DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (unaudited)
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Additional
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Accumulated
Other
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Total
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Common Stock
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Paid-in
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Comprehensive
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Accumulated
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Stockholders'
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Shares
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Amount
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Capital
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Loss
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Deficit
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Equity (Deficit)
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Balances - December 27, 2015
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26,298,725
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$
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2,597
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$
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36,136,319
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$
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(1,006,667
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)
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$
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(18,531,897
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)
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$
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16,600,352
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Issuance of restricted shares
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335,831
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—
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—
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—
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—
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—
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Forfeitures of restricted shares
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(22,351
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)
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—
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—
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—
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—
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—
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Shares effectively repurchased for required employee withholding taxes
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(5,940
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)
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—
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(9,326
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)
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—
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—
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(9,326
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)
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Employee stock purchase plan
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13,546
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2
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20,780
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—
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—
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20,782
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Share-based compensation
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—
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—
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187,710
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—
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—
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187,710
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Other comprehensive loss
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—
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—
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—
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(1,413,837
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—
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(1,413,837
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Net income from continuing operations
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—
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—
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—
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—
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1,526,773
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1,526,773
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Net loss from discontinued operations
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—
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—
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—
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—
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(1,278,795
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(1,278,795
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Balances - June 26, 2016
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26,619,811
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$
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2,599
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$
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36,335,483
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$
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(2,420,504
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)
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$
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(18,283,919
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$
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15,633,659
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Balances - December 25, 2016
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26,632,222
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$
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2,610
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$
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21,355,270
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$
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(934,222
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)
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$
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(24,534,378
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)
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$
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(4,110,720
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)
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Forfeitures of restricted shares
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(11,517
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—
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—
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—
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—
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—
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Employee stock purchase plan
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12,594
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2
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28,917
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—
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—
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28,919
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Share-based compensation
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—
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—
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181,922
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—
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—
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181,922
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Other comprehensive loss
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—
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—
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—
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(154,033
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—
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(154,033
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Adoption of ASU 2016-09 (Note 1)
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—
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—
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—
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—
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268,000
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268,000
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Net income from continuing operations
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—
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—
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—
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—
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504,237
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504,237
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Net loss from discontinued operations
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—
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—
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—
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—
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(82,207
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(82,207
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Balances - June 25, 2017
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26,633,299
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$
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2,612
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$
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21,566,109
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$
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(1,088,255
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$
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(23,844,348
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$
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(3,363,882
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The accompanying notes are an integral part of these interim consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
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Six Months Ended
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June 25, 2017
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June 26, 2016
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Cash flows from operating activities
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Net income
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$
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422,030
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$
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247,978
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Net loss from discontinued operations
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(82,207
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(1,278,795
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)
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Net income from continuing operations
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504,237
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1,526,773
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Adjustments to reconcile net income to net cash provided by operating activities
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Depreciation and amortization
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6,904,795
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7,586,179
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Amortization of debt discount and loan fees
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104,970
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117,238
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Amortization of gain on sale-leaseback
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(67,696
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)
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(78,604
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)
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Loss on asset disposals
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286,074
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184,151
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Share-based compensation
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181,922
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187,710
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Deferred income taxes
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(632,681
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)
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298,537
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Changes in operating assets and liabilities that provided (used) cash
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Accounts receivable
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143,276
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3,843
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Inventory
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33,233
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61,136
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Prepaid and other assets
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58,922
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220,604
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Intangible assets
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(8,653
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)
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47,253
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Other long-term assets
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40,822
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7,939
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Accounts payable
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(75,913
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(2,032,153
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Accrued liabilities
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(941,964
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)
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(111,344
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)
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Deferred rent
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(4,448
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)
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64,941
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Net cash provided by operating activities of continuing operations
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6,526,896
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8,084,203
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Net cash used in operating activities of discontinued operations
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(82,207
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)
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(2,660,649
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)
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Net cash provided by operating activities
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6,444,689
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5,423,554
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Cash flows from investing activities
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Purchases of property and equipment
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(3,571,296
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(9,422,814
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Net cash used in investing activities of continuing operations
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(3,571,296
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)
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(9,422,814
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)
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Net cash provided by investing activities of discontinued operations
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—
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(258,319
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)
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Net cash used in investing activities
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(3,571,296
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)
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(9,681,133
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Cash flows from financing activities
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Proceeds from issuance of long-term debt
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3,215,641
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7,109,154
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Repayments of long-term debt
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(6,358,310
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)
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(11,134,717
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)
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Proceeds from employee stock purchase plan
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28,919
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20,782
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Tax withholdings for restricted stock units
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—
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(9,326
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)
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Net cash used in financing activities
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(3,113,750
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)
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(4,014,107
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)
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Net decrease in cash and cash equivalents
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(240,357
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)
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(8,271,686
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)
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Cash and cash equivalents, beginning of period
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4,021,126
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13,499,890
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Cash and cash equivalents, end of period
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$
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3,780,769
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$
|
5,228,204
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The accompanying notes are an integral part of these interim consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Diversified Restaurant Holdings, Inc. and its wholly-owned subsidiaries (“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
65
DRH-owned BWW restaurants (
20
in Michigan,
18
in Florida,
15
in Missouri,
7
in Illinois and
5
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
30
restaurants out of a total required of
42
by 2021. We 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 (the "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"). See Note
2
for additional details.
