
Other Operating Costs.
Other operating costs consist primarily of restaurant-related operating costs, such as supplies, utilities, repairs and maintenance, travel cost, insurance, credit card fees, recruiting and security. This expense category also includes franchise royalty and national advertising fund expenses. These costs generally increase with higher sales volume but decline as a percentage of revenue.
General and Administrative Expenses.
General and administrative expenses include costs associated with administrative and operational support functions including senior and supervisory management and staff compensation costs (including share-based compensation) and benefits, marketing and advertising expenses, travel, legal and professional fees, information systems, support office rent and other related support costs.
Pre-Opening Costs.
Restaurant pre-opening costs consist of expenses incurred prior to opening a new restaurant, including manager salaries, relocation costs, supplies, recruiting expenses, initial new market public relations costs, pre-opening activities, team member payroll and related training costs for new team members. Restaurant pre-opening expenses also include rent recorded during the period between date of lease inception and the restaurant opening date. In addition, the Company includes restaurant labor costs that exceed the historical average for the first three months of restaurant operations that are attributable to training and initial staff turnover.
Depreciation and Amortization
. Depreciation and amortization includes depreciation on fixed assets, including equipment and leasehold improvements, and amortization of certain intangible assets for restaurants.
Interest Expense
. Interest expense consists primarily of interest on our outstanding indebtedness and the amortization of our debt issuance costs, reduced by capitalized interest.
Discontinued Operations.
As a result of the Spin-Off of Bagger Dave’s effective December 25, 2016, the assets, liabilities, results of operations and cash flows from operating and investing activities are presented as discontinued operations.
RESULTS OF OPERATIONS
The following table presents the consolidated statements of operations for the fiscal years ended
December 25, 2016
and
December 27, 2015
with each line item in dollars and as a percentage of revenue.
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Fiscal Years-Ended
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2016
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2015
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Total revenue
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100.0
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%
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100.0
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%
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Operating expenses
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Food, beverage, and packaging
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28.1
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%
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28.1
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%
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Compensation
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24.8
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%
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24.4
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%
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Occupancy
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6.8
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%
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6.2
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%
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Other operating costs
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20.9
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%
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21.6
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%
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General and administrative expenses
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5.6
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%
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7.9
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%
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Pre-opening costs
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0.4
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%
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1.0
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%
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Depreciation and amortization
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8.8
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%
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8.2
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%
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Loss on asset disposals
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0.2
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%
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0.7
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%
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Total operating expenses
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95.6
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%
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98.1
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%
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Operating profit
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4.4
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%
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1.9
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%
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Interest expense
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(3.5
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)%
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(2.9
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)%
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Other income (expense), net
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(0.1
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)%
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0.5
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%
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Income (loss) from continuing operations before income taxes
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0.8
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%
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(0.5
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)%
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Income tax benefit
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(1.4
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)%
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(0.1
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)%
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Income (loss) from continuing operations
|
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2.2
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%
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(0.4
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)%
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Loss from discontinued operations before income taxes
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(6.1
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)%
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(17.7
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)%
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Income tax benefit from discontinued operations
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(0.3
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)%
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(6.9
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)%
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Loss from discontinued operations
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(5.8
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)%
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(10.8
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)%
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Net loss
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(3.6
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)%
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(11.2
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)%
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FISCAL YEAR
2016
COMPARED WITH FISCAL YEAR
2015
Revenue
Total revenue for Fiscal Year
2016
was
$166.5 million
, an increase of
$21.7 million
, or
15.0%
, over revenue generated during Fiscal Year
2015
. The increase was attributable to the following:
$20.9 million
increase from the acquisition of 18 BWW locations;
$7.8 million
increase from two new restaurant openings in 2016 and three in 2015;
$1.2 million
decrease from the closure of 1 BWW location; and
$5.8 million
decrease in same-store sales. The decrease in same-store sales resulted from market headwinds in the casual dining sector, exacerbated by a fourth quarter calendar shift relative to 2015.
Operating Expenses
Food, beverage, packaging and merchandise related costs
increased
by
$6.1 million
, or
14.9%
, to
$46.8 million
in Fiscal Year
2016
from
$40.7 million
in Fiscal Year
2015
as a result of the increase in the number of restaurants. Food, beverage, and packaging cost as a percentage of sales remained flat to Fiscal Year
2015
at 28.1%. Commodity cost inflation driven primarily by bone-in chicken wing prices were offset by menu price increases and other commodity cost deflation. Average cost per pound for bone-in chicken wings increased to
$1.87
in Fiscal Year
2016
from
$1.81
in Fiscal Year
2015
.
Compensation costs
increased
by $
6.0 million
, or
17.1%
, to $
41.3 million
in Fiscal Year
2016
from $
35.3 million
in Fiscal Year
2015
. The increase was primarily due to the acquisition of 18 BWW locations occurring in the second half of 2015. Compensation cost as a percentage of sales
increased
to
24.8%
in Fiscal Year
2016
from
24.4%
in Fiscal Year
2015
primarily due to higher hourly and management wages.
Occupancy costs
increased
by $2.5 million, or
27.2%
, to $
11.4 million
in Fiscal Year
2016
from $
8.9 million
in Fiscal Year
2015
, primarily due to the increase in the number of restaurants operating in
2016
, including the acquisition of 18 BWW restaurants. Occupancy cost as a percentage of sales
increased
to
6.8%
in Fiscal Year
2016
from
6.2%
in Fiscal Year
2015
. The increase is driven primarily by rents from the sale leaseback of 7 previously owned properties.
Other operating costs
increased
by $3.5 million, or
11.3%
, to $
34.8 million
in Fiscal Year
2016
from $
31.3 million
in Fiscal Year
2015
primarily due to the increase in the number of restaurants operating in
2016
. Other operating cost as a percentage of sales
decreased
to
20.9%
in Fiscal Year
2016
from
21.6%
in Fiscal Year
2015
, as a result of cost savings initiatives.
General and administrative expenses
decreased
by $
2.1 million
, or
(18.6)%
, to $
9.3 million
in Fiscal Year
2016
from $
11.4 million
in Fiscal Year
2015
. This decrease was primarily due to settlement costs and expenses related to a wage-claim litigation occurring in 2015 and transitioning our accounting duties in house. General and administrative costs as a percentage of sales
decreased
to
5.6%
in Fiscal Year
2016
from
7.9%
in Fiscal Year
2015
.
Pre-opening costs
decreased
by $
0.8 million
, or
58.4%
, to $
0.6 million
in Fiscal Year
2016
from $
1.4 million
in Fiscal Year
2015
. The decrease in pre-opening costs was due to the timing, cost, and number of new restaurant openings during Fiscal Year 2016. The company opened two new restaurants in Fiscal Year 2016 versus two new restaurant openings and one relocation in Fiscal Year 2015. As a percentage of sales, pre-opening costs
decreased
to
0.4%
in Fiscal Year
2016
from
1.0%
in Fiscal Year
2015
.
Depreciation and amortization
increased
by $
2.8 million
, or
23.3%
, to $
14.7 million
in Fiscal Year
2016
from $
11.9 million
in Fiscal Year
2015
, primarily due to the increase in the total number of restaurants operating in
2016
. Depreciation and amortization as a percentage of sales
increased
to
8.8%
in Fiscal Year
2016
from
8.2%
in Fiscal Year
2015
primarily due to the impact of the 18 acquired restaurants, which had higher average depreciation expenses as a percentage of sales.
Impairment and loss on asset disposal
decreased
by $0.7 million or
65.0%
, to $
0.3 million
in Fiscal Year
2016
from $
1.0 million
in Fiscal Year
2015
. The decrease was primarily due to the closure of one restaurant in 2015 compared to none in 2016, and the sale leaseback transaction in 2015. Loss on disposal of assets as a percentage of sales,
decreased
to
0.2%
in Fiscal Year
2016
from
0.7%
in Fiscal Year
2015
.
Interest and Taxes
Interest expense was $
5.8 million
and $
4.2 million
during the years ended
December 25, 2016
and
December 27, 2015
, respectively. The increase was primarily due to the increased debt pertaining to the acquisition of 18 BWW locations occurring in June 2015 in addition to building of new restaurants in 2016.
In Fiscal Year
2016
we recorded an income tax benefit of
$2.3 million
compared with an income tax benefit of
$0.1 million
in Fiscal Year
2015
. The increase in the income tax benefit is primarily related to tax credits and losses generated during 2016 and retained by DRH as a result of a restructuring of the Bagger Dave's entities prior to the Spin-Off.
Loss from Operations of Discontinued Component
Loss from operations of discontinued component was $10.2 million and $25.6 million in 2016 and 2015, respectively. The decrease was attributable to lower impairment and loss on asset disposal charges in 2016, and to improved operating results of the discontinued component in 2016, both as result of the closure of 11 Bagger Dave’s underperforming locations in late-2015.
LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS
On June 29, 2015, the Company entered into a
$155.0 million
senior secured credit facility with a syndicate of lenders led by
Citizens (the “June 2015 Senior Secured Credit Facility”) with a senior lien on all the Company’s personal property and fixtures. The June 2015 Senior Secured Credit Facility consists of a
$120.0 million
term loan (the “June 2015 Term Loan”), a
$30.0 million
, subsequently amended to $23.0 million (see amendment details immediately following this paragraph), development line of credit (the “June 2015 DLOC”) and a
$5.0 million
(see amendment details immediately following this paragraph) 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 finance an acquisition discussed in Note 4. 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
.
On December 23, 2016, the Company entered into an amendment agreement for purposes of, among other things, releasing the Bagger Dave’s entities as borrowers and releasing all related liens on the Bagger Dave’s assets. In addition, the amendment (a) converted the amounts then outstanding under the June 2015 DLOC to a development facility term loan (the “DF Term Loan”), (b) canceled
$6.8
million previously available under the June 2015 DLOC, and (c) extended the maturity date on the remaining
$5.0
million under the June 2015 DLOC to June 29, 2018.
Payments of principal are based upon a
12
-year straight-line amortization schedule, with monthly principal payments totaling
$833,333
on the June 2015 Term and $126,385 on the DF Term Loan, plus accrued interest. The entire remaining outstanding principal and accrued interest on the June 2015 Term Loan and the DF Term Loan is due and payable on the maturity date of June 29, 2020. Availability under the June 2015 DLOC is subject to certain limitations relative to actual development costs, and outstanding balances convert into an additional DF Term Loan 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. There were no balances outstanding under the June 2015 DLOC at December 25, 2016. If the DLOC is not fully drawn by the end of the
two years
term, the outstanding principal balance becomes due based on the
12
amortization period with final payment due June 29, 2020. The June 2015 RLOC is for a term of
five years
.
The interest rate for each of the loans, as selected by the borrower, is based upon either a LIBOR or base rate (generally Prime or Fed Funds) plus an applicable margin, which ranges from 2.25% to 3.5% for LIBOR loans and from 1.25% to 2.5% for base rate loans, depending on the lease adjusted leverage ratio as defined in the agreement.
The current debt agreement contains various customary financial covenants generally based on the performance of the Company. The financial covenants consist of a minimum required debt service coverage ratio and a maximum permitted lease adjusted leverage ratio. As of
December 25, 2016
the Company was in compliance with the loan covenants.
We believe that our current cash balance, in addition to our cash flow from operations and availability of credit, will be sufficient to fund our present operations and meet our commitments on our existing debt. If suitable acquisition opportunities or working capital needs arise that require additional financing, we believe that our financial position and earnings history provide a sufficient base for obtaining additional financing resources at reasonable rates and terms. We may also issue additional shares or common or preferred stock to raise funds.
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 BWW restaurant will require an estimated cash investment ranging from $1.7 million to $2.5 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 which have historically been as high as $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, among other things, how quickly we reach our target sales volume and the cost of construction.
Cash flow from continuing operations for fiscal
2016
and
2015
was $
17.0 million
and $
16.8 million
, respectively. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses.
For 2016, our capital expenditures were $
12.5 million
. Approximately 46.2% of the capital was used for new restaurant openings and the remaining 53.8% for restaurant remodels, upgrades and other general corporate purposes.
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 million to upgrade a typical BWW restaurant to the new Stadia design. Our strategy is to fully remodel existing BWW restaurants to the new Stadia design at the time of a scheduled refresh or remodel, typically within seven years or less of opening.
After the Spin-Off of Bagger Dave’s, the Company retained certain tax benefits (net operating loss and tax credit carryforwards) in an amount sufficient to offset pre-tax income totaling over $50 million at current estimated tax rates. We expect to incur federal and/or state income tax liabilities when our tax benefits have become fully utilized.
Mandatory Upgrades
In fiscal 2016, all seven of the required remodels were completed. These were primarily funded through cash from operations, supplemented by our development line of credit. We are planning to complete at least two remodels for BWW locations in 2017.
