DIVERSIFIED RESTAURANT HOLDINGS, INC., 10-Q filed on 5/9/2019
Quarterly Report
v3.19.1
Document And Entity Information - shares
3 Months Ended
Mar. 31, 2019
May 07, 2019
Document and Entity Information [Abstract]    
Entity Registrant Name Diversified Restaurant Holdings, Inc.  
Document Type 10-Q  
Current Fiscal Year End Date --12-29  
Entity Common Stock, Shares Outstanding   33,214,834
Amendment Flag false  
Entity Central Index Key 0001394156  
Entity Filer Category Non-accelerated Filer  
Document Period End Date Mar. 31, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Entity Small Business true  
Entity Emerging Growth Company false  
v3.19.1
Consolidated Balance Sheets (Unaudited) - USD ($)
Mar. 31, 2019
Dec. 30, 2018
Current assets:    
Cash and cash equivalents $ 6,506,938 $ 5,364,014
Accounts receivable 328,914 654,322
Inventory 1,505,609 1,526,779
Prepaid and other assets 391,621 556,480
Total current assets 8,733,082 8,101,595
Property and equipment, net 32,458,202 34,423,345
Operating lease right-of-use assets 50,767,942  
Operating lease right-of-use assets   52,303,764
Intangible assets, net 2,085,460 2,106,489
Goodwill 50,097,081 50,097,081
Other long-term assets 289,046 408,761
Total assets 144,430,813 147,441,035
Current liabilities:    
Accounts payable 4,338,999 4,273,133
Accrued compensation 2,802,803 1,830,415
Other accrued liabilities 3,235,999 2,821,235
Current portion of long-term debt 11,494,830 11,515,093
Current portion of operating lease liabilities 6,190,122  
Current portion of operating lease liabilities   6,670,227
Total current liabilities 28,062,753 27,110,103
Operating lease liabilities, less current portion 47,897,014  
Operating lease liabilities, less current portion   48,956,491
Deferred income taxes 1,177,039 1,220,087
Other long-term liabilities 321,454 343,075
Long-term debt, less current portion 88,027,975 90,907,537
Total liabilities 165,486,235 168,537,293
Commitments and contingencies (Notes 2, 9 and 10)
Stockholders’ deficit:    
Common stock - $0.0001 par value; 100,000,000 shares authorized; 33,215,584 and 33,200,708, respectively, issued and outstanding 3,188 3,182
Preferred stock - $0.0001 par value; 10,000,000 shares authorized; zero shares issued and outstanding 0 0
Additional paid-in capital 27,192,077 27,021,517
Accumulated other comprehensive income 114,338 355,293
Accumulated deficit (48,365,025) (48,476,250)
Total stockholders’ deficit (21,055,422) (21,096,258)
Total liabilities and stockholders’ deficit $ 144,430,813 $ 147,441,035
v3.19.1
Consolidated Balance Sheets (Unaudited) (Parentheticals) - $ / shares
Mar. 31, 2019
Dec. 30, 2018
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 33,215,584 33,200,708
Common stock, shares outstanding 33,215,584 33,200,708
Preferred stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
v3.19.1
Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($)
3 Months Ended
Mar. 31, 2019
Apr. 01, 2018
Statement of Comprehensive Income [Abstract]    
Net Income $ 55,441 $ 159,870
Other comprehensive income (loss):    
Unrealized changes in fair value of interest rate swaps, net of tax of $49,223 and ($23,015), respectively. (185,171) 708,342
Comprehensive income (loss) $ (129,730) $ 868,212
v3.19.1
Consolidated Statements of Operations (Unaudited) - USD ($)
3 Months Ended
Mar. 31, 2019
Apr. 01, 2018
Revenue $ 40,568,084 $ 39,532,957
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):    
Compensation costs 10,906,293 10,164,655
Occupancy costs 2,938,054 2,943,840
Other operating costs 8,688,161 8,393,955
General and administrative expenses 2,239,947 2,253,928
Depreciation and amortization 2,565,370 3,166,500
Loss on asset disposal (8,385) (5,851)
Total operating expenses 39,030,605 38,061,106
Operating profit 1,537,479 1,471,851
Interest expense (1,505,335) (1,646,044)
Other income, net 40,054 32,640
Loss from continuing operations before income taxes 72,198 (141,553)
Income tax benefit (expense) (16,757) 301,423
Net Income 55,441 159,870
Net income $ 55,441 $ 159,870
Basic and diluted earnings per share (in dollars per share) $ 0.00 $ 0.01
Weighted average number of common shares outstanding:    
Basic and diluted (in shares) 31,925,521 26,853,724
Food and Beverage [Member]    
Food, beverage, and packaging costs $ 11,684,395 $ 11,132,377
v3.19.1
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (Parentheticals) - USD ($)
3 Months Ended
Mar. 31, 2019
Apr. 01, 2018
Statement of Comprehensive Income [Abstract]    
Unrealized changes in fair value of interest rate swaps, tax $ 49,223 $ (23,015)
v3.19.1
Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($)
Total
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Balance (in shares) at Dec. 31, 2017   26,859,125      
Balance at Dec. 31, 2017 $ (23,228,635) $ 2,625 $ 21,776,402 $ (283,208) $ (44,724,454)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of restricted shares (in shares)   216,500      
Forfeitures of restricted shares (in shares)   (4,585)      
Shares effectively repurchased for required withholding taxes (in shares)   (29,924)      
Shares effectively repurchased for required withholding taxes (43,617) $ (3) (43,614)    
Employee stock purchase plan (in shares)   14,374      
Employee stock purchase plan 18,974 $ 1 18,973    
Share-based compensation (in shares)   81,024      
Share-based compensation 234,758 $ 20 234,738    
Other comprehensive loss 708,342        
Other comprehensive loss 708,342     708,342  
Net Income 159,870        
Net income 159,870        
Balance at Apr. 01, 2018 $ (20,754,816) $ 2,643 21,986,499 425,134 (43,169,092)
Balance (in shares) at Apr. 01, 2018   27,136,514      
Balance (in shares) at Dec. 30, 2018 33,200,708 33,200,708      
Balance at Dec. 30, 2018 $ (21,096,258) $ 3,182 27,021,517 355,293 (48,476,250)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Forfeitures of restricted shares (in shares)   (500)      
Shares effectively repurchased for required withholding taxes (in shares)   (17,458)      
Shares effectively repurchased for required withholding taxes (25,909) $ (2) (25,907)    
Employee stock purchase plan (in shares)   32,834      
Employee stock purchase plan 28,137 $ 3 28,134    
Share-based compensation 168,338 5 168,333    
Other comprehensive loss (185,171)     (185,171)  
Net Income 55,441        
Net income 55,441        
Balance at Mar. 31, 2019 $ (21,055,422) $ 3,188 $ 27,192,077 $ 114,338 $ (48,365,025)
Balance (in shares) at Mar. 31, 2019 33,215,584 33,215,584      
v3.19.1
Consolidated Statements of Cash Flows (Unaudited) - USD ($)
3 Months Ended
Mar. 31, 2019
Apr. 01, 2018
Cash flows from operating activities    
Net Income $ 55,441 $ 159,870
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 2,565,370 3,166,500
Amortization of operating lease assets 1,535,822 1,566,916
Amortization of debt discount and loan fees 64,080 72,434
Loss on asset disposal (8,385) (5,851)
Share-based compensation 168,338 234,758
Deferred income taxes 6,175 (301,423)
Changes in operating assets and liabilities that provided (used) cash:    
Accounts receivable 325,408 358,167
Inventory 21,171 (2,937)
Prepaid and other assets (107,230) 38,763
Other long-term assets (57,050) 0
Accounts payable 85,155 (1,325,034)
Operating lease liabilities (1,539,582) (1,581,449)
Accrued liabilities 1,365,530 1,187,397
Net cash provided by operating activities 4,711,473 3,502,287
Cash flows from investing activities    
Purchases of property and equipment (606,872) (500,647)
Net cash used in investing activities (606,872) (500,647)
Cash flows from financing activities    
Repayments of long-term debt (2,963,905) (2,879,156)
Proceeds from employee stock purchase plan 28,137 18,974
Tax withholdings for restricted stock (25,909) (43,617)
Net cash used in financing activities (2,961,677) (2,903,799)
Net increase in cash and cash equivalents 1,142,924 97,841
Cash and cash equivalents, beginning of period 5,364,014 4,371,156
Cash and cash equivalents, end of period $ 6,506,938 $ 4,468,997
v3.19.1
NATURE OF BUSINESS AND BASIS OF PRESENTATION
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

