Item 1. Financial Statements
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
ASSETS
|
|
(unaudited)
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,665,491
|
|
|
$
|
4,021,126
|
|
Accounts receivable
|
|
103,843
|
|
|
276,238
|
|
Inventory
|
|
1,503,617
|
|
|
1,700,604
|
|
Prepaid and other assets
|
|
1,171,343
|
|
|
1,305,936
|
|
Total current assets
|
|
7,444,294
|
|
|
7,303,904
|
|
|
|
|
|
|
Deferred income taxes
|
|
18,020,997
|
|
|
16,250,928
|
|
Property and equipment, net
|
|
50,684,927
|
|
|
56,630,031
|
|
Intangible assets, net
|
|
2,493,602
|
|
|
2,666,364
|
|
Goodwill
|
|
50,097,081
|
|
|
50,097,081
|
|
Other long-term assets
|
|
187,084
|
|
|
233,539
|
|
Total assets
|
|
$
|
128,927,985
|
|
|
$
|
133,181,847
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
5,135,349
|
|
|
$
|
3,995,846
|
|
Accrued compensation
|
|
1,640,664
|
|
|
2,803,549
|
|
Other accrued liabilities
|
|
2,544,416
|
|
|
2,642,269
|
|
Current portion of long-term debt
|
|
11,375,468
|
|
|
11,307,819
|
|
Current portion of deferred rent
|
|
471,365
|
|
|
194,206
|
|
Total current liabilities
|
|
21,167,262
|
|
|
20,943,689
|
|
|
|
|
|
|
Deferred rent, less current portion
|
|
2,103,398
|
|
|
2,020,199
|
|
Unfavorable operating leases
|
|
531,018
|
|
|
591,247
|
|
Other long-term liabilities
|
|
3,316,271
|
|
|
3,859,231
|
|
Long-term debt, less current portion
|
|
105,381,002
|
|
|
109,878,201
|
|
Total liabilities
|
|
132,498,951
|
|
|
137,292,567
|
|
|
|
|
|
|
Commitments and contingencies (Notes 3, 10 and 11)
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit
|
|
|
|
|
Common stock - $0.0001 par value; 100,000,000 shares authorized; 26,848,507 and 26,632,222, respectively, issued and outstanding
|
|
2,623
|
|
|
2,610
|
|
Additional paid-in capital
|
|
21,624,434
|
|
|
21,355,270
|
|
Accumulated other comprehensive loss
|
|
(795,281
|
)
|
|
(934,222
|
)
|
Accumulated deficit
|
|
(24,402,742
|
)
|
|
(24,534,378
|
)
|
Total stockholders' deficit
|
|
(3,570,966
|
)
|
|
(4,110,720
|
)
|
|
|
|
|
|
Total liabilities and stockholders' deficit
|
|
$
|
128,927,985
|
|
|
$
|
133,181,847
|
|
The accompanying notes are an integral part of these interim consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
|
September 24, 2017
|
|
September 25, 2016
|
Revenue
|
|
$
|
39,262,940
|
|
|
$
|
41,625,312
|
|
|
$
|
123,535,506
|
|
|
$
|
125,719,745
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
|
|
|
|
|
|
|
|
|
Food, beverage, and packaging costs
|
|
11,569,925
|
|
|
11,402,389
|
|
|
36,529,901
|
|
|
34,881,667
|
|
Compensation costs
|
|
9,991,381
|
|
|
10,288,623
|
|
|
31,125,287
|
|
|
31,112,586
|
|
Occupancy costs
|
|
2,969,250
|
|
|
2,899,508
|
|
|
8,701,927
|
|
|
8,440,075
|
|
Other operating costs
|
|
8,770,406
|
|
|
8,922,440
|
|
|
26,188,432
|
|
|
25,808,943
|
|
General and administrative expenses
|
|
2,301,061
|
|
|
2,375,476
|
|
|
6,724,436
|
|
|
6,896,819
|
|
Pre-opening costs
|
|
79,605
|
|
|
84,650
|
|
|
405,448
|
|
|
654,034
|
|
Depreciation and amortization
|
|
3,244,255
|
|
|
3,626,377
|
|
|
10,149,050
|
|
|
11,212,555
|
|
Loss on asset disposal
|
|
16,578
|
|
|
79,220
|
|
|
302,652
|
|
|
263,371
|
|
Total operating expenses
|
|
38,942,461
|
|
|
39,678,683
|
|
|
120,127,133
|
|
|
119,270,050
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
320,479
|
|
|
1,946,629
|
|
|
3,408,373
|
|
|
6,449,695
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(1,822,876
|
)
|
|
(1,439,273
|
)
|
|
(5,041,136
|
)
|
|
(4,324,765
|
)
|
Other income, net
|
|
26,000
|
|
|
11,849
|
|
|
78,307
|
|
|
87,856
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
(1,476,397
|
)
|
|
519,205
|
|
|
(1,554,456
|
)
|
|
2,212,786
|
|
Income tax benefit (expense) of continuing operations
|
|
933,157
|
|
|
77,504
|
|
|
1,515,453
|
|
|
(89,304
|
)
|
Income (loss) from continuing operations
|
|
(543,240
|
)
|
|
596,709
|
|
|
(39,003
|
)
|
|
2,123,482
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
|
(22,960
|
)
|
|
(2,748,012
|
)
|
|
(155,552
|
)
|
|
(4,593,907
|
)
|
Income tax benefit of discontinued operations
|
|
7,806
|
|
|
762,178
|
|
|
58,191
|
|
|
1,329,278
|
|
Loss from discontinued operations
|
|
(15,154
|
)
|
|
(1,985,834
|
)
|
|
(97,361
|
)
|
|
(3,264,629
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(558,394
|
)
|
|
$
|
(1,389,125
|
)
|
|
$
|
(136,364
|
)
|
|
$
|
(1,141,147
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share from:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
$
|
—
|
|
|
$
|
0.08
|
|
Discontinued operations
|
|
—
|
|
|
(0.07
|
)
|
|
—
|
|
|
(0.12
|
)
|
Basic net earnings (loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
—
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share from:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
|
$
|
—
|
|
|
$
|
0.08
|
|
Discontinued operations
|
|
—
|
|
|
(0.07
|
)
|
|
—
|
|
|
(0.12
|
)
|
Diluted net earnings (loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
—
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
26,764,776
|
|
|
26,625,615
|
|
|
26,672,057
|
|
|
26,434,238
|
|
Diluted
|
|
26,764,776
|
|
|
26,625,615
|
|
|
26,672,057
|
|
|
26,434,238
|
|
The accompanying notes are an integral part of these interim consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
|
September 24, 2017
|
|
September 25, 2016
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(558,394
|
)
|
|
$
|
(1,389,125
|
)
|
|
$
|
(136,364
|
)
|
|
$
|
(1,141,147
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Unrealized changes in fair value of interest rate swaps, net of tax of ($150,926), ($183,417), ($71,576) and $544,923, respectively.
|
|
292,974
|
|
|
356,047
|
|
|
138,941
|
|
|
(1,057,790
|
)
|
Total other comprehensive income (loss)
|
|
292,974
|
|
|
356,047
|
|
|
138,941
|
|
|
(1,057,790
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(265,420
|
)
|
|
$
|
(1,033,078
|
)
|
|
$
|
2,577
|
|
|
$
|
(2,198,937
|
)
|
The accompanying notes are an integral part of these interim consolidated financial statements.
