DIVERSIFIED RESTAURANT HOLDINGS, INC., 10-Q filed on 11/3/2017
Quarterly Report
Document And Entity Information
9 Months Ended
Sep. 24, 2017
Nov. 2, 2017
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
Diversified Restaurant Holdings, Inc. 
 
Document Type
10-Q 
 
Current Fiscal Year End Date
--12-31 
 
Entity Common Stock, Shares Outstanding
 
26,881,607 
Amendment Flag
false 
 
Entity Central Index Key
0001394156 
 
Entity Filer Category
Smaller Reporting Company 
 
Document Period End Date
Sep. 24, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Consolidated Balance Sheets (Unaudited) (USD $)
Sep. 24, 2017
Dec. 25, 2016
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 
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 
Consolidated Balance Sheets (Unaudited) (Parentheticals) (USD $)
Sep. 24, 2017
Dec. 25, 2016
Statement of Financial Position [Abstract]
 
 
Common stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
26,848,507 
26,632,222 
Common stock, shares outstanding
26,848,507 
26,632,222 
Consolidated Statements of Comprehensive Loss (Unaudited) (USD $)
3 Months Ended 9 Months Ended
Sep. 24, 2017
Sep. 25, 2016
Sep. 24, 2017
Sep. 25, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
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)
Consolidated Statements of Operations (Unaudited) (USD $)
3 Months Ended 9 Months Ended
Sep. 24, 2017
Sep. 25, 2016
Sep. 24, 2017
Sep. 25, 2016
Income Statement [Abstract]
 
 
 
 
Revenue
$ 39,262,940 
$ 41,625,312 
$ 123,535,506 
$ 125,719,745 
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 
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:
 
 
 
 
Basic earnings (loss) per share from continuing operations (in dollars per share)
$ (0.02)
$ 0.02 
$ 0.00 
$ 0.08 
Basic earnings (loss) per share from discontinued operations (in dollars per share)
$ 0.00 
$ (0.07)
$ 0.00 
$ (0.12)
Basic net earnings per share (in dollars per share)
$ (0.02)
$ (0.05)
$ 0.00 
$ (0.04)
Diluted earnings (loss) per share from:
 
 
 
 
Diluted earnings (loss) per share from continuing operations (in dollars per share)
$ (0.02)
$ 0.02 
$ 0.00 
$ 0.08 
Diluted earnings (loss) per share from discontinued operations (in dollars per share)
$ 0.00 
$ (0.07)
$ 0.00 
$ (0.12)
Diluted net earnings per share (in dollars per share)
$ (0.02)
$ (0.05)
$ 0.00 
$ (0.04)
Weighted average number of common shares outstanding
 
 
 
 
Basic (in shares)
26,764,776 
26,625,615 
26,672,057 
26,434,238 
Diluted (in shares)
26,764,776 
26,625,615 
26,672,057 
26,434,238 
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (Parentheticals) (USD $)
3 Months Ended 9 Months Ended
Sep. 24, 2017
Sep. 25, 2016
Sep. 24, 2017
Sep. 25, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
Unrealized changes in fair value of interest rate swaps, tax
$ (150,926)
$ (183,417)
$ (71,576)
$ 544,923 
Consolidated Statements of Stockholders' Equity (Unaudited) (USD $)
Total
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Balance at Dec. 27, 2015
$ 16,600,352 
$ 2,597 
$ 36,136,319 
$ (1,006,667)
$ (18,531,897)
Balance (in shares) at Dec. 27, 2015
 
26,298,725 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Issuance of restricted shares (in shares)
 
342,331 
 
 
 
Forfeitures of restricted shares (in shares)
 
(23,851)
 
 
 
Shares effectively repurchased for required employee withholding taxes (in shares)
 
(5,940)
 
 
 
Shares effectively repurchased for required employee withholding taxes
(9,326)
(1)
(9,325)
 
 
Employee stock purchase plan (in shares)
 
21,896 
 
 
 
Employee stock purchase plan
31,223 
31,220 
 
 
Share-based compensation
351,377 
351,369 
 
 
Other comprehensive income (loss)
(1,057,790)
 
 
(1,057,790)
 
Net income from continuing operations
2,123,482 
 
 
 
 
Net loss from discontinued operations
(3,264,629)
 
 
 
 
Balance at Sep. 25, 2016
14,774,689 
2,607 
36,509,583 
(2,064,457)
(19,673,044)
Balance (in shares) at Sep. 25, 2016
 
26,633,161 
 
 
 
Balance at Jun. 26, 2016
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Share-based compensation
 
 
114,914 
 
 
Other comprehensive income (loss)
356,047 
 
 
 
 
Net income from continuing operations
596,709 
 
 
 
 
Net loss from discontinued operations
(1,985,834)
 
 
 
 
Balance at Sep. 25, 2016
14,774,689 
 
36,509,583 
 
(19,673,044)
Balance at Dec. 25, 2016
(4,110,720)
2,610 
21,355,270 
(934,222)
(24,534,378)
Balance (in shares) at Dec. 25, 2016
26,632,222 
26,632,222 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Issuance of restricted shares (in shares)
 