Diversified Restaurant Holdings, Inc. (“DRH,” the "Company," "us," "our" or "we") is a restaurant company operating a single concept, Buffalo Wild Wings® (“BWW”). As one of the largest franchisees of BWW, we provide a unique guest experience in a casual and inviting environment.

DRH currently operates 64 BWW restaurants (20 in Michigan, 17 in Florida, 15 in Missouri, 7 in Illinois and 5 in Indiana).

Basis of Presentation

The consolidated financial statements as of March 31, 2019 and December 30, 2018, and for the three-month periods ended March 31, 2019 and April 1, 2018, have been prepared in accordance with 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 March 31, 2019 and for the three-month periods ended March 31, 2019 and April 1, 2018 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 30, 2018 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 30, 2018, which is included in Item 8 in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2018, and should be read in conjunction with such consolidated financial statements.

The results of operations for the three-month periods ended March 31, 2019 and April 1, 2018 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 29, 2019.

Certain prior year amounts have been reclassified for consistency with the current year presentation.

Our significant accounting policies are disclosed in Part II, Item 8, of our Annual Report on Form 10-K for the fiscal year ended December 30, 2018.

Since December 30, 2018, there has been one significant change in our accounting policies related to the implementation of ASU No. 2016-02, Leases, which is presented below and in Note 9.

Going Concern

As further discussed in Note 6, the Company has approximately $99.5 million of debt outstanding under its $155.0 million senior secured credit facility with a syndicate of lenders led by Citizens (the “Credit Facility”) with a maturity date of June 29, 2020. The debt agreement contains various customary financial covenants generally based on the earnings of the Company relative to its debt. The financial covenants consist of a quarterly minimum required debt service coverage ratio (the "DSCR") and a maximum permitted lease adjusted leverage ratio (the "LALR") which were reset pursuant an amendment dated February 28, 2018. This amendment also changed the definition of "consolidated EBITDA" used in the calculation of these financial covenants to permit the inclusion of a maximum of $5 million of equity proceeds over the remaining term of the agreement.

On July 24, 2018 the Company completed an underwritten registered public offering of 6 million shares of common stock at a public offering price of $1.00 per share, which included 700,000 shares offered by a certain selling stockholder, for total Company gross proceeds of $5.3 million. The net proceeds from the offering were approximately $4.6 million after deducting the underwriting discounts and commissions and offering expenses payable by us, and were included in "consolidated EBITDA" for purposes of computing financial covenants beginning in the third quarter of 2018.

As of March 31, 2019, the Company was in compliance with its loan covenants. However, beginning in the third quarter of 2019, the net proceeds from the registered public offering will no longer be included in "consolidated EBITDA" and, as a result, the Company is currently forecasting that it may not be in compliance with these financial covenants in the third quarter.

While the Company has successfully negotiated financial covenant amendments in the past and would seek to do so again should it be in default or near a default, there can be no assurance that it will be successful in obtaining a satisfactory amendment.

As a result of this uncertainty coupled with the June 2020 maturity of the Credit Facility, the Company has been in discussions with its current lenders and other sources of capital regarding a possible refinancing and/or replacement of the Credit Facility. The Company is also exploring various other alternatives, including, among other things, possible equity financing. There can be no assurance, however, that any such efforts will be successful.

Until such time as the Company has executed an agreement to amend, refinance or replace the Credit Facility, the Company cannot conclude that it is probable that it will do so and, accordingly, this raises substantial doubt about the Company’s ability to continue as a going concern.

However, the accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying financial statements do not include adjustments that might result from the outcome of this uncertainty, including any adjustments to reflect the possible future effects of the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Revenue Recognition Policy
Revenue is measured based on consideration specified in implied contracts with our customers and excludes amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation (at the time of sale) by transferring control over a product to a customer. Payment is due at the time the food or merchandise is transferred to the customer. The portion of any sale that results in loyalty rewards being issued is deferred, net of estimated breakage, until redemption.
Nature of Goods Sold
DRH earns revenue through sales of food, beverages and merchandise, and redemptions of gift cards by our customers. These sales occur through multiple channels, such as in-restaurant, call-in, online (web-based) and via third party delivery services.
BWW offers a system-wide loyalty program (Blazin’ Rewards®) whereby enrolled customers earn points for each qualifying purchase. As a franchisee, DRH is required to participate in the program. DRH estimates the value of loyalty points earned (the value per point) by dividing the menu price of redeemable items by the loyalty reward points required to redeem that menu item. Points issued as part of the loyalty program expire after 6 months of member inactivity. DRH commissioned a study to determine a reasonable estimate of the breakage rate, which was approximately 32%.

DRH has two types of sales transactions, transactions without loyalty attachment and transactions with loyalty attachment. Transactions without loyalty attachment require no allocation of the transaction price, because the price is observable and fixed based on the menu. Transactions with loyalty attachment have two performance obligations: 1) providing the purchased food, beverages and/or merchandise to the customer and, 2) redeeming awarded loyalty points for food, beverages or merchandise in the future. In loyalty related transactions the price is allocated to the products sold and the points issued. Revenue related to loyalty points that may be redeemed in the future is deferred, net of estimated breakage, until such loyalty points are redeemed. The accrued loyalty liability balance is reflected in Note 5.