Discretionary Upgrades and Relocations
In fiscal year 2016, the Company invested additional capital to provide minor upgrades to a number of its existing locations, all of which were funded by cash from operations. These improvements primarily consist of refreshing interior building finishes audio/visual equipment upgrades, and patio upgrades. In fiscal 2016, we did not have any 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 and discretionary remodels are funded by a combination of cash from operations and borrowing from our credit facility.
2017 Capital Plan
In 2017, we anticipate our capital expenses will range between $4.0 million and $6.0 million. Our capital expenses for 2017 will include the development of one new BWW restaurant, which is currently under construction. Our remaining capital needs will include two to four BWW remodels of existing locations and various maintenance-related capital expenditures. We expect to fund a portion of the new restaurant development with our DLOC and all other capital needs out of our free cash flow. The core element of our capital plan in 2017 is to improve our net debt leverage ratio by reducing our capital spending and using our free cash flow to pay down debt.
Contractual Obligations
The following table presents a summary of our contractual obligations as of
December 25, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than
one year
|
|
1 - 3 years
|
|
3 - 5 years
|
|
After 5 years
|
Long-term debt
1
|
|
$
|
121,186,020
|
|
|
11,313,112
|
|
|
22,642,927
|
|
|
87,229,981
|
|
|
—
|
|
Operating lease obligations
|
|
69,316,114
|
|
|
8,826,295
|
|
|
16,122,432
|
|
|
14,252,537
|
|
|
30,114,850
|
|
Commitments for restaurants under development
2
|
|
5,111,805
|
|
|
1,718,555
|
|
|
300,000
|
|
|
300,000
|
|
|
2,793,250
|
|
|
|
195,613,939
|
|
|
21,857,962
|
|
|
39,065,359
|
|
|
101,782,518
|
|
|
32,908,100
|
|
|
|
|
|
1
|
|
Amount represents the expected principal cash payments relating to our long-term debt and do not include any fair value adjustments or discounts/premiums or interest rate payments due to the variability of the rates. See Note 10 for additional details.
|
|
|
2
|
|
Amount represents capital expenditures DRH is obligated to pay for restaurants under development in addition to non-cancelable operating leases for these restaurants.
|
Impact of 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 related to 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
December 25, 2016
,
29
of the required
42
restaurants under the ADA had been opened for business. We have one additional restaurant in process and are in discussions with BWLD regarding the remaining
12
restaurants required by 2021. We expect the Company may continue to open new locations, but at a lower number over a longer period of time, under an amended ADA.
In conjunction with the Spin-Off, DRH entered into a transition services agreement (the "TSA") with Bagger Dave's pursuant to which DRH will provide certain information technology and human resources support, limited accounting support, and other minor administrative functions at no charge. The TSA is intended to assist the discontinued component in efficiently and seamlessly transitioning to stand on its own. The agreement expires in December 2017 at which time the parties may negotiate which services will be required on an ongoing basis and the fees that will be charged for such services.
After the Spin-Off, the Company remains liable for guarantees of certain Bagger Dave’s leases. These guarantees cover 18 separate leases, several of which relate to restaurants previously closed and being operated by a new tenant under either a sub-lease or a new lease.
The Company has determined that its maximum exposure resulting from the lease guarantees includes approximately $9.8 million of future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance requirements under the leases. The terms and conditions of the guarantees vary, and each guarantee has an expiration date which may or may not correspond with the end of the underlying lease term. These expiration dates range from one (1) year to thirteen (13) years as of December 25, 2016. In the event that the Company is required to perform under any of its lease guarantees, we do not believe a liability to the Company would be material because it would first seek to minimize its exposure by finding a suitable tenant to sub-lease the space. In many cases, a replacement tenant can be found and the lessor could agree to release the Company from its future guarantee obligation. During 2015, 11 Bagger Dave’s locations were closed, 9 of which had DRH lease guarantees. Of the 9 guaranteed leases, new tenants were found to step into the Company’s obligations for 5 locations in 3 to 14 months from the date of closure, 3 guarantees expired or were terminated, and 1 remains an obligation of the Company.
Further, in conjunction with the Spin-Off, DRH entered into a transition services agreement (the "TSA") with Bagger Dave's pursuant to which DRH will provide certain information technology and human resources support, limited accounting support, and other minor administrative functions at no charge. The TSA is intended to assist the discontinued component in efficiently and seamlessly transitioning to stand on its own. The current terms of the TSA expire in December 2017 at which time the parties may negotiate which services will be required on an ongoing basis and the fees that will be charged for such services, and at any time thereafter the TSA can be terminated by the Company with 10 days written notice.
Critical Accounting Polices and Estimates
The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, “Nature of Business and Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material. We consider an accounting estimate to be critical if it requires assumptions to be made and changes in these assumptions could have a material impact on our consolidated financial condition or results of operations.
Management considers these policies critical because they are both important to the portrayal of the Company’s financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. The Company’s management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Company’s Board of Directors.
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. For fiscal years ended
December 25, 2016
and
December 27, 2015
no impairment losses were recognized in continuing operations.
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.
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 or more frequently if impairment indicators are present 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 in fiscal
2016
or
2015
in continuing operations.
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 both
December 25, 2016
and
December 27, 2015
, we had goodwill of $
50.1 million
. The goodwill is assigned to the Company's BWW reporting unit, which, due to the Spin-Off of Bagger Dave's on December 25, 2016, represents the Company's only reporting unit.
The Company assesses goodwill for impairment on an annual basis by reviewing relevant qualitative and quantitative factors. More frequent evaluations may be required if the Company experiences changes in its business climate or as a result of other triggering events that take place. If carrying value exceeds fair value, a possible impairment exists and further evaluation is performed.
ASC Topic 350-20,
Intangibles - Goodwill and Other
, gives companies the option to perform a one-step (Step zero) qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we assess relevant events and circumstances. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, the first and second steps of the goodwill impairment test would be necessary. Conversely, if it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, further action would not be required.
The quantitative 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. 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 25, 2016
, and as a result of step zero of the qualitative assessment, the Company has concluded that its goodwill is recoverable. As of
December 27, 2015
, based on our quantitative analysis, goodwill was considered recoverable.
Income Taxes
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
In accordance with the provisions of FASB ASC 740,
Income Taxes
, (“ASC 740”)
a valuation allowance is established when it is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. On December 25, 2016 we completed the Spin-Off of Bagger Dave’s, which had previously generated significant pre-tax losses. After the Spin-Off, the majority of the net deferred tax assets were retained by the Company, which in its continuing operations has a history of profitability and is expected to continue to generate pre-tax income in the future. This expected operating performance combined with the planned opening of additional BWW restaurants will provide future taxable income that will enable the Company to utilize the tax benefits prior to their expirations, which begin in 2028. As a result, there was no valuation allowance recorded for both fiscal years ended
December 25, 2016
and
December 27, 2015
. Management continually reviews the likelihood that deferred tax assets will be realized and the Company recognizes these benefits only as reassessment indicates that it is more likely than not that such tax benefits will be realized. While there is no allowance recorded against the deferred tax assets of the continuing operations, the Company incurred a one-time charge against the benefit for income taxes of
$1.8 million
related to discontinued operations. This charge is the result of certain deferred tax assets relating to discontinued operations that were determined to be unrealizable. The valuation allowance deferred tax charge was allocable to continuing operations in accordance with ASC 740.
The Company applies the provisions of ASC 740, regarding the accounting for uncertainty in income taxes. The Company classifies all interest and penalties as income tax expense. There are
no
accrued interest amounts or penalties related to uncertain tax positions as of
December 25, 2016
and
December 27, 2015
.
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. Our derivative financial instruments
are recorded at fair value on the balance sheet. The effective portion of changes in the fair value of derivatives which qualify for hedge accounting is recorded in accumulated other comprehensive income (loss) and is recognized in the statement of operations when the hedged item affects earnings. Ineffective portion of the change in fair value of a hedge would be recognized in income immediately. 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 interest rate swap agreements associated with the Company’s current debt 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 liabilities depending on the fair value of the swaps. See Note
10
, Note
17
and Note
18
for additional information on the interest rate swap agreements.
Share-based Compensation
The Company estimates the fair value of stock option awards utilizing the Black-Scholes pricing model. The fair value of the awards is amortized as compensation expense on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The fair value of restricted shares is equal to the number of restricted shares issued times the Company’s stock price on the date of grant and is amortized as compensation expense on a straight-line basis over the service period of the award.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes to Consolidated Financial Statements, and the Report of Independent Registered Accounting Firm are included in this Annual Report and are incorporated herein by reference.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Diversified Restaurant Holdings, Inc. and Subsidiaries
Southfield, Michigan
We have audited the accompanying consolidated balance sheets of Diversified Restaurant Holdings, Inc. and Subsidiaries as of
December 25, 2016
and
December 27, 2015
and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit as of December 25, 2016 and for the year then ended, included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diversified Restaurant Holdings, Inc. and Subsidiaries at
December 25, 2016
and
December 27, 2015
, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 of the consolidated financial statements, on December 25, 2016, the Company completed the spin-off of its Bagger Dave's business through a tax-free transaction. As a result of the spin-off, the financial position, results of operations and cash flows related to the Bagger Dave's business have been presented as discontinued operations for all periods presented.
/s/ BDO USA, LLP
Troy, Michigan
March 27, 2017
REPORT BY DIVERSIFIED RESTAURANT HOLDINGS, INC.'S MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective system of internal control over financial reporting that is designed to produce reliable financial statements presented in conformity with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal control. Accordingly, even an effective system of internal control can provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Company's system of internal control over financial reporting that is designed to produce reliable financial statements presented in conformity with generally accepted accounting principles as of
December 25, 2016
. This assessment was based on criteria for effective internal control over financial reporting described in
Internal Control — Integrated Framework
(2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of
December 25, 2016
, Diversified Restaurant Holdings, Inc. maintained an effective system of internal control over financial reporting that is designed to produce reliable financial statements presented in conformity with generally accepted accounting principles based on those criteria.
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management's report in this Annual Report. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to Section 404(c) of the Sarbanes-Oxley Act.
|
|
|
|
Diversified Restaurant Holdings, Inc.