Principles of Consolidation
The consolidated financial statements as of
June 25, 2017
and
December 25, 2016
, and for the
six
-month periods ended
June 25, 2017
and
June 26, 2016
, have been prepared by DRH pursuant to accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information as of
June 25, 2017
and for the
six
-month periods ended
June 25, 2017
and
June 26, 2016
is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
The consolidated financial information as of
December 25, 2016
is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended
December 25, 2016
, which is included in Item 8 in the Fiscal
2016
Annual Report on Form 10-K, and should be read in conjunction with such consolidated financial statements.
The results of operations for the
six
-month periods ended
June 25, 2017
and
June 26, 2016
are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending
December 31, 2017
.
For Variable Interest Entities ("VIE(s)"), we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIEs. 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
3
to the accompanying notes to the consolidated financial statements for more details.
Segment Reporting
Since 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.
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
June 25, 2017
and
December 25, 2016
, 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.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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 we do not make this determination, further action would not be required.
As of
December 25, 2016
, as a result of step zero of the qualitative assessment, the Company has concluded that its goodwill is recoverable. At
June 25, 2017
, there were no impairment indicators warranting an analysis.
Impairment or Disposal of Long-Lived Assets
We review long-lived assets quarterly to determine if triggering events have occurred which would require a test to determine if the carrying amount of these assets may not be recoverable based on estimated future cash flows. Assets are reviewed at the lowest level for which cash flows can be identified, which is at the individual restaurant level. In the absence of extraordinary circumstances, restaurants are included in the impairment analysis after they have been open for two years. We evaluate the recoverability of a restaurant’s long-lived assets, including buildings, intangibles, leasehold improvements, furniture, fixtures, and equipment over the remaining life of the primary asset in the asset group, after considering the potential impact of planned operational improvements, marketing programs, and anticipated changes in the trade area. In determining future cash flows, significant estimates are made by management with respect to future operating results for each restaurant over the remaining life of the primary asset in the asset group. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value based on our estimate of discounted future cash flows. The determination of asset fair value is also subject to significant judgment. During the three-month and
six
-month periods ended
June 25, 2017
and
June 26, 2016
,
no
impairment was recognized.
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.
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. During the three-month and
six
-month periods ended
June 25, 2017
and
June 26, 2016
,
no
impairment was recognized.
Concentration Risks
Approximately
77%
and
78%
of the Company's continuing revenues for the
three months ended June 25, 2017
and
June 26, 2016
, respectively, were generated from food and beverage sales from restaurants located in the Midwest region. The remaining
23%
and
22%
of the Company's continuing revenues for the
three months ended June 25, 2017
and
June 26, 2016
, respectively, were generated from food and beverage sales from restaurants located in Florida.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM 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”) and other banks 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. The 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 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
7
and Note
14
for additional information on the interest rate swap agreements.
Recent Accounting Pronouncements
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation: Scope of Modification Accounting.” ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The updated guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. We do not believe the updated requirements will materially impact our consolidated financial statements.
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 unit's 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. We are currently evaluating the pending adoption of ASU 2017-04 and the impact it will have on our consolidated financial statements.