The Company offers gift cards for purchase through a BWW system-wide program. Gift cards sold are recorded as a liability to BWW. When redeemed, the gift card liability is offset by recording the transaction as revenue. Net gift card activity is settled with BWW weekly. At times, gift card redemptions may exceed amounts due to BWW for gift card purchases, resulting in an asset balance. Because this is a system-wide program operated by BWW, the Company is not impacted by and does not record breakage.

Disaggregation of Revenue
In the following table, revenue is disaggregated by product mix.
Disaggregated Revenue
 
 
 
 
Product
Three Months Ended March 31, 2019
 
Three Months Ended April 1, 2018
Food
$
34,023,662

 
$
33,007,708

Alcohol
6,544,422

 
6,525,249

Total
$
40,568,084

 
$
39,532,957




Recent Accounting Pronouncements

We reviewed all 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 February 2016, FASB issued ASU No. 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize a lease asset and liability for lease arrangements longer than 12 months. Leases are 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. The Company adopted the new standard as of December 31, 2018 using the modified retrospective approach. The Company has adjusted comparative periods and has elected the package of practical expedients which allows it to not reassess whether a contract is or contains a lease, lease classification, and initial direct costs. The adoption of ASU 2016-02 materially impacted our consolidated financial statements by significantly increasing our non-current assets and liabilities on our consolidated balance sheets in order to record the right-of-use ("ROU") assets and related lease liabilities for our operating leases. We lease all of our restaurant properties under operating leases. The adoption of the standard does not have a material impact on our Consolidated Statements of Comprehensive Income (Loss) or Consolidated Statements of Cash Flows.

In conjunction with our adoption of the new lease accounting standard, certain line items have been adjusted on our opening balance sheets as of January 1, 2018 and December 31, 2018 to conform to the current period presentation. As of January 1, 2018, the line items impacted and adjustments consist of: the addition of $50.0 million in ROU assets, $6.3 million in current operating lease liabilities, $46.9 million in non-current operating lease liabilities, and $1.4 million in retained earnings; and the removal of $0.1 million of intangible assets, $2.6 million in deferred rent, $0.5 million of unfavorable operating lease liabilities, and $1.5 million in deferred gains associated with prior sale leaseback transactions. As of December 31, 2018, the line items impacted and adjustments consist of: the addition of $52.3 million in ROU assets, $6.7 million in current operating lease liabilities, $49.0 million in non-current operating lease liabilities, and $1.3 million in retained earnings; and the removal of $0.1 million of intangible assets, $2.8 million in deferred rent, $0.4 million of unfavorable operating lease liabilities, and $1.4 million in deferred gains associated with prior sale leaseback transactions. Additionally, the Consolidated Statement of Operations for the three-month period ended April 1, 2018, reflects an increase in general and administrative expense of approximately $32,000. Refer to Note 9 for further details.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). ASU 2018-02 provided financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (or portion thereof) was recorded. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018. The Company adopted ASU 2018-02 effective December 31, 2018, and elected to reclassify the income tax effects of the 2017 Tax Cuts and Jobs Act from Accumulated Other Comprehensive Income (Loss) to retained earnings. Adoption did not have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue with Contracts from Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. This ASU and subsequently issued amendments, introduce 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 August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 for public companies to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date.

The requirements for these standards relating to Topic 606 were effective for interim and annual periods beginning after December 15, 2017. The Company adopted ASU 2014-09 effective as of January 1, 2018, using the modified retrospective transition method to all existing contracts that were not substantially completed at the adoption date. We finalized our analysis and the adoption of ASU 2014-09 which did not have a material impact on the timing or amount of revenue recognized as compared to the Company's previous revenue recognition practices.
v3.19.1
Unconsolidated Variable Interest Entities
3 Months Ended
Mar. 31, 2019
Guarantees [Abstract]  
UNCONSOLIDATED VARIABLE INTEREST ENTITIES

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"). After the Spin-Off, the Company remains involved with certain activities that result in Bagger Dave’s being considered a Variable Interest Entity ("VIE"). This conclusion results primarily from the existence of guarantees by the Company of certain Bagger Dave’s leases as described below under "Lease Guarantees". While the Company holds a variable interest in Bagger Dave’s, it is not considered to be its primary beneficiary because it does not have the power to direct the activities of Bagger Dave’s. Specifically, we considered the fact that, although our Executive Chairman is currently also on Bagger Dave’s board, there are no agreements in place that require him to vote in the interests of the Company, as he does not represent the Company in his capacity as a Bagger Dave’s director. As a result, the Company does not consolidate the VIE.

Lease Guarantees

At March 31, 2019, the Company is a guarantor for 9 leases, three of which have been re-leased to unaffiliated parties. In the event the respective lessees cannot make their lease payments, the Company may become responsible for the payments under its guarantee.

Upon the 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. As of March 31, 2019 and December 30, 2018, the liability is $0.3 million, and it is included in other liabilities on the Consolidated Balance Sheet. Prior to the Spin-Off, no liability had 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 March 31, 2019 and December 30, 2018, no loss under the guarantees was probable because all of the Bagger Dave's restaurants subject to the guaranteed leases are either currently operating or the site has been leased to another tenant who is responsible for, and making, the lease payments.

The Company has determined that its maximum exposure resulting from the lease guarantees includes approximately $7.3 million of future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance requirements under the leases as of March 31, 2019. 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 11 months to 11 years as of March 31, 2019. 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. 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 table discloses the guarantee expiration of all Bagger Dave's leases that include a guarantee by the Company as of March 31, 2019:

Guarantee Expiration
Future guaranteed lease payments
Less than six years
$
1,002,437

Six to eleven years
6,291,391

Total
$
7,293,828

v3.19.1
Property and Equipment
3 Months Ended
Mar. 31, 2019
Property, Plant and Equipment [Abstract]  
PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT, NET

Property and equipment are comprised of the following assets:
 
 
March 31, 2019
 
December 30, 2018
Equipment
 
$
28,134,184

 
$
27,541,376

Furniture and fixtures
 
6,747,121

 
6,742,523

Leasehold improvements
 
57,443,511

 
57,344,678

Restaurant construction in progress
 
219,070

 
439,321

Total
 
92,543,886

 
92,067,898

Less accumulated depreciation
 
(60,085,684
)
 
(57,644,553
)
Property and equipment, net
 
$
32,458,202

 
$
34,423,345



We are currently monitoring several restaurants with regard to the valuation of the property and equipment. As we periodically refine our estimated future operating results, changes in our estimates and assumptions may cause us to realize impairment charges in the future that could be material.
v3.19.1
Intangible Assets
3 Months Ended
Mar. 31, 2019
Intangible Assets, Net (Excluding Goodwill) [Abstract]  
INTANGIBLE ASSETS
INTANGIBLE ASSETS

Intangible assets are comprised of the following:
 
 
March 31, 2019
 
December 30, 2018
Amortized intangible assets
 
 
 
 
Franchise fees
 
$
1,305,642

 
$
1,305,642

Trademark
 
2,500

 
2,500

Non-compete
 
76,560

 
76,560

Total
 
1,384,702

 
1,384,702

Less accumulated amortization
 
(555,569
)
 
(534,540
)
Total amortized intangible assets, net
 
829,133

 
850,162

 
 
 
 
 
Unamortized intangible assets
 
 
 
 
Liquor licenses
 
1,256,327

 
1,256,327

Total intangible assets, net
 
$
2,085,460

 
$
2,106,489



Amortization expense was $21,029 and $20,805 for the three-month periods ended March 31, 2019 and April 1, 2018, respectively.