|
|
|
|
|
|
/s/ David G. Burke
|
Dated:
|
March 27, 2017
|
David G. Burke
|
|
|
Chairman of the Board, President, Chief Executive Officer, and Principal Executive Officer
|
|
|
|
|
|
|
|
|
/s/ Phyllis Knight
|
Dated:
|
March 27, 2017
|
Phyllis Knight
|
|
|
Chief Financial Officer, Treasurer, Principal Financial Officer, and Principal Accounting Officer
|
|
|
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
|
December 27, 2015
|
ASSETS
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,021,126
|
|
|
$
|
13,499,890
|
|
Accounts receivable
|
|
276,238
|
|
|
247,323
|
|
Inventory
|
|
1,700,604
|
|
|
1,598,379
|
|
Prepaid and other current assets
|
|
1,305,936
|
|
|
1,314,463
|
|
Current assets, discontinued operations
|
|
—
|
|
|
1,714,429
|
|
Total current assets
|
|
7,303,904
|
|
|
18,374,484
|
|
|
|
|
|
|
Deferred income taxes
|
|
16,250,928
|
|
|
4,368,683
|
|
Property and equipment, net
|
|
56,630,031
|
|
|
59,272,611
|
|
Intangible assets, net
|
|
2,666,364
|
|
|
2,844,963
|
|
Goodwill
|
|
50,097,081
|
|
|
50,097,081
|
|
Other long-term assets
|
|
233,539
|
|
|
987,499
|
|
Long-term assets, discontinued operations
|
|
—
|
|
|
29,827,174
|
|
Total assets
|
|
$
|
133,181,847
|
|
|
$
|
165,772,495
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
3,995,846
|
|
|
$
|
5,960,310
|
|
Accrued compensation
|
|
2,803,549
|
|
|
2,408,476
|
|
Other accrued liabilities
|
|
2,642,269
|
|
|
2,235,351
|
|
Current portion of long-term debt
|
|
11,307,819
|
|
|
9,891,825
|
|
Current portion of deferred rent
|
|
194,206
|
|
|
207,045
|
|
Current liabilities, discontinued operations
|
|
—
|
|
|
4,143,577
|
|
Total current liabilities
|
|
20,943,689
|
|
|
24,846,584
|
|
|
|
|
|
|
Deferred rent, less current portion
|
|
2,020,199
|
|
|
1,899,623
|
|
Unfavorable operating leases
|
|
591,247
|
|
|
671,553
|
|
Other liabilities
|
|
3,859,231
|
|
|
3,755,888
|
|
Long-term debt, less current portion
|
|
109,878,201
|
|
|
116,364,165
|
|
Long-term liabilities, discontinued operations
|
|
—
|
|
|
1,634,330
|
|
Total liabilities
|
|
137,292,567
|
|
|
149,172,143
|
|
|
|
|
|
|
Commitments and contingencies (Notes 5, 13 and 14)
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit)
|
|
|
|
|
Common stock - $0.0001 par value; 100,000,000 shares authorized; 26,632,222 and 26,298,725, respectively, issued and outstanding
|
|
2,610
|
|
|
2,597
|
|
Additional paid-in capital
|
|
21,355,270
|
|
|
36,136,319
|
|
Accumulated other comprehensive loss
|
|
(934,222
|
)
|
|
(1,006,667
|
)
|
Accumulated deficit
|
|
(24,534,378
|
)
|
|
(18,531,897
|
)
|
Total stockholders' equity (deficit)
|
|
(4,110,720
|
)
|
|
16,600,352
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
133,181,847
|
|
|
$
|
165,772,495
|
|
See accompanying notes to consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
December 25, 2016
|
|
December 27, 2015
|
Revenue
|
|
$
|
166,520,925
|
|
|
$
|
144,800,046
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
|
|
|
|
|
Food, beverage, and packaging
|
|
46,794,091
|
|
|
40,730,583
|
|
Compensation costs
|
|
41,307,718
|
|
|
35,287,202
|
|
Occupancy
|
|
11,370,223
|
|
|
8,935,702
|
|
Other operating costs
|
|
34,845,059
|
|
|
31,293,900
|
|
General and administrative expenses
|
|
9,265,432
|
|
|
11,385,201
|
|
Pre-opening costs
|
|
599,279
|
|
|
1,439,390
|
|
Depreciation and amortization
|
|
14,696,846
|
|
|
11,922,548
|
|
Loss on asset disposals
|
|
338,306
|
|
|
967,035
|
|
Total operating expenses
|
|
159,216,954
|
|
|
141,961,561
|
|
|
|
|
|
|
Operating profit
|
|
7,303,971
|
|
|
2,838,485
|
|
|
|
|
|
|
Interest expense
|
|
(5,763,684
|
)
|
|
(4,214,452
|
)
|
Other income (expense), net
|
|
(172,031
|
)
|
|
785,591
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
1,368,256
|
|
|
(590,376
|
)
|
Income tax benefit
|
|
(2,270,792
|
)
|
|
(83,514
|
)
|
Income (loss) from continuing operations
|
|
3,639,048
|
|
|
(506,862
|
)
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
|
(10,226,996
|
)
|
|
(25,588,123
|
)
|
Income tax benefit of discontinued operations
|
|
(585,467
|
)
|
|
(9,902,493
|
)
|
Loss from discontinued operations
|
|
(9,641,529
|
)
|
|
(15,685,630
|
)
|
|
|
|
|
|
Net loss
|
|
$
|
(6,002,481
|
)
|
|
$
|
(16,192,492
|
)
|
|
|
|
|
|
Basic earnings (loss) per share from:
|
|
|
|
|
Continuing operations
|
|
0.14
|
|
|
(0.02
|
)
|
Discontinued operations
|
|
(0.37
|
)
|
|
(0.60
|
)
|
Basic net loss per share
|
|
(0.23
|
)
|
|
(0.62
|
)
|
|
|
|
|
|
Fully diluted earnings (loss) per share from:
|
|
|
|
|
Continuing operations
|
|
0.14
|
|
|
(0.02
|
)
|
Discontinued operations
|
|
(0.37
|
)
|
|
(0.60
|
)
|
Fully diluted net loss per share
|
|
(0.23
|
)
|
|
(0.62
|
)
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
Basic
|
|
26,491,549
|
|
|
26,211,669
|
|
Diluted
|
|
26,491,549
|
|
|
26,211,669
|
|
See accompanying notes to consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
December 25, 2016
|
|
December 27, 2015
|
Net loss
|
|
$
|
(6,002,481
|
)
|
|
$
|
(16,192,492
|
)
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
Unrealized changes in fair value of interest rate swaps, net of tax of ($37,319) and $430,468
|
|
72,445
|
|
|
(835,315
|
)
|
Unrealized changes in fair value of investments, net of tax of $0 and ($1,959)
|
|
—
|
|
|
3,804
|
|
Total other comprehensive income (loss)
|
|
72,445
|
|
|
(831,511
|
)
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(5,930,036
|
)
|
|
$
|
(17,024,003
|
)
|
See accompanying notes to consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Accumulated
Other
|
|
|
|
Total
|
|
Common Stock
|
|
Paid-in
|
|
Comprehensive
|
|
Accumulated
|
|
Stockholders'
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Loss
|
|
Deficit
|
|
Equity (Deficit)
|
Balances - December 28, 2014
|
26,149,824
|
|
|
$
|
2,582
|
|
|
$
|
35,668,001
|
|
|
$
|
(175,156
|
)
|
|
$
|
(2,339,405
|
)
|
|
$
|
33,156,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares
|
131,752
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares effectively repurchased for required employee withholding taxes
|
(1,387
|
)
|
|
—
|
|
|
(4,443
|
)
|
|
—
|
|
|
—
|
|
|
(4,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures of restricted shares
|
(8,587
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan
|
21,623
|
|
|
1
|
|
|
71,614
|
|
|
—
|
|
|
—
|
|
|
71,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
—
|
|
|
13
|
|
|
424,401
|
|
|
—
|
|
|
—
|
|
|
424,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock repurchase
|
(24,500
|
)
|
|
(2
|
)
|
|
(98,250
|
)
|
|
—
|
|
|
—
|
|
|
(98,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
30,000
|
|
|
3
|
|
|
74,996
|
|
|
—
|
|
|
—
|
|
|
74,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(831,511
|
)
|
|
—
|
|
|
(831,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(506,862
|
)
|
|
(506,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,685,630
|
)
|
|
(15,685,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances - December 27, 2015
|
26,298,725
|
|
|
$
|
2,597
|
|
|
$
|
36,136,319
|
|
|
$
|
(1,006,667
|
)
|
|
$
|
(18,531,897
|
)
|
|
$
|
16,600,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares
|
398,164
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures of restricted shares
|
(84,817
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares effectively repurchased for required employee withholding taxes
|
(8,114
|
)
|
|
(1
|
)
|
|
(12,391
|
)
|
|
—
|
|
|
—
|
|
|
(12,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan
|
28,264
|
|
|
4
|
|
|
40,599
|
|
|
—
|
|
|
—
|
|
|
40,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
—
|
|
|
10
|
|
|
435,845
|
|
|
—
|
|
|
—
|
|
|
435,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
72,445
|
|
|
—
|
|
|
72,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spin-Off of Bagger Dave's
|
—
|
|
|
—
|
|
|
(15,245,102
|
)
|
|
—
|
|
|
—
|
|
|
(15,245,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,639,048
|
|
|
3,639,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,641,529
|
)
|
|
(9,641,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances - December 25, 2016
|
26,632,222
|
|
|
$
|
2,610
|
|
|
$
|
21,355,270
|
|
|
$
|
(934,222
|
)
|
|
$
|
(24,534,378
|
)
|
|
$
|
(4,110,720
|
)
|
See accompanying notes to consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
December 25, 2016
|
|
December 27, 2015
|
Cash flows from operating activities
|
|
|
|
|
Net loss
|
|
$
|
(6,002,481
|
)
|
|
$
|
(16,192,492
|
)
|
Net loss from discontinued operations
|
|
9,641,529
|
|
|
15,685,630
|
|
Net income (loss) from continuing operations
|
|
3,639,048
|
|
|
(506,862
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities
|
|
|
|
|
Depreciation and amortization
|
|
14,696,846
|
|
|
11,922,548
|
|
Amortization and write-off of debt discount and loan fees
|
|
238,784
|
|
|
240,036
|
|
Realized gain on sale leaseback
|
|
(128,782
|
)
|
|
(127,836
|
)
|
Loss on asset disposals
|
|
338,306
|
|
|
967,035
|
|
Share-based compensation
|
|
435,845
|
|
|
424,414
|
|
Deferred income taxes
|
|
(2,270,792
|
)
|
|
(83,514
|
)
|
Changes in operating assets and liabilities that provided (used) cash
|
|
|
|
|
Accounts receivable
|
|
(28,915
|
)
|
|
1,159,700
|
|
Inventory
|
|
(102,225
|
)
|
|
(226,825
|
)
|
Prepaid assets
|
|
8,527
|
|
|
(990,885
|
)
|
Intangible assets
|
|
(73,150
|
)
|
|
36,986
|
|
Other long-term assets
|
|
753,960
|
|
|
(695,189
|
)
|
Accounts payable
|
|
(1,771,388
|
)
|
|
3,014,870
|
|
Accrued liabilities
|
|
1,143,880
|
|
|
1,395,565
|
|
Deferred rent
|
|
107,737
|
|
|
224,537
|
|
Net cash provided by operating activities of continuing operations
|
|
16,987,681
|
|
|
16,754,580
|
|
Net cash used in operating activities of discontinued operations
|
|
(5,863,807
|
)
|
|
(7,886,772
|
)
|
Net cash provided by operating activities
|
|
11,123,874
|
|
|
8,867,808
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
Proceeds from sale of investments
|
|
—
|
|
|
2,952,302
|
|
Purchases of property and equipment
|
|
(12,499,507
|
)
|
|
(20,155,132
|
)
|
Acquisition of business, net of cash acquired
|
|
—
|
|
|
(54,041,489
|
)
|
Proceeds from sale leaseback transaction
|
|
—
|
|
|
3,521,931
|
|
Net cash used in investing activities of continuing operations
|
|
(12,499,507
|
)
|
|
(67,722,388
|
)
|
Net cash used in investing activities of discontinued operations
|
|
(907,890
|
)
|
|
(10,303,988
|
)
|
Net cash used in investing activities
|
|
(13,407,397
|
)
|
|
(78,026,376
|
)
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
11,109,154
|
|
|
72,963,858
|
|
Repayments of long-term debt
|
|
(16,134,717
|
)
|
|
(8,166,667
|
)
|
Payment of loan fees
|
|
(197,889
|
)
|
|
(751,071
|
)
|
Proceeds from employee stock purchase plan
|
|
40,603
|
|
|
71,615
|
|
Repurchase of stock
|
|
—
|
|
|
(98,252
|
)
|
Stock options exercised
|
|
—
|
|
|
74,999
|
|
Tax withholding for restricted stock units
|
|
(12,392
|
)
|
|
(4,443
|
)
|
Capital infusion to discontinued component
|
|
(2,000,000
|
)
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
(7,195,241
|
)
|
|
64,090,039
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(9,478,764
|
)
|
|
(5,068,529
|
)
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
13,499,890
|
|
|
18,568,419
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
4,021,126
|
|
|
$
|
13,499,890
|
|
See accompanying notes to consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
NATURE OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Diversified Restaurant Holdings, Inc. (“DRH”) is a restaurant company operating a single concept, Buffalo Wild Wings
®
Grill & Bar (“BWW”). As the largest franchisee of BWW, we provide a unique guest experience in a casual and inviting environment.
DRH currently operates
64
BWW restaurants (
20
in Michigan,
17
in Florida,
15
in Missouri,
seven
in Illinois and
five
in Indiana), including the nation’s largest BWW, based on square footage, in downtown Detroit, Michigan. We have an area development agreement (“ADA”) with Buffalo Wild Wings International, Inc. ("BWLD") under which we have opened
29
restaurants out of a total required of
42
by 2021. We have one additional restaurant in process and are in discussions with BWLD regarding the remaining
12
restaurants. We may continue to open new restaurants but at a potentially lower number over a longer period of time under an amended ADA.
On December 25, 2016, the Company completed a spin-off of
19
Bagger Dave's entities and certain real estate entities which house the respective Bagger Dave's entities previously owned by DRH into a new independent publicly traded company, Bagger Dave's Burger Tavern, Inc. ("Bagger Dave's"). For additional details refer to Note
2
.
DRH and its wholly-owned subsidiaries (collectively, the “Company”), AMC Group, Inc. (“AMC”), AMC Wings, Inc. (“WINGS”), and AMC Real Estate, Inc. (“REAL ESTATE”) own and operate BWW restaurants located throughout Florida, Illinois, Indiana, Michigan and Missouri. The following organizational chart outlines the current corporate structure of DRH. A brief textual description of the entities follows the organizational chart. DRH is incorporated in Nevada.
AMC was formed on March 28, 2007 and serves as our operational and administrative center. AMC renders management, operational support, and advertising services to WINGS and REAL ESTATE and their subsidiaries. Services rendered by AMC include marketing, restaurant operations, restaurant management consultation, hiring and training of management and staff, and other management services reasonably required in the ordinary course of restaurant operations.
WINGS was formed on March 12, 2007 and serves as a holding company for our BWW restaurants. We are economically dependent on retaining our franchise rights with BWLD. The franchise agreements have specific initial term expiration dates ranging from
December 2020 through June 2036
, depending on the date each was executed and the duration of its initial term. The franchise agreements are renewable at the option of the franchisor and are generally renewable if the franchisee has complied with the franchise agreement. When factoring in any applicable renewals, the franchise agreements have specific expiration dates ranging from
December 2025 through June 2051
. We believe we are in compliance with the terms of these agreements.