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Accumulated
Other
|
|
|
|
Total
|
|
Common Stock
|
|
Paid-in
|
|
Comprehensive
|
|
Accumulated
|
|
Stockholders'
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Loss
|
|
Deficit
|
|
Equity (Deficit)
|
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
|
342,331
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures of restricted shares
|
(23,851
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares effectively repurchased for required employee withholding taxes
|
(5,940
|
)
|
|
(1
|
)
|
|
(9,325
|
)
|
|
—
|
|
|
—
|
|
|
(9,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan
|
21,896
|
|
|
3
|
|
|
31,220
|
|
|
—
|
|
|
—
|
|
|
31,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
—
|
|
|
8
|
|
|
351,369
|
|
|
—
|
|
|
—
|
|
|
351,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,057,790
|
)
|
|
—
|
|
|
(1,057,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,123,482
|
|
|
2,123,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,264,629
|
)
|
|
(3,264,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances - September 25, 2016
|
26,633,161
|
|
|
$
|
2,607
|
|
|
$
|
36,509,583
|
|
|
$
|
(2,064,457
|
)
|
|
$
|
(19,673,044
|
)
|
|
$
|
14,774,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances - December 25, 2016
|
26,632,222
|
|
|
$
|
2,610
|
|
|
$
|
21,355,270
|
|
|
$
|
(934,222
|
)
|
|
$
|
(24,534,378
|
)
|
|
$
|
(4,110,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares
|
263,332
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures of restricted shares
|
(48,850
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares effectively repurchased for required employee withholding taxes
|
(22,716
|
)
|
|
(2
|
)
|
|
(59,926
|
)
|
|
—
|
|
|
—
|
|
|
(59,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan
|
24,519
|
|
|
2
|
|
|
45,003
|
|
|
—
|
|
|
—
|
|
|
45,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
—
|
|
|
13
|
|
|
284,087
|
|
|
—
|
|
|
—
|
|
|
284,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
138,941
|
|
|
—
|
|
|
138,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of ASU 2016-09 (Note 1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
268,000
|
|
|
268,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(39,003
|
)
|
|
(39,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(97,361
|
)
|
|
(97,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances - September 24, 2017
|
26,848,507
|
|
|
$
|
2,623
|
|
|
$
|
21,624,434
|
|
|
$
|
(795,281
|
)
|
|
$
|
(24,402,742
|
)
|
|
$
|
(3,570,966
|
)
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
Cash flows from operating activities
|
|
|
|
|
Net loss
|
|
$
|
(136,364
|
)
|
|
$
|
(1,141,147
|
)
|
Net loss from discontinued operations
|
|
(97,361
|
)
|
|
(3,264,629
|
)
|
Net income (loss) from continuing operations
|
|
(39,003
|
)
|
|
2,123,482
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities
|
|
|
|
|
Depreciation and amortization
|
|
10,149,050
|
|
|
11,212,555
|
|
Amortization of debt discount and loan fees
|
|
156,951
|
|
|
178,287
|
|
Amortization of gain on sale-leaseback
|
|
(99,657
|
)
|
|
(95,878
|
)
|
Loss on asset disposals
|
|
302,652
|
|
|
263,371
|
|
Share-based compensation
|
|
284,100
|
|
|
351,377
|
|
Deferred income taxes
|
|
(1,573,644
|
)
|
|
(100,119
|
)
|
Changes in operating assets and liabilities that provided (used) cash
|
|
|
|
|
Accounts receivable
|
|
172,395
|
|
|
(56,139
|
)
|
Inventory
|
|
196,987
|
|
|
135,837
|
|
Prepaid and other assets
|
|
134,593
|
|
|
(704,206
|
)
|
Intangible assets
|
|
(28,729
|
)
|
|
31,763
|
|
Other long-term assets
|
|
46,455
|
|
|
746,772
|
|
Accounts payable
|
|
1,228,025
|
|
|
(1,049,207
|
)
|
Accrued liabilities
|
|
(1,270,506
|
)
|
|
(1,049,327
|
)
|
Deferred rent
|
|
137,342
|
|
|
81,177
|
|
Net cash provided by operating activities of continuing operations
|
|
9,797,011
|
|
|
12,069,745
|
|
Net cash used in operating activities of discontinued operations
|
|
(97,361
|
)
|
|
(3,859,500
|
)
|
Net cash provided by operating activities
|
|
9,699,650
|
|
|
8,210,245
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
Purchases of property and equipment
|
|
(4,453,861
|
)
|
|
(12,161,596
|
)
|
Net cash used in investing activities of continuing operations
|
|
(4,453,861
|
)
|
|
(12,161,596
|
)
|
Net cash used in investing activities of discontinued operations
|
|
—
|
|
|
(640,655
|
)
|
Net cash used in investing activities
|
|
(4,453,861
|
)
|
|
(12,802,251
|
)
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
4,650,965
|
|
|
8,609,154
|
|
Repayments of long-term debt
|
|
(9,237,466
|
)
|
|
(13,634,717
|
)
|
Proceeds from employee stock purchase plan
|
|
45,005
|
|
|
31,223
|
|
Tax withholdings for restricted stock units
|
|
(59,928
|
)
|
|
(9,326
|
)
|
Net cash used in financing activities
|
|
(4,601,424
|
)
|
|
(5,003,666
|
)
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
644,365
|
|
|
(9,595,672
|
)
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
4,021,126
|
|
|
13,499,890
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
4,665,491
|
|
|
$
|
3,904,218
|
|
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
September 24, 2017
and
December 25, 2016
, and for the
nine
-month periods ended
September 24, 2017
and
September 25, 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
September 24, 2017
and for the
nine
-month periods ended
September 24, 2017
and
September 25, 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
nine
-month periods ended
September 24, 2017
and
September 25, 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
September 24, 2017
and
December 25, 2016
, we had goodwill of
$50.1 million
.
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, no further action would 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
September 24, 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
nine
-month periods ended
September 24, 2017
and
September 25, 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 agreements-
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
nine
-month periods ended
September 24, 2017
and
September 25, 2016
,
no
impairment was recognized.
Concentration Risks
Approximately
77%
and
76%
of the Company's continuing revenues for the
three months ended September 24, 2017
and
September 25, 2016
, respectively, were generated from food and beverage sales from restaurants located in the Midwest region.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The remaining
23%
and
24%
of the Company's continuing revenues for the
three months ended September 24, 2017
and
September 25, 2016
, respectively, were generated from food and beverage sales from restaurants located in Florida.