The aggregate weighted-average amortization period for intangible assets is 7.7 years at March 31, 2019.
v3.19.1
Other Accrued Liabilities
3 Months Ended
Mar. 31, 2019
Payables and Accruals [Abstract]  
OTHER ACCRUED LIABILITIES
OTHER ACCRUED LIABILITIES
 
March 31, 2019
 
December 30, 2018
Sales tax payable
$
1,060,084

 
$
940,165

Accrued interest
429,564

 
484,535

Accrued royalty fees
165,460

 
173,189

Accrued property taxes
488,431

 
224,865

Accrued loyalty rewards
944,235

 
847,434

Other
148,225

 
151,047

Total other accrued liabilities
$
3,235,999

 
$
2,821,235

v3.19.1
Debt
3 Months Ended
Mar. 31, 2019
Debt Disclosure [Abstract]  
DEBT
DEBT

Debt consists of the following obligations:
 
 
March 31, 2019
 
December 30, 2018
$120.0 million term loan - the rate at March 31, 2019 and December 30, 2018 was 5.99% and 5.85%, respectively.
 
$
77,198,616

 
$
79,698,616

$30.0 million development line of credit, converted to the DF Term Loan in December 2016 and June 2018. The rate at March 31, 2019 and December 30, 2018 was 5.99% and 5.85%, respectively.
 
17,647,354

 
18,111,259

$5.0 million revolving line of credit - the rate at March 31, 2019 and December 30, 2018 was 6.00% and 6.01%, respectively.
 
5,000,000

 
5,000,000

Unamortized discount and debt issuance costs
 
(323,165
)
 
(387,245
)
Total debt
 
99,522,805

 
102,422,630

 
 
 
 
 
Less current portion
 
(11,494,830
)
 
(11,515,093
)
Long-term debt, net of current portion
 
$
88,027,975

 
$
90,907,537



On June 29, 2015, the Company entered into a five year $155.0 million senior secured credit facility with a syndicate of lenders led by Citizens Bank, N.A. (the “Credit Facility”) with a senior lien on all the Company’s personal property and fixtures. The Credit Facility initially consisted of a $120.0 million term loan (the “Term Loan”), a $30.0 million development line of credit (the “DLOC”) and a $5.0 million revolving line of credit (the “RLOC”).

On December 23, 2016, the Company amended the Credit Facility (the "December 2016 Amendment") 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 DLOC to a development facility term loan (the “DF Term Loan” and, together with the Term Loan, the "Term Loans"), (b) canceled $6.8 million previously available under the DLOC, and (c) extended the maturity date on the remaining $5.0 million under the DLOC to June 29, 2018. Upon the maturity of the DLOC on June 29, 2018, the amount outstanding under the DLOC was added to the existing DF Term Loan.

Payments of principal are based upon a 12-year straight-line amortization schedule, with monthly principal payments of $980,906 on the Term Loans, plus accrued interest. As of March 31, 2019 and December 30, 2018, $5.0 million was outstanding under the RLOC. The entire remaining outstanding principal and accrued interest on the Credit Facility is due and payable on the maturity date of June 29, 2020.

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. 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 $323,165 and $387,245 at March 31, 2019 and December 30, 2018, 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 March 31, 2019 and April 1, 2018 interest expense was $1.5 million and $1.6 million, respectively.

The Credit Facility agreement contains various customary financial covenants generally based on the earnings of the Company relative to its debt. The financial covenants consist of a quarterly minimum required debt service coverage ratio ("DSCR") and a maximum permitted lease adjusted leverage ratio ("LALR") which were reset pursuant to an amendment dated February 28, 2018. This amendment also changed the definition of "consolidated EBITDA" used in the calculation of these financial covenants to permit the inclusion of a maximum of $5 million of equity proceeds over the remaining term of the Credit Facility agreement.

On July 24, 2018, the Company completed an underwritten registered public offering of 6 million shares of common stock at a public offering price of $1.00 per share, which included 700,000 shares offered by a certain selling stockholder, for total Company gross proceeds of $5.3 million. The net proceeds from the offering were approximately $4.6 million after deducting the underwriting discounts and commissions and offering expenses payable by us, and were included in "consolidated EBITDA" for purposes of computing financial covenants beginning in the third quarter of 2018.

As of March 31, 2019, the Company was in compliance with its loan covenants. However, beginning in the third quarter of 2019, the net proceeds from the registered public offering will no longer be included in "consolidated EBITDA" and, as a result, the Company is currently forecasting that it may not be in compliance with these financial covenants beginning in the third quarter of 2019. Unless we obtain a waiver for, or amendment of the financial covenants prior to being out of compliance, which requires that lenders representing at least 50.1% of the outstanding principal amount are in agreement, failure to comply with the financial covenants would represent an event of default under the Credit Facility agreement, as amended, and would allow the lenders to accelerate repayment of the debt.

At March 31, 2019, the Company has three interest rate swap agreements to fix a portion of the interest rates on its variable rate debt. The swap agreements all qualify for hedge accounting. Under the swap agreements, the Company receives interest at the one-month LIBOR and pays a fixed rate. Since these swap agreements qualify for hedge accounting, the changes in fair value are recorded in other comprehensive income (loss), net of tax. The fair value of the derivative assets and liabilities are included in other long-term assets and other long-term liabilities on the Consolidated Balance Sheets, respectively. See Note 13 for additional information pertaining to interest rate swaps.

The following tables summarize the fair value of derivative instruments designated as cash flow hedges which were outstanding:

 
 
 
March 31, 2019
 
 
 
Notional amounts
 
Derivative assets
 
Derivative liabilities
Interest rate swaps
Rate
Expires
 
 
 
 
 
April 2012
1.4%
April 2019
$
190,476

 
$
166

 
$

January 2015
1.8%
December 2019
24,345,238

 
95,905

 

August 2015
2.3%
June 2020
58,560,119

 
48,661

 

Total
 
 
$
83,095,833

 
$
144,732


$


 
 
 
December 30, 2018
 
 
 
Notional amounts
 
Derivative assets
 
Derivative liabilities
Interest rate swaps
Rate
Expires
 
 
 
 
 
April 2012
1.4%
April 2019
$
761,905

 
$
1,689

 
$

January 2015
1.8%
December 2019
25,809,524

 
152,011

 

August 2015
2.3%
June 2020
58,930,655

 
225,426

 

Total
 
 
$
85,502,084

 
$
379,126

 
$

v3.19.1
Share-Based Compensation
3 Months Ended
Mar. 31, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
SHARE-BASED COMPENSATION
SHARE-BASED COMPENSATION

Restricted share awards

The Company's Stock Incentive Plan of 2017 authorizes a total of 2,500,000 shares of common stock for issuance as incentive awards.

