2016 ANNUAL REPORT
NASDAQ: SAUC
Diversified Restaurant Holdings, Inc. (“DRH”) is a
leading restaurant operator and the largest
franchisee of Buffalo Wild Wings® (“BWW”).
Diversified Restaurant Holdings, Inc. (“DRH”)
is a leading restaurant operator and the
largest franchisee of Buffalo Wild Wings
(“BWW”).
DRH has 64 BWW restaurants located in key urban
and suburban markets in Florida, Illinois, Indiana,
Michigan and Missouri. Over the last five years, the
Company has nearly tripled its number of
restaurants through a combination of organic
growth and acquisition.
DRH has 64 BWW restaurants located in
key urban and suburban markets in Florida,
Illinois, Indiana, Michigan and Missouri.
Over the last five years, the Company has
nearly tripled its number of restaurants
through a combination of organic growth and
acquisition.
DRH’s strategy is to generate cash, reduce debt and
leverage its strong franchise operating capabilities
for future growth.
DRH’s strategy is to generate cash, reduce
debt and
its strong franchise
operating capabilities for future growth.
leverage
Our Mission: “DELIGHT our guests” by providing an experience that creates repeat business.
Our Mission: “WOW our guests” by providing an experience that creates repeat business.
2
1 – See EBITDA reconciliation on back of shareholder letter
2 – Operating cash flow from continued operations / enterprise value based on March 28, 2017 closing price of $2.31
Clinton Township, MI (pictured above)
Fourth DRH restaurant out of 64; built in 2003 with a remodel in 2013.
DEAR FELLOW STOCKHOLDERS, GUESTS, ASSOCIATES, AND FANS:
2016 was a year of transformation. With the completion of the Bagger Dave’s spin-off, we are exclusively focused on driving strong
performance and growth with our Buffalo Wild Wings franchise restaurants. We made significant improvements in our cost
structure as a result of the spin-off, enabling us to deploy other efficiency initiatives to drive improved operating profitability. We
used our free cash flow to reduce debt and strengthen our balance sheet. And we executed our management succession plan:
Phyllis Knight joined the company as CFO and Michael Ansley, our founder and former President and CEO, now serves as Executive
Chairman. In that capacity, Michael provides invaluable insights to DRH, while turning his day to day efforts to the operation of the
Bagger Dave’s business.
I am honored to have been named President and CEO, and I look forward to advancing the Company’s strategic priorities.
Solid Results in the Face of Industry Headwinds
We ended 2016 with 64 locations across five states, and we continue to be the largest franchisee of Buffalo Wild Wings. While faced
with the same headwinds hitting the rest of the restaurant industry, we believe we are doing what it takes to increase traffic,
improve our capacity utilization, deliver on our value proposition and enhance the customer experience.
As a result of continuing operations in 2016, which include only the Buffalo Wild Wings business:
• Revenue increased 15% to $166.5 million, primarily due to new unit development and the inclusion of a full year of
opera6ons for 18 restaurants acquired in mid-2015.
•
Same-store sales decreased 3%, a result of industry-wide traffic trends influenced by - among other things - the impacts of
over-capacity and declining retail food traffic.
• Restaurant-level EBITDA increased nearly 9% to $32.3 million, and our restaurant-level EBITDA margin was 19.4%.
• Opera6ng profit increased 2.6 6mes to $7.3 million, and opera6ng margin more than doubled to 4.4%.
• We achieved net income of $3.6 million, a significant improvement from a net loss in 2015.
•
Total debt decreased $5.1 million from the end of 2015.
Historically, we have produced restaurant-level EBITDA margins in the vicinity of 20%. Despite a challenging labor environment and
record high costs for our largest food commodity – chicken wings – we expect to continue to operate at or around those levels
through a sharp focus on cost management.
A Focused Strategy in 2017: Generate Cash, Pay Down Debt and Set the Stage for Future Growth
As we move forward, we are planning significant reductions in our capital spending with a focus on driving stronger free cash flow
and reducing our leverage. We will continue to tightly manage our costs and, as we strengthen our balance sheet, we expect to see
tremendous opportunities for future growth. While we remain open to opportunistic organic expansion of our core business, we
intend to open only one new restaurant in 2017.
In concert with corporate Buffalo Wild Wings efforts, a number of initiatives are in place to drive more traffic and increase our
average ticket. These include promotions such as Half-Price Wing Tuesdays, the new Blazin’ Rewards™ program, and the 15-Minute
Lunch. In 24 locations, we are also offering delivery through third-party services like Grub Hub, and are working to bring additional
locations online during the year. Overall, we are seeing encouraging results from each of these initiatives and are hopeful we will
see continued momentum as we move through 2017. In addition, we are renovating and upgrading our stores to the newer Stadia
design, a proven traffic driver. As of today, nearly half of our restaurants are Stadia. Our goal is to convert the remaining locations to
the Stadia concept by 2021.
I am personally convinced that all of these results, as well as our ability to execute our plans to grow, are the direct products of two
factors: We have a solid foundation, with one of the best brands in the business, and we’re building on that foundation through a
laser-like focus on our mission, our purpose and our values and principles.
We are committed to WOWing all our guests, all the time.
We’ll do so by being guest driven, team focused, community connected and dedicated to excellence. And the indisputable measure
of our success in these efforts will be the long-term success of the Company, and the kind of profits and growth that we all want in
the coming year.
I want to express my deepest appreciation to the Board, my fellow associates, our guests, our fans and, of course, our stockholders
for your ongoing support.
Sincerely,
David G. Burke
President and Chief Executive Officer
We use Adjusted Restaurant-Level EBITDA and
Adjusted EBITDA together with financial
measures prepared in accordance with GAAP,
such as revenue, income from operations, net
income, and cash flows from operations, to
assess our historical and prospective operating
performance and to enhance the understanding
of our core operating performance. Adjusted
Restaurant-Level EBITDA and Adjusted EBITDA
are presented because: (i) we believe they are
useful measures for investors to assess the
operating performance of our business without
the effect of non-cash depreciation and
amortization expenses; (ii) we believe investors
will find these measures useful in assessing our
ability to service or incur indebtedness; and (iii)
they are used internally as benchmarks to
evaluate our operating performance or compare
our performance to that of our competitors.
Adjusted Restaurant-Level EBITDA and Adjusted
EBITDA are not determined in accordance with
GAAP and should not be considered in isolation
or as an alternative to net income or other
financial statement data presented as indicators
of financial performance or liquidity, each as
presented in accordance with GAAP.
Net loss
+ Loss from discontinued operations
+ Income tax benefit
+ Interest expense
+ Other (income) expense, net
+ Loss on disposal of property and equipment
+ Depreciation and amortization
EBITDA
+ Pre-opening costs
+ Non-recurring expenses (Restaurant level)
+ Non-recurring expenses (Corporate level)
Adjusted EBITDA
Adjusted EBITDA margin (%)
+ General and administrative
+ Non-recurring expenses
Restaurant–Level EBITDA
Restaurant–Level EBITDA margin (%)
Fiscal Year
Ended
December 25,
2016
$ (6,002,481)
9,641,529
(2,270,792)
5,763,684
172,031
338,306
14,696,846
22,339,123
599,279
71,184
335,655
23,345,241
14.0 %
9,265,432
(335,655)
$ 32,275,018
19.4 %
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 25, 2016
or
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 000-53577
DIVERSIFIED RESTAURANT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Nevada
03-0606420
27680 Franklin Rd., Southfield, MI 48034
(248) 223-9160
(Address, including zip code and telephone number, including area code, of Registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer☐
Accelerated filer ☐
Non-accelerated filer☐
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
The aggregate market value of the Registrant’s voting common stock held by non-affiliates was $16.9 million based on the per share closing price of the
Company's common stock as reported on the NASDAQ stock market on June 26, 2016.
The number of shares outstanding of the registrant's common stock as of March 24, 2017 was 26,669,347 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement for its Annual Meeting of Stockholders to be held on or about May 18, 2017, are incorporated by reference
in Part III herein. The registrant intends to file such Proxy Statement with the Securities and Exchange Commission no later than 120 days after the end of the
fiscal year covered by this report on Form 10-K.
TABLE OF CONTENTS
PART I ................................................................................................................................................................................