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 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 have analyzed the impact of the new standard and concluded that 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. Operating leases comprise the majority of our current lease portfolio. With respect
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
to implementation, we are currently reviewing the accounting standard and are not yet able to estimate the impact on our consolidated financial statements.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 "Revenue with Contracts from Customers (Topic 606)." ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-04, "Liabilities - Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products." ASU 2016-04 provides specific guidance for the de-recognition of prepaid stored-value product liabilities. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." ASU 2016-08 provides specific guidance to determine whether an entity is providing a specified good or service itself or is arranging for the good or service to be provided by another party. In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing." ASU 2016-10 provides clarification on the subjects of identifying performance obligations and licensing implementation guidance.
The requirements for these standards relating to Topic 606 will be effective for interim and annual periods beginning after December 15, 2017. The Company expects to adopt these standards upon their effective date. We do not expect the new revenue recognition standard to materially impact our recognition of restaurant sales, our primary source of revenue. With respect to implementation, we are currently reviewing the accounting standard and are not yet able to estimate the 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 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.
Effective December 26, 2016, the Company adopted the accounting guidance contained within ASU 2016-09. As a result, the Company recorded a deferred tax asset and retained earnings increase of
$268,000
to recognize the Company's excess tax benefits that existed as of December 25, 2016, on the Consolidated Balance Sheet.
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 company. AMC Burgers, Inc. owned and operated 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 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. Through the period ended
June 25, 2017
, no additional funding has been required.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM 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.
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 would 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. Additionally, as a start-up brand, Bagger Dave's has both higher risk and higher growth potential while BWW, being a mature brand and as a franchisee, has more limited organic growth potential due to the status of its existing market penetration and the need to obtain development rights from the franchisor.
In conjunction with the Spin-Off, DRH entered into a transition services agreement (the "TSA") with Bagger Dave's pursuant to which DRH provides 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 Statements of Operations - Bagger Dave's results of operations for the
three and six
month periods ended
June 26, 2016
have been presented as discontinued operations. Additionally, all activity related to the discontinued operation at the Company is presented as discontinued operations for the
three and six
month periods ended
June 25, 2017
.
|
|
|
|
|
•
|
Consolidated Statements of Cash Flows - The Bagger Dave's cash flows from operating and investing activities for the
six-month periods ended June 25, 2017
and
June 26, 2016
have been presented separately on the face of the cash flow statement. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 25, 2017
|
|
June 26, 2016
|
|
June 25, 2017
|
|
June 26, 2016
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
5,439,866
|
|
|
$
|
—
|
|
|
$
|
10,709,413
|
|
|
Restaurant operating and closure related costs (exclusive of depreciation and amortization)
|
|
29,583
|
|
|
(5,362,878
|
)
|
|
96,276
|
|
|
(10,859,752
|
)
|
|
General and administrative expenses
|
|
(198,710
|
)
|
|
(467,930
|
)
|
|
(228,868
|
)
|
|
(956,397
|
)
|
|
Depreciation and amortization
|
|
—
|
|
|
(578,106
|
)
|
|
—
|
|
|
(1,123,721
|
)
|
|
Pre-opening costs
|
|
—
|
|
|
(203,178
|
)
|
|
—
|
|
|
(352,099
|
)
|
|
Other income
|
|
—
|
|
|
3,357
|
|
|
—
|
|
|
8,887
|
|
|
Gain on asset disposals
|
|
—
|
|
|
746,678
|
|
|
—
|
|
|
727,774
|
|
|
Loss from discontinued operations before income taxes
|
|
(169,127
|
)
|
|
(422,191
|
)
|
|
(132,592
|
)
|
|
(1,845,895
|
)
|
|
Income tax benefit
|
|
51,380
|
|
|
5,421
|
|
|
50,385
|
|
|
567,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(117,747
|
)
|
|
$
|
(416,770
|
)
|
|
$
|
(82,207
|
)
|
|
$
|
(1,278,795
|
)
|
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The operating results of the discontinued operations include only direct expenses incurred by 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.
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
3
for a discussion of involvement the Company will continue to have with Bagger Dave's after the Spin-Off.