For the three-months ended March 31, 2019, no restricted shares were issued. For the three-month period ended April 1, 2018, restricted shares were issued to certain team members under the Stock Incentive Plan of 2017 at a weighted-average grant date fair value of $1.35. Based on the standard form of 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 Company's Compensation Committee. Upon vesting, the Company withholds shares to cover the minimum withholding requirement, unless the recipient opts out. Unrecognized share-based compensation expense of $1.0 million at March 31, 2019 will be recognized over the remaining weighted-average vesting period of 2.7 years. The total grant date fair value of shares vested during the three-month periods ended March 31, 2019 and April 1, 2018, was $0.1 million each. Under the Stock Incentive Plan of 2017, there were 1.3 million shares available for future awards at March 31, 2019.

The following table presents the restricted stock transactions during the three-month period ended March 31, 2019:
 
Number of
Restricted
Stock Shares
Unvested, December 30, 2018
1,274,839

Granted

Vested
(52,375
)
Vested shares tax portion
(17,458
)
Expired/Forfeited
(500
)
Unvested, March 31, 2019
1,204,506


The following table presents the restricted stock transactions during the three-month period ended April 1, 2018:
 
Number of
Restricted
Stock Shares
Unvested, December 31, 2017
531,000

Granted
216,500

Vested
(62,332
)
Vested shares tax portion
(9,665
)
Expired/Forfeited
(4,585
)
Unvested, April 1, 2018
670,918



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 March 31, 2019, 150,000 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 March 31, 2019 and April 1, 2018.

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 three-months ended March 31, 2019 and April 1, 2018, the Company issued 32,834 and 14,374 shares, respectively. Under the ESPP, there were 43,080 shares available for future purchase at March 31, 2019.

Share-based compensation

Share-based compensation of $0.2 million was recognized during both three-month periods ended March 31, 2019 and April 1, 2018, as compensation costs in the Consolidated Statements of Operations and as additional paid-in capital on the Consolidated Statements of Stockholders' Deficit to reflect the grant date 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 March 31, 2019. 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.
v3.19.1
Income Taxes
3 Months Ended
Mar. 31, 2019
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES

The effective income tax provision (benefit) rate was 23.2% and (212.9)% for the three-month periods ended March 31, 2019 and April 1, 2018, respectively. The change in the effective income tax rate for the three months ended March 31, 2019 compared with the three months ended April 1, 2018 is primarily attributable to the difference in income before taxes and the full year earnings expectation.

In accordance with the provisions of ASC 740, a valuation allowance was established as of December 31, 2017, for the deferred tax assets of the Company, and remains in place as of March 31, 2019. On a quarterly basis, the Company evaluates the recoverability of the deferred tax asset by reviewing current and projected company and restaurant industry trends, and the macro economic environment.
v3.19.1
Leases
3 Months Ended
Mar. 31, 2019
Leases, Operating [Abstract]  
LEASES
LEASES

General Lease Information

As of March 31, 2019, we operated 64 Company-owned restaurants, all of which are leased properties. Our restaurants range in size from approximately 5,300 square feet to 13,500 square feet with the majority of our restaurants located in stand-alone buildings and/or end-cap positions in strip malls, with a few being in strip mall in-line positions. The Company's initial restaurant lease terms range from 10-20 years and frequently require us to pay variable lease costs, which include a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Typically, our restaurant operating lease renewal options allow us to extend the lease terms for periods of five to 10 years, though the options are not recognized in the ROU assets or lease liabilities. Some restaurant leases provide for contingent rental payments payable only when sales exceed certain thresholds. The sales thresholds were not met and no contingent rental payments were incurred during the three-month periods ended March 31, 2019 and April 1, 2018. Most of our real estate leases incorporate incremental rent increases based on the passage of time.

An election was made by the Company to not account for short-term leases of 12 months or less on the balance sheet.

Leases Not Yet Commenced

The Company entered in to a new lease agreement for its corporate headquarters in Troy, Michigan on February 11, 2019. The lease commences on May 1, 2019, or when build out of the space is complete. The initial lease term is 7 years and 9 months, inclusive of a free rent period.

Significant Assumptions and Judgments

Allocation of consideration - The Company has non-real estate leases that contain both a service component and equipment. In most cases, the Company has obtained stand-alone pricing from our vendors for the restaurant equipment that is leased in order to allocate the contract consideration between the lease and non-lease components.

Discount rate - The Company does not know the rate implicit in its leases and, as a result, we use our estimated incremental borrowing rate. The estimated rate is based on a risk free rate plus a risk-adjusted margin. We believe that this rate is indicative of a fully-collateralized borrowing rate that would have been used in the particular circumstances of our leases.

Amounts Recognized in the Financial Statements
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
Lease cost:

 

Operating lease cost
$
2,357,820

 
$
2,311,541

Variable lease cost
717,376

 
684,578

Sublease income
(61,100
)
 
(24,563
)
Total lease cost
$
3,014,096

 
$
2,971,556

 
 
 
 
Supplemental information:

 

Cash paid for operating lease liabilities
$
2,389,530

 
$
2,348,105

ROU assets obtained in exchange for new operating lease liabilities (1)
$

 
$
50,464,127

Weighted-average remaining lease term - operating leases
9.3 Years

 
9.8 Years

Weighted-average discount rate - operating leases
6.0
%
 
6.0
%
(1)Amounts for the three months ended April 1, 2018 include the transition adjustment for the adoption of ASU 2016-02 discussed in Note 1

Scheduled future undiscounted minimum lease payments for each of the next five years and thereafter for non-cancelable operating leases with initial or remaining lease terms in excess of one year at March 31, 2019 are summarized as follows:
Year
Amount
Remainder of 2019
$
6,990,881

2020
9,297,725

2021
8,696,402

2022
7,913,344

2023
6,996,589

Thereafter
32,429,990

Total lease payments
72,324,931

Less: imputed interest
(18,237,795
)
Present value of lease liabilities
$
54,087,136

v3.19.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES

Refer to Note 2 for a discussion of lease guarantees provided by the Company.

Franchise Related
The Company is required to pay BWW royalties (5.0% of net sales) and advertising fund contributions (3.00% - 3.15% of net sales). In addition, the Company is required to spend an additional 0.25% - 0.5% of regional net sales related to advertising cooperatives for certain metropolitan markets for the term of the individual franchise agreements. The Company incurred $2.0 million in royalty expense for both of the three-month periods ended March 31, 2019 and April 1, 2018. Advertising fund contribution expenses were $1.3 million for both of the three-month periods ended March 31, 2019 and April 1, 2018. Amounts are recorded in Other operating costs on the Consolidated Statement of Operations.

The Company is required by its various BWW 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 BWW has approved. In the past, the modernization costs for a restaurant ranged from $50,000 to $1.3 million depending on an individual restaurant's needs.