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 its 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 agreement 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.
Blazin' Rewards® Loyalty Program
In 2017, the Company completed the implementation of a customer loyalty program, Blazin' Rewards®. The program allows members to earn points when they make purchases at our restaurants. The Company developed an estimate for the value of each point based on historical data. We record the fair value, net of estimated breakage, of the points as a reduction of restaurant sales and establish a liability within deferred revenue as the points are earned. Breakage is the percentage of points earned that are not expected to be redeemed. The revenue associated with the points is recognized upon the redemption of the points. Points generally expire after six months of inactivity.
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
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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 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. While the Company's evaluation of the standard is ongoing, our preliminary assessment indicates that the new revenue recognition standard will not materially impact the recognition of restaurant sales, our primary source of revenue. As we continue the evaluation, documentation and implementation of ASU 2016-09, other areas which could be impacted may be identified. Additionally, this guidance will require us to enhance our disclosures, including disclosing performance obligations to customers arising from certain promotional activity, such as our customer loyalty program. With respect to the transition method for adoption, we expect to adopt this standard using the modified retrospective approach. We expect to complete the evaluation and documentation by year end
December 31,
2017
.
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.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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
September 24, 2017
, no additional funding has been required.
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 nine
month periods ended
September 25, 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 nine
month periods ended
September 24, 2017
.
|
|
|
•
|
Consolidated Statements of Cash Flows - The Bagger Dave's cash flows from operating and investing activities for the
nine-month periods ended September 24, 2017
and
September 25, 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:
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
|
September 24, 2017
|
|
September 25, 2016
|
Revenue
|
|
$
|
—
|
|
|
$
|
5,063,316
|
|
|
$
|
—
|
|
|
$
|
15,772,729
|
|
Restaurant operating and closure related costs (exclusive of depreciation and amortization)
|
|
|
|
|
(5,265,968
|
)
|
|
96,276
|
|
|
(16,125,720
|
)
|
General and administrative expenses
|
|
(22,960
|
)
|
|
(909,153
|
)
|
|
(251,828
|
)
|
|
(1,865,550
|
)
|
Depreciation and amortization
|
|
|
|
|
(1,547,698
|
)
|
|
—
|
|
|
(2,671,419
|
)
|
Pre-opening costs
|
|
—
|
|
|
(11,664
|
)
|
|
—
|
|
|
(363,763
|
)
|
Other income
|
|
—
|
|
|
1,018
|
|
|
—
|
|
|
9,905
|
|
Gain (loss) on asset disposals
|
|
—
|
|
|
(77,863
|
)
|
|
—
|
|
|
649,911
|
|
Loss from discontinued operations before income taxes
|
|
(22,960
|
)
|
|
(2,748,012
|
)
|
|
(155,552
|
)
|
|
(4,593,907
|
)
|
Income tax benefit
|
|
7,806
|
|
|
762,178
|
|
|
58,191
|
|
|
1,329,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(15,154
|
)
|
|
$
|
(1,985,834
|
)
|
|
$
|
(97,361
|
)
|
|
$
|
(3,264,629
|
)
|
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 continues 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
September 24, 2017
, the Company is a guarantor for
17
leases, three of which have been re-leased 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.
Upon Spin-Off of Bagger Dave's, in accordance with ASC 460,
Guarantees
, the Company evaluated its liability from the 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
September 24, 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
September 24, 2017
and
December 25, 2016
, no loss under the guarantees was probable because all but one of the Bagger Dave's restaurants subject to the leases is either currently operating or the site has been leased to another tenant who is responsible for, and making, the lease
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
payments. With respect to the one recent closure, we expect to find a new tenant for the site and, in the meantime, Bagger Dave's is continuing to make the lease payments.
The Company has determined that its maximum exposure resulting from the lease guarantees includes approximately
$8.8 million
of future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance requirements under the leases as of
September 24, 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. The guarantee expiration dates range from less than
1
month to
12
years as of
September 24, 2017
. In the event that the Company is required to perform under any of its lease guarantees, we do not believe the liability would be material because we would first seek to minimize the exposure by finding a suitable tenant to 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. Since 2015,
10
Bagger Dave’s locations with DRH lease guarantees were closed. New tenants were found to step into the Company’s lease obligations for
7
of these locations in
3
to
14
months from the date of closure. Over this time,
6
guarantees expired or terminated, and
4
remain obligations 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 history of incurring operating losses;
|
|
|
•
|
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
September 24, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Location of lease
|
Status of location
|
Guarantee expiry date
|
|
Liability recognized on balance sheet
|
|
Future guaranteed lease payments
|
Holland, MI
|
Closed / re-leased
|
10/09/17
|
|
$
|
2,101
|
|
|
$
|
2,177
|
|
Bloomfield, MI
|
Open
|
01/14/18
|
|
2,787
|
|
|
25,833
|
|
Shelby Township, MI
|
Open
|
01/31/18
|
|
2,622
|
|
|
25,929
|
|
West Chester Township, OH
|
Open
|
02/01/18
|
|
2,866
|
|
|
28,333
|
|
Woodhaven, MI
|
Closed
|
11/30/18
|
|
4,426
|
|
|
86,567
|
|
Traverse City, MI
|
Open
|
01/31/19
|
|
5,887
|
|
|
121,667
|
|
Fort Wayne, IN
|
Open
|
01/31/19
|
|
5,424
|
|
|
111,909
|
|
Grand Blanc, MI
|
Open
|
01/31/20
|
|
6,759
|
|
|
164,667
|
|
Centerville, OH
|
Open
|
11/30/20
|
|
13,293
|
|
|
345,343
|
|
Chesterfield Township, MI
|
Open
|
12/31/20
|
|
8,092
|
|
|
211,250
|
|
E. Lansing, MI
|
Open
|
09/10/21
|
|
2,334
|
|
|
75,000
|
|
Birch Run, MI
|
Open
|
12/31/24
|
|
23,557
|
|
|
690,138
|
|
Berkley, MI
|
Open
|
06/08/29
|
|
32,532
|
|
|
989,520
|
|
Cascade Township, MI
|
Open
|
06/08/29
|
|
29,856
|
|
|
908,124
|
|
Avon, IN
|
Closed / re-leased
|
06/30/29
|
|
48,658
|
|
|
1,480,024
|
|
Greenwood, IN
|
Closed / re-leased
|
06/30/29
|
|
50,372
|
|
|
1,532,160
|
|
Canton, MI
|
Open
|
06/30/30
|
|
63,541
|
|
|
1,971,938
|
|
Totals
|
|
|
|
$
|
305,107
|
|
|
$
|
8,770,579
|
|
DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following assets:
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
Equipment
|
|
$
|
30,265,430
|
|
|
$
|
29,426,476
|
|
Furniture and fixtures
|
|
7,466,401
|
|
|
7,275,923
|
|
Leasehold improvements
|
|
64,837,092
|
|
|
63,449,082
|
|
Restaurant construction in progress
|
|
27,720
|
|
|
94,595
|
|
Total
|
|
102,596,643
|
|
|
100,246,076
|
|
Less accumulated depreciation
|
|
(51,911,716
|
)
|
|
(43,616,045
|
)
|
Property and equipment, net
|
|
$
|
50,684,927
|
|
|
$
|
56,630,031
|
|
5. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 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
|
|
(859,779
|
)
|
|
(718,517
|
)
|
Amortized intangible assets, net
|
|
1,229,350
|
|
|
1,370,612
|
|
|
|
|
|
|
Unamortized intangible assets
|
|
|
|
|
Liquor licenses
|
|
1,264,252
|
|
|
1,295,752
|
|
Total intangible assets, net
|
|
$
|
2,493,602
|
|
|
$
|
2,666,364
|
|
Amortization expense was
$21,067
and
$21,571
,
$63,443
and
$64,912
for the
three-month periods ended September 24, 2017
and
September 25, 2016
and
nine-month periods ended September 24, 2017
and
September 25, 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
8.5 years
at
September 24, 2017
.