REAL ESTATE was formed on March 18, 2013, and serves as the holding company for any real estate properties owned by DRH. Currently, DRH does not own any real estate after completing certain sale leaseback transactions. Refer to Note 3 of the Consolidated Financial Statements for additional information on the sale leaseback transactions.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We follow accounting standards set by the Financial Accounting Standards Board ("FASB"). The FASB sets generally accepted accounting principles in the United States of America ("GAAP") that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification ("ASC").
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
For Variable Interest Entities ("VIE(s)"), we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIE. The primary beneficiary of a VIE is the party that has the power to direct the activities that most significantly impact the performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity. See Note 5 to the accompanying notes to the consolidated financial statements for more details.
Segment Reporting
As of December 25, 2016, as a result of the Spin-Off of Bagger Dave’s as further described in Note 2 to the consolidated financial statements, the Company has one operating and reportable segment.
Fiscal Year
The Company utilizes a 52- or 53-week accounting period that ends on the last Sunday in December. Fiscal year
2016
ended on
December 25, 2016
and was comprised of 52 weeks. Fiscal year
2015
ended on
December 27, 2015
was comprised of
52 weeks
.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and demand deposits in banks. The Company considers all highly-liquid investments purchased with original maturities of three months or less to be cash and cash equivalents. The Company, at times throughout the year, may, in the ordinary course of business, maintain cash balances in excess of federally-insured limits. Management does not believe the Company is exposed to any unusual risks on such deposits.
Accounts Receivable
Accounts receivable primarily consist of contractually determined receivables from BWLD for local media advertising reimbursements and are stated at the amount management expects to collect. Balances that are outstanding after management has used reasonable collection efforts are written off with a corresponding charge to bad debt expense or deferred rent as applicable. There was
no
allowance for doubtful accounts necessary at
December 25, 2016
and
December 27, 2015
.
Gift Cards
The Company records gift cards under a BWLD system-wide program. Gift cards sold are recorded as a gift card liability. When redeemed, the gift card liability account is offset by recording the transaction as revenue. At times, gift card redemptions can exceed amounts due to BWLD for gift card purchases resulting in an asset balance. Under this centralized system, any breakage would be recorded by Blazin Wings, Inc., a subsidiary of BWLD, and is subject to the breakage laws in the state of Minnesota, where Blazin Wings, Inc. is located. The Company's gift card liability was
$0.1
million as of
December 25, 2016
. At
December 27, 2015
, the Company had an asset of
$0.1
million relating to gift cards.
Inventory
Inventory consists mainly of food and beverage products and is accounted for at the lower of cost or market using the first in, first out method of inventory valuation. Cash flows related to inventory sales are classified in net cash provided by operating activities in the Consolidated Statements of Cash Flows.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prepaids and Other Long-Term Assets
Prepaid assets consist principally of prepaid rent, insurance and contracts and are recognized ratably as operating expense over the period of future benefit. Other assets consist primarily of security deposits for operating leases and utilities.
Property and Equipment
Property and equipment are recorded at cost. Equipment and furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the assets, which range from
three
to
seven years
. Leasehold improvements, which include the cost of improvements funded by landlord incentives or allowances, are amortized using the straight-line method over the lesser of the term of the lease, without consideration of renewal options, or the estimated useful lives of the assets, which is typically
five
-
15 years
. Maintenance and repairs are expensed as incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the respective accounts and the related gains or losses are credited or charged to earnings.
The Company capitalizes items associated with construction but not yet placed into service, known as construction in progress (“CIP”). Items capitalized include fees associated with the design, build out, furnishing of the restaurants, leasehold improvements, construction period interest (when applicable), equipment, and furniture and fixtures. Restaurant CIP is not amortized or depreciated until the related assets are placed into service. Items are placed into service according to their asset category when the restaurant is open for service.
Intangible Assets
Amortizable intangible assets consist of franchise fees, trademarks, non-compete agreements, favorable and unfavorable operating leases, and loan fees and are stated at cost, less accumulated amortization. Intangible assets are amortized on a straight-line basis over the estimated useful life, as follows: Franchise fees-
10
–
20 years
, Trademarks-
15 years
, Non-compete-
3 years
, Favorable and unfavorable leases - over the term of the respective leases and Loan fees - over the term of the respective loan.
Liquor licenses, if transferable, are deemed to have an indefinite life and are carried at the lower of fair value or cost. 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 fair value of the asset is less than the carrying amount, an impairment charge is recorded. No impairments were recognized in fiscal years ended December 25,
2016
and December 27,
2015
.
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. During the years ended December 25, 2016 and December 27, 2015, there were no impairments of long-lived assets pertaining to continuing operations.
We account for exit or disposal activities, including restaurant closures, in accordance with ASC Topic 420,
Exit or Disposal Cost Obligations
. Such costs include the cost of disposing of the assets as well as other facility-related expenses from previously closed restaurants. These costs are generally expensed as incurred. Additionally, at the date 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.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 both
December 25, 2016
and
December 27, 2015
, we had goodwill of
$50.1 million
. The goodwill is assigned to the Company's Buffalo Wild Wings reporting unit, which, due to the Spin-Off of Bagger Dave's on December 25, 2016, represents the Company's only reporting unit.
The Company assesses goodwill for impairment on an annual basis by reviewing relevant qualitative and quantitative factors. More frequent evaluations may be required if the Company experiences changes in its business climate or as a result of other triggering events that take place. If carrying value exceeds fair value, a possible impairment exists and further evaluation is performed.
ASC Topic 350-20,
Intangibles - Goodwill and Other
, gives companies the option to perform a one-step (Step zero) qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we assess relevant events and circumstances. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, the first and second steps of the goodwill impairment test would be necessary. Conversely, if it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, further action would not be required.
The quantitative 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. 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 25, 2016
, as a result of step zero of the qualitative assessment, the Company has concluded that its goodwill is recoverable. As of
December 27, 2015
, based on our quantitative analysis, goodwill was considered recoverable.
Deferred Rent
Certain operating leases provide for minimum annual payments that increase over the life of the lease. Typically, our operating leases contain renewal options under which we may extend the initial lease terms for periods of
five
to
10 years
. The aggregate minimum annual payments are expensed on a straight-line basis commencing at the start of our construction period and extending over the term of the related lease, including option renewals as deemed reasonably assured. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the lease is accrued as deferred rent liability and reduced in later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts, in its straight-line computation, for the effect of any "rental holidays", "free rent periods", and "landlord incentives or allowances".
Deferred Gains
Deferred gains on the sale leaseback transaction described in Note
3
, are recognized into income over the life of the related operating lease agreements.
Revenue Recognition
Revenues from food, beverage and merchandise sales are recognized and generally collected at the point of sale. All sales taxes are presented on a net basis and are excluded from revenue.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising
Advertising expenses associated with contributions to the BWLD advertising fund (between
3.00%
and
3.15%
of total net sales) are recorded as operating expenses as contributed, while all other advertising expenses are recorded in general and administrative expenses as incurred. Advertising expenses of continuing operations of
$2.0 million
and
$4.3 million
are included in other operating costs in the Consolidated Statements of Operations and advertising expense of
$1.1 million
and
$0.9 million
are included in general and administrative expenses in the Consolidated Statements of Operations for the years ended
December 25, 2016
and
December 27, 2015
, respectively. Advertising expenses in discontinued operations of
$1.1 million
and
$2.7 million
are presented as such in the Consolidated Statements of Operations for the years ended
December 25, 2016
and
December 27, 2015
, respectively.
Pre-opening Costs
Pre-opening costs are those costs associated with opening new restaurants and will vary based on the number of new locations opening and under construction. Pre-opening costs typically consist of manager salaries, relocation costs, supplies, recruiting expenses, certain marketing costs and costs associated with team member training. The Company also reclassifies labor costs that exceed the historical average for the first three months of restaurant operations that are attributable to training. These costs are expensed as incurred. Pre-opening costs in continuing operations were
$0.6 million
and
$1.4 million
for the years ended
December 25, 2016
and
December 27, 2015
, respectively. Excess labor cost incurred after restaurant opening and included in pre-opening cost were approximately
$0.3 million
and
$0.6 million
for the years ended
December 25, 2016
and
December 27, 2015
, respectively.
Income Taxes
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
The Company applies the provisions of ASC Topic 740,
Income Taxes
, regarding the accounting for uncertainty in income taxes. The Company classifies all interest and penalties as income tax expense. There are
no
accrued interest amounts or penalties related to uncertain tax positions as of
December 25, 2016
and
December 27, 2015
.
Earnings Per Common Share
Earnings per share are calculated under the provisions of FASB ASC 260,
Earnings per Share,
which requires a dual presentation of "basic" and "diluted" earnings per share on the face of the Consolidated Statements of Operations. Basic earnings per common share excludes dilution and is computed by dividing the net earnings available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share include dilutive common stock equivalents consisting of stock options determined by the treasury stock method. Restricted stock awards contain non-forfeitable rights to dividends, making such awards participating securities. The calculation of basic and diluted earnings per share uses an earnings allocation method to consider the impact of restricted stock.
Share-based Compensation
The Company estimates the fair value of stock option awards utilizing the Black-Scholes pricing model. The fair value of the awards is amortized as compensation expense on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The fair value of restricted shares is equal to the number of restricted shares issued times the Company’s stock price on the date of grant and is amortized as compensation expense on a straight-line basis over the service period of the award.
Concentration Risks
Approximately
77.4%
and
76.1%
of the Company's continuing revenues for the years ended
December 25, 2016
and
December 27, 2015
, respectively, were generated from food and beverage sales from restaurants located in the Midwest region. The remaining
22.6%
and
23.9%
of the Company's continuing revenues for the years ended
December 25, 2016
and
December 27, 2015
, respectively, were generated from food and beverage sales from restaurants located in Florida.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. Our derivative financial instruments are recorded at fair value on the Consolidated Balance Sheets. The effective portion of changes in the fair value of derivatives which qualify for hedge accounting is recorded in other comprehensive income and is recognized in the Consolidated Statements of Operations when the hedged item affects earnings. Ineffective portion of the change in fair value of a hedge would be recognized in income immediately. 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 interest rate swap agreements associated with the Company’s current debt 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 Sheets in other long-term assets or other liabilities depending on the fair value of the swaps. See Note
10
and Note
17
for additional information on the interest rate swap agreements.
Recent Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-04,
Topic 350: Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment
("ASU 2017-04"). ASU 2017-04 simplified wording and removes step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step 2 of the goodwill test. We do not expect the standard will have a significant impact. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2020, with early adoption permitted for interim or annual goodwill impairment tests on testing dates after January 1, 2017.
In August 2016, the FASB issued ASU 2016-15, Topic 230:
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15"). ASU 2016-15 clarifies current GAAP that is either unclear or does not include specific guidance on a number of specific issues. The amendments set forth are an improvement to GAAP because they provide guidance for each issue and reduce the current and potential future diversity in practice. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the pending adoption of ASU 2016-15 and the impact it will have on our consolidated financial statements.
In March 2016, the FASB issued 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. Beginning in fiscal 2017, the tax effects of awards will be recognized in the statement of operations. In addition, the Company will account for forfeitures as they occur.
In February 2016, FASB issued ASU 2016-02,
Leases
. 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 believe the adoption of ASU 2016-02 will materially impact our consolidated financial statements by significantly increasing our non-current assets and non-current liabilities on our consolidated balance sheets in order to record the right of use assets and related lease liabilities for our existing operating leases. We are currently unable to estimate the impact of the updated guidance on our consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO 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. Most recent updates to the standard delay the required adoption by one year, now effective for annual periods beginning after December 15, 2018, 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 Pronouncements
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 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.
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, with early adoption permitted. 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, in the amounts of
$27,002
and
$318,315
, respectively.
2.
DISCONTINUED OPERATIONS
Spin-Off of Bagger Dave's
On August 4, 2016, DRH announced that its Board of Directors unanimously approved a plan to pursue a tax-free spin-off of its Bagger Dave's business. Pursuant to this plan, DRH contributed its
100.0%
owned entity, AMC Burgers, LLC and certain real estate entities into Bagger Dave's Burger Tavern, Inc., a newly created Nevada company, which was then spun-off into a stand-alone, publicly traded company on the over-the-counter exchange. AMC Burger, Inc. owns and operates all of the Bagger Dave's Burger Tavern ® restaurants and the real estate entities held certain real estate related to the restaurants before the real estate was sold in 2014 and 2015. In connection with the Spin-Off, DRH contributed certain assets, liabilities and employees currently related to its Bagger Dave's businesses. Intercompany balances due to/from DRH, which included amounts from sales, were contributed to equity of Bagger Dave's. The Spin-Off was effected on December 25, 2016 via a one-for-one distribution of common shares in Bagger Dave's to DRH holders of record on December 19, 2016.