Legal Proceedings
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 our business. These claims arise from personal injuries, contract claims, dram shop claims, employment-related claims, and claims from guests or team members alleging injury, illness, or other food quality, health, or operational concerns. 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 business, financial condition or results of operations.
v3.19.1
Earnings Per Share
3 Months Ended
Mar. 31, 2019
Earnings Per Share [Abstract]  
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 March 31, 2019 and April 1, 2018:

 
Three months ended
 
 
March 31, 2019
 
April 1, 2018
Net Income
 
$
55,441

 
$
159,870

 
 
 
 
 
Weighted-average shares outstanding
 
31,925,521

 
26,853,724

Effect of dilutive securities
 
299,490

 

Weighted-average shares outstanding - assuming dilution
 
32,225,011

 
26,853,724

 
 
 
 
 
Earnings per common share
 
$

 
$
0.01

 
 
 
 
 
Earnings per common share - assuming dilution
 
$

 
$
0.01



During the three month periods ended March 31, 2019 and April 1, 2018, 905,016 and 670,918 shares, respectively, of unvested restricted stock were excluded from the calculation of diluted earnings per share because such shares were anti-dilutive.

During the three month periods ended March 31, 2019 and April 1, 2018, 150,000 and 180,000 options, respectively, were excluded from the calculation of diluted earnings per share because such options were anti-dilutive.
v3.19.1
Supplemental Cash Flows Information
3 Months Ended
Mar. 31, 2019
Supplemental Cash Flow Elements [Abstract]  
SUPPLEMENTAL CASH FLOWS INFORMATION
SUPPLEMENTAL CASH FLOWS INFORMATION

Other Cash Flows Information

Cash paid for interest was $1.5 million during both three-month periods ended March 31, 2019 and April 1, 2018.

Cash paid for income taxes was $10,582 and $0, during the three-month periods ended March 31, 2019 and April 1, 2018, respectively.

Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities

Non-cash investing activities for property and equipment not yet paid as of both March 31, 2019 and April 1, 2018, was $0.1 million.
v3.19.1
Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2019
Fair Value Disclosures [Abstract]  
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 March 31, 2019 and December 30, 2018, respectively, 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 6 for additional information pertaining to interest rates swaps.

The fair value of our lease guarantee liability was 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 March 31, 2019 and December 30, 2018, our total debt was approximately $99.5 million and $102.4 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 month period ended March 31, 2019 and the fiscal year ended December 30, 2018.

The following table presents the fair values for those assets and liabilities measured on a recurring basis as of March 31, 2019:

FAIR VALUE MEASUREMENTS
Description
 
Level 1
 
Level 2
 
Level 3
 
Asset/(Liability)
Total
Interest rate swaps
 
$

 
$
144,732

 
$

 
$
144,732

Lease guarantee liability
 

 
(265,540
)
 

 
(265,540
)
Total
 
$

 
$
(120,808
)
 
$

 
$
(120,808
)

 
The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 30, 2018:

FAIR VALUE MEASUREMENTS
Description
 
Level 1
 
Level 2
 
Level 3
 
Asset/(Liability)
Total
Interest rate swaps
 
$

 
$
379,126

 
$

 
$
379,126

Lease guarantee liability
 

 
(282,084
)
 

 
(282,084
)
Total
 
$

 
$
97,042

 
$

 
$
97,042

v3.19.1
Accumulated Other Comprehensive Income
3 Months Ended
Mar. 31, 2019
Stockholders' Equity Note [Abstract]  
ACCUMULATED OTHER COMPREHENSIVE INCOME
ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes each component of Accumulated Other Comprehensive Income ("AOCI"):
 
 
Three Months Ended March 31, 2019
 
Three Months Ended April 1, 2018
 
 
Interest Rate Swaps
 
Interest Rate Swaps
Beginning balance
 
$
355,293

 
$
(283,208
)
 
 
 
 
 
Gain (loss) recorded
 
(234,394
)
 
731,357

Tax benefit (expense)
 
49,223

 
(23,015
)
Adoption of ASU 2018-02 (Note 1)
 
(55,784
)
 

Other comprehensive income (loss)
 
(240,955
)
 
708,342


 
 
 
 
Ending balance AOCI
 
$
114,338

 
$
425,134

v3.19.1
Subsequent Events
3 Months Ended
Mar. 31, 2019
Subsequent Events [Abstract]  
Subsequent Event
SUBSEQUENT EVENT

As previously disclosed on Form 8-K filed February 28, 2019, AMC Wings, Inc., a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “Purchase Agreement”) to acquire substantially all of the assets of Here’s Wings, LLC and B-Dubs CL, LLC. The assets were to consist primarily of 9 existing Buffalo Wild Wings restaurants in the Chicago market. The acquisition was subject to a right of first refusal in favor of Buffalo Wild Wings, Inc., our franchisor. On April 12, 2019, we received notice from the franchisor that it had exercised its right of first refusal. As such, the Purchase Agreement has been effectively terminated.
v3.19.1
NATURE OF BUSINESS AND BASIS OF PRESENTATION (Policies)
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
Basis of Presentation
Basis of Presentation

The consolidated financial statements as of March 31, 2019 and December 30, 2018, and for the three-month periods ended March 31, 2019 and April 1, 2018, have been prepared in accordance with 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 March 31, 2019 and for the three-month periods ended March 31, 2019 and April 1, 2018 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 30, 2018 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 30, 2018, which is included in Item 8 in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2018, and should be read in conjunction with such consolidated financial statements.

The results of operations for the three-month periods ended March 31, 2019 and April 1, 2018 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 29, 2019.
Recent Accounting Pronouncements and Recently Adopted Accounting Pronouncements
Recent Accounting Pronouncements

We reviewed all 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 February 2016, FASB issued ASU No. 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize a lease asset and liability for lease arrangements longer than 12 months. Leases are 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. The Company adopted the new standard as of December 31, 2018 using the modified retrospective approach. The Company has adjusted comparative periods and has elected the package of practical expedients which allows it to not reassess whether a contract is or contains a lease, lease classification, and initial direct costs. The adoption of ASU 2016-02 materially impacted our consolidated financial statements by significantly increasing our non-current assets and liabilities on our consolidated balance sheets in order to record the right-of-use ("ROU") assets and related lease liabilities for our operating leases. We lease all of our restaurant properties under operating leases. The adoption of the standard does not have a material impact on our Consolidated Statements of Comprehensive Income (Loss) or Consolidated Statements of Cash Flows.