6. OTHER ACCRUED LIABILITES
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
Sales tax payable
|
$
|
671,642
|
|
|
$
|
816,215
|
|
Accrued interest
|
590,450
|
|
|
442,976
|
|
Accrued royalty fees
|
162,407
|
|
|
144,727
|
|
Accrued property taxes
|
315,412
|
|
|
490,809
|
|
Accrued loyalty rewards
|
279,923
|
|
|
—
|
|
Other
|
524,582
|
|
|
747,542
|
|
Total other accrued liabilities
|
$
|
2,544,416
|
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
December 25, 2016
|
$120.0 million term loan - the rate at September 24, 2017 and December 25, 2016 was 4.73% and 4.12%, respectively.
|
|
$
|
92,198,617
|
|
|
$
|
99,698,616
|
|
|
|
|
|
|
$23.0 million development line of credit, converted to $18.2 million facility term loan in December 2016 - the rate at September 24, 2017 and December 25, 2016 was 4.73% and 4.21%, respectively.
|
|
17,062,009
|
|
|
18,199,476
|
|
|
|
|
|
|
$5.0 million revolving line of credit - the rate at September 24, 2017 and December 25, 2016 was 4.79% and 6.25%, respectively.
|
|
5,000,000
|
|
|
4,000,000
|
|
|
|
|
|
|
$5.0 million development line of credit - the rate at September 24, 2017 was 4.73%.
|
|
3,050,965
|
|
|
—
|
|
|
|
|
|
|
Unamortized discount and debt issuance costs
|
|
(555,121
|
)
|
|
(712,072
|
)
|
|
|
|
|
|
Total debt
|
|
116,756,470
|
|
|
121,186,020
|
|
|
|
|
|
|
Less current portion
|
|
(11,375,468
|
)
|
|
(11,307,819
|
)
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
105,381,002
|
|
|
$
|
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 related to term debt, net of accumulated amortization totaled
$555,121
and
$712,072
at
September 24, 2017
and
December 25, 2016
, respectively. The unamortized portion of capitalized debt issuance costs related to the DLOC and RLOC totaled
$180,359
and
$244,336
at
September 24, 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 September 24, 2017
and
September 25, 2016
and
nine-month periods ended September 24, 2017
and
September 25, 2016
interest expense was
$1.8 million
and
$1.4 million
,
$5.0 million
and
$4.3 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. As of
September 24, 2017
, the Company is in compliance with the loan covenants.
At
September 24, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2017
|
|
|
|
Notional amounts
|
|
Derivative assets
|
|
Derivative liabilities
|
Interest rate swaps
|
Rate
|
Expires
|
|
|
|
|
|
April 2012
|
1.4%
|
April 2019
|
$
|
3,619,048
|
|
|
$
|
696
|
|
|
$
|
—
|
|
October 2012
|
0.9%
|
October 2017
|
1,714,286
|
|
|
438
|
|
|
—
|
|
July 2013
|
1.4%
|
April 2018
|
2,190,476
|
|
|
—
|
|
|
1,307
|
|
May 2014
|
1.5%
|
April 2018
|
7,678,571
|
|
|
—
|
|
|
8,540
|
|
January 2015
|
1.8%
|
December 2019
|
21,547,619
|
|
|
—
|
|
|
133,945
|
|
August 2015
|
2.3%
|
June 2020
|
60,783,333
|
|
|
—
|
|
|
1,062,316
|
|
Total
|
|
|
$
|
97,533,333
|
|
|
$
|
1,134
|
|
|
$
|
1,206,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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 authorized a total of 2,500,000 shares for issuance as incentive awards.
For the
nine-months ended September 24, 2017
, and
September 25, 2016
, restricted shares were issued to certain team members under the Stock Incentive Plan of 2011 and the Stock Incentive Plan of 2017 at a weighted-average grant date fair value of
$2.31
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
$778,737
at
September 24, 2017
will be recognized over the remaining weighted-average vesting period of
1.8 years
. The total fair value of shares vested during the
nine-month periods ended September 24, 2017
and
September 25, 2016
, was
$386,675
and
$108,671
, respectively. Under the Stock Incentive Plan of 2017, there were
2,270,001
shares available for future awards at
September 24, 2017
.
The following table presents the restricted shares transactions during the
nine
-month period ended
September 24, 2017
:
|
|
|
|
|
Number of
Restricted
Stock Shares
|
Unvested, December 25, 2016
|
473,391
|
|
Granted
|
263,332
|
|
Vested
|
(132,158
|
)
|
Vested shares tax portion
|
(22,716
|
)
|
Expired/Forfeited
|
(48,850
|
)
|
Unvested, September 24, 2017
|
532,999
|
|
The following table presents the restricted shares transactions during the
nine
-month period ended
September 25, 2016
:
|
|
|
|
|
Number of
Restricted
Stock Shares
|
Unvested, December 27, 2015
|
241,124
|
|
Granted
|
342,331
|
|
Vested
|
(63,106
|
)
|
Vested shares tax portion
|
(5,940
|
)
|
Expired/Forfeited
|
(23,851
|
)
|
Unvested, September 25, 2016
|
490,558
|
|
On July 30, 2010, prior to the adoption of the Stock Incentive Plan of 2011, 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
September 24, 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
September 24, 2017
and
September 25, 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
nine-months ended September 24, 2017
and
September 25, 2016
, the Company issued
24,519
and
21,896
shares, respectively. Under the ESPP, there were
159,806
shares available for future purchase at
September 24, 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
,
$0.3 million
and
$0.4 million
, was recognized during the
three-month periods ended September 24, 2017
and
September 25, 2016
and
nine-month periods ended September 24, 2017
and
September 25, 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
September 24, 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 expense (benefit) rate for continuing operations was
(63.2)%
and
(14.9)%
,
(97.5)%
and
4.0%
for the
three-month periods ended September 24, 2017
and
September 25, 2016
and the
nine-month periods ended September 24, 2017
and
September 25, 2016
, respectively. The change in the effective income tax rate for the
nine
months ended
September 24, 2017
compared with the
nine
months ended
September 25, 2016
is primarily attributable to the decrease in income before income taxes and the fluctuations that the tip credits cause in the effective tax rate when income (loss) is relatively close to break even.