Item 1. Business ...........................................................................................................................................................
Item 1A. Risk Factors ..................................................................................................................................................
Item 1B. Unresolved Staff Comments .........................................................................................................................
Item 2. Properties .........................................................................................................................................................
Item 3. Legal Proceedings............................................................................................................................................
Item 4. Mine Safety Disclosures ..................................................................................................................................
PART II ...............................................................................................................................................................................
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ......................................................................................................................................................................
Item 6. Selected Financial Data ...................................................................................................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation ............................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .......................................................................
Item 8. Consolidated Financial Statements and Supplementary Data ..........................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..........................
Item 9A. Controls and Procedures ...............................................................................................................................
Item 9B. Other Information .........................................................................................................................................
PART III ..............................................................................................................................................................................
Item 10. Directors, Executive Officers and Corporate Governance .............................................................................
Item 11. Executive Compensation ...............................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ......
Item 13. Certain Relationships and Related Transactions, and Director Independence ...............................................
Item 14. Principal Accountant Fees and Services ........................................................................................................
PART IV ..............................................................................................................................................................................
Item 15. Exhibits and Financial Statement Schedules .................................................................................................
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SIGNATURES ....................................................................................................................................................................
69
i
PART I
When used in this Form 10-K, the “Company” and “DRH” refers to Diversified Restaurant Holdings, Inc. and, depending on the
context, could also be used to refer generally to the Company and its subsidiaries, which are described below.
Cautionary Statement Regarding Forward-Looking Information
Some of the statements in the sections entitled “Business,” and “Risk Factors,” and statements made elsewhere in this Annual
Report may constitute forward-looking statements. These statements reflect the current views of our senior management team
with respect to future events, including our financial performance, business, and industry in general. Statements that include the
words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar
statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws
or otherwise.
Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important
factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these
factors include, but are not limited to, the following:
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the success of our existing and new restaurants;
our ability to identify appropriate sites and develop and expand our operations;
changes in economic conditions;
damage to our reputation or lack of acceptance of our brands in existing or new markets;
economic and other trends and developments, including adverse weather conditions, in the local or regional areas in
which our restaurants are located;
the impact of negative economic factors, including the availability of credit, on our landlords and surrounding tenants;
changes in food availability and costs;
labor shortages and increases in our compensation costs, including, as a result, changes in government regulation;
increased competition in the restaurant industry and the segments in which we compete;
the impact of legislation and regulations regarding nutritional information, new information or attitudes regarding diet
and health, or adverse opinions about the health of consuming our menu offerings;
the impact of federal, state, and local beer, liquor, and food service regulations;
the success of our marketing programs;
the impact of new restaurant openings, including the effect on our existing restaurants of opening new restaurants in the
same markets;
the loss of key members of our management team;
inability or failure to effectively manage our growth, including without limitation, our need for liquidity and human
capital;
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the impact of litigation;
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the adequacy of our insurance coverage and fluctuating insurance requirements and costs;
the impact of our indebtedness on our ability to invest in the ongoing needs of our business;
our ability to obtain debt or other financing on favorable terms, or at all;
the impact of a potential requirement to record asset impairment charges in the future;
the impact of any security breaches of confidential guest information in connection with our electronic processing of
credit/debit card transactions;
our ability to protect our intellectual property;
the impact of any failure of our information technology system or any breach of our network security;
the impact of any materially adverse changes in our federal, state, and local taxes;
the impact of any food-borne illness outbreak;
our ability to maintain our relationship with our franchisor on economically favorable terms;
the impact of future sales of our common stock in the public market, the exercise of stock options, and any additional
capital raised by us through the sale of our common stock
the effect of changes in accounting principles applicable to us; and
the success of the spin-off of Bagger Dave's Burger Tavern, Inc., as further discussed below, particularly related to the
impact on the Company's future results as a result of its guarantees of certain Bagger Dave's leases.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements
included in this Annual Report. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions
prove to be incorrect, actual results may differ materially from what we anticipate. Any forward-looking statements you read in
this Annual Report reflect our views as of the date of this Annual Report with respect to future events and are subject to these
and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and
liquidity. You should carefully consider all of the factors identified in this Annual Report that could cause actual results to differ.
ITEM 1. BUSINESS
Business Overview
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. We were incorporated in 2006 and are
headquartered in the Detroit metropolitan area. As of December 25, 2016, we had 64 restaurants in Florida, Illinois, Indiana,
Michigan and Missouri.
In 2008, DRH became publicly-owned by completing a self-underwritten initial public offering for $735,000 and 140,000
shares. We subsequently completed an underwritten, follow-on offering on April 23, 2013 of 6.9 million shares with net proceeds
of $31.9 million.
DRH and its wholly-owned subsidiaries (collectively, the “Company”), AMC Group, Inc. (“AMC”), AMC Wings, Inc.
("WINGS”), and AMC Real Estate, Inc. (“REAL ESTATE”) own and operate BWW restaurants.
Our BWW restaurants are located in Michigan, Florida, Missouri, Illinois, and Indiana and include 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") and have opened 29 restaurants out of a total required of 42 by 2021. We have one additional
2
restaurant in process and are in discussions with BWLD regarding the remaining 12 restaurants. We may continue to open new
restaurants but at a potentially lower number over a longer period of time under an amended ADA.
DRH is continually recognized as a leading franchisee in the BWW system. In 2014 our Chief Operating Officer received the
Founders' Award, and in both 2014 and 2015 we were recognized as Franchisee of the Year. In 2015, three of our restaurants
were awarded for sales performance and, in 2016, four of the Company's restaurants were recognized as Blazin' 25 restaurants,
which rewards the top performing 25 franchise restaurants in the system. Also in 2016, our Chief Operating Officer was awarded
the Franchise Advisory Council Excellence Award.
The following organizational chart outlines the current corporate structure of DRH. A brief textual description of the entities
follows the organizational chart. DRH is incorporated in Nevada.
AMC was formed on March 28, 2007, and serves as our operational and administrative center. AMC renders management,
operational support, and advertising services to WINGS, REAL ESTATE and their subsidiaries. Services rendered by AMC
include marketing, restaurant operations, restaurant management consultation, hiring and training of management and staff, and
other management services reasonably required in the ordinary course of restaurant operations.
WINGS was formed on March 12, 2007, and serves as a holding company for our restaurants. We are economically dependent
on retaining our franchise rights with BWLD. The franchise agreements have specific initial term expiration dates ranging from
December 2020 through June 2036, depending on the date each was executed and the duration of its initial term. The franchise
agreements are renewable at the option of the franchisor and are generally renewable if the franchisee has complied with the
franchise agreement. When factoring in any applicable renewals, the franchise agreements have specific expiration dates ranging
from December 2025 through June 2051. We believe we are in compliance with the terms of these agreements.
REAL ESTATE was formed on March 18, 2013, and serves as the holding company for any real estate properties owned by
DRH. Currently, DRH does not own any real estate after completing a sale leaseback transaction. Refer to Note 3 of the
Consolidated Financial Statements for additional information on the sale leaseback transaction.
Our headquarters are located at 27680 Franklin Road, Southfield, Michigan 48034. Our telephone number is (248) 223-9160. We
can also be found on the Internet at www.diversifiedrestaurantholdings.com.
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Background
Bagger Dave’s Spin-Off
On December 25, 2016, DRH completed the previously announced tax-free spin-off (the “Spin-Off”) of its Bagger Dave's
business. Specifically, 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 corporation ("Bagger Dave's" or "Bagger"), which was then spun-off into a
stand-alone, publicly-traded company on the over-the-counter exchange. In connection with the Spin-Off, DRH contributed to
Bagger 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. Additionally, DRH contributed $2 million in cash to
Bagger to provide working capital for Bagger’s operations and is a guarantor for certain of Bagger's lease obligations.
Further, in conjunction with the Spin-Off, DRH entered into a transition services agreement (the "TSA") with Bagger Dave's
pursuant to which DRH will provide certain information technology and human resources support, limited accounting support,
and other minor administrative functions at no charge. The TSA is intended to assist the discontinued component in efficiently
and seamlessly transitioning to stand on its own. The current terms of the TSA expire in December 2017 at which time the parties
may negotiate which services will be required on an ongoing basis and the fees that will be charged for such services, and at any
time thereafter the TSA can be terminated by the Company with 10 days written notice.