263,332 
 
 
 
Forfeitures of restricted shares (in shares)
 
(48,850)
 
 
 
Shares effectively repurchased for required employee withholding taxes (in shares)
 
(22,716)
 
 
 
Shares effectively repurchased for required employee withholding taxes
(59,928)
(2)
(59,926)
 
 
Employee stock purchase plan (in shares)
 
24,519 
 
 
 
Employee stock purchase plan
45,005 
45,003 
 
 
Share-based compensation
284,100 
13 
284,087 
 
 
Other comprehensive income (loss)
138,941 
 
 
138,941 
 
Adoption of ASU 2016-09 (Note 1)
268,000 
 
 
 
268,000 
Net income from continuing operations
(39,003)
 
 
 
 
Net loss from discontinued operations
(97,361)
 
 
 
 
Balance at Sep. 24, 2017
(3,570,966)
2,623 
21,624,434 
(795,281)
(24,402,742)
Balance (in shares) at Sep. 24, 2017
26,848,507 
26,848,507 
 
 
 
Balance at Jun. 25, 2017
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Share-based compensation
 
 
102,176 
 
 
Other comprehensive income (loss)
292,974 
 
 
 
 
Net income from continuing operations
(543,240)
 
 
 
 
Net loss from discontinued operations
(15,154)
 
 
 
 
Balance at Sep. 24, 2017
$ (3,570,966)
 
$ 21,624,434 
 
 
Balance (in shares) at Sep. 24, 2017
26,848,507 
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
9 Months Ended
Sep. 24, 2017
Sep. 25, 2016
Net loss
 
 
Net Loss
$ (136,364)
$ (1,141,147)
Net loss from discontinued operations
(97,361)
(3,264,629)
Net income 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 disposal
(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 
Business and Summary of Significant Accounting Policies
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.

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- 1020 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. 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 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.
Discontinued Operations (Notes)
DISCONTINUED OPERATIONS
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:


 
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.
Unconsolidated Variable Interest Entities
UNCONSOLIDATED VARIABLE INTEREST ENTITIES
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 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

Property and Equipment
PROPERTY AND EQUIPMENT
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

Intangible Assets
INTANGIBLE ASSETS
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.
Other Accrued Liabilities
OTHER ACCRUED LIABILITIES
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

Long-Term Debt
LONG-TERM DEBT
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.

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
 
Share-Based Compensation
SHARE-BASED COMPENSATION
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.

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 $0.0001No 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.
Income Taxes
INCOME TAXES
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.
Operating Leases
OPERATING LEASES
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

Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
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.
Earnings Per Share
EARNINGS PER SHARE
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.
Supplemental Cash Flows Information
SUPPLEMENTAL CASH FLOWS INFORMATION
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.
Fair Value of Financial Instruments
FAIR VALUE OF FINANCIAL INSTRUMENTS
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.

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
)
Accumulated Other Comprehensive Income (Loss)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
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
)
Business and Summary of Significant Accounting Policies (Policies)

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.
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.

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
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- 1020 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.
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.
Recent Accounting Pronouncements

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The updated guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. We do not believe the updated requirements will materially impact our consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-04, Topic 350: Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplified wording and removes step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step 2 of the goodwill test. We do not expect the standard will have a significant impact.  ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2020, with early adoption permitted for interim or annual goodwill impairment tests on testing dates after January 1, 2017. We are currently evaluating the pending adoption of ASU 2017-04 and the impact it will have on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Topic 230: Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 clarifies current GAAP that is either unclear or does not include specific guidance on a number of specific issues. The amendments set forth are an improvement to GAAP because they provide guidance for each issue and reduce the current and potential future diversity in practice. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the pending adoption of ASU 2016-15 and the impact it will have on our consolidated financial statements.

In February 2016, FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that lease arrangements longer than 12 months result in a lessee recognizing a lease asset and liability. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We have analyzed the impact of the new standard and concluded that the adoption of ASU 2016-02 will materially impact our consolidated financial statements by significantly increasing our non-current assets and non-current liabilities on our consolidated balance sheets in order to record the right of use assets and related lease liabilities for our existing operating leases. Operating leases comprise the majority of our current lease portfolio. With respect 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.
Discontinued Operations (Tables)
Disposal Groups, Including Discontinued Operations
The following are major classes of line items constituting pre-tax loss from discontinued operations:


 
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
)
(Tables)
Schedule of Guarantor Obligations
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

Property and Equipment (Tables)
Property, Plant 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

Intangible Assets (Tables)
Schedule of Finite-Lived 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

Other Accrued Liabilities (Tables)
Other Accrued Liabilities
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

Long-Term Debt (Tables)
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

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
 
Share-Based Compensation (Tables)
Nonvested Restricted Stock Shares Activity
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

Operating Leases (Tables)
Schedule of Future Minimum Rental Payments for Operating Leases
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

Earnings Per Share (Tables)
Schedule of Earnings Per Share, Basic and Diluted
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