3. 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 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 three of the Company’s executive officers are currently also on Bagger Dave’s board, there are no agreements in place that require these executive officers to vote in the interests of the Company, as these executive officers do not represent the Company in their capacity as Bagger Dave’s directors. Furthermore, they 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
June 25, 2017
, the Company is a guarantor for
17
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 as of
June 25, 2017
and
December 25, 2016
. 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
June 25, 2017
and
December 25, 2016
, no loss exposure under the guarantees was probable because, among other things, each of the Bagger Dave's restaurants subject to 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.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The Company has determined that its maximum exposure resulting from the lease guarantees includes approximately
$9.1 million
of future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance requirements under the leases as of
June 25, 2017
. 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 less than
4
months to
13
years as of
June 25, 2017
. 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, we expect that a replacement tenant would be found and the lessor would 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 Dave's 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
June 25, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of lease
|
Status of location
|
Guarantee expiry date
|
|
Liability recognized on balance sheet
|
|
Future guaranteed lease payments
|
|
Holland, MI
|
Closed
|
10/09/17
|
|
$
|
2,101
|
|
|
$
|
22,500
|
|
|
Bloomfield, MI
|
Open
|
01/14/18
|
|
2,787
|
|
|
47,083
|
|
|
Shelby Township, MI
|
Open
|
01/31/18
|
|
2,622
|
|
|
45,376
|
|
|
West Chester Township, OH
|
Open
|
02/01/18
|
|
2,866
|
|
|
49,583
|
|
|
Woodhaven, MI
|
Open
|
11/30/18
|
|
4,426
|
|
|
105,117
|
|
|
Traverse City, MI
|
Open
|
01/31/19
|
|
5,887
|
|
|
144,167
|
|
|
Fort Wayne, IN
|
Open
|
01/31/19
|
|
5,424
|
|
|
132,697
|
|
|
Grand Blanc, MI
|
Open
|
01/31/20
|
|
6,759
|
|
|
182,167
|
|
|
Centerville, OH
|
Open
|
11/30/20
|
|
13,293
|
|
|
372,607
|
|
|
Chesterfield Township, MI
|
Open
|
12/31/20
|
|
8,092
|
|
|
243,750
|
|
|
E. Lansing, MI
|
Open
|
09/10/21
|
|
2,334
|
|
|
75,000
|
|
|
Birch Run, MI
|
Open
|
12/31/24
|
|
23,557
|
|
|
712,400
|
|
|
Berkley, MI
|
Open
|
06/08/29
|
|
32,532
|
|
|
1,008,120
|
|
|
Cascade Township, MI
|
Open
|
06/08/29
|
|
29,856
|
|
|
925,194
|
|
|
Avon, IN
|
Closed
|
06/30/29
|
|
48,658
|
|
|
1,507,844
|
|
|
Greenwood, IN
|
Closed
|
06/30/29
|
|
50,372
|
|
|
1,560,960
|
|
|
Canton, MI
|
Open
|
06/30/30
|
|
63,541
|
|
|
1,994,917
|
|
|
Totals
|
|
|
|
$
|
305,107
|
|
|
$
|
9,129,482
|
|
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2017
|
|
December 25, 2016
|
|
Equipment
|
|
$
|
30,079,884
|
|
|
$
|
29,426,476
|
|
|
Furniture and fixtures
|
|
7,457,424
|
|
|
7,275,923
|
|
|
Leasehold improvements
|
|
64,582,498
|
|
|
63,449,082
|
|
|
Restaurant construction in progress
|
|
—
|
|
|
94,595
|
|
|
Total
|
|
102,119,806
|
|
|
100,246,076
|
|
|
Less accumulated depreciation
|
|
(49,020,521
|
)
|
|
(43,616,045
|
)
|
|
Property and equipment, net
|
|
$
|
53,099,285
|
|
|
$
|
56,630,031
|
|
5. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2017
|
|
December 25, 2016
|
|
Amortized intangible assets
|
|
|
|
|
|
Franchise fees
|
|
$
|
1,290,642
|
|
|
$
|
1,290,642
|
|
|
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
|
|
|
2,089,129
|
|
|
Less accumulated amortization
|
|
(815,121
|
)
|
|
(718,517
|
)
|
|
Amortized intangible assets, net
|
|
1,274,008
|
|
|
1,370,612
|
|
|
|
|
|
|
|
|
Unamortized intangible assets
|
|
|
|
|
|
Liquor licenses
|
|
1,264,252
|
|
|
1,295,752
|
|
|
Total intangible assets, net
|
|
$
|
2,538,260
|
|
|
$
|
2,666,364
|
|
Amortization expense was
$21,230
and
$21,670
,
$42,376
and
$43,341
for the
three-month periods ended June 25, 2017
and
June 26, 2016
and
six-month periods ended June 25, 2017
and
June 26, 2016
, respectively. Amortization of favorable leases and loan fees are reflected as part of occupancy and interest expense, respectively.