Restaurant Concept
With 64 BWW restaurants (20 in Michigan, 17 in Florida, 15 in Missouri, seven in Illinois and five in Indiana), including the
nation’s largest BWW, based on square footage, in downtown Detroit, Michigan, DRH is the largest BWLD franchisee. As of
December 25, 2016, BWLD reported over 1,200 BWW restaurants in North America that were either directly owned or
franchised. The restaurants feature a variety of boldly-flavored, crave-able menu items, including Buffalo, New York-style
chicken wings. Buffalo Wild Wings restaurants create a welcoming neighborhood atmosphere that includes an extensive multi-
media system, a full bar and an open layout, which appeals to sports fans and families alike. The differentiation of the restaurants
is made by the social environment created and the connections made with Team Members, guests and the local community.
Guests have the option of watching sporting events or other popular programs on various projection screens and televisions,
competing in Buzztime ® Trivia or playing video games. The open layout of the restaurants offers dining and bar areas that
provide distinct seating choices for sports fans and families. Restaurants offer flexibility and allow guests to customize their
Buffalo Wild Wings experience to meet their time demands, service preferences or the experience they are seeking for a workday
lunch, a dine-in dinner, a take-out meal, an afternoon or evening enjoying a sporting event or a late-night craving.
Buffalo Wild Wings restaurants have widespread appeal and have won dozens of “Best Wings” and “Best Sports Bar” awards
across the country. The made-to-order menu items are enhanced by the bold flavor profile of 16 signature sauces and 5 signature
seasonings, ranging from Sweet BBQ™ to Blazin’®. Restaurants offer 20 to 40 domestic and imported beers on tap, including
craft brews, and a wide selection of bottled beers, wines, and liquor. The award-winning food and memorable experience drive
guest visits and loyalty. For fiscal year 2016, our average BWW restaurant derived 82.9% of its revenue from food, including
non-alcoholic beverages, and 17.1% of its revenue from alcohol sales, primarily draft beer.
Growth Strategy
We plan to drive top and bottom line growth through the development and acquisition of new restaurant locations, achievement
of positive same-store-sales in comparable restaurant locations, and the successful implementation of cost reduction initiatives
at the restaurant and support level.
We currently own 64 BWW restaurants in five states. Our new restaurant growth strategy includes continuing to open a limited
number of new BWW locations in our core markets. However, expansion opportunities in our current markets are limited. As a
result, our growth strategy also includes completing disciplined, strategic acquisitions of existing BWW restaurants and
potentially other franchised restaurants from other operators.
Since 2012 we have acquired 29 restaurants in several transactions and have developed a strong process to identify, evaluate and
integrate acquisitions. We are continually recognized as one of the best operators in the BWW system, and we believe that we
can apply our strong operating disciplines and management culture to acquired locations to achieve financial improvements and
growth.
We intend to drive same-store-sales growth in all of our locations through the execution of local, traffic-driving marketing and
advertising strategies, continued support of the community through sponsorship programs and local charities and delivery of
quality food and service in a clean and modernized environment. One of our guiding principles is that a happy team member
4
translates to a happy guest. A happy guest drives repeat sales and word-of-mouth referrals; two key factors that are fundamental
and directly support our local marketing strategy.
We also plan to improve our margins through a number of initiatives including enhanced methods to manage cost of sales and
hourly labor with use of technology and improved application of standards, and working with our service vendors to leverage
our scale and obtain higher value at more competitive prices. With improved operating margins and an intense focus on improving
our cashflow, we will be able to reduce our overall debt leverage.
Site Selection
We consider the real estate selection process to be a key factor in the long-term success of each restaurant and, as such, devote a
significant amount of time and effort into identifying and evaluating each potential location. We consider several metrics to
assess the strength of each proposed site, including daytime population, accessibility, population density, visibility and
neighboring retailers, along with a number of demographic factors. For our restaurants, we prefer a strong end-cap position,
which is a premier, highly visible corner positioned in a well-anchored shopping center or lifestyle entertainment center. We
also seek to develop freestanding locations, if the opportunity meets our site selection criteria, along with specific return
thresholds.
Restaurant Operations
We believe retaining talented and passionate restaurant managers and providing our team members with the tools, skills and
motivation to deliver our goal of the ultimate social experience are key to our continued success. In order to retain our unique
culture as we grow, we devote substantial resources to identifying, selecting, and training our restaurant-level team members. We
typically have six in-restaurant trainers at each existing location who provide both front- and back-of-house training on site. We
also have a seven-week training program for our restaurant managers, which consists of an average of four weeks of restaurant
training and three weeks of cultural training. During their training, managers observe our established restaurants’ operations and
guest interactions. We believe our focus on guest-centric training is a core strength of our Company and reinforces our mission
to delight our guests.
Management and Staffing
The core values that define our culture are to be guest driven, team focused, community connected and dedicated to excellence.
Our restaurants are generally staffed with one managing partner and up to five assistant managers, depending on the sales volume
of the restaurant. The managing partner is responsible for day-to-day operations and for maintaining the standards of quality and
performance that define our corporate culture. We utilize regional managing partners to oversee our managing partners and
supervise the operation of our restaurants, including the continuing development of each restaurant’s management team. Through
regular visits to the restaurants and constant communication with the management team, the regional managing partners ensure
adherence to all aspects of our concept, strategy and standards of quality.
Training, Development, and Recruiting
We believe that successful restaurant operations, guest satisfaction, quality, and cleanliness begin with the team member - a key
component of our strategy. We pride ourselves on facilitating a well-organized, thorough, hands-on training program. In 2013,
after nine months of developing our new training program with the help of industry experts, we introduced our Hospitality
Excellence Academy ("HEA"). To ensure the success of our organization, HEA was designed to foster our culture of excellence
by cultivating the leaders of tomorrow.
We offer an incentive program that we believe is very competitive in the restaurant industry. Aside from competitive base
salaries and benefits, management is incentivized with a performance-based bonus program. We also provide group health,
dental, and vision insurance, a company-sponsored 401(k) plan with a discretionary matching contribution feature, a tuition
reimbursement program, a referral bonus program and opportunities for career advancement. We emphasize growth from within
the organization, giving our team members the opportunity to develop and advance. We believe this philosophy helps build a
strong, loyal management team with high team member retention rates, giving us an advantage over our competitors.
Restaurants
Our restaurants range in size from 5,300 to 13,500 square feet, with a historical square foot average of about 6,400. We anticipate
that future restaurants will range in size from 4,800 to 5,500 square feet with an average cash investment per restaurant ranging
from approximately $1.7 million to $2.5 million. From time to time, our restaurants may be smaller or larger or cost more or less
5
than our targeted range, depending on the particular circumstances of the selected site. Also, from time to time, we may elect to
purchase either the building or the land and building for certain restaurants, which would require additional capital.
We have a continuous capital improvement plan for our restaurants and generally plan major renovations every seven years. For
a more detailed discussion of our capital improvement plans, see the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and specifically, the subsection entitled “Liquidity and Capital Resources;
Expansion Plans.”
Quality Control and Purchasing
We strive to maintain high quality standards, protecting our food supply at all times. Purchasing for our restaurants is primarily
through channels established by BWLD corporate operations. We do, however, negotiate directly with most of these channels
regarding price and delivery terms. When we purchase directly, we seek to obtain the highest quality ingredients, products, and
supplies from reliable sources at competitive prices. To maximize our purchasing efficiencies, our corporate staff negotiates,
when available, fixed-price contracts (usually for a one-year period) or, where appropriate, contract based on fluctuating
commodity prices.
Marketing and Advertising
We pay an advertising fee to BWLD equal to 3.00% - 3.15% of total net sales, which supports national advertising designed to
build brand awareness and drive traffic to our restaurants. Some examples include television commercials on ESPN and CBS
during certain regional key games for the NFL, MLB, NBA and the March Madness NCAA basketball tournament. In addition,
we invest 0.25% - 0.5% of certain regional net sales in cooperatives of BWW franchisees for two metropolitan areas. We currently
have co-ops for the Detroit, MI and Chicago, IL markets where we engage in coordinated local restaurant marketing efforts.