The deferred tax asset as of
September 24, 2017
was
$18.0 million
. On a quarterly basis, the Company evaluates the recoverability of the asset by reviewing current and projected company and restaurant industry trends, and the macro economic environment. Currently, we have concluded no valuation reserve against the deferred tax asset is necessary, however unfavorable business conditions in the future could cause this assessment to change.
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
$2.2 million
,
$6.6 million
and
$6.5 million
for the
three-month periods ended September 24, 2017
and
September 25, 2016
and
nine-month periods ended September 24, 2017
and
September 25, 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
September 24, 2017
are summarized as follows:
|
|
|
|
|
Year
|
Amount
|
Remainder of 2017
|
$
|
2,282,774
|
|
2018
|
8,947,232
|
|
2019
|
8,249,477
|
|
2020
|
8,170,861
|
|
2021
|
7,342,901
|
|
Thereafter
|
33,729,527
|
|
Total
|
$
|
68,722,772
|
|
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
September 24, 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
and
$2.3 million
in royalty expense for the
three-month periods ended September 24, 2017
and
September 25, 2016
and
$6.0 million
and
$6.3 million
for the
nine-month periods ended September 24, 2017
and
September 25, 2016
, respectively. Advertising fund contribution and advertising cooperative expenses were
$1.3 million
and
$1.4 million
for the
three-month periods ended September 24, 2017
and
September 25, 2016
and
$4.0 million
and
$4.1 million
for the
nine-month periods ended September 24, 2017
and
September 25, 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
September 24, 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 September 24, 2017
and
September 25, 2016
and
nine-month periods ended September 24, 2017
and
September 25, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
Income (loss) from continuing operations
|
|
$
|
(543,240
|
)
|
|
$
|
596,709
|
|
Loss from discontinued operations
|
|
(15,154
|
)
|
|
(1,985,834
|
)
|
Net loss
|
|
$
|
(558,394
|
)
|
|
$
|
(1,389,125
|
)
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
26,764,776
|
|
|
26,625,615
|
|
Effect of dilutive securities
|
|
—
|
|
|
—
|
|
Weighted-average shares outstanding - assuming dilution
|
|
26,764,776
|
|
|
26,625,615
|
|
|
|
|
|
|
Earnings per common share from continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.02
|
|
Earnings per common share from discontinued operations
|
|
—
|
|
|
(0.07
|
)
|
Earnings per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
Earnings per common share - assuming dilution - from continuing operations
|
|
(0.02
|
)
|
|
0.02
|
|
Earnings per common share - assuming dilution - from discontinued operations
|
|
—
|
|
|
(0.07
|
)
|
Earnings per common share - assuming dilution
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
Income (loss) from continuing operations
|
|
$
|
(39,003
|
)
|
|
$
|
2,123,482
|
|
Loss from discontinued operations
|
|
(97,361
|
)
|
|
(3,264,629
|
)
|
Net loss
|
|
$
|
(136,364
|
)
|
|
$
|
(1,141,147
|
)
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
26,672,057
|
|
|
26,434,238
|
|
Effect of dilutive securities
|
|
—
|
|
|
—
|
|
Weighted-average shares outstanding - assuming dilution
|
|
26,672,057
|
|
|
26,434,238
|
|
|
|
|
|
|
|
|
Earnings per common share from continuing operations
|
|
$
|
—
|
|
|
$
|
0.08
|
|
Earnings per common share from discontinued operations
|
|
—
|
|
|
(0.12
|
)
|
Earnings per common share
|
|
$
|
—
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
Earnings per common share - assuming dilution - from continuing operations
|
|
—
|
|
|
0.08
|
|
Earnings per common share - assuming dilution - from discontinued operations
|
|
—
|
|
|
(0.12
|
)
|
Earnings per common share - assuming dilution
|
|
$
|
—
|
|
|
$
|
(0.04
|
)
|
During the
three and nine
month periods ended
September 24, 2017
and the
three and nine
month periods ended
September 25, 2016
,
533,000
and
490,559
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
$1.7 million
and
$1.4 million
,
$4.7 million
and
$4.2 million
during the
three-month periods ended September 24, 2017
and
September 25, 2016
and
nine-month periods ended September 24, 2017
and
September 25, 2016
, respectively.
Cash paid for income taxes was
$0
and
$0
,
$2,819
and
$10,000
during the
three-month periods ended September 24, 2017
and
September 25, 2016
and
nine-month periods ended September 24, 2017
and
September 25, 2016
, respectively.
Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities
Noncash investing activities for property and equipment not yet paid as of
September 24, 2017
and
September 25, 2016
, was
$0.0 million
and
$0.5 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
September 24, 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
September 24, 2017
and
December 25, 2016
, our total debt was approximately
$116.8 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 nine
month periods ended
September 24, 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
September 24, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAIR VALUE MEASUREMENTS
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Liability
Total
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
(1,204,974
|
)
|
|
$
|
—
|
|
|
$
|
(1,204,974
|
)
|
Lease guarantee liability
|
|
—
|
|
|
(305,107
|
)
|
|
—
|
|
|
(305,107
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
(1,510,081
|
)
|
|
$
|
—
|
|
|
$
|
(1,510,081
|
)
|
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 September 24, 2017
|
|
Three Months Ended September 25, 2016
|
|
|
Interest Rate Swaps
|
|
Interest Rate Swaps
|
Beginning balance
|
|
$
|
(1,088,255
|
)
|
|
$
|
(2,420,504
|
)
|
|
|
|
|
|
Income recorded to other comprehensive loss
|
|
443,900
|
|
|
539,464
|
|
Tax expense
|
|
(150,926
|
)
|
|
(183,417
|
)
|
Other comprehensive income
|
|
292,974
|
|
|
356,047
|
|
|
|
|
|
|
Accumulated OCL
|
|
$
|
(795,281
|
)
|
|
$
|
(2,064,457
|
)
|
|
|
|
|
|
|
|
Nine Months Ended September 24, 2017
|
|
Nine Months Ended September 25, 2016
|
|
|
Interest Rate Swaps
|
|
Interest Rate Swaps
|
Beginning balance
|
|
$
|
(934,222
|
)
|
|
$
|
(1,006,667
|
)
|
|
|
|
|
|
Income (loss) recorded to other comprehensive loss
|
|
210,517
|
|
|
(1,602,713
|
)
|
Tax benefit (expense)
|
|
(71,576
|
)
|
|
544,923
|
|
Other comprehensive income (loss)
|
|
138,941
|
|
|
(1,057,790
|
)
|
|
|
|
|
|
Accumulated OCL
|
|
$
|
(795,281
|
)
|
|
$
|
(2,064,457
|
)
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated interim financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results from Operations contained in our Form 10-K for the fiscal year ended
December 25, 2016
. Information included in this discussion and analysis includes commentary on company-owned restaurants, restaurant sales, and same store sales. Management believes such sales information is an important measure of our performance, and is useful in assessing the Buffalo Wild Wings® Grill & Bar (“BWW”) concept. However, same store sales information does not represent sales in accordance with accounting principles generally accepted in the United States of America (“GAAP”), should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP and may not be comparable to financial information as defined or used by other companies.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this “Quarterly Report on Form 10-Q” may contain information that includes or is based upon certain “forward-looking statements” relating to our business. These forward-looking statements represent management’s current judgment and assumptions, and can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are frequently accompanied by the use of such words as “anticipates,” “plans,” “believes,” “expects,” “projects,” “intends,” and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, those relating to our ability to secure the additional financing adequate to execute our business plan; our ability to locate and start up new restaurants; acceptance of our restaurant concepts in new marketplaces; and the cost of food and other operating costs. Any one of these or other risks, uncertainties, other factors, or any inaccurate assumptions may cause actual results to be materially different from those described herein or elsewhere by us. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they were made. Certain of these risks, uncertainties, and other factors may be described in greater detail in our filings from time to time with the Securities and Exchange Commission ("SEC"), which we strongly urge you to read and consider. Subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above and elsewhere in our reports filed with the SEC. We expressly disclaim any intent or obligation to update any forward-looking statements.