As part of the Spin-Off transaction, DRH agreed to fund a one-time
$2.0 million
cash distribution to Bagger Dave's and agreed that, if deemed necessary within twelve months after the date of the Spin-Off, up to
$1 million
of additional cash funding may be considered upon approval by DRH and its lenders.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the Spin-Off, Bagger Dave’s was a co-obligor on a joint and several basis with the Company on its
$155.0 million
senior secured credit facility. The Company’s debt under this facility remained with the Company and Bagger Dave’s was released as a borrower. As a result, this debt was not assigned to discontinued operations. Additionally, DRH retained substantially all of the tax benefits (net operating loss and tax credit carryforwards) generated by Bagger Dave's prior to the date of the transaction representing an amount sufficient to offset pre-tax income totaling over
$50 million
at current estimated tax rates. See Note
12
for additional information related to income taxes.
DRH decided to spin-off Bagger Dave's after considering all reasonable strategic and structural alternatives because of the disparity between the operating models of its two brands, BWW as franchisee, and Bagger Dave's as an owned concept. The management teams of Bagger Dave's and DRH agreed that the nature of the two concepts varied greatly, and that each will be more valuable and operate more effectively independently of one another. Bagger Dave's is a concept developed by the management team of DRH. In contrast to operating a franchised concept like BWW it has no development restrictions and the flexibility to enhance brand attributes such as logos, trade dress and restaurant design, change its menu offering and improve its operational model in an effort to better align with guest expectations. To manage these functions effectively, specific resources are required that are not necessary for a franchisee. For example, menu development, purchasing and brand marketing are critical to the success of Bagger Dave's but not necessary for a BWW franchisee since these functions are managed by the franchisor. Additional considerations were contemplated with respect to growth potential. As a start-up brand, Bagger Dave's has a higher growth potential while BWW, being a mature brand and as a franchisee, has more limits to its organic growth potential due to its development rights.
In conjunction with the Spin-Off, DRH entered into a transition services agreement (the "TSA") with Bagger Dave's pursuant to which DRH will provide certain information technology and human resources support, limited accounting support, and other minor administrative functions at no charge. The TSA is intended to assist the discontinued component in efficiently and seamlessly transitioning to stand on its own. The agreement expires in December 2017 at which time the parties may negotiate which services will be required on an ongoing basis and the fees that will be charged for such services.
Information related to Bagger Dave's has been reflected in the accompanying consolidated financial statements as follows:
|
|
•
|
Consolidated Balance Sheets - as a result of the Spin-Off of Bagger Dave's, effective
December 25, 2016
, the Bagger Dave's assets and liabilities as of
December 27, 2015
have been presented as discontinued operations.
|
|
|
•
|
Consolidated Statements of Operations - Bagger Dave's results of operations for the years ended
December 25, 2016
and
December 27, 2015
have been presented as discontinued operations. There was no gain or loss on the transaction recorded.
|
|
|
•
|
Consolidated Statements of Cash Flows - The Bagger Dave's cash flows from operating and investing activities for the years ended
December 25, 2016
and
December 27, 2015
have been presented separately on the face of the cash flow statements. The Bagger Dave's cash flows from financing activities for these years have not been separately reported on the consolidated statements of cash flows since there was only one financing function for both entities.
|
The following are major classes of line items constituting pre-tax loss from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
December 25, 2016
|
|
December 27, 2015
|
Revenue
|
|
$
|
20,741,427
|
|
|
$
|
27,685,331
|
|
Restaurant operating costs (exclusive of depreciation and amortization)
|
|
(21,436,377
|
)
|
|
(29,606,736
|
)
|
General and administrative expenses
|
|
(2,881,467
|
)
|
|
(3,966,240
|
)
|
Depreciation and amortization
|
|
(3,353,194
|
)
|
|
(4,659,689
|
)
|
Pre-opening costs
|
|
(362,064
|
)
|
|
(1,804,768
|
)
|
Other income
|
|
11,066
|
|
|
39,649
|
|
Impairment and loss on asset disposals
|
|
(2,946,387
|
)
|
|
(13,275,670
|
)
|
Loss from discontinued operations before income taxes
|
|
(10,226,996
|
)
|
|
(25,588,123
|
)
|
Income tax benefit
|
|
(585,467
|
)
|
|
(9,902,493
|
)
|
|
|
|
|
|
Total loss from discontinued operations
|
|
$
|
(9,641,529
|
)
|
|
$
|
(15,685,630
|
)
|
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The operating results of the discontinued operations include only direct expenses incurred by Bagger Dave’s. Discontinued operations exclude certain corporate functions that were previously allocated to Bagger Dave’s. Interest expense was not allocated to discontinued operations because the Company’s debt under the
$155 million
secured credit facility remained with the Company.
The following are major classes of line items for assets and liabilities of discontinued operations at December 27, 2015:
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current assets, discontinued operations:
|
|
|
Cash and cash equivalents
|
|
$
|
700,638
|
|
Accounts receivable
|
|
373,619
|
|
Inventory
|
|
336,205
|
|
Prepaid assets
|
|
303,967
|
|
Total current assets, discontinued operations
|
|
1,714,429
|
|
|
|
|
Long-term assets, discontinued operations:
|
|
|
Property and equipment, net
|
|
19,917,050
|
|
Deferred tax assets, net
|
|
8,951,494
|
|
Intangible assets, net
|
|
793,753
|
|
Other long-term assets
|
|
164,877
|
|
Total long-term assets, discontinued operations
|
|
$
|
29,827,174
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Current liabilities, discontinued operations:
|
|
|
Accounts payable
|
|
$
|
1,847,242
|
|
Accrued compensation
|
|
679,408
|
|
Other accrued liabilities
|
|
1,427,859
|
|
Current portion of deferred rent
|
|
189,068
|
|
Total current liabilities, discontinued operations
|
|
4,143,577
|
|
|
|
|
Long-term liabilities, discontinued operations:
|
|
|
Deferred rent
|
|
926,587
|
|
Other liabilities
|
|
707,743
|
|
Total long-term liabilities, discontinued operations
|
|
$
|
1,634,330
|
|
During
2015
, the Company closed
11
underperforming Bagger Dave's locations. The Company recorded expenses totaling
$10.8 million
, consisting of property and equipment impairment charges, exit costs associated with lease obligations, employee terminations costs and other obligations in connection with the closures. These expenses are reflected in discontinued operations in the Consolidated Statements of Operations for the fiscal year ended
December 27, 2015
.
The following table summarizes the Company’s accrual activity related to facility closures during the fiscal years ended
December 25, 2016
and
December 27, 2015
:
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
Fiscal 2015
|
Beginning of the year
|
$
|
1,247,186
|
|
|
$
|
—
|
|
Charges
|
—
|
|
|
1,322,308
|
|
Cash payments
|
(1,140,033
|
)
|
|
(75,122
|
)
|
End of the year
|
$
|
107,153
|
|
|
$
|
1,247,186
|
|
The closure liability of
$0.1 million
was retained by the Company after the Spin-Off of Bagger Dave's, as it is responsible for certain ongoing lease payments associated with the closures.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At
December 25, 2016
and
December 27, 2015
, there were
$0
and
$0.9 million
, respectively, of fixed and intangible assets for the closed locations held for sale.
Based on impairment indicators that existed in the fourth quarter of 2016, the Company performed an impairment analysis on certain long-lived assets relating to Bagger Dave's and recorded an impairment charge of
$3.5 million
related to seven locations where the carrying amount of the assets was not considered recoverable based on the estimated future cash flows of the restaurants. An impairment analysis relating to certain Bagger Dave's long-lived assets was also performed in 2015 and an impairment charge of
$2.8 million
relating to four locations was recorded. The impairment charges for both years are recorded in discontinued operations.
The following is a summary of the expenses recognized in discontinued operations in the Consolidated Statement of Operations during the years ended
December 25, 2016
and
December 27, 2015
related to the restaurant closures and impairment of property and equipment:
|
|
|
|
|
|
|
|
|
Description
|
Fiscal 2016
|
|
Fiscal 2015
|
Property and equipment impairments
|
$
|
3,548,515
|
|
|
$
|
12,701,875
|
|
Facility closure and other expenses
|
—
|
|
|
733,834
|
|
Severance expense
|
—
|
|
|
154,764
|
|
|
$
|
3,548,515
|
|
|
$
|
13,590,473
|
|
During 2016 and 2015, Bagger Dave's recorded other asset disposal gains of
$0.6 million
and losses of
$0.6 million
, respectively, in discontinued operations.
Prior to the Spin-Off, Bagger Dave's was a reportable segment of the Company. Following the Spin-Off, there were no assets or liabilities remaining from the Bagger Dave's operations as of December 25, 2016. See Note
5
for a discussion of involvement the Company will continue to have with Bagger Dave's after the Spin-Off.
3.
SIGNIFICANT BUSINESS TRANSACTIONS
Sale leaseback transactions
On October 6, 2014, the Company entered into a sale leaseback agreement for
$15.7 million
with a third-party Real Estate Investment Trust (“REIT”) and included the sale of
six
locations. In Q4 2014, we closed on
5
of the
6
properties, with total proceeds of
$12.2 million
. In connection with the closing of the sale-leaseback transactions in Q4 2014, the Company recorded losses of approximately
$0.2 million
, which is included in loss on asset disposals on the Consolidated Statements of Operations. The Company also recorded deferred gains of
$1.9 million
for the properties sold at a gain as of December 28, 2014. We closed on the remaining property in August 2015 and received total proceeds of
$3.5 million
and recorded losses of
$0.2 million
, which is recorded in loss on asset disposals on the Consolidated Statements of Operations. Pursuant to the terms of each sale-leaseback transaction, we transferred title of the real property to the purchaser after final inspection and, in turn, entered into separate leases with the purchaser having a
15
-year basic operating lease term plus
four
separate
5
-year renewal options. At
December 25, 2016
and
December 27, 2015
,
$0.1 million
and
$0.1 million
of the deferred gain was recorded in other accrued liabilities, respectively, and
$1.5 million
and
$1.7 million
of the deferred gain was recorded in other liabilities, respectively, on the Consolidated Balance Sheets. The gains will be recognized into income as an offset to rent expense over the life of the related lease agreements.
4.
ACQUISITIONS
St. Louis - June 29, 2015
On June 29, 2015, the Company completed the acquisition of substantially all of the assets of A Sure Wing, LLC, a Missouri limited liability company (“ASW”). The assets acquired consist primarily of
18
existing BWW restaurants,
15
in Missouri and three in Illinois. As consideration for the acquisition of the assets, the Company paid
$54.0 million
in cash at closing, subject to adjustment for cash on hand, inventory and certain prorated items. The Seller reimbursed the Company for one-half of all fees imposed by BWLD under its franchise agreements for the transfer of these restaurants. The acquisition not only provides greater geographic diversity to the Company’s restaurant portfolio, but also control of an entire market, as no other franchisee or BWLD restaurants compete in the St. Louis metropolitan area.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the fair values of net assets acquired and liabilities assumed:
|
|
|
|
|
Working capital
|
$
|
413,232
|
|
Fixed assets
|
13,993,000
|
|
Intangible assets
|
505,000
|
|
Favorable lease
|
112,344
|
|
Unfavorable lease
|
(58,797
|
)
|
Goodwill
|
39,098,451
|
|
Net Cash paid for acquisition
|
$
|
54,063,230
|
|
The excess of the purchase price over the aggregate fair value of assets acquired is allocated to goodwill, which will be deductible for tax purposes. The results of operations of these locations are included in our Consolidated Statements of Operations from the date of acquisition.
The following table summarizes the unaudited pro forma financial information from continuing operations as if the acquisition had occurred at the beginning of the fiscal year ended
December 27, 2015
:
|
|
|
|
|
|
|
|
December 27, 2015
|
Revenue
|
|
$
|
165,795,995
|
|
Net income
|
|
435,110
|
|
Basic net income per share
|
|
0.02
|
|
Diluted net income per share
|
|
0.02
|
|
The results of operations from the acquisition are included in the Company's results beginning June 29, 2015. The actual amounts of revenue and net income that are included in continuing operations in the accompanying Consolidated Statements of Operations for the period of June 29, 2015 to
December 27, 2015
is
$20.9 million
and
$25,095
, respectively. For additional information pertaining to the ASW acquisition refer to the 8-K/a filed on September 3, 2015.
5. UNCONSOLIDATED VARIABLE INTEREST ENTITIES
After the Spin-Off of Bagger Dave’s and the related discontinuation of its operations described in Note
2
, the Company remains involved with certain activities that result in Bagger Dave’s being considered a variable interest entity (VIE). This conclusion results primarily from the existence of guarantees by the Company of certain Bagger Dave’s leases as described below under "Lease Guarantees". While the Company holds a variable interest in Bagger Dave’s, it is not considered to be its primary beneficiary
because it does not have the power to direct the activities of Bagger Dave’s. Specifically, we considered the fact that, although two of the Company’s board members are currently also on Bagger Dave’s board and a third Bagger Dave’s director is currently also an executive officer of the Company, there are no agreements in place that require these board members and executive officer to vote in the interests of the Company. In other words, these board members and executive officer do not represent the Company in their capacity as Bagger Dave’s directors. Furthermore, these directors remain on the board of Bagger Dave’s so long as the shareholders annually elect them. At any time, these board members can be replaced by a vote of the Bagger Dave’s shareholders. As a result, the Company does not consolidate the VIE.