In fiscal year 2016, we spent approximately 1.20% of all restaurant sales on local marketing efforts (including co-ops), before
reimbursements and rebates. This includes charitable donations and local community sponsorships, which help develop local
public relations and are a major component of our marketing efforts. We support programs that build traffic at the grass-roots
level. We also participate in numerous local restaurant marketing events throughout the communities we serve.
Information Systems and Technology
Enhancing the security of our financial data and other personal information remains a high priority for us. We continue to innovate
and modernize our technology infrastructure to provide improved efficiency, control and security. Our ability to accept credit
cards as payment in our restaurants and for online gift card orders depends on us remaining compliant with standards set by the
Payment Card Industry Security Standards Council (“PCI”). The standards set by PCI contain compliance guidelines and
standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual
cardholder data. We maintain security measures that are designed to protect and prevent unauthorized access to such information.
We continue to assess new payment standards and intend to implement EMV chip enabled devices to ensure the most secure
transaction available in restaurant, as well as implementing a CCV code requirement for online purchases.
We also believe that technology can provide a competitive advantage and enable our strategy for growth through efficient
restaurant operations, information analysis and ease and speed of guest service. We have a standard point-of-sale system in our
restaurants that is integrated to our corporate office through a web-based, above-store business intelligence reporting and analysis
tool. Our systems are designed to improve operating efficiencies, enable rapid analysis of marketing and financial information
and improve administrative productivity. We also integrated the online ordering function and leverage Rockbot® which allows
the guest to select the music played throughout the restaurant using their mobile device. In-restaurant tablets are also being
introduced to enhance the guest experience through interactive free and paid arcade games, as well as payment at the table.
We are constantly assessing new technologies to improve operations, back-office processes and overall guest experience. This
includes the implementation of mobile payment options, advanced programming of kitchen display units, tablet-based wait-
listing applications and a mobile-based loyalty program, EMV chip payment, and server tablet ordering functionality.
Competition
The restaurant industry is highly competitive. We believe we compete primarily with local and regional sports bars and national
casual dining and quick-casual establishments. Competition is expected to remain intense with respect to price, service, location,
concept and type and quality of food. There is also competition for real estate sites, qualified management personnel and hourly
restaurant staff. Many of our competitors have been in existence longer than we have and may be better established in markets
where we are currently located or may, in the future, be located. Accordingly, we strive to continually improve our restaurants,
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maintain high quality standards and treat our guests in a manner that encourages them to return. We believe our pricing
communicates value to the guest in a comfortable, welcoming atmosphere that provides full service to the guest.
Trademarks, Service Marks, and Trade Secrets
The BWW registered service mark is owned by BWLD.
Government Regulations
The restaurant industry is subject to numerous federal, state, and local governmental regulations, including those relating to the
preparation and sale of food and alcoholic beverages, sanitation, public health, nutrition labeling requirements, fire codes, zoning,
and building requirements and to periodic review by state and municipal authorities for areas in which the restaurants are
located. Each restaurant requires appropriate licenses from regulatory authorities allowing it to sell beer, wine and liquor and
each restaurant requires food service licenses from local health authorities. The majority of our licenses to sell alcoholic
beverages must be renewed annually and may be suspended or revoked at any time for cause, including violation by us or our
team members of any law or regulation pertaining to alcoholic beverage control, such as those regulating the minimum age of
team members or patrons who may serve or be served alcoholic beverages, the serving of alcoholic beverages to visibly
intoxicated patrons, advertising, wholesale purchasing and inventory control. In order to reduce this risk, restaurant team
members are trained in standardized operating procedures designed to assure compliance with all applicable codes and
regulations. We have not encountered any material problems relating to alcoholic beverage licenses or permits to date.
We are also subject to laws governing our relationship with team members. Our failure to comply with federal, state and local
employment laws and regulations may subject us to losses and harm our brand. The laws and regulations govern such matters
as: wage and hour requirements; workers’ compensation insurance; unemployment and other taxes; working and safety
conditions; overtime; and citizenship and immigration status. Significant additional government-imposed regulations under the
Fair Labor Standards Act and similar laws related to minimum wages, overtime, rest breaks, paid leaves of absence, and mandated
health benefits may also impact the performance of our operations. In addition, team member claims based on, among other
things, discrimination, harassment, wrongful termination, wages, hour requirements and payments to team members who receive
gratuities, may divert financial and management resources and adversely affect operations. The losses that may be incurred as a
result of any violation of such governmental regulations by the Company are difficult to quantify. To our knowledge, we are in
compliance in all material respects with all applicable federal, state and local laws affecting our business.
The federal Patient Protection and Affordable Care Act (PPACA) was enacted in March 2010. On January 1, 2015, the employer
portion of the PPACA went into effect. In addition to being required to provide full-time employees with medical insurance that
meets minimum value and affordability standards, the employer mandate requires employers to provide covered employees and
the Internal Revenue Service with specific reportable benefit information. The Company’s 2015 and 2016 medical plans have
been offered to all full-time employees and meet the minimum value and affordability requirements of the PPACA, and the
Company has complied with the informational reporting requirements of the act.
Compliance with these laws and regulations may lead to increased costs and operational complexity and may increase our
exposure to governmental investigations or litigation. We may also be subject, in certain states, to “dram shop” statutes, which
generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served
alcoholic beverages to the intoxicated person. We carry liquor liability coverage as part of our existing comprehensive general
liability insurance which we believe is consistent with coverage carried by other companies in the restaurant industry of similar
size and scope of operations. Even though we carry liquor liability insurance, a judgment against us under a “dram shop” statute
in excess of our liability coverage could have a material adverse effect on our operations.
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ITEM 1A. RISK FACTORS
This Form 10-K, including the discussions contained in Items 1 and 7, contains various “forward-looking statements” that are
based on current expectations or beliefs concerning future events. Such statements can be identified by the use of terminology
such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “will,”
“forecast” and similar words or expressions. Our forward-looking statements generally relate to our growth strategy, financial
results, sales efforts, franchise expectations, restaurant openings and related expense and cash requirements. Although we
believe there is a reasonable basis for the forward-looking statements, our actual results could be materially different. While it
is not possible to foresee all of the factors that may cause actual results to differ from our forward-looking statements, such
factors include, among others, the risk factors that follow. Investors are cautioned that all forward-looking statements involve
risks and uncertainties and speak only as of the date on which they are made, and we do not undertake any obligation to update
any forward-looking statement.
Risks Related to Our Business and Industry
Our Financial Results Depend Significantly Upon the Success of Our Existing and New Restaurants
Our ability to maintain and grow our revenue and profits will depend on our ability to successfully drive sales volumes and
efficiently manage costs in our existing and new restaurants. Currently, we have 64 BWW restaurants. The results achieved by
our current restaurants may not be indicative of longer-term performance or the potential market acceptance of our restaurant
concept in other locations.
The success of our restaurants depends principally upon generating and maintaining guest traffic, loyalty and achieving positive
margins. Significant factors that might adversely affect guest traffic and loyalty and profit margins include:
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economic conditions, including housing market downturns, rising unemployment rates, lower disposable income, adverse credit
conditions, rising fuel prices and decreasing consumer confidence and other events or factors that adversely affect consumer spending
in the markets we serve;
competition in the restaurant industry, particularly in the casual and fast-casual dining segments;
changes in consumer preferences;
our guests’ failure to accept menu price increases that we may make to offset increases in certain operating costs;
our reputation and consumer perception of our concepts’ offerings in terms of quality, price, value, ambiance and service; and
our guests’ actual experiences from dining in our restaurants.
Our restaurants are also susceptible to increases in certain key operating expenses that are either wholly or partially beyond our
control, including:
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food and other raw materials costs, many of which we cannot effectively hedge;
compensation costs, including wage, workers’ compensation, health care and other benefits expenses;
rent expenses and construction, remodeling, maintenance and other costs under leases for our new and existing restaurants;
compliance costs as a result of changes in regulatory or industry standards;
energy, water and other utility costs;
costs for insurance (including health, liability and workers’ compensation);
information technology and other logistical costs; and
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expenses due to litigation against us.