The aggregate weighted-average amortization period for intangible assets is
8.7 years
at
June 25, 2017
.
6. OTHER ACCRUED LIABILITES
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2017
|
|
December 25, 2016
|
|
Sales tax payable
|
$
|
736,897
|
|
|
$
|
816,215
|
|
|
Accrued interest
|
515,081
|
|
|
442,976
|
|
|
Accrued royalty fees
|
147,978
|
|
|
144,727
|
|
|
Accrued property taxes
|
484,079
|
|
|
490,809
|
|
|
Other
|
250,971
|
|
|
747,542
|
|
|
Total other accrued liabilities
|
$
|
2,135,006
|
|
|
$
|
2,642,269
|
|
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
Long-term debt consists of the following obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2017
|
|
December 25, 2016
|
|
$120.0 million term loan - the rate at June 25, 2017 and December 25, 2016 was 4.56% and 4.12%, respectively.
|
|
$
|
94,698,616
|
|
|
$
|
99,698,616
|
|
|
|
|
|
|
|
|
$23.0 million development line of credit, converted to $18.2 million facility term loan in December 2016 - the rate at June 25, 2017 and December 25, 2016 was 4.56% and 4.21%, respectively.
|
|
17,441,165
|
|
|
18,199,476
|
|
|
|
|
|
|
|
|
$5.0 million revolving line of credit - the rate at June 25, 2017 and December 25, 2016 was 4.60% and 6.25%, respectively.
|
|
5,000,000
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
$5.0 million development line of credit - the rate at June 25, 2017 was 4.61%.
|
|
1,615,641
|
|
|
—
|
|
|
|
|
|
|
|
|
Unamortized discount and debt issuance costs
|
|
(607,102
|
)
|
|
(712,072
|
)
|
|
|
|
|
|
|
|
Total debt
|
|
118,148,320
|
|
|
121,186,020
|
|
|
|
|
|
|
|
|
Less current portion
|
|
(12,929,400
|
)
|
|
(11,307,819
|
)
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
105,218,920
|
|
|
$
|
109,878,201
|
|
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 refinance an acquisition occurring in second quarter 2015. The remaining balance of the June 2015 Term Loan, approximately
$0.5 million
, was used to pay the fees, costs, and expenses associated with the closing of the June 2015 Senior Secured Credit Facility. The June 2015 Term Loan is for a period of
five years
.
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 of
$833,333
on the June 2015 Term Loan 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. The June 2015 DLOC is for a term of
two years
and is subject to certain limitations relative to actual development costs. Once the DLOC is fully drawn, outstanding balances convert into a term note based on the terms of the agreement, at which time monthly principal payments will be due based on a
12
-year straight-line amortization schedule, plus interest, through maturity on June 29, 2020. 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, which is subject to certain usage restrictions during each annual period, 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.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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 represent 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
$607,102
and
$712,072
at
June 25, 2017
and
December 25, 2016
, respectively. The unamortized portion of capitalized debt issuance costs related to the DLOC and RLOC totaled
$201,684
and
$244,336
at
June 25, 2017
and
December 25, 2016
, 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.
For the
three-month periods ended June 25, 2017
and
June 26, 2016
and
six-month periods ended June 25, 2017
and
June 26, 2016
interest expense was
$1.6 million
and
$1.4 million
,
$3.2 million
and
$2.9 million
, respectively.
The current debt agreement contains various customary financial covenants generally based on the performance of the specific borrowing entity and other related entities. The more significant covenants consist of a minimum debt service coverage ratio and a maximum lease adjusted leverage ratio. On June 30, 2017, the Company entered into an amendment agreement for purposes of revising the maximum lease adjusted leverage ratio and revising certain definitions impacting the calculation of the ratio. After giving effect to the amendment, as of
June 25, 2017
, the Company is in compliance with the loan covenants.
At
June 25, 2017
, 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 loss, net of tax. See Note
1
and Note
14
for additional information pertaining to interest rate swaps.