In conjunction with our adoption of the new lease accounting standard, certain line items have been adjusted on our opening balance sheets as of January 1, 2018 and December 31, 2018 to conform to the current period presentation. As of January 1, 2018, the line items impacted and adjustments consist of: the addition of $50.0 million in ROU assets, $6.3 million in current operating lease liabilities, $46.9 million in non-current operating lease liabilities, and $1.4 million in retained earnings; and the removal of $0.1 million of intangible assets, $2.6 million in deferred rent, $0.5 million of unfavorable operating lease liabilities, and $1.5 million in deferred gains associated with prior sale leaseback transactions. As of December 31, 2018, the line items impacted and adjustments consist of: the addition of $52.3 million in ROU assets, $6.7 million in current operating lease liabilities, $49.0 million in non-current operating lease liabilities, and $1.3 million in retained earnings; and the removal of $0.1 million of intangible assets, $2.8 million in deferred rent, $0.4 million of unfavorable operating lease liabilities, and $1.4 million in deferred gains associated with prior sale leaseback transactions. Additionally, the Consolidated Statement of Operations for the three-month period ended April 1, 2018, reflects an increase in general and administrative expense of approximately $32,000. Refer to Note 9 for further details.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). ASU 2018-02 provided financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (or portion thereof) was recorded. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018. The Company adopted ASU 2018-02 effective December 31, 2018, and elected to reclassify the income tax effects of the 2017 Tax Cuts and Jobs Act from Accumulated Other Comprehensive Income (Loss) to retained earnings. Adoption did not have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue with Contracts from Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. This ASU and subsequently issued amendments, introduce 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 August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 for public companies to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date.

The requirements for these standards relating to Topic 606 were effective for interim and annual periods beginning after December 15, 2017. The Company adopted ASU 2014-09 effective as of January 1, 2018, using the modified retrospective transition method to all existing contracts that were not substantially completed at the adoption date. We finalized our analysis and the adoption of ASU 2014-09 which did not have a material impact on the timing or amount of revenue recognized as compared to the Company's previous revenue recognition practices.
v3.19.1
NATURE OF BUSINESS AND BASIS OF PRESENTATION (Tables)
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
Disaggregation of Revenue
In the following table, revenue is disaggregated by product mix.
Disaggregated Revenue
 
 
 
 
Product
Three Months Ended March 31, 2019
 
Three Months Ended April 1, 2018
Food
$
34,023,662

 
$
33,007,708

Alcohol
6,544,422

 
6,525,249

Total
$
40,568,084

 
$
39,532,957

v3.19.1
(Tables)
3 Months Ended
Mar. 31, 2019
Guarantees [Abstract]  
Schedule of Guarantor Obligations
The following table discloses the guarantee expiration of all Bagger Dave's leases that include a guarantee by the Company as of March 31, 2019:

Guarantee Expiration
Future guaranteed lease payments
Less than six years
$
1,002,437

Six to eleven years
6,291,391

Total
$
7,293,828

v3.19.1
Property and Equipment (Tables)
3 Months Ended
Mar. 31, 2019
Property, Plant and Equipment [Abstract]  
Property, Plant and Equipment
Property and equipment are comprised of the following assets:
 
 
March 31, 2019
 
December 30, 2018
Equipment
 
$
28,134,184

 
$
27,541,376

Furniture and fixtures
 
6,747,121

 
6,742,523

Leasehold improvements
 
57,443,511

 
57,344,678

Restaurant construction in progress
 
219,070

 
439,321

Total
 
92,543,886

 
92,067,898

Less accumulated depreciation
 
(60,085,684
)
 
(57,644,553
)
Property and equipment, net
 
$
32,458,202

 
$
34,423,345

v3.19.1
Intangible Assets (Tables)
3 Months Ended
Mar. 31, 2019
Intangible Assets, Net (Excluding Goodwill) [Abstract]  
Schedule of Finite-Lived Intangible Assets
Intangible assets are comprised of the following:
 
 
March 31, 2019
 
December 30, 2018
Amortized intangible assets
 
 
 
 
Franchise fees
 
$
1,305,642

 
$
1,305,642

Trademark
 
2,500

 
2,500

Non-compete
 
76,560

 
76,560

Total
 
1,384,702

 
1,384,702

Less accumulated amortization
 
(555,569
)
 
(534,540
)
Total amortized intangible assets, net
 
829,133

 
850,162

 
 
 
 
 
Unamortized intangible assets
 
 
 
 
Liquor licenses
 
1,256,327

 
1,256,327

Total intangible assets, net
 
$
2,085,460

 
$
2,106,489

v3.19.1
Other Accrued Liabilities (Tables)
3 Months Ended
Mar. 31, 2019
Payables and Accruals [Abstract]  
Other Accrued Liabilities
 
March 31, 2019
 
December 30, 2018
Sales tax payable
$
1,060,084

 
$
940,165

Accrued interest
429,564

 
484,535

Accrued royalty fees
165,460

 
173,189

Accrued property taxes
488,431

 
224,865

Accrued loyalty rewards
944,235

 
847,434

Other
148,225

 
151,047

Total other accrued liabilities
$
3,235,999

 
$
2,821,235

v3.19.1
Debt (Tables)
3 Months Ended
Mar. 31, 2019
Debt Disclosure [Abstract]  
Schedule of Long-term Debt
Debt consists of the following obligations:
 
 
March 31, 2019
 
December 30, 2018
$120.0 million term loan - the rate at March 31, 2019 and December 30, 2018 was 5.99% and 5.85%, respectively.
 
$
77,198,616

 
$
79,698,616

$30.0 million development line of credit, converted to the DF Term Loan in December 2016 and June 2018. The rate at March 31, 2019 and December 30, 2018 was 5.99% and 5.85%, respectively.
 
17,647,354

 
18,111,259

$5.0 million revolving line of credit - the rate at March 31, 2019 and December 30, 2018 was 6.00% and 6.01%, respectively.
 
5,000,000

 
5,000,000

Unamortized discount and debt issuance costs
 
(323,165
)
 
(387,245
)
Total debt
 
99,522,805

 
102,422,630

 
 
 
 
 
Less current portion
 
(11,494,830
)
 
(11,515,093
)
Long-term debt, net of current portion
 
$
88,027,975

 
$
90,907,537

Fair Values of Derivative Instruments
The following tables summarize the fair value of derivative instruments designated as cash flow hedges which were outstanding:

 
 
 
March 31, 2019
 
 
 
Notional amounts
 
Derivative assets
 
Derivative liabilities
Interest rate swaps
Rate
Expires
 
 
 
 
 
April 2012
1.4%
April 2019
$
190,476

 
$
166

 
$

January 2015
1.8%
December 2019
24,345,238

 
95,905

 

August 2015
2.3%
June 2020
58,560,119

 
48,661

 

Total
 
 
$
83,095,833

 
$
144,732


$


 
 
 
December 30, 2018
 
 
 
Notional amounts
 
Derivative assets
 
Derivative liabilities
Interest rate swaps
Rate
Expires
 
 
 
 
 
April 2012
1.4%
April 2019
$
761,905

 
$
1,689

 
$

January 2015
1.8%
December 2019
25,809,524

 
152,011

 

August 2015
2.3%
June 2020
58,930,655

 
225,426

 

Total
 
 
$
85,502,084

 
$
379,126

 
$

v3.19.1
Share-Based Compensation (Tables)
3 Months Ended
Mar. 31, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Nonvested Restricted Stock Shares Activity
The following table presents the restricted stock transactions during the three-month period ended March 31, 2019:
 