OVERVIEW
Diversified Restaurant Holdings, Inc. and its wholly-owned subsidiaries (“DRH” or the "Company") is a single-concept restaurant company operating
65
BWW franchised restaurants. 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 2006 and are headquartered in the Detroit metropolitan area. As of
September 24, 2017
, we had
65
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 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.
RESTAURANT OPENINGS
The following table outlines the restaurant unit information for each fiscal year from 2013 through 2017 (estimate).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 (estimate)
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
Restaurants open at the beginning of year
|
|
64
|
|
|
62
|
|
|
42
|
|
|
36
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
Openings/closures:
|
|
|
|
|
|
|
|
|
|
|
New restaurant openings
|
|
1
|
|
|
2
|
|
|
3
|
|
|
3
|
|
|
3
|
|
Restaurant acquisitions
|
|
—
|
|
|
—
|
|
|
18
|
|
|
3
|
|
|
—
|
|
Restaurant closures
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Total restaurants open at the end of the year
|
|
65
|
|
|
64
|
|
|
62
|
|
|
42
|
|
|
36
|
|
RESULTS OF OPERATIONS
For the three-month period ended
September 24, 2017
("
Third
Quarter
2017
"), revenue was generated from the operations of
65
restaurants. For the three-month period ended
September 25, 2016
("
Third
Quarter
2016
"), revenue was generated from the operations of
64
restaurants. Quarterly operating results may fluctuate significantly as a result of a variety of factors, including the timing and number of new restaurant openings and related expenses, increases or decreases in same store sales, changes in commodity prices, general economic conditions, and seasonal fluctuations. As a result, our quarterly results of operations are not necessarily indicative of the results that may be achieved for any future period. Same store sales is defined as a restaurant's comparable sales in the first full month after the 18th month of operation. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Our comparable restaurant base consisted of 62 and 60 restaurants at
September 24, 2017
and
September 25, 2016
, respectively.
Results of Operations for the Three Months Ended
September 24, 2017
and
September 25, 2016
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
Total revenue
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
Food, beverage, and packaging costs
|
|
29.5
|
%
|
|
27.4
|
%
|
Compensation costs
|
|
25.4
|
%
|
|
24.7
|
%
|
Occupancy costs
|
|
7.6
|
%
|
|
7.0
|
%
|
Other operating costs
|
|
22.3
|
%
|
|
21.4
|
%
|
General and administrative expenses
|
|
5.9
|
%
|
|
5.7
|
%
|
Pre-opening costs
|
|
0.2
|
%
|
|
0.2
|
%
|
Depreciation and amortization
|
|
8.3
|
%
|
|
8.7
|
%
|
Loss on asset disposal
|
|
—
|
%
|
|
0.2
|
%
|
Total operating expenses
|
|
99.2
|
%
|
|
95.3
|
%
|
|
|
|
|
|
Operating profit
|
|
0.8
|
%
|
|
4.7
|
%
|
|
|
|
|
|
Interest expense
|
|
(4.6
|
)%
|
|
(3.5
|
)%
|
Other income, net
|
|
0.1
|
%
|
|
0.0
|
%
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
(3.7
|
)%
|
|
1.2
|
%
|
|
|
|
|
|
Income tax benefit of continuing operations
|
|
2.4
|
%
|
|
0.3
|
%
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
(1.3
|
)%
|
|
1.5
|
%
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
|
(0.1
|
)%
|
|
(6.6
|
)%
|
Income tax benefit of discontinued operations
|
|
—
|
%
|
|
1.8
|
%
|
Loss from discontinued operations
|
|
(0.1
|
)%
|
|
(4.8
|
)%
|
|
|
|
|
|
Net Loss
|
|
(1.4
|
)%
|
|
(3.3
|
)%
|
Revenue for
Third
Quarter
2017
was
$39.3 million
, a decrease of
$2.3 million
, or
5.7%
, compared to
$41.6 million
of revenue generated during
Third
Quarter
2016
. The decrease was driven by lost sales due to Hurricane Irma, major construction projects impacting two locations, the honeymoon phase of two new restaurants that opened in the Second Quarter 2016 and the impact of the revenue deferral related to the Blazin' Rewards loyalty program launched in late-2016. The decrease was partially offset by a new restaurant opening late in Second Quarter 2017. Third Quarter 2017 same-store sales decreased by 4.4%.
Food, beverage, and packaging costs
increased
by
$0.2 million
, or
1.5%
, to
$11.6 million
in
Third
Quarter
2017
from
$11.4 million
in
Third
Quarter
2016
due to the increase in the number of restaurants operating in 2017. Food, beverage, and packaging costs as a percentage of revenue
increased
to
29.5%
in
Third
Quarter
2017
from
27.4%
in
Third
Quarter
2016
primarily due to higher traditional chicken wing costs and an increase in promotional activity. Average cost per pound for traditional bone-in chicken wings, our most significant input cost, increased to
$2.14
in
Third
Quarter
2017
compared with
$1.70
in
Third
Quarter
2016
, while the mix of traditional wings to total product sales increased from
29.6%
in the Third Quarter of 2016 to 38.3% in the
Third
Quarter of
2017
, driven by promotions.