Competition in the Restaurant Industry May Affect Our Ability to Compete Effectively
The restaurant industry is intensely competitive. We believe we compete primarily with regional and local sports bars, casual
dining concept, and fast-casual establishments. Many of our direct and indirect competitors are well-established national,
regional or local chains with a greater market presence than us. Further, some competitors have substantially greater financial,
marketing and other resources than us. In addition, independent owners of local or regional establishments may enter the wing-
based restaurant businesses without significant barriers to entry and such establishments may provide price competition for our
restaurants. Competition in the casual dining, fast-casual and quick-service segments of the restaurant industry is expected to
remain intense with respect to price, service, location, concept and the type and quality of food. We also face intense competition
for real estate sites, qualified management personnel and hourly restaurant staff.
Actions by Our Franchisor Could Negatively Affect Our Business and Operating Results
We are economically dependent on retaining our franchise rights with BWLD. Our BWW restaurant operations depend, in part,
on decisions made by our franchisor, including changes of distributors, food menu items and prices, policies and procedures, and
advertising programs. Business decisions made by BWLD could adversely impact our operating performance and profitability.
Under our ADA, BWLD has the right to immediately terminate the ADA if, among other things, we are unable to comply with
the development schedule, or if one of the Franchise Agreements entered into pursuant to the area ADA is terminated.
Termination of the ADA could adversely affect our growth strategy and, in turn, our financial condition. Additionally, the ADA
and the individual Franchise Agreements provide BWLD with the authority to approve the location selected for our future BWLD
franchises, as well as approve the design of the individual restaurant. BWLD must give its consent prior to the opening of a new
BWW restaurant and, once the restaurant is open, we are subject to various operational requirements, including the use of specific
suppliers and products. Delays in the approval of our locations or pre-opening approval, as well as changes to the operational
requirements, may impact our operating performance. We have opened 29 restaurants out of a total required of 42 by 2021. We
have one additional restaurant in process and are in discussions with BWLD regarding the remaining 12 restaurants. We may
continue to open new restaurants but at a potentially lower number over a longer period of time under an amended ADA. If we
are unable to reach agreement regarding an amendment to the ADA, we may be required to open restaurants under circumstances
that we view as less than optimal, or pay fees or penalties under the ADA, and our financial condition and results of operations
may be adversely impacted.
Our Success Depends Substantially on the Value of the BWW Brand and Unfavorable Publicity Could Harm Our Business
With the completion of the Spin-Off all of our restaurants are BWW restaurants. Multi-unit restaurant businesses such as ours
can be adversely affected by publicity resulting from complaints, litigation or general publicity regarding poor food quality, food-
borne illness, personal injury, food tampering, adverse health effects of consumption of various food products or high-calorie
foods (including obesity) or other concerns. Negative publicity from traditional media or online social network postings may
also result from actual or alleged incidents or events taking place in our restaurants.
There has been a marked increase in the use of social media platforms and similar devices, including weblogs (blogs), social
media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of
consumers and other interested persons. Consumers value readily available information concerning goods and services that they
have or plan to purchase, and may act on such information without further investigation or authentication. The availability of
information on social media platforms is virtually immediate, as is its impact. Many social media platforms immediately publish
the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. The
opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily
available. Information concerning our Company may be posted on such platforms at any time. Information posted may be
adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or business. The harm may
be immediate without affording us an opportunity for redress or correction. Such platforms also could be used for dissemination
of trade secret information, compromising valuable company assets. In summary, the dissemination of information online could
harm our business, prospects, financial condition and results of operations, regardless of the information’s accuracy.
Regardless of whether any public allegations or complaints are valid, unfavorable publicity relating to a number of our
restaurants, or only to a single restaurant, could adversely affect public perception of the entire brand. Adverse publicity and its
effect on overall consumer perceptions of food safety, or our failure to respond effectively to adverse publicity, could have a
material adverse effect on our business. We must protect and grow the value of our brands to continue to be successful in the
future. Any incident that erodes consumer trust in or affinity for our brands could significantly reduce their value. If consumers
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perceive or experience a reduction in food quality, service and ambiance or in any way believe we failed to deliver a consistently
positive experience, the value of our brand could suffer.
We May Not Be Able to Manage Our Growth
Our expansion strategy will depend upon our ability to acquire, open and operate additional restaurants profitably. The opening
of new restaurants will depend on a number of factors, many of which are beyond our control. These factors include, among
others, the availability of management, restaurant staff, and other personnel, the cost and availability of suitable restaurant
locations, cost-effective and timely planning, design and build out of restaurants, acceptable leasing terms, acceptable financing,
and securing required governmental permits. Although we have formulated our business plans and expansion strategies based
on certain estimates and assumptions we believe are reasonable, we anticipate that we will be subject to changing conditions that
will cause certain of these estimates and assumptions to be incorrect. For example, our restaurants may not open at the planned
time due to factors beyond our control, including, among other factors, site selection, BWLD’s approval with respect to new
BWW openings, negotiations with landlord and construction or permitting delays.
We May Not Be Successful When Entering New Markets
When expanding the BWW concept or potentially acquiring other franchise concepts, we may enter new markets in which we
may have limited or no operating experience. There can be no assurance that we will be able to achieve success and/or
profitability in our new markets or in our new restaurants. The success of these new restaurants will be affected by the different
competitive conditions, consumer taste, and discretionary spending patterns within the new markets, as well as by our ability to
generate market awareness of the BWW brand or other brands. New restaurants typically require several months of operation
before achieving normal levels of profitability. When we enter highly competitive new markets or territories in which we have
not yet established a market presence, the realization of our revenue targets and desired profit margins may be more susceptible
to volatility and/or more prolonged than anticipated.
New Restaurants Added to Our Existing Markets May Take Sales From Existing Restaurants
New restaurants added to our existing markets, whether by us or others, may take sales away from our existing
restaurants. Because we intend to open restaurants in our existing markets, and others may intend the same, this may impact
revenue earned by our existing restaurants.
Higher-Than-Anticipated Costs Associated With the Opening of New Restaurants or With the Closing, Relocating, or
Remodeling of Existing Restaurants May Adversely Affect Our Results of Operations
Our revenue and expenses may be significantly impacted by the location, number and timing of the opening of new restaurants
and the closing, relocating and remodeling of existing restaurants. We incur substantial pre-opening expenses each time we open
a new restaurant and will incur other expenses if we close, relocate or remodel existing restaurants. These expenses are generally
higher when we open restaurants in new markets, but the costs of opening, closing, relocating or remodeling any of our restaurants
may be higher than anticipated. An increase in such expenses could have an adverse effect on our results of operations.
Future Acquisitions May Have Unanticipated Consequences That Could Harm Our Business and Our Financial Condition
We may seek to selectively acquire existing BWW restaurants or other restaurant concepts as a franchisee. To do so, we would
need to identify suitable acquisition candidates, negotiate acceptable acquisition terms and obtain appropriate financing as
needed. Any acquisitions we pursue, whether successfully completed or not, may involve risks, including:
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material adverse effects on our operating results, particularly in the fiscal quarters immediately following the acquisition as the acquired
restaurants are integrated into our operations;
customary closing and indemnification risks associated with any acquisition;
funds used pursuing acquisitions we are ultimately unable to consummate because the transaction is subject to a right of first refusal in
favor of our franchisor, BWLD; and
diversion of management’s attention from other business concerns.
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Future acquisitions of existing restaurants, which may be accomplished through a cash purchase transaction, the issuance of our
equity securities, or a combination of both, could result in potentially dilutive issuances of our equity securities, the incurrence
of debt and contingent liabilities and impairment charges related to intangible assets, any of which could harm our business and
financial condition.
The Loss of Key Executives Could Affect Our Performance
Our success depends substantially on the contributions and abilities of key executives and other team members. The loss of any
of our executive officers could jeopardize our ability to meet our financial targets. Our inability to retain the services of our
executive team or to attract other qualified executives could have an adverse effect on us, and there could be a difficult transition
period in finding suitable replacements for any of them.
We May Not Be Able to Attract and Retain Qualified Team Members to Operate and Manage Our Restaurants
The success of our restaurants depends on our ability to attract, motivate, develop and retain a sufficient number of qualified
restaurant team members, including managers and hourly team members. The inability to recruit, develop and retain these
individuals may delay the planned openings of new restaurants or result in high team member turnover in existing restaurants,
thus increasing the cost to efficiently operate our restaurants. This could inhibit our expansion strategy and business performance
and negatively impact our operating results.