The following summarizes the fair values of derivative instruments designated as cash flow hedges which were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2017
|
|
|
|
|
Notional amounts
|
|
Derivative assets
|
|
Derivative liabilities
|
|
Interest rate swaps
|
Rate
|
Expires
|
|
|
|
|
|
|
April 2012
|
1.4%
|
April 2019
|
$
|
4,190,476
|
|
|
$
|
—
|
|
|
$
|
3,587
|
|
|
October 2012
|
0.9%
|
October 2017
|
1,928,572
|
|
|
1,826
|
|
|
—
|
|
|
July 2013
|
1.4%
|
April 2018
|
3,047,619
|
|
|
—
|
|
|
3,381
|
|
|
May 2014
|
1.5%
|
April 2018
|
8,214,286
|
|
|
—
|
|
|
17,327
|
|
|
January 2015
|
1.8%
|
December 2019
|
21,404,762
|
|
|
—
|
|
|
227,098
|
|
|
August 2015
|
2.3%
|
June 2020
|
49,523,661
|
|
|
—
|
|
|
1,399,305
|
|
|
Total
|
|
|
$
|
88,309,376
|
|
|
$
|
1,826
|
|
|
$
|
1,650,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2016
|
|
|
|
|
Notional amounts
|
|
Derivative assets
|
|
Derivative liabilities
|
|
Interest rate swaps
|
Rate
|
Expires
|
|
|
|
|
|
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, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
8. SHARE-BASED COMPENSATION
Restricted share awards
For the
six-months ended June 25, 2017
, and
June 26, 2016
, restricted shares were issued to certain team members under the Stock Incentive Plan of 2011 at a weighted-average grant date fair value of
$2.70
and
$1.52
, 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 Compensation Committee. Unrecognized share-based compensation expense of
$368,535
at
June 25, 2017
will be recognized over the remaining weighted-average vesting period of
1.8 years
. The total fair value of shares vested during the
six-month periods ended June 25, 2017
and
June 26, 2016
, was
$265,248
and
$108,671
, respectively. Under the Stock Incentive Plan of 2011, there were
97,686
shares available for future awards at
June 25, 2017
.
On July 13, 2017 the Company's shareholders approved a new stock incentive plan - the Stock Incentive Plan of 2017. No further grants will be made under the Stock Incentive Plan of 2011. The Stock Incentive Plan of 2017 has 2,500,000 shares available for future awards.
The following table presents the restricted shares transactions during the
six
-month period ended
June 25, 2017
:
|
|
|
|
|
|
|
|
Number of
Restricted
Stock Shares
|
|
Unvested, December 25, 2016
|
473,391
|
|
|
Granted
|
33,333
|
|
|
Vested
|
(113,146
|
)
|
|
Vested shares tax portion
|
(16,378
|
)
|
|
Expired/Forfeited
|
(44,850
|
)
|
|
Unvested, June 25, 2017
|
332,350
|
|
The following table presents the restricted shares transactions during the
six
-month period ended
June 26, 2016
:
|
|
|
|
|
|
|
|
Number of
Restricted
Stock Shares
|
|
Unvested, December 27, 2015
|
241,124
|
|
|
Granted
|
335,831
|
|
|
Vested
|
(63,106
|
)
|
|
Vested shares tax portion
|
(5,940
|
)
|
|
Expired/Forfeited
|
(22,351
|
)
|
|
Unvested, June 26, 2016
|
485,558
|
|
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 had an original expiration date
six years
from the date of issuance. 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
June 25, 2017
,
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
June 25, 2017
and
June 26, 2016
.
Employee stock purchase plan
The Company 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
six-months ended June 25, 2017
and
June 26, 2016
, the Company issued
12,594
and
13,546
shares, respectively. Under the ESPP, there are
167,522
shares available for future purchase at
June 25, 2017
.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Share-based Compensation
Share-based compensation of
$0.1 million
and
$0.1 million
,
$0.2 million
and
$0.2 million
, was recognized during the
three-month periods ended June 25, 2017
and
June 26, 2016
and
six-month periods ended June 25, 2017
and
June 26, 2016
, respectively, as compensation cost in the Consolidated Statements of Operations and as additional paid-in capital on the Consolidated Statement of Stockholders' Equity (Deficit) to reflect the fair value of shares vested.
The Company has authorized
10,000,000
shares of preferred stock at a par value of
$0.0001
.
No
preferred shares are issued or outstanding as of
June 25, 2017
. 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.
9. INCOME TAXES
The effective income tax rate for continuing operations was
67.5%
and
1,462.0%
,
746.0%
and
(9.8)%
for the
three-month periods ended June 25, 2017
and
June 26, 2016
and
six-month periods ended June 25, 2017
and
June 26, 2016
, respectively. The change in the effective income tax rate for six months ended
June 25, 2017
compared with the six months ended
June 26, 2016
is primarily attributable to the increase in estimated tip tax credits for 2017 creating a tax recovery. As the decrease in income before income taxes for the six months ended June 25, 2017 resulted in an operating loss, the effective income tax rate appears as an expense but is effectively a recovery generated by the operating loss and the increase in estimated tip tax credits.