Compensation costs decreased by
$0.3 million
, or
2.9%
, to
$10.0 million
in
Third
Quarter
2017
from
$10.3 million
in
Third
Quarter
2016
. The decrease was primarily due to lower volumes, and lower bonuses and labor overhead expense. Compensation costs as a percentage of sales
increased
to
25.4%
in
Third
Quarter
2017
from
24.7%
in
Third
Quarter
2016
as a result of lower volumes compared to the same period last year.
Occupancy costs
increased
$0.1 million
, or
2.4%
, to
$3.0 million
in
Third
Quarter
2017
from
$2.9 million
in
Third
Quarter
2016
due to having more restaurants in Third Quarter of 2017. Occupancy as a percentage of sales increased to
7.6%
in
Third
Quarter
2017
compared with
7.0%
Third
Quarter
2016
due to lower sales compared to the same period last year.
Other operating costs
decreased
$0.1 million
, or
1.7%
, to
$8.8 million
in
Third
Quarter
2017
from
$8.9 million
in
Third
Quarter
2016
primarily due to cost saving initiatives. Other operating costs as a percentage of sales
increased
to
22.3%
in
Third
Quarter
2017
from
21.4%
in
Third
Quarter
2016
, due to lower sales compared to the same period last year.
General and administrative expenses
decreased
$0.1 million
, or
3.1%
, to
$2.3 million
in
Third
Quarter
2017
from
$2.4 million
in
Third
Quarter
2016
. This decrease was primarily due to a decrease in corporate wages and lower marketing expenses. General and administrative expenses as a percentage of sales
increased
to
5.9%
in
Third
Quarter
2017
from
5.7%
in
Third
Quarter
2016
.
Depreciation and amortization
decreased
by
$0.4 million
, or
10.5%
, to
$3.2 million
in
Third
Quarter
2017
from
$3.6 million
in
Third
Quarter
2016
. This decrease was primarily due to fixed asset disposals partially offset by the addition of a new restaurant opened in the Second Quarter of 2017. Depreciation and amortization as a percentage of sales
decreased
to
8.3%
in
Third
Quarter
2017
from
8.7%
in
Third
Quarter
2016
.
Results of Operations for the
Nine Months Ended
September 24, 2017
and
September 25, 2016
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
September 24, 2017
|
|
September 25, 2016
|
Total revenue
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
Food, beverage, and packaging costs
|
|
29.6
|
%
|
|
27.7
|
%
|
Compensation costs
|
|
25.2
|
%
|
|
24.8
|
%
|
Occupancy costs
|
|
7.0
|
%
|
|
6.7
|
%
|
Other operating costs
|
|
21.2
|
%
|
|
20.6
|
%
|
General and administrative expenses
|
|
5.4
|
%
|
|
5.5
|
%
|
Pre-opening costs
|
|
0.3
|
%
|
|
0.5
|
%
|
Depreciation and amortization
|
|
8.2
|
%
|
|
8.9
|
%
|
Loss on asset disposal
|
|
0.2
|
%
|
|
0.2
|
%
|
Total operating expenses
|
|
97.1
|
%
|
|
94.9
|
%
|
|
|
|
|
|
Operating profit
|
|
2.9
|
%
|
|
5.1
|
%
|
|
|
|
|
|
Interest expense
|
|
(4.1
|
)%
|
|
(3.4
|
)%
|
Other income, net
|
|
0.1
|
%
|
|
0.1
|
%
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
(1.1
|
)%
|
|
1.8
|
%
|
|
|
|
|
|
Income tax benefit (expense) of continuing operations
|
|
1.2
|
%
|
|
(0.1
|
)%
|
|
|
|
|
|
Income from continuing operations
|
|
0.1
|
%
|
|
1.7
|
%
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
|
(0.1
|
)%
|
|
(3.7
|
)%
|
Income tax benefit of discontinued operations
|
|
—
|
%
|
|
1.1
|
%
|
Loss from discontinued operations
|
|
(0.1
|
)%
|
|
(2.6
|
)%
|
|
|
|
|
|
Net Loss
|
|
—
|
%
|
|
(0.9
|
)%
|
Revenue for Year to Date
2017
was
$123.5 million
, a
decrease
of
$2.2 million
, or
1.7%
, over
$125.7 million
of revenue generated during Year to Date
2016
. The
decrease
was driven by lost sales from Hurricane Irma, unfavorable number of major sporting events in our core markets in the Second Quarter, a decline in traffic and the impact of the revenue deferral related to the Blazin' Rewards loyalty program launched in late-2016, partially offset by sales from a new restaurant opened in Second Quarter 2017. Year to Date
2017
same-store sales decreased by 2.7%.
Food, beverage, and packaging costs
increased
by
$1.6 million
, or
4.7%
, to
$36.5 million
in Year to Date
2017
from
$34.9 million
in Year to Date
2016
due to the increase in the number of restaurants operating in
2017
. Food, beverage, and packaging costs as a percentage of revenue
increased
to
29.6%
in Year to Date
2017
from
27.7%
in Year to Date
2016
primarily due to commodity cost inflation and an increase in promotional activity. Average cost per pound for traditional bone-in chicken wings, our most significant input cost, increased to
$2.06
in Year to Date
2017
compared with
$1.85
in Year to Date
2016
, while the yield from bone-in chicken wings was reduced in Year to Date 2017 compared to Year to Date 2016 as a result of larger average pieces, as we purchase by the pound and sell by the piece.
Compensation costs were flat at
$31.1 million
in Year to Date
2017
and Year to Date
2016
. Compensation costs as a percentage of sales
increased
to
25.2%
in Year to Date
2017
from
24.8%
in Year to Date
2016
due to lower average unit volumes.
Occupancy costs
increased
$0.3 million
, or
3.1%
, to
$8.7 million
in Year to Date
2017
from
$8.4 million
in Year to Date
2016
due to the increased number of restaurants operating in
2017
. Occupancy as a percentage of sales
increased
to
7.0%
in Year to Date
2017
compared with
6.7%
in Year to Date
2016
primarily due to lower volumes.
Other operating costs
increased
$0.4 million
, or
1.5%
, to
$26.2 million
in Year to Date
2017
from
$25.8 million
in Year to Date
2016
due to the increased number of restaurants operating in 2017. Other operating costs as a percentage of sales
increased
to
21.2%
in Year to Date
2017
from
20.6%
in Year to Date
2016
, primarily due to lower average unit volumes.
General and administrative expenses
decreased
$0.2 million
, or
2.5%
, to
$6.7 million
in Year to Date
2017
from
$6.9 million
in Year to Date
2016
. This decrease was primarily due to a decrease in corporate wages and marketing expenses. General and administrative expenses as a percentage of sales remained relatively flat at
5.4%
in Year to Date
2017
and
5.5%
in Year to Date
2016
.