Fluctuations in the Cost of Food Could Impact Operating Results
Our primary food products are fresh bone-in chicken wings, frozen boneless chicken and potatoes. Our food, beverage and
packaging costs could be significantly affected by increases in the cost of fresh chicken wings, which can result from a number
of factors, including but not limited to, seasonality, cost of corn and grain, animal disease, drought and other weather phenomena,
increase in demand domestically and internationally, and other factors that may affect availability. Additionally, if there is a
significant rise in the price of chicken wings, and we are unable to successfully adjust menu prices or menu mix or otherwise
make operational adjustments to account for the higher wing prices, our operating results could be adversely affected. We also
depend on our franchisor, BWLD, as it relates to chicken wings, to negotiate prices and deliver product to us at a competitive
cost. Chicken wing prices per pound averaged $1.87 in 2016, $0.06 higher than the average of $1.81 in 2015. BWLD currently
sources, negotiates and secures fresh bone-in chicken wings for its franchisees.
Shortages or Interruptions in the Availability and Delivery of Food and Other Supplies May Increase Costs or Reduce
Revenue
Possible shortages or interruptions in the supply of food items and other supplies to our restaurants caused by inclement weather,
terrorist attacks, natural disasters such as floods, drought, and hurricanes, pandemics, the inability of our vendors to obtain credit
in a tightened credit market, food safety warnings or advisories, or the prospect of such pronouncements or other conditions
beyond our control, could adversely affect the availability, quality and cost of items we buy and the operations of our
restaurants. Our inability to effectively manage supply chain risk could increase our costs and limit the availability of products
critical to our restaurant operations.
We May Face Guaranty Obligations or Other Potential Liabilities in Connection With the Spin-Off of Bagger Dave's
Following the Bagger Dave's Spin-Off, we continue to provide lease guaranties and certain transition services to Bagger. We
may also be asked to consider providing additional capital support. We remain as a guarantor on 18 lease agreements as of the
date of the Spin-Off, two of which now relate to an unaffiliated party which has taken over the Bagger Dave's lease. In the event
Bagger Dave's or the unaffiliated party were unable to meet their lease obligations, we could be required to make the lease
payments or suffer other financial liability. Additionally, we have entered into a Transition Services Agreement with Bagger
Dave's, agreeing to provide certain services or functions that the companies historically have shared, including various
administrative and information technology services. During the first year, there is no compensation payable to DRH in connection
with the services. Thereafter, we expect compensation for transition services will be based to the extent possible, on actual cost
of providing the service. In connection with the Spin-Off, we provided initial capitalization of $2.0 million to Bagger Dave's.
Under certain circumstances, with the approval of our Board and our lenders, we may provide up to an additional $1.0 million
in capitalization to Bagger Dave's. These or other liabilities and costs that may be incurred in connection with the Spin-Off,
including the time required of our personnel in performing the transition services, may exceed our estimates and could have an
adverse impact on our operating results and financial condition.
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Board and Officer Overlap with Bagger Dave's May Give Rise to Conflicts of Interest
Our Executive Chairman, our President and CEO (both of whom are also members of our board of directors) and our CFO
currently serve on Bagger Dave's board of directors. Our Executive Chairman is also the Chairman of the Board, Chief Executive
Officer and President of Bagger Dave's. We have certain business dealings with Bagger Dave's, including the transition services
agreement and the lease guarantees. We may also have business dealings that extend beyond separation matters. In certain
locations, our restaurants are located adjacent to or near a Bagger Dave's restaurant and may compete for guests. While we have
procedures in place to consider related party transactions through independent committee members of our board, the overlap in
directors and officers with Bagger Dave's may give rise to conflicts of interest.
Increases in Our Compensation Costs, Including as a Result of Changes in Government Regulation, Could Slow Our Growth
or Harm Our Business
We are subject to a wide range of compensation costs. Because our compensation costs are, as a percentage of revenue, higher
than other industries, we may be significantly harmed by compensation cost increases. Unfavorable fluctuations in market
conditions, availability of such insurance, or changes in state and/or federal regulations could significantly increase our insurance
premiums. In addition, we are subject to the risk of employment-related litigation at both the state and federal levels, including
claims styled as class action lawsuits, which are more costly to defend. Also, some employment-related claims in the area of
wage and hour disputes are not insurable risks.
Significant increases in health care costs may also continue to occur, and we can provide no assurance that we will be able to
effectively contain those costs. Further, we are continuing to assess the impact of recently-adopted federal health care legislation
on our health care benefit costs, and significant increases in such costs could adversely impact our operating results.
In addition, many of our restaurant personnel are hourly team members subject to various minimum wage requirements or
changes to existing tip credit laws. Mandated increases in minimum wage levels and changes to the tip credit laws, which dictate
the amounts an employer is permitted to assume a team member receives in tips when calculating the team member’s hourly
wage for minimum wage compliance purposes, have recently been and continue to be proposed and implemented at both federal
and state government levels. Continued minimum wage increases or changes to allowable tip credits may further increase our
compensation costs or effective tax rate.
Various states in which we operate are considering or have already adopted new immigration laws, and the U.S. Congress and
Department of Homeland Security from time to time consider or implement changes to federal immigration laws, regulations, or
enforcement programs as well. Some of these changes may increase our obligations for compliance and oversight, which could
subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential team
members. Although we require all team members to provide us with government-specified documentation evidencing their
employment eligibility, some of our team members may, without our knowledge, be unauthorized team members. Unauthorized
team members are subject to deportation and may subject us to fines or penalties, and if any of our team members are found to
be unauthorized, we could experience adverse publicity that negatively impacts our brand and may make it more difficult to hire
and keep qualified team members. Termination of a significant number of team members that, unbeknownst to us, were
unauthorized team members may disrupt our operations, cause temporary increases in our compensation costs as we train new
team members and result in additional adverse publicity. Our financial performance could be materially harmed as a result of
any of these factors.
Changes in Public Health Concerns and Legislation and Regulations Requiring the Provision of Nutritional Information
May Impact Our Performance
Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and
health or new information regarding the health effects of consuming our menu offerings. These changes have resulted in, and
may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu
offerings, or laws and regulations requiring us to disclose the nutritional content of our food offerings. For example, a number
of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain
nutritional information available to guests, or have enacted legislation restricting the use of certain types of ingredients in
restaurants. The U.S. health care reform law included nation-wide menu labeling and nutrition disclosure requirements as well,
and our restaurants will be covered by these national requirements when they go into effect. The final rule was published on
December 1, 2014 and required implementation by the end of 2016. Although the federal legislation is intended to preempt
conflicting state or local laws on nutrition labeling, until we are required to comply with the federal law, we will be subject to a
patchwork of state and local laws and regulations regarding nutritional content disclosure requirements. Many of these
requirements are inconsistent or are interpreted differently from one jurisdiction to another. The effect of such labeling
requirements on consumer choices, if any, is unclear at this time. We cannot make any assurances regarding our ability to
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effectively respond to changes in consumer health perceptions or our ability to successfully implement the nutrient content
disclosure requirements and to adapt our menu offerings to trends in eating habits. The imposition of menu-labeling laws could
have an adverse effect on our results of operations and financial position, as well as the restaurant industry in general.
Multiple jurisdictions in which we operate could adopt recently enacted new requirements that require us to adopt and implement
a Hazard Analysis and Critical Control Points (“HACCP”) system for managing food safety and quality. HACCP refers to a
management system in which food safety is addressed through the analysis and control of potential hazards from production,
procurement and handling, to manufacturing, distribution and consumption of the finished product. We expect to incur certain
costs to comply with these regulations, and these costs may be more than we anticipate. If we fail to comply with these laws or
regulations, our business could experience a material adverse effect.
Further, growing movements to change laws relating to alcohol may result in a decline in alcohol consumption at our restaurants
or increase the number of dram shop claims made against us, either of which may negatively impact operations or result in the
loss of liquor licenses.