Lease Guarantees
At December 25, 2016 the Company is a guarantor for eighteen (
18
) leases, two of which now relate to an unaffiliated party. In the event the respective lessees cannot make their lease payments, the Company may become responsible for the payments under its guarantee.
In accordance with ASC 460,
Guarantees
, the Company evaluated its liability from the Bagger Dave's lease guarantees first by estimating the non-contingent component representing the estimated fair market value of the guarantees at inception, and recorded a liability in the amount of
$0.3 million
as of December 25, 2016, which is included in other liabilities on the Consolidated Balance Sheet. No liability had previously been recorded as a result of the affiliate relationship between the Company and Bagger Dave’s.
Secondly, the Company considered the contingent component of the guarantees and concluded that, as of December 25, 2016, no loss exposure under the guarantees was probable because, among other things, each of the Bagger Dave's restaurants subject to
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the leases is either currently operating or the lease has been assigned or sublet to another tenant who is responsible for, and making, the lease payments.
The Company has determined that its maximum exposure resulting from the lease guarantees includes approx.
$9.8 million
of future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance requirements under the leases. The terms and conditions of the guarantees vary, and each guarantee has an expiration date which may or may not correspond with the end of the underlying lease term. These expiration dates range from one (
1
) year to thirteen (
13
) years as of December 25, 2016. In the event that the Company is required to perform under any of its lease guarantees, we do not believe a liability to the Company would be material because we would first seek to minimize its exposure by finding a suitable tenant to sub-lease the space. In many cases, a replacement tenant can be found and the lessor could agree to release the Company from its future guarantee obligation. During 2015,
11
Bagger Dave’s locations were closed,
9
of which had DRH lease guarantees. Of the
9
guaranteed leases, new tenants were found to step into the Company’s obligations for
5
locations in
3
to
14
months from the date of closure,
3
guarantees expired or were terminated, and
1
remains an obligation of the Company. In reaching our conclusion, we also considered the following:
|
|
•
|
the financial condition of Bagger Dave’s, including its ability to service the lease payments on the locations it continues to operate;
|
|
|
•
|
its recent history of incurring operating losses, along with the more recent trends in its business after completing the closure of
11
underperforming locations and rationalizing the cost structure both of its remaining
18
restaurants and its general and administrative costs;
|
|
|
•
|
its liquidity position and the actions available to it should its liquidity deteriorate to such a degree that its ability to service required lease payments is threatened; and
|
|
|
•
|
the actions available to the Company to avoid or mitigate potential losses should Bagger become unable to service one or more of the leases that the Company guarantees.
|
The following is a detailed listing of all Bagger Dave's leases that include a guarantee by the Company as of December 25, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Location of lease
|
Status of location
|
Guarantee expiry date
|
|
Liability recognized on balance sheet
|
|
Future guaranteed lease payments
|
Grandville, MI
|
Closed
|
05/12/17
|
|
$
|
893
|
|
|
$
|
28,698
|
|
Holland, MI
|
Closed
|
10/09/17
|
|
2,101
|
|
|
67,500
|
|
Bloomfield, MI
|
Open
|
01/14/18
|
|
2,788
|
|
|
89,583
|
|
Shelby Township, MI
|
Open
|
01/31/18
|
|
2,623
|
|
|
84,270
|
|
West Chester Township, MI
|
Open
|
02/01/18
|
|
2,866
|
|
|
92,083
|
|
Woodhaven, MI
|
Open
|
11/30/18
|
|
4,426
|
|
|
142,217
|
|
Traverse City, MI
|
Open
|
01/31/19
|
|
5,887
|
|
|
189,167
|
|
Fort Wayne, IN
|
Open
|
01/31/19
|
|
5,424
|
|
|
174,273
|
|
Grand Blanc, MI
|
Open
|
01/31/20
|
|
6,759
|
|
|
217,167
|
|
Centerville, MI
|
Open
|
11/30/20
|
|
13,293
|
|
|
427,135
|
|
Chesterfield Township, MI
|
Open
|
12/31/20
|
|
8,092
|
|
|
260,000
|
|
E. Lansing, MI
|
Open
|
09/10/21
|
|
2,334
|
|
|
75,000
|
|
Birch Run, MI
|
Open
|
12/31/24
|
|
23,557
|
|
|
756,925
|
|
Berkley, MI
|
Open
|
06/08/29
|
|
32,532
|
|
|
1,045,320
|
|
Cascade Township, MI
|
Open
|
06/08/29
|
|
29,856
|
|
|
959,334
|
|
Avon, IL
|
Closed
|
06/30/29
|
|
48,658
|
|
|
1,563,484
|
|
Greenwood, IL
|
Closed
|
06/30/29
|
|
50,372
|
|
|
1,618,560
|
|
Canton, MI
|
Open
|
06/30/30
|
|
63,541
|
|
|
2,041,689
|
|
Totals
|
|
|
|
$
|
306,000
|
|
|
$
|
9,832,405
|
|
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT, NET
Property and equipment are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
|
December 27, 2015
|
Equipment
|
|
$
|
29,426,476
|
|
|
$
|
26,547,394
|
|
Furniture and fixtures
|
|
7,275,923
|
|
|
6,426,708
|
|
Leasehold improvements
|
|
63,449,082
|
|
|
58,252,782
|
|
Restaurant construction in progress
|
|
94,595
|
|
|
782,219
|
|
Total
|
|
100,246,076
|
|
|
92,009,103
|
|
Less accumulated depreciation
|
|
(43,616,045
|
)
|
|
(32,736,492
|
)
|
Property and equipment, net
|
|
$
|
56,630,031
|
|
|
$
|
59,272,611
|
|
Depreciation expense for the year ended
December 25, 2016
was $
18.1 million
, of which $
14.7 million
related to continuing operations and $
3.4 million
related to discontinued operations. Depreciation expense for the year ended
December 27, 2015
was $
16.6 million
, of which $
11.9 million
related to continuing operations and $
4.7 million
related to discontinued operations.
7. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
|
December 27, 2015
|
Amortized intangible assets
|
|
|
|
|
Franchise fees
|
|
$
|
1,290,642
|
|
|
$
|
1,278,142
|
|
Trademark
|
|
2,500
|
|
|
2,500
|
|
Non-compete
|
|
76,560
|
|
|
76,560
|
|
Favorable operating leases
|
|
351,344
|
|
|
351,344
|
|
Loan fees
|
|
368,083
|
|
|
368,083
|
|
Total
|
|
2,089,129
|
|
|
2,076,629
|
|
|
|
|
|
|
Less accumulated amortization
|
|
(718,517
|
)
|
|
(510,875
|
)
|
Amortized intangible assets, net
|
|
1,370,612
|
|
|
1,565,754
|
|
|
|
|
|
|
Unamortized intangible assets
|
|
|
|
|
Liquor licenses
|
|
1,295,752
|
|
|
1,279,209
|
|
Total intangible assets, net
|
|
$
|
2,666,364
|
|
|
$
|
2,844,963
|
|
Amortization expense for both years ended
December 25, 2016
and
December 27, 2015
was $
0.1 million
. Amortization of favorable/unfavorable leases and loan fees are reflected as part of occupancy and interest expense, respectively. Loan fees written off to interest expense during both years ended
December 25, 2016
and
December 27, 2015
was
$0.1
million.
Based on the current intangible assets and their estimated useful lives, future intangible-related expense for the next
five
years and thereafter is projected as follows:
|
|
|
|
|
Year
|
Amount
|
2017
|
$
|
175,281
|
|
2018
|
173,606
|
|
2019
|
173,048
|
|
2020
|
135,811
|
|
2021
|
87,094
|
|
Thereafter
|
625,772
|
|
Total
|
$
|
1,370,612
|
|
The aggregate weighted-average amortization period for intangible assets is
9.9 years
.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. OTHER ACCRUED LIABILITES
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
|
December 27, 2015
|
Sales tax payable
|
|
$
|
816,215
|
|
|
$
|
854,264
|
|
Accrued interest
|
|
442,976
|
|
|
495,865
|
|
Accrued property taxes
|
|
490,809
|
|
|
320,189
|
|
Other
|
|
892,269
|
|
|
565,033
|
|
Total accrued other liabilities
|
|
$
|
2,642,269
|
|
|
$
|
2,235,351
|
|
9. 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 years ended
December 25, 2016
and
December 27, 2015
were
$64,296
and
$596,856
, respectively. As of
December 25, 2016
and
December 27, 2015
, we had unpaid fees of
$0
and
$14,631
, respectively.
10. LONG-TERM DEBT
Long-term debt consists of the following obligations:
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
|
December 27, 2015
|
$120.0 million term loan - the rate at December 25, 2016 and December 27, 2015 was 4.12% and 3.86%, respectively.
|
|
$
|
99,698,616
|
|
|
$
|
115,833,333
|
|
|
|
|
|
|
|
$30.0 million development line of credit, converted to $18.2 million facility term loan in December 2016 - the rate at December 25, 2016 and December 27, 2015 was 4.21% and 3.86%, respectively.
|
|
18,199,476
|
|
|
11,090,323
|
|
|
|
|
|
|
|
$5.0 million revolving line of credit - the rate at December 25, 2016 was 6.25%.
|
|
4,000,000
|
|
|
—
|
|
|
|
|
|
|
|
Unamortized discount and debt issuance costs
|
|
(712,072
|
)
|
|
(667,666
|
)
|
|
|
|
|
|
Total debt
|
|
121,186,020
|
|
|
126,255,990
|
|
|
|
|
|
|
Less current portion
|
|
(11,307,819
|
)
|
|
(9,891,825
|
)
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
109,878,201
|
|
|
$
|
116,364,165
|
|
On June 29, 2015, the Company entered into a
$155.0 million
senior secured credit facility with a syndicate of lenders led by
Citizens (the “June 2015 Senior Secured Credit Facility”) with a senior lien on all the Company’s personal property and fixtures. The June 2015 Senior Secured Credit Facility consists of a
$120.0 million
term loan (the “June 2015 Term Loan”), a
$30.0 million
, subsequently amended to
$23.0 million
(see amendment details immediately following this paragraph), development line of credit (the “June 2015 DLOC”) and a
$5.0 million
(see amendment details immediately following this paragraph) 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 finance the acquisition discussed in Note
4
. 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
.
On December 23, 2016, the Company entered into an amendment agreement for purposes of, among other things, releasing the Bagger Dave’s entities as borrowers and releasing all related liens on the Bagger Dave’s assets. In addition, the amendment (a) converted the amounts then outstanding under the June 2015 DLOC to a development facility term loan (the “DF Term Loan”), (b) canceled
$6.8
million previously available under the June 2015 DLOC, and (c) extended the maturity date on the remaining
$5.0
million under the June 2015 DLOC to June 29, 2018.
Payments of principal are based upon a
12
-year straight-line amortization schedule, with monthly principal payments totaling
$833,333
on the June 2015 Term and
$126,385
on the DF Term Loan, plus accrued interest. The entire remaining outstanding principal and accrued interest on the June 2015 Term Loan and the DF Term Loan is due and payable on the maturity date of June 29, 2020. Availability under the June 2015 DLOC is subject to certain limitations relative to actual development costs, and
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
outstanding balances convert into an additional DF Term Loan 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. There were no balances outstanding under the June 2015 DLOC at December 25, 2016. If the DLOC is not fully drawn by the end of the
two years
term, the outstanding principal balance becomes due based on the
12
- year amortization period with final payment due June 29, 2020. The June 2015 RLOC is for a term of
five years
.
The interest rate for each of the loans, as selected by the borrower, is based upon either a LIBOR or base rate (generally Prime or Fed Funds) plus an applicable margin, which ranges from
2.25%
to
3.5%
for LIBOR loans and from
1.25%
to
2.5%
for base rate loans, depending on the lease adjusted leverage ratio as defined in the agreement
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. As a result of the December 2016 Amendment, the Company incurred
$197,889
of debt issuance costs recorded as a part of debt discount. Debt discount and debt issuance cost related to term debt, net of accumulated amortization, totaled
$712,072
and
$667,666
, at
December 25, 2016
and
December 27, 2015
, respectively. The unamortized portion of capitalized debt issuance costs related to the DLOC and RLOC totaled
$244,336
and
$324,256
, at
December 25, 2016
and
December 27, 2015
, respectively. 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.
Based on the long-term debt terms that existed at
December 25, 2016
, the scheduled principal maturities, net of unamortized discount, for the next
five years
and thereafter are summarized as follows:
|
|
|
|
|
|
Amount
|
2017
|
$
|
11,307,819
|
|
2018
|
11,319,774
|
|
2019
|
11,319,034
|
|
2020
|
87,239,393
|
|
2021
|
—
|
|
Thereafter
|
—
|
|
Total
|
$
|
121,186,020
|
|
Interest expense was
$5.8 million
and
$4.2 million
for the years ended
December 25, 2016
and
December 27, 2015
, 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. As of
December 25, 2016
the Company was in compliance with the loan covenants.