10. 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
$2.2 million
and
$2.1 million
,
$4.4 million
and
$4.3 million
for the
three-month periods ended June 25, 2017
and
June 26, 2016
and
six-month periods ended June 25, 2017
and
June 26, 2016
, respectively.
Scheduled future minimum lease payments for each of the
five years
and thereafter for non-cancelable operating leases with initial or remaining lease terms in excess of
one year
at
June 25, 2017
are summarized as follows:
|
|
|
|
|
|
|
|
Year
|
Amount
|
|
Remainder of 2017
|
$
|
4,557,978
|
|
|
2018
|
8,831,563
|
|
|
2019
|
8,095,252
|
|
|
2020
|
8,016,636
|
|
|
2021
|
7,188,676
|
|
|
Thereafter
|
33,536,746
|
|
|
Total
|
$
|
70,226,851
|
|
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES
The Company’s ADA with BWLD calls for it to open
42
restaurants by April 1, 2021. As of
June 25, 2017
we have opened
30
restaurants under the ADA. We are currently in discussions with BWLD with respect to both the timing and desirability of building the remaining
12
restaurants pursuant to the current ADA. If the ADA is not renegotiated, the Company may choose not to build some, or all of the remaining
12
locations in exchange for a fee of
$50,000
for each unbuilt unit.
The Company is required to pay BWLD royalties (
5.0%
of net sales) and advertising fund contributions (between
3.00%
and
3.15%
of net sales). In addition, the Company is required to spend an additional
0.25%
-
0.50%
of regional net sales related to advertising cooperatives for certain metropolitan markets for the term of the individual franchise agreements. The Company incurred
$2.0 million
in royalty expense for both
three-month periods ended June 25, 2017
and
June 26, 2016
and
$4.0 million
for both
six-month periods ended June 25, 2017
and
June 26, 2016
, respectively. Advertising fund contribution and advertising cooperative expenses were
$1.3 million
for both
three-month periods ended June 25, 2017
and
June 26, 2016
and
$2.7 million
for both
six-month periods ended June 25, 2017
and
June 26, 2016
. 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 design model that BWLD has approved. The modernization costs for a restaurant can range from approximately
$250,000
to
$850,000
depending on an individual restaurant's needs and whether or not additions such as enclosed patios will be included.
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. As of June 25, 2017, no additional funding has been required.
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.
Refer to Note
3
for a discussion of lease guarantees provided by the Company.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
12. EARNINGS PER SHARE
The following is a reconciliation of basic and fully diluted earnings per common share for the
three-month periods ended June 25, 2017
and
June 26, 2016
and
six-month periods ended June 25, 2017
and
June 26, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
June 25, 2017
|
|
June 26, 2016
|
|
Income from continuing operations
|
|
$
|
(291,343
|
)
|
|
$
|
234,344
|
|
|
Income (loss) from discontinued operations
|
|
(117,747
|
)
|
|
(416,770
|
)
|
|
Net income
|
|
$
|
(409,090
|
)
|
|
$
|
(182,426
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
26,621,421
|
|
|
26,379,065
|
|
|
Effect of dilutive securities
|
|
—
|
|
|
—
|
|
|
Weighted-average shares outstanding - assuming dilution
|
|
26,621,421
|
|
|
26,379,065
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share from continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
Earnings per common share from discontinued operations
|
|
(0.01
|
)
|
|
(0.02
|
)
|
|
Earnings per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per common share - assuming dilution - from continuing operations
|
|
(0.01
|
)
|
|
0.01
|
|
|
Earnings per common share - assuming dilution - from discontinued operations
|
|
(0.01
|
)
|
|
(0.02
|
)
|
|
Earnings per common share - assuming dilution
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
June 25, 2017
|
|
June 26, 2016
|
|
Income from continuing operations
|
|
$
|
504,237
|
|
|
$
|
1,526,773
|
|
|
Income (loss) from discontinued operations
|
|
(82,207
|
)
|
|
(1,278,795
|
)
|
|
Net income
|
|
$
|
422,030
|
|
|
$
|
247,978
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
26,625,697
|
|
|
26,338,549
|
|
|
Effect of dilutive securities
|
|
—
|
|
|
—
|
|
|
Weighted-average shares outstanding - assuming dilution
|
|
26,625,697
|
|
|
26,338,549
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share from continuing operations
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
Earnings per common share from discontinued operations
|
|
—
|
|
|
(0.05
|
)
|
|
Earnings per common share
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share - assuming dilution - from continuing operations
|
|
0.02
|
|
|
0.06
|
|
|
Earnings per common share - assuming dilution - from discontinued operations
|
|
—
|
|
|
(0.05
|
)
|
|
Earnings per common share - assuming dilution
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
During the
three and six
month periods ended
June 25, 2017
and the
three and six
month periods ended
June 26, 2016
,
332,350
and
485,558
shares, respectively, of unvested restricted stock were excluded from the calculation of diluted earnings per share because such shares were anti-dilutive.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
13. SUPPLEMENTAL CASH FLOWS INFORMATION
Other Cash Flows Information
Cash paid for interest was
$1.6 million
and
$1.4 million
,
$3.0 million
and
$2.8 million
during the
three-month periods ended June 25, 2017
and
June 26, 2016
and
six-month periods ended June 25, 2017
and
June 26, 2016
, respectively.