A Regional or Global Health Pandemic Could Severely Affect Our Business
A health pandemic is a disease outbreak that spreads rapidly and widely by infection and affects many individuals in an area or
population at the same time. If a regional or global health pandemic were to occur, depending upon its duration and severity, our
business could be severely affected. We have positioned our brand as a place where people can gather together. Customers might
avoid public gathering places in the event of a health pandemic, and local, regional or national governments might limit or ban
public gatherings to halt or delay the spread of disease. A regional or global health pandemic might also adversely impact our
business by disrupting or delaying production and delivery of materials and products in our supply chain and by causing staffing
shortages in our restaurants. The impact of a health pandemic on us might be disproportionately greater than on other companies
that depend less on the gathering of people together for the sale or use of their products and services.
Changes in Consumer Preferences or Discretionary Consumer Spending Could Harm Our Performance
Our success depends, in part, upon the continued popularity of our chicken and boneless wings, other food and beverage items
and the appeal of our restaurant concepts. We also depend on trends toward consumers eating away from home. Shifts in these
consumer preferences could negatively affect our future profitability. Such shifts could be based on health concerns related to
the cholesterol, carbohydrate, fat, calorie or salt content of certain food items, including items featured on our menu. Negative
publicity over the health aspects of such food items may adversely affect consumer demand for our menu items and could result
in a decrease in guest traffic to our restaurants, which could materially harm our business. In addition, our success depends, to
a significant extent, on numerous factors affecting discretionary consumer spending, general economic conditions (including the
continuing effects of the recent recession), disposable consumer income, and consumer confidence. A decline in consumer
spending or in economic conditions could reduce guest traffic or impose practical limits on pricing, either of which could harm
our business, financial condition, operating results or cash flow.
Our Operating Results May Fluctuate Due to the Timing of Special Events
Our operating results depend, in part, on special events, such as the Super Bowl® and other sporting events viewed by our guests
in our restaurants, including those sponsored by the National Football League, Major League Baseball, National Basketball
Association, National Hockey League and National Collegiate Athletic Association. Interruptions in the viewing of these
professional sporting league events due to strikes or lockouts may impact our business and operating results. Additionally, our
results are subject to fluctuations based on the dates of sporting events and their availability for viewing through broadcast,
satellite, Internet and cable networks. Historically, sales in most of our restaurants have been higher during fall and winter
months based on the relative popularity and extent of national, regional and local sporting and other events in the geographic
regions in which we currently operate.
Our Inability to Renew Existing Leases or Enter Into New Leases For New or Relocated Restaurants on Favorable Terms
May Adversely Affect Our Results of Operations
As of December 25, 2016, all of our restaurants are located on leased premises and are subject to varying lease-specific
arrangements. For example, some of the leases require base rent that is subject to increase based on market factors, and other
leases include base rent with specified periodic increases. Some leases are subject to renewals, which could involve substantial
increases. Additionally, a few leases require contingent rent based on a percentage of gross sales. When our leases expire in
the future, we will evaluate the desirability of renewing such leases. While we currently expect to pursue all renewal options, no
guarantee can be given that such leases will be renewed or, if renewed, that rents will not increase substantially. The success of
our restaurants depends in large part on their leased locations. As demographic and economic patterns change, current leased
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locations may or may not continue to be attractive or profitable. Possible declines in trade areas where our restaurants are located
or adverse economic conditions in surrounding areas could result in reduced revenue in those locations. In addition, desirable
lease locations for new restaurant openings or for the relocation of existing restaurants may not be available at an acceptable cost
when we identify a particular opportunity for a new restaurant or relocation.
Economic Conditions Could Have a Material Adverse Impact on Our Landlords in Retail Centers in Which We Are Located
Our landlords may be unable to obtain financing or remain in good standing under their existing financing arrangements, resulting
in failures to pay required construction contributions or satisfy other lease covenants to us. If our landlords fail to satisfy required
co-tenancies, such failures may result in us terminating leases or delaying openings in these locations. Also, decreases in total
tenant occupancy in retail centers in which we are located may affect guest traffic at our restaurants. All of these factors could
have a material adverse impact on our operations.
A Decline in Visitors to Any of the Business Districts Near the Locations of Our Restaurants Could Negatively Affect Our
Restaurant Sales
Some of our restaurants are located near high-activity areas such as retail centers, big-box shopping centers and entertainment
centers. We depend on high visitor rates at these businesses to attract guests to our restaurants. If visitors to these centers decline
due to economic conditions, closure of big-box retailers, road construction, changes in consumer preferences or shopping
patterns, changes in discretionary consumer spending or otherwise, our restaurant sales in these areas could decline significantly
and adversely affect the results of our operations.
Because Many of Our Restaurants are Concentrated in Local or Regional Areas, We are Susceptible to Economic and Other
Trends and Developments, Including Adverse Weather Conditions, in These Areas
Our financial performance is highly dependent on restaurants located in Florida, Illinois, Indiana, Michigan, and Missouri. As a
result, adverse economic conditions in any of these areas could have a material adverse effect on our overall results of
operations. In recent years, certain of these states have been more negatively impacted by the housing decline, high
unemployment rates and the overall economic crisis than other geographic areas. In addition, other regional occurrences such as
local strikes, terrorist attacks, increases in energy prices, adverse weather conditions, hurricanes, droughts or other natural or
man-made disasters have occurred. In particular, adverse weather conditions can impact guest traffic at our restaurants, cause
the temporary underutilization of certain seating areas, and, in more severe cases, cause temporary restaurant closures, sometimes
for prolonged periods. As of December 25, 2016, approximately 73.4% of our total restaurants are located in Illinois, Indiana,
Michigan and Missouri, which are particularly susceptible to snowfall, and approximately 26.6% of our total restaurants are
located in Florida, which is particularly susceptible to hurricanes.
Legal Actions Could Have an Adverse Effect on Us
We have faced in the past and could face in the future legal action from government agencies, team members, guests, or other
parties. Many state and federal laws govern our industry, and if we fail to comply with these laws, we could be liable for damages
or penalties. In October 2015, the Company settled two collective actions alleging violations of fair labor standards acts and
minimum wage laws, and a third suit with similar claims was settled in August, 2016. We may face such claims in the future.
Further, we may face litigation from guests alleging that we were responsible for an illness or injury they suffered at or after a
visit to our restaurants, or alleging that we are not complying with regulations governing our food quality or operations. We may
also face employment-related litigation, including claims of age discrimination, sexual harassment, gender discrimination,
immigration violations, or other local, state, and federal labor law violations. In light of the potential cost and uncertainty involved
in litigation, we may settle matters even when we believe we have a meritorious defense. Litigation and its related costs may
have a material adverse effect on our results of operations and financial condition.
We May Not Be Able to Obtain and Maintain Licenses and Permits Necessary to Operate Our Restaurants
The restaurant industry is subject to various federal, state and local government licensure and permitting requirements, including
those relating to the sale of food and alcoholic beverages. The failure to obtain and maintain these licenses, permits and approvals,
including food and liquor licenses, could adversely affect our operating results. Difficulties or failure to obtain any required
licenses, permits or other government approvals could delay or result in our decision to cancel the opening of new
restaurants. Local authorities may revoke, suspend or deny renewal of our food and liquor licenses if they determine that our
conduct violates applicable regulations.
14
The Sale of Alcoholic Beverages at Our Restaurants Subjects Us to Additional Regulations and Potential Liability
For fiscal year 2016, approximately 17.1% of our consolidated restaurant sales were attributable to the sale of alcoholic
beverages. Our restaurants sell alcoholic beverages, and as such, we are required to comply with the alcohol licensing
requirements of the federal government, states and municipalities where our restaurants are located. Alcoholic beverage control
regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and
permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, the
licenses are renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations
relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and team members, hours
of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. If
we fail to comply with federal, state or local regulations, our licenses may be revoked and we may be forced to terminate the sale
of alcoholic beverages at one or more of our restaurants.
In certain states, we are subject to “dram shop” statutes, which generally allow a person injured by an intoxicated person the right
to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Some dram
shop litigation against restaurant companies has resulted in significant judgments, including punitive damages.