At
December 25, 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. 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
17
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
Interest rate swaps
|
Rate
|
Expires
|
Notional amounts
|
|
Derivative assets
|
|
Derivative liabilities
|
April 2012
|
1.4%
|
April 2019
|
$
|
5,333,333
|
|
|
$
|
—
|
|
|
$
|
21,037
|
|
October 2012
|
0.9%
|
October 2017
|
2,357,143
|
|
|
—
|
|
|
723
|
|
July 2013
|
1.4%
|
April 2018
|
4,761,905
|
|
|
—
|
|
|
18,949
|
|
May 2014
|
1.5%
|
April 2018
|
9,285,714
|
|
|
—
|
|
|
58,359
|
|
January 2015
|
1.8%
|
December 2019
|
21,119,048
|
|
|
—
|
|
|
271,144
|
|
August 2015
|
2.3%
|
June 2020
|
49,696,875
|
|
|
—
|
|
|
1,045,279
|
|
Total
|
|
|
$
|
92,554,018
|
|
|
$
|
—
|
|
|
$
|
1,415,491
|
|
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2015
|
Interest rate swaps
|
Rate
|
Expires
|
Notional amounts
|
|
Derivative assets
|
|
Derivative liabilities
|
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
|
|
11. SHARE-BASED COMPENSATION
The Company established a Stock Incentive Plan in 2011 (“Stock Incentive Plan”) to attract and retain directors, consultants, and team members and to align their interests with the interests of the Company’s shareholders through the opportunity for increased stock ownership. The plan permits the grant and award of
750,000
shares of common stock by way of stock options and/or restricted stock. Stock options must be awarded at exercise prices at least equal to or greater than
100.0%
of the fair market value of the shares on the date of grant. The options will expire no later than
10 years
from the date of grant, with vesting terms to be defined at grant date, ranging from a vesting schedule based on performance to a vesting schedule that extends over a period of time as selected by the Compensation Committee of the Board of Directors (the “Committee”) or another committee as determined by the Board of Directors. The Committee also determines the grant, issuance, retention, and vesting timing and conditions of awards of restricted stock. The Committee may place limitations, such as continued employment, passage of time, and/or performance measures, on restricted stock. Awards of restricted stock may not provide for vesting or settlement in full of restricted stock over a period of less than
one year
from the date the award is made.
Restricted stock awards
During fiscal
2016
and
2015
, restricted shares were issued to certain team members at a weighted-average grant date fair value of
$1.47
and
$3.56
, respectively. Based on the Stock Award Agreement, shares typically vest ratably over either a one or
three
year period, or on the third anniversary of the grant date, as determined by the Committee. Unrecognized share-based compensation expense of
$0.5 million
and
$0.6 million
at
December 25, 2016
and
December 27, 2015
, respectively, will be recognized over the remaining weighted-average vesting period of
1.9 years
. The total fair value of shares vested during years ended
December 25, 2016
and
December 27, 2015
was
$0.3 million
and
$0.2 million
, respectively. Under the Stock Incentive Plan, there are
69,791
and
365,051
shares available for future awards at
December 25, 2016
and
December 27, 2015
, respectively.
The following table presents the restricted stock transactions for fiscal
2016
:
|
|
|
|
|
Number of Restricted Stock Shares
|
Unvested, December 27, 2015
|
241,124
|
|
Granted
|
398,164
|
|
Vested
|
(72,966
|
)
|
Vested shares tax portion
|
(8,114
|
)
|
Forfeited
|
(84,817
|
)
|
Unvested, December 25, 2016
|
473,391
|
|
As a result of the Spin-Off of Bagger Dave’s, all restricted shares previously awarded to Bagger Dave’s employees were vested on a pro rata basis for time served through December 25, 2016, and were otherwise forfeited.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the restricted stock transactions for fiscal
2015
:
|
|
|
|
|
Number of Restricted Stock Shares
|
Unvested, December 28, 2014
|
164,867
|
|
Granted
|
131,752
|
|
Vested
|
(45,521
|
)
|
Vested shares tax portion
|
(1,387
|
)
|
Forfeited
|
(8,587
|
)
|
Unvested, December 27, 2015
|
241,124
|
|
On July 30, 2010, prior to the Stock Incentive Plan, DRH granted options for the purchase of
210,000
shares of common stock to the directors of the Company. These options are fully vested and originally expired
six years
from issuance. On August 13, 2015,
30,000
shares were exercised at a price of
$2.50
per share. The intrinsic value of the options exercised was
$6,300
. On July 28, 2016, the Stock Option Agreement of 2010 was amended to extend the expiration date of these options to July 31, 2019. The options can be exercised at a price of
$2.50
per share. At
December 25, 2016
,
180,000
shares of authorized common stock are reserved for issuance to provide for the exercise of the remaining options. The intrinsic value of outstanding options was negligible as of both
December 25, 2016
and
December 27, 2015
.
Employee stock purchase plan
The Company 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 plan 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
December 25, 2016
and
December 27, 2015
we issued
28,264
and
21,623
shares, respectively. Under the ESPP, there are
184,325
shares available for future purchase at
December 25, 2016
.
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
$0.1 million
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.
Share-based compensation
Share-based compensation of
$0.4 million
and
$0.4 million
, was recognized during the years ended
December 25, 2016
and
December 27, 2015
, respectively, as compensation costs in the Consolidated Statements of Operations and as additional paid-in capital on the Consolidated Statements of Stockholders' Equity to reflect the fair value of shares vested.
Preferred stock
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
December 25, 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.
12. INCOME TAXES
As of and for the fiscal year ended
December 27, 2015
, the 2015 provision for income taxes (benefit) was reallocated among continuing operations and discontinued operations based upon a revised computation of income tax from continuing operations and a reallocation of the difference to discontinued operations as required by ASC 740. Reallocating the majority of the 2015 tax benefit to discontinued operations is consistent with the split of pretax income (loss), using the same assumptions and estimates originally used to prepare the provisions, and considering that the Bagger Dave's entities were separate legal entities and subsidiaries of the consolidated group. The allocation of income taxes (benefit) for the fiscal year ended
December 25, 2016
was determined
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
based on pretax income and the outcome of a restructuring completed prior to the Spin-Off which effectively triggered a tax status change of the legal entities making up the Bagger Dave's business in a manner which enables the continuing business parent entity to retain the majority of the tax benefits from losses and credits. Following the status change, the Company contributed all of the hard assets and liabilities of the Bagger Dave's entities into a newly formed entity, Bagger Dave's Burger Tavern, Inc., the stock of which was ultimately spun-off to shareholders. The income tax benefit allocated to discontinued operations for 2016 related to benefits generated during the period between the date that the Company contributed the hard assets and liabilities of the Bagger Dave's entities to Bagger Dave's Burger Tavern, Inc. and the date that the Spin-Off was completed. A valuation allowance reserve was deemed necessary for the net deferred tax assets of Bagger Dave's Burger Tavern, Inc., and the resulting deferred tax expense was allocated to continuing operations as required by ASC 740.
The income tax benefit from continuing operations consists of the following components for the fiscal years ended
December 25, 2016
and
December 27, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
December 25, 2016
|
|
December 27, 2015
|
Federal
|
|
|
|
|
Current
|
|
$
|
19,911
|
|
|
$
|
—
|
|
Deferred
|
|
(1,823,443
|
)
|
|
(80,469
|
)
|
State
|
|
|
|
|
Current
|
|
(81,500
|
)
|
|
—
|
|
Deferred
|
|
(385,760
|
)
|
|
(3,045
|
)
|
Income tax benefit
|
|
$
|
(2,270,792
|
)
|
|
$
|
(83,514
|
)
|
The benefit for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to loss before income loss. The items causing this difference are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
December 25, 2016
|
|
December 27, 2015
|
Income tax expense (benefit) at federal statutory rate
|
|
$
|
465,207
|
|
|
$
|
(200,728
|
)
|
State income tax, net of federal benefit
|
|
132,740
|
|
|
1,592
|
|
Permanent differences
|
|
70,206
|
|
|
1,508,666
|
|
Tax credits
|
|
(1,748,632
|
)
|
|
(1,393,044
|
)
|
Benefit resulting from restructuring
|
|
(3,016,513
|
)
|
|
—
|
|
Change in valuation allowance (Bagger Dave's)
|
|
1,826,200
|
|
|
—
|
|
Income tax benefit
|
|
$
|
(2,270,792
|
)
|
|
$
|
(83,514
|
)
|
For the fiscal year ended
December 25, 2016
, the Company recorded an expense of
$1.8 million
relating to Bagger Dave's deferred tax assets that were not expected to be realized. Due to the restructuring involving a tax status change that occurred prior to the Spin-Off, the continuing operations retained tax benefits that were generated by discontinued operations amounting to
$3.0 million
for the fiscal year ended
December 25, 2016
.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company expects the deferred tax assets to be fully realizable prior to expiration. Significant components of the Company's deferred income tax assets and liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
|
December 27, 2015
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
11,223,494
|
|
|
$
|
3,315,739
|
|
Deferred rent expense
|
|
752,897
|
|
|
124,764
|
|
Start-up costs
|
|
129,152
|
|
|
138,832
|
|
Tax credit carry-forwards
|
|
6,559,392
|
|
|
4,522,041
|
|
Interest rate swaps
|
|
481,267
|
|
|
518,589
|
|
Sale leaseback deferred gain
|
|
629,924
|
|
|
579,600
|
|
Share-based compensation
|
|
239,925
|
|
|
457,680
|
|
Accrued closure liabilities
|
|
36,432
|
|
|
31,281
|
|
Other
|
|
967,812
|
|
|
375,758
|
|
Total deferred tax assets
|
|
$
|
21,020,295
|
|
|
$
|
10,064,284
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Tax depreciation in excess of book
|
|
2,366,739
|
|
|
4,486,770
|
|
Goodwill amortization in excess of book
|
|
2,402,628
|
|
|
1,208,831
|
|
Total deferred tax liabilities
|
|
4,769,367
|
|
|
5,695,601
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
16,250,928
|
|
|
$
|
4,368,683
|
|
In accordance with the provisions of ASC 740,
a valuation allowance is established when it is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. On December 25, 2016 we completed the Spin-Off of Bagger Dave’s, which had previously generated significant pre-tax losses. After the Spin-Off, the majority of the net deferred tax assets were retained by the Company, which in its continuing operations has a history of profitability and is expected to continue to generate pre-tax income in the future. This expected operating performance combined with the planned opening of additional BWW restaurants will provide future taxable income that will enable the Company to utilize the tax benefits prior to their expirations, which begin in 2028. Management continually reviews the likelihood that deferred tax assets will be realized and the Company recognizes these benefits only as reassessment indicates that it is more likely than not that such tax benefits will be realized. There was no valuation allowance recorded for both fiscal years ended
December 25, 2016
and December 27, 2015. While there is no allowance recorded against the deferred tax assets of the continuing operations, the Company incurred a one-time charge against the benefit for income taxes of
$1.8 million
. This charge is the result of certain deferred tax assets relating to discontinued operations that were determined to be unrealizable by Bagger Dave's and is allocable to continuing operations as required by ASC 740.
The Company expects to use the net operating loss and general business tax credit carryforwards before their
20
-year expiration. A significant portion of the net operating loss carry forwards were created in the past three years with expiration dates between 2034 and 2036. As of
December 25, 2016
and
December 27, 2015
, the Company has available federal and state net operating loss carryforwards of approximately
$33.0 million
and
$21.4 million
, respectively. Of these amounts, approximately
$0.7 million
and
$0.5 million
, respectively, relates to share-based compensation tax deductions in excess of book compensation expense. Net operating losses relating to such benefits are not included in the table above. General business tax credits of
$6.6 million
will expire between
2028
and
2037
.
The Company applies the provisions of ASC 740 regarding the accounting for uncertainty in income taxes. There are no amounts recorded on the Company's consolidated financial statements for uncertain positions. The Company classifies all interest and penalties as income tax expense. There are
no
accrued interest amounts or penalties related to uncertain tax positions as of
December 25, 2016
.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions, and is subject to U.S. Federal, state, and local income tax examinations for tax years 2012 through 2015. The Company is currently under IRS exam for the 2014 fiscal year.
13. OPERATING LEASES
The Company's lease terms 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
$8.7 million
and
$7.0 million
for the fiscal years ended
December 25, 2016
and
December 27, 2015
, respectively.