Number of
Restricted
Stock Shares
Unvested, December 30, 2018
1,274,839

Granted

Vested
(52,375
)
Vested shares tax portion
(17,458
)
Expired/Forfeited
(500
)
Unvested, March 31, 2019
1,204,506


The following table presents the restricted stock transactions during the three-month period ended April 1, 2018:
 
Number of
Restricted
Stock Shares
Unvested, December 31, 2017
531,000

Granted
216,500

Vested
(62,332
)
Vested shares tax portion
(9,665
)
Expired/Forfeited
(4,585
)
Unvested, April 1, 2018
670,918

v3.19.1
Leases (Tables)
3 Months Ended
Mar. 31, 2019
Leases, Operating [Abstract]  
Schedule of Future Minimum Rental Payments for Operating Leases
s located in stand-alone buildings and/or end-cap positions in strip malls, with a few being in strip mall in-line positions. The Company's initial restaurant lease terms range from 10-20 years and frequently require us to pay variable lease costs, which include a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Typically, our restaurant operating lease renewal options allow us to extend the lease terms for periods of five to 10 years, though the options are not recognized in the ROU assets or lease liabilities. Some restaurant leases provide for contingent rental payments payable only when sales exceed certain thresholds. The sales thresholds were not met and no contingent rental payments were incurred during the three-month periods ended March 31, 2019 and April 1, 2018. Most of our real estate leases incorporate incremental rent increases based on the passage of time.

An election was made by the Company to not account for short-term leases of 12 months or less on the balance sheet.

Leases Not Yet Commenced

The Company entered in to a new lease agreement for its corporate headquarters in Troy, Michigan on February 11, 2019. The lease commences on May 1, 2019, or when build out of the space is complete. The initial lease term is 7 years and 9 months, inclusive of a free rent period.

Significant Assumptions and Judgments

Allocation of consideration - The Company has non-real estate leases that contain both a service component and equipment. In most cases, the Company has obtained stand-alone pricing from our vendors for the restaurant equipment that is leased in order to allocate the contract consideration between the lease and non-lease components.

Discount rate - The Company does not know the rate implicit in its leases and, as a result, we use our estimated incremental borrowing rate. The estimated rate is based on a risk free rate plus a risk-adjusted margin. We believe that this rate is indicative of a fully-collateralized borrowing rate that would have been used in the particular circumstances of our leases.

Amounts Recognized in the Financial Statements
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
Lease cost:

 

Operating lease cost
$
2,357,820

 
$
2,311,541

Variable lease cost
717,376

 
684,578

Sublease income
(61,100
)
 
(24,563
)
Total lease cost
$
3,014,096

 
$
2,971,556

 
 
 
 
Supplemental information:

 

Cash paid for operating lease liabilities
$
2,389,530

 
$
2,348,105

ROU assets obtained in exchange for new operating lease liabilities (1)
$

 
$
50,464,127

Weighted-average remaining lease term - operating leases
9.3 Years

 
9.8 Years

Weighted-average discount rate - operating leases
6.0
%
 
6.0
%
(1)Amounts for the three months ended April 1, 2018 include the transition adjustment for the adoption of ASU 2016-02 discussed in Note 1

Scheduled future undiscounted minimum lease payments for each of the next five years and thereafter for non-cancelable operating leases with initial or remaining lease terms in excess of one year at March 31, 2019 are summarized as follows:
Year
Amount
Remainder of 2019
$
6,990,881

2020
9,297,725

2021
8,696,402

2022
7,913,344

2023
6,996,589

Thereafter
32,429,990

Total lease payments
72,324,931

Less: imputed interest
(18,237,795
)
Present value of lease liabilities
$
54,087,136

Lease, Cost [Table Text Block]
Amounts Recognized in the Financial Statements
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
Lease cost:

 

Operating lease cost
$
2,357,820

 
$
2,311,541

Variable lease cost
717,376

 
684,578

Sublease income
(61,100
)
 
(24,563
)
Total lease cost
$
3,014,096

 
$
2,971,556

 
 
 
 
Supplemental information:

 

Cash paid for operating lease liabilities
$
2,389,530

 
$
2,348,105

ROU assets obtained in exchange for new operating lease liabilities (1)
$

 
$
50,464,127

Weighted-average remaining lease term - operating leases
9.3 Years

 
9.8 Years

Weighted-average discount rate - operating leases
6.0
%
 
6.0
%
(1)Amounts for the three months ended April 1, 2018 include the transition adjustment for the adoption of ASU 2016-02 discussed in Note 1
v3.19.1
Earnings Per Share (Tables)
3 Months Ended
Mar. 31, 2019
Earnings Per Share [Abstract]  
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 March 31, 2019 and April 1, 2018:

 
Three months ended
 
 
March 31, 2019
 
April 1, 2018
Net Income
 
$
55,441

 
$
159,870

 
 
 
 
 
Weighted-average shares outstanding
 
31,925,521

 
26,853,724

Effect of dilutive securities
 
299,490

 

Weighted-average shares outstanding - assuming dilution
 
32,225,011

 
26,853,724

 
 
 
 
 
Earnings per common share
 
$

 
$
0.01

 
 
 
 
 
Earnings per common share - assuming dilution
 
$

 
$
0.01

v3.19.1
Fair Value of Financial Instruments (Tables)
3 Months Ended
Mar. 31, 2019
Fair Value Disclosures [Abstract]  
Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis
The following table presents the fair values for those assets and liabilities measured on a recurring basis as of March 31, 2019:

FAIR VALUE MEASUREMENTS
Description
 
Level 1
 
Level 2
 
Level 3
 
Asset/(Liability)
Total
Interest rate swaps
 
$

 
$
144,732

 
$

 
$
144,732

Lease guarantee liability
 

 
(265,540
)
 

 
(265,540
)
Total
 
$

 
$
(120,808
)
 
$

 
$
(120,808
)

 
The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 30, 2018:

FAIR VALUE MEASUREMENTS
Description
 
Level 1
 
Level 2
 
Level 3
 
Asset/(Liability)
Total
Interest rate swaps
 
$

 
$
379,126

 
$

 
$
379,126

Lease guarantee liability
 

 
(282,084
)
 

 
(282,084
)
Total
 
$

 
$
97,042

 
$

 
$
97,042

v3.19.1
Accumulated Other Comprehensive Income (Tables)
3 Months Ended
Mar. 31, 2019
Stockholders' Equity Note [Abstract]  
Schedule of Accumulated Other Comprehensive Income (Loss)
The following table summarizes each component of Accumulated Other Comprehensive Income ("AOCI"):
 
 
Three Months Ended March 31, 2019
 
Three Months Ended April 1, 2018
 
 
Interest Rate Swaps
 
Interest Rate Swaps
Beginning balance
 
$
355,293

 
$
(283,208
)
 
 
 
 
 
Gain (loss) recorded
 
(234,394
)
 
731,357

Tax benefit (expense)
 
49,223

 
(23,015
)
Adoption of ASU 2018-02 (Note 1)
 
(55,784
)
 

Other comprehensive income (loss)