Pre-opening costs
decreased
$0.3 million
, or
38.0%
, to
$0.4 million
in Year to Date
2017
from
$0.7 million
in Year to Date
2016
. We opened one new restaurant in Second Quarter
2017
and opened two new restaurants in the Second Quarter
2016
. Pre-opening costs as a percentage of sales
decreased
to
0.3%
in Year to Date
2017
from
0.5%
in Year to Date
2016
.
Depreciation and amortization
decreased
by
$1.1 million
, or
9.5%
, to
$10.1 million
in Year to Date
2017
from
$11.2 million
in Year to Date
2016
. This decrease was primarily due to fixed asset disposals partially offset by the addition of two new restaurants opened in the Second Quarter of 2016 and one new restaurant opened in Second Quarter 2017. Depreciation and amortization as a percentage of sales
decreased
to
8.2%
in Year to Date
2017
from
8.9%
in Year to Date
2016
.
INTEREST AND TAXES
Interest expense was
$1.8 million
and
$1.4 million
during
Third
Quarter
2017
and in
Third
Quarter
2016
, respectively. Interest expense was
$5.0 million
and
$4.3 million
in Year to Date
2017
and in Year to Date
2016
, respectively. The increase was primarily due to increased debt resulting from building new restaurants in fiscal
2016
and Second Quarter
2017
.
For
Third
Quarter
2017
, DRH had an income tax
benefit
of
$0.9 million
compared to
Third
Quarter
2016
income tax
benefit
of
$0.1 million
. For Year to Date
2017
, DRH had an income tax
benefit
of
$1.5 million
compared to Year to Date
2016
income tax
provision
of
$0.1 million
. The increase in the income tax
benefit
was 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 nine months ended
September 24, 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.
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
development line of credit that was subsequently amended to $23.0 million (see amendment details below) (the “June 2015 DLOC”) and a
$5.0 million
revolving line of credit (the “June 2015 RLOC”). The Company used approximately
$65.5 million
of the June 2015 Term Loan to refinance existing outstanding debt and used approximately
$54.0 million
of the June 2015 Term Loan to finance an acquisition. 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 (the "DLOC Maturity Date").
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 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. 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 fully drawn prior to the DLOC Maturity Date, the outstanding principal balance automatically converts to a term loan and becomes due based on the
12
-year amortization period with final payment due June 29, 2020. If the DLOC is not fully drawn prior to the DLOC Maturity Date, then any outstanding balances automatically convert to a term loan on on such date. 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. 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. As of
September 24, 2017
, 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. However, if current negative sales trends persist, key commodity costs remain elevated, or suitable acquisition opportunities or other 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 or restructuring our existing debt at reasonable rates and terms. We may also issue additional shares of common or preferred stock to raise funds.
Our capital requirements are primarily dependent upon the pace of our new restaurant growth plan and our restaurant remodeling schedule. The new restaurant growth plan is primarily dependent upon economic conditions, the real estate market and resources to both develop and operate new restaurants. Our capital expenditure outlays are also dependent on the cost and potential obligation to invest in maintenance, facility upgrades, capacity enhancements, information technology and other general corporate capital expenditures.
The amount of capital required to open a new restaurant is largely dependent on whether we build-out an existing leased space or build from the ground up. Our preference is to find leased space for new restaurant locations, but depending on the availability of real estate in specific markets, we will take advantage of alternative strategies, which may include land purchases, land leases, and ground-up construction of a building to house our restaurant operation. We expect that a build-out of a new DRH-owned BWW restaurant will require an estimated cash investment of $1.7 million to $2.1 million (excluding potential tenant incentives). 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 up to $0.4 million. The projected cash investment per restaurant is based on recent opening costs and future projections and may fluctuate based on construction costs specific to new restaurant locations.
We target a cash on cash payback on our initial total capital investment of less than four years. The expected payback is subject to how quickly we reach our target sales volume and the cost of construction.
Cash flow from continuing operations for the
nine
months ended
September 24, 2017
was
$9.8 million
compared with
$12.1 million
for the
nine
months ended
September 25, 2016
. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses.
For
2017
, capital expenditures are anticipated to total approximately $6.0 million. We plan to use the capital as follows: approximately 45.0% for new restaurant openings and the remaining 55.0% for restaurant remodels, upgrades, maintenance and other general corporate purposes.
Although investments in new restaurants have been 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 have ranged from approximately $50,000 (for minor interior refreshes) to approximately $1.3 million (for a full remodel of the restaurant). We target remodels of $0.3 million to $0.7 million to upgrade a typical BWW restaurant to the new Stadia design, where the higher end of the range would also typically include an expansion such as the addition of an enclosed patio. The Company's strategy is to fully remodel existing BWW restaurants to the Stadia design at time of scheduled refresh or remodel, typically within seven years of opening.
Mandatory Upgrades
In fiscal year
2017
, we have invested in two mandatory remodels of existing BWW restaurants. These have been primarily funded through cash from operations, supplemented by borrowing on our development line of credit.
Discretionary Upgrades and Relocations
In fiscal year
2017
, the Company plans to invest additional capital to provide minor upgrades to a number of its existing locations, all of which we expect to fund with cash from operations. These improvements will primarily consist of refreshing interior building finishes, audio/visual equipment upgrades, and patio upgrades. In fiscal year
2017
, we do not have any planned relocations. The decision to relocate is typically driven by timing of our current lease agreements and the availability of real estate that we deem to be a better long-term investment. Relocations are funded by a combination of cash from operations and borrowing from our credit facility.
Inflation
Our profitability is dependent, among other things, on our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy, and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our restaurant guests. The impact of inflation on food, labor, energy, and occupancy costs can significantly affect the profitability of our restaurant operations.
All of our restaurant staff members are paid hourly rates based on, or in excess of, 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 at higher rates 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 be able 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
September 24, 2017
,
30
of the required
42
restaurants under the ADA had been opened for business. We are in discussions with BWLD regarding the remaining
12
restaurants required by 2021. The Company may continue to open new locations, but at a lower number over a longer period of time under an amended ADA.
After the Spin-Off, the Company remains liable for guarantees of certain Bagger Dave’s leases. These guarantees cover
17
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
$8.8 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 less than
1
month to
12
years as of
September 24, 2017
. In the event that the Company is required to perform under any of its lease guarantees, we do not believe the liability would be material because we would first seek to minimize the exposure by finding a suitable tenant to 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. Since 2015,
10
Bagger Dave’s locations with DRH lease guarantees were closed. New tenants were found to step into the Company’s lease obligations for
7
of these locations in
3
to
14
months from the date of closure. Over this time,
6
guarantees expired or terminated, and
4
remain obligations 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.
Impact of New Accounting Standards
See Note
1
, "Nature of Business and Summary of Significant Accounting Policies" included in Part 1, Item 1, "Notes to Interim Consolidated Financial Statements," of this Quarterly Report.
CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting policies have not changed materially from those previously reported in our Annual Report on Form 10-K for the fiscal year ended
December 25, 2016
.