Scheduled future minimum lease payments for each of the
five years
and thereafter for non-cancelable operating leases for existing restaurants with initial or remaining lease terms in excess of
one year
at
December 25, 2016
are summarized as follows:
|
|
|
|
|
Year
|
Amount
|
2017
|
$
|
8,826,295
|
|
2018
|
8,421,826
|
|
2019
|
7,700,606
|
|
2020
|
7,561,189
|
|
2021
|
6,691,348
|
|
Thereafter
|
30,114,850
|
|
Total
|
$
|
69,316,114
|
|
Scheduled future minimum lease payments for each of the
five years
and thereafter for non-cancelable operating leases for restaurants under development, with initial or remaining lease terms in excess of
one year
at
December 25, 2016
are summarized as follows:
|
|
|
|
|
Year
|
Amount
|
2017
|
$
|
87,500
|
|
2018
|
150,000
|
|
2019
|
150,000
|
|
2020
|
150,000
|
|
2021
|
150,000
|
|
Thereafter
|
2,793,250
|
|
Total
|
$
|
3,480,750
|
|
14. COMMITMENTS AND CONTINGENCIES
Refer to Note
5
for a discussion of lease guarantees provided by the Company.
The Company’s ADA requires DRH to open
42
restaurants by April 1, 2021. As of
December 25, 2016
, we have opened
29
of the restaurants required by the ADA. The Company has one additional restaurant under development and is currently in discussion with BWLD with respect to both the timing and desirability of building the remaining
12
restaurants pursuant to the current ADA.
The Company is required to pay BWLD royalties (
5.0%
of net sales) and advertising fund contributions (
3.00%
-
3.15%
of net sales). In addition, the Company is required to spend an additional
0.25%
-
0.5%
of regional net sales related to advertising cooperatives for certain metropolitan markets for the term of the individual franchise agreements. The Company incurred
$8.3 million
and
$7.2 million
in royalty expense for the fiscal years ended
December 25, 2016
and
December 27, 2015
, respectively. Advertising fund contribution expenses were
$5.5 million
and
$4.6 million
for the fiscal years ended
December 25, 2016
and
December 27, 2015
, respectively. Amounts are recorded in Other operating costs on the Consolidated Statement of Operations.
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
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
design model that BWLD has approved. The modernization costs for a restaurant are expected to range from
$0.6
million to
$0.8 million
depending on an individual restaurant's needs.
In 2016 and 2015, we had a defined contribution 401(k) plan whereby eligible team members could contribute pre-tax wages in accordance with the provisions of the plan. Each year the Company considers a discretionary contribution to the 401(k) plan. For fiscal
2016
and
2015
, the discretionary match was
100.0%
of
2.0%
contributed, which equated to
$0.2 million
in both years.
In connection with the Spin-Off of Bagger Dave’s, the Company’s Board of Directors approved a cash distribution of
$2.0 million
to
$3.0 million
to Bagger Dave’s within twelve months of the transaction date. On December 25, 2016, the Company contributed
$2.0 million
in cash to Bagger Dave’s as part of the Spin-Off. The additional
$1.0 million
of funding by the Company would only be considered if deemed necessary, and would only be made if approved by the Company’s lenders.
In October 2015, the Company settled two collective actions alleging violations of fair labor standards acts and minimum wage laws. The first action, Tammy Wolverton et al v. Diversified Restaurant Holdings, Inc. et al, was filed on March 31, 2014, in the United States District Court for the Eastern District of Michigan and made allegations regarding employees in Michigan. The second action, Lisa Murphy & Andre D. Jordan, Jr. v. Diversified Restaurants Holdings, Inc., et al, was filed on May 19, 2014, in United States District Court for the Northern District of Illinois, and made allegations involving employees in Illinois, Indiana and Florida.
The actions, in which the plaintiffs were represented by the same legal counsel, contained mirror allegations that tipped servers and bartenders in the Company’s restaurants were required to perform general preparation and maintenance duties, or “non-tipped work,” for which they should be compensated at the minimum wage.
In August 2016, the Company and A Sure Wing, LLC settled a third collective action that was filed on December 18, 2015 against AMC Wings, Inc. and the Company in the U.S. District Court for the Southern District of Illinois 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 alleged 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. The Company filed an indemnity claim against A Sure Wing, LLC and received a reciprocal indemnity claim from A Sure Wing, LLC.
We believe that the Company’s wage and hour policies comply with the law and that we had meritorious defenses to the substantive claims in each of these matters. However, in light of the potential cost and uncertainty involved, we settled with the plaintiffs from the October 2015 collective actions for
$1.9 million
plus payroll taxes. A Sure Wing, LLC settled with the plaintiffs in the December 2015 matter and funded the settlement. As a result, the Company released its indemnity claim against A Sure Wing, LLC.
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. We have insured and continue to insure against most of these types of claims. A judgment on any claim not covered by or in excess of our insurance coverage could materially adversely affect our financial condition or results of operations.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. EARNINGS PER COMMON SHARE
The following is a reconciliation of basic and fully diluted earnings per common share for the fiscal years ended
December 25, 2016
and
December 27, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
|
December 27, 2015
|
Income (loss) from continuing operations
|
|
$
|
3,639,048
|
|
|
$
|
(506,862
|
)
|
Loss from discontinued operations
|
|
(9,641,529
|
)
|
|
(15,685,630
|
)
|
Net loss
|
|
$
|
(6,002,481
|
)
|
|
$
|
(16,192,492
|
)
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
26,491,549
|
|
|
26,211,669
|
|
Effect of dilutive securities
|
|
—
|
|
|
—
|
|
Weighted-average shares outstanding - assuming dilution
|
|
26,491,549
|
|
|
26,211,669
|
|
|
|
|
|
|
Earnings per common share from continuing operations
|
|
$
|
0.14
|
|
|
$
|
(0.02
|
)
|
Earnings per common share from discontinued operations
|
|
(0.37
|
)
|
|
(0.60
|
)
|
Earnings per common share
|
|
$
|
(0.23
|
)
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
Earnings per common share - assuming dilution - from continuing operations
|
|
0.14
|
|
|
(0.02
|
)
|
Earnings per common share - assuming dilution - from discontinued operations
|
|
(0.37
|
)
|
|
(0.60
|
)
|
Earnings per common share - assuming dilution
|
|
$
|
(0.23
|
)
|
|
$
|
(0.62
|
)
|
For the year ended
December 25, 2016
and
December 27, 2015
,
473,391
and
241,124
shares, respectively, of unvested restricted stock were excluded from the calculation of diluted earnings per share because such shares were anti-dilutive.
16. SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest was
$5.5 million
and
$3.1 million
during the years ended
December 25, 2016
and
December 27, 2015
, respectively. Cash paid for income taxes was
$0.1 million
during the years ended
December 25, 2016
and
December 27, 2015
, respectively.
17. 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 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
December 25, 2016
and
December 27, 2015
, respectively, our financial instruments consisted of cash and cash equivalents; including money market funds, accounts receivable, accounts payable, interest rate swaps, lease guarantee liability, 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
10
for additional information pertaining to interest rates swaps.
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of our lease guarantee liability is determined by calculating the present value of the difference between the estimated rate at which the Company and Bagger Dave’s could borrow money in a duration similar to the underlying lease guarantees. Our lease guarantees are classified as a Level 2 measurement as there is no actively traded market for such instruments.
As of
December 25, 2016
and
December 27, 2015
, our total debt was approximately
$121.2 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 fiscal years ended
December 25, 2016
and
December 27, 2015
, respectively.
The following table presents the fair values for those assets and liabilities measured on a recurring basis as of
December 25, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAIR VALUE MEASUREMENTS
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Asset/(Liability) Total
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
(1,415,491
|
)
|
|
$
|
—
|
|
|
$
|
(1,415,491
|
)
|
Lease guarantee liability
|
|
—
|
|
|
(306,000
|
)
|
|
—
|
|
|
(306,000
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
(1,721,491
|
)
|
|
$
|
—
|
|
|
$
|
(1,721,491
|
)
|
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
|
|
18. ACCUMULATED OTHER COMPREHENSIVE
LOSS
The following table summarizes each component of Accumulated Other Comprehensive Loss ("OCL"):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 25, 2016
|
|
|
Interest Rate
Swaps
|
|
Investments
|
|
Total
|
Beginning balance
|
|
$
|
(1,006,667
|
)
|
|
$
|
—
|
|
|
$
|
(1,006,667
|
)
|
Gain recorded to other comprehensive income
|
|
109,764
|
|
|
|
|
|
109,764
|
|
Tax benefit (expense)
|
|
(37,319
|
)
|
|
|
|
|
(37,319
|
)
|
Other comprehensive income
|
|
72,445
|
|
|
—
|
|
|
72,445
|
|
Accumulated OCL
|
|
$
|
(934,222
|
)
|
|
$
|
—
|
|
|
$
|
(934,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 27, 2015
|
|
|
Interest Rate
Swaps
|
|
Investments
|
|
Total
|
Beginning balance
|
|
$
|
(171,352
|
)
|
|
$
|
(3,804
|
)
|
|
$
|
(175,156
|
)
|
Gain (loss) recorded to other comprehensive loss
|
|
(1,265,783
|
)
|
|
5,763
|
|
|
(1,260,020
|
)
|
Tax benefit (expense)
|
|
430,468
|
|
|
(1,959
|
)
|
|
428,509
|
|
Other comprehensive income (loss)
|
|
(835,315
|
)
|
|
3,804
|
|
|
(831,511
|
)
|
Accumulated OCL
|
|
$
|
(1,006,667
|
)
|
|
$
|
—
|
|
|
$
|
(1,006,667
|
)
|
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19.
SUMMARY QUARTERLY FINANCIAL DATA (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarters
|
|
|
March 27,
2016
|
|
June 26,
2016
|
|
September 25,
2016
|
|
December 25,
2016
|
Revenue
|
|
$
|
43,143,252
|
|
|
$
|
40,951,181
|
|
|
$
|
41,625,312
|
|
|
$
|
40,801,180
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
3,115,981
|
|
|
1,387,085
|
|
|
1,946,629
|
|
|
854,276
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
1,710,783
|
|
|
(17,202
|
)
|
|
519,205
|
|
|
(844,530
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
1,292,429
|
|
|
$
|
234,344
|
|
|
$
|
596,709
|
|
|
$
|
1,515,566
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
$
|
(862,025
|
)
|
|
$
|
(416,770
|
)
|
|
$
|
(1,985,834
|
)
|
|
$
|
(6,376,900
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
430,404
|
|
|
$
|
(182,426
|
)
|
|
$
|
(1,389,125
|
)
|
|
$
|
(4,861,334
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
0.05
|
|
|
0.01
|
|
|
0.02
|
|
|
0.06
|
|
Discontinued operations
|
|
(0.03
|
)
|
|
(0.02
|
)
|
|
(0.07
|
)
|
|
(0.24
|
)
|
Basic net loss per share
|
|
0.02
|
|
|
(0.01
|
)
|
|
(0.05
|
)
|
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Fully diluted earnings per share from:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
0.05
|
|
|
0.01
|
|
|
0.02
|
|
|
0.06
|
|
Discontinued operations
|
|
(0.03
|
)
|
|
(0.02
|
)
|
|
(0.07
|
)
|
|
(0.24
|
)
|
Fully diluted net loss per share
|
|
0.02
|
|
|
(0.01
|
)
|
|
(0.05
|
)
|
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
26,298,034
|
|
|
26,379,065
|
|
|
26,625,615
|
|
|
26,664,409
|
|
Diluted
|
|
26,298,034
|
|
|
26,379,065
|
|
|
26,625,615
|
|
|
26,664,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarters
|
|
|
March 29,
2015
|
|
June 28,
2015
|
|
September 27,
2015
|
|
December 27,
2015
|
Revenue
|
|
$
|
31,852,089
|
|
|
$
|
29,610,702
|
|
|
$
|
41,033,963
|
|
|
$
|
42,303,292
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
3,115,605
|
|
|
(868,414
|
)
|
|
311,877
|
|
|
279,417
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
2,694,928
|
|
|
(728,452
|
)
|
|
(1,498,159
|
)
|
|
(1,058,693
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
1,548,301
|
|
|
(496,127
|
)
|
|
(915,059
|
)
|
|
(643,977
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
(1,285,659
|
)
|
|
(2,822,216
|
)
|
|
(2,666,476
|
)
|
|
(8,911,279
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
262,642
|
|
|
$
|
(3,318,343
|
)
|
|
$
|
(3,581,535
|
)
|
|
$
|
(9,555,256
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.06
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
Discontinued operations
|
|
(0.05
|
)
|
|
(0.11
|
)
|
|
(0.10
|
)
|
|
(0.34
|
)
|
Basic net loss per share
|
|
$
|
0.01
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
Fully diluted earnings per share from:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.06
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
Discontinued operations
|
|
(0.05
|
)
|
|
(0.11
|
)
|
|
(0.10
|
)
|
|
(0.34
|
)
|
Fully diluted net loss per share
|
|
$
|
0.01
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
26,149,184
|
|
|
26,151,853
|
|
|
26,251,621
|
|
|
26,294,530
|
|
Diluted
|
|
26,248,337
|
|
|
26,151,853
|
|
|
26,251,621
|
|
|
26,294,530
|
|
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20.
SUBSEQUENT EVENTS
None.