Cash paid for income taxes was
$2,819
and
$10,000
,
$2,819
and
$10,000
during the
three-month periods ended June 25, 2017
and
June 26, 2016
and
six-month periods ended June 25, 2017
and
June 26, 2016
, respectively.
Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities
Noncash investing activities for property and equipment not yet paid as of
June 25, 2017
and
June 26, 2016
, was
$0.1 million
and
$0.6 million
, respectively.
14. 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
June 25, 2017
and
December 25, 2016
, our financial instruments consisted of cash and cash equivalents, 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 observable market 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
7
for additional information pertaining to interest rates swaps.
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
June 25, 2017
and
December 25, 2016
, our total debt was approximately
$118.1 million
and
$121.2 million
, respectively, which approximated fair value because the applicable interest rates are adjusted frequently based on short-term market rates (Level 2).
There were
no
transfers between levels of the fair value hierarchy during the
three and six
month periods ended
June 25, 2017
and the fiscal year ended
December 25, 2016
.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair values for those liabilities measured on a recurring basis as of
June 25, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAIR VALUE MEASUREMENTS
|
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Liability
Total
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
(1,648,872
|
)
|
|
$
|
—
|
|
|
$
|
(1,648,872
|
)
|
|
Lease guarantee liability
|
|
—
|
|
|
(305,107
|
)
|
|
—
|
|
|
(305,107
|
)
|
|
Total
|
|
$
|
—
|
|
|
$
|
(1,953,979
|
)
|
|
$
|
—
|
|
|
$
|
(1,953,979
|
)
|
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
|
|
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
|
)
|
15. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes each component of Accumulated Other Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 25, 2017
|
|
Three Months Ended June 26, 2016
|
|
|
|
Interest Rate Swaps
|
|
Interest Rate Swaps
|
|
Beginning balance
|
|
$
|
(769,778
|
)
|
|
$
|
(2,055,477
|
)
|
|
|
|
|
|
|
|
Loss recorded to other comprehensive loss
|
|
(482,541
|
)
|
|
(553,071
|
)
|
|
Tax benefit
|
|
164,064
|
|
|
188,044
|
|
|
Other comprehensive loss
|
|
(318,477
|
)
|
|
(365,027
|
)
|
|
|
|
|
|
|
|
Accumulated OCL
|
|
$
|
(1,088,255
|
)
|
|
$
|
(2,420,504
|
)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 25, 2017
|
|
Six Months Ended June 26, 2016
|
|
|
|
Interest Rate Swaps
|
|
Interest Rate Swaps
|
|
Beginning balance
|
|
$
|
(934,222
|
)
|
|
$
|
(1,006,667
|
)
|
|
|
|
|
|
|
|
Loss recorded to other comprehensive loss
|
|
(233,383
|
)
|
|
(2,142,177
|
)
|
|
Tax benefit
|
|
79,350
|
|
|
728,340
|
|
|
Other comprehensive loss
|
|
(154,033
|
)
|
|
(1,413,837
|
)
|
|
|
|
|
|
|
|
Accumulated OCL
|
|
$
|
(1,088,255
|
)
|
|
$
|
(2,420,504
|
)
|