We Are Dependent on Information Technology and Any Material Failure or Breach in Security of That Technology Could
Impair Our Ability to Efficiently Operate Our Business
We rely on information systems across our operations, including, for example, point-of-sale processing in our restaurants,
management of our supply chain, collection of cash, payment of obligations, and various other processes and procedures. Our
ability to efficiently manage our business depends significantly on the reliability and capacity of these systems. The failure of
these systems to operate effectively, problems with maintenance, upgrading or transitioning to replacement systems, or a breach
in security of these systems could cause delays in guest service and reduce efficiency in our operations. There have been a number
of recent occurrences of cyber security breaches across many retail industries, and such a breach of our systems could represent
a material risk to our operations. Significant capital investments might be required to remediate any problems.
Our Ability to Raise Capital in the Future May Be Limited, Which Could Adversely Impact Our Business
Changes in our restaurant operations, lower than anticipated restaurant sales, increased food or compensation costs, increased
property expenses, acceleration of our expansion plans or other events, including those described in this Annual Report, may
cause us to seek additional debt or equity financing on an accelerated basis. Financing may not be available to us on acceptable
terms, and our failure to raise capital when needed could negatively impact our restaurant growth plans as well as our financial
condition and the results of operations. Additional equity financing, if available, may be dilutive to the holders of our common
stock. Debt financing may involve significant cash payment obligations, covenants and financial ratios that may restrict our
ability to operate and grow our business.
There Can Be No Assurances That, in the Future, We Will Be in Compliance With All Covenants of Our Current or Future
Debt Agreements or That Our Lenders Will Waive Any Violations of Such Covenants
Non-compliance with our debt covenants could have a material adverse effect on our business, results of operations, and financial
condition. Non-compliance may result in us being in default under our debt agreements, which could cause a substantial financial
burden by requiring us to repay our debt earlier than otherwise anticipated.
Our Current Insurance May Not Provide Adequate Levels of Coverage Against Claims
We currently maintain insurance that is customary and required in our franchise agreements and leases. However, there are types
of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure against, such
as losses due to natural disasters. Such damages could have a material adverse effect on our business and the results of
operations. Additionally, there is no assurance that we will be able to maintain our current coverage at acceptable premium rates
or that any coverage will be available to us in the future.
An Impairment in the Carrying Value of Our Fixed Assets, Intangible Assets or Goodwill Could Adversely Affect Our
Financial Condition and Consolidated Results of Operations
Goodwill represents the excess of cost over the fair value of identified net assets of businesses acquired. We review goodwill for
impairment annually, or whenever circumstances change in a way which could indicate that impairment may have occurred.
Goodwill is tested at the reporting unit level. We identify potential goodwill impairments by comparing the fair value of the
reporting unit to its carrying amount, which includes goodwill and other intangible assets. If the carrying amount of the reporting
15
unit exceeds the fair value, this is an indication that impairment may exist. We calculate the amount of the impairment by
comparing the fair value of the assets and liabilities to the fair value of the reporting unit. The fair value of the reporting unit in
excess of the value of the assets and liabilities is the implied fair value of the goodwill. If this amount is less than the carrying
amount of goodwill, impairment is recognized for the difference. A significant amount of judgment is involved in determining
if an indication of impairment exists. Factors may include, among others: a significant decline in our expected future cash flows;
a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the
business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and
slower growth rates. Any adverse change in these factors would have a significant impact on the recoverability of these assets
and negatively affect our financial condition and consolidated results of operations. We are required to record a non-cash
impairment charge if the testing performed indicates that goodwill has been impaired.
We evaluate the useful lives of our fixed assets and intangible assets to determine if they are definite- or indefinite-lived. Reaching
a determination on useful life requires significant judgments and assumptions regarding the lease term, future effects of
obsolescence, demand, competition, other economic factors (such as the stability of the industry, legislative action that results in
an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required
maintenance expenditures and the expected lives of other related groups of assets. We cannot accurately predict the amount and
timing of any impairment of assets. Should the value of fixed assets or intangible assets become impaired, there could be an
adverse effect on our financial condition and consolidated results of operations.
We May Incur Costs Resulting From Security Risks We Face in Connection With Our Electronic Processing and
Transmission of Confidential Guest Information
We accept electronic payment cards from our guests in our restaurants. For the fiscal year ended December 25, 2016,
approximately 74.5% of our sales were attributable to credit/debit card transactions, and credit/debit card usage could continue
to increase. A number of restaurant operators and retailers have experienced actual or potential security breaches in which
credit/debit card information may have been stolen. While we carry cyber risk insurance and have taken reasonable steps to
prevent the occurrence of security breaches in this respect, we may in the future become subject to claims for purportedly
fraudulent transactions arising out of the actual or alleged theft of credit/debit card information, and we may also be subject to
lawsuits or other proceedings in the future relating to these types of incidents. Proceedings related to theft of credit/debit card
information may be brought by payment card providers, banks, and credit unions that issue cards, cardholders (either individually
or as part of a class action lawsuit), and federal and state regulators. Any such proceedings could distract our management team
members from running our business and cause us to incur significant unplanned losses and expenses.
We also receive and maintain certain personal information about our guests and team members. The use of this information by
us is regulated at the federal and state levels. If our security and information systems are compromised or our team members fail
to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it
could adversely affect our reputation, as well as the results of operations, and could result in litigation against us or the imposition
of penalties. In addition, our ability to accept credit/debit cards as payment in our restaurants and online depends on us
maintaining our compliance status with standards set by the PCI Security Standards Council. These standards, set by a
consortium of the major credit card companies, require certain levels of system security and procedures to protect our guests’
credit/debit card information as well as other personal information. Privacy and information security laws and regulations change
over time, and compliance with those changes may result in cost increases due to necessary system and process changes.
Failure to Establish and Maintain Our Internal Control Over Financial Reporting Could Harm Our Business and Financial
Results.
Our management team members are responsible for establishing and maintaining effective internal control over financial
reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of
financial reporting for external purposes in accordance with accounting principles generally accepted in the United
States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance
that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system
of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect
and prevent fraud. The occurrence of material weaknesses in internal control over financial reporting could cause a loss of
investor confidence and decline in the market price of our stock.
16
Our Inability or Failure to Effectively Manage Our Marketing Through Social Media Could Materially Adversely Impact
Our Business.
As part of our marketing efforts, we rely on BWLD managed search engine marketing and social media platforms such as
Facebook® and Twitter® to attract and retain guests. BWLD is also initiating a multi-year effort to implement new technology
platforms that should allow us to digitally engage with our guests and team members and strengthen our marketing and analytics
capabilities. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues or
increased employee engagement. In addition, a variety of risks are associated with the use of social media, including the improper
disclosure of proprietary information, negative comments about our company, exposure of personally identifiable information,
fraud, or out-of-date information. The inappropriate use of social media vehicles by our guests or team members could increase
our costs, lead to litigation or result in negative publicity that could damage our reputation.
There is Volatility in Our Stock Price
The market for our stock has, from time to time, experienced extreme price and volume fluctuations. Factors such as
announcements of variations in our quarterly financial results and fluctuations in same-store sales could cause the market price
of our stock to fluctuate significantly. In addition, the stock market in general, and the market prices for restaurant companies in
particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad
market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.
The market price of our stock can be influenced by shareholders’ expectations about the ability of our business to grow and to
achieve certain profitability targets. If our financial performance in a particular quarter does not meet the expectations of our
shareholders, it may adversely affect their views concerning our growth potential and future financial performance. In addition,
if the securities analysts who regularly follow our stock lower their ratings of our stock, the market price of our stock is likely to
drop significantly.
If the Spin-Off Does Not Qualify as a Tax-free Transaction, the Company and its Shareholders Could be Subject to Additional
Tax Liabilities
The Company, with the assistance of an opinion obtained from our tax advisors, structured the Spin-Off of Bagger Dave's as a
100% tax-free transaction under the applicable provisions of the U.S. Internal Revenue Code. This opinion is based on
assumptions and other representations regarding factual matters made by the Company and Bagger Dave's. In the event these
assumptions and representations were found to be inaccurate or incomplete, the tax-free status conclusion reached by our advisors
could be in jeopardy. There is a risk that the IRS, upon examination of the facts and circumstances surrounding the transaction,
could conclude that the Spin-Off is a taxable event. As a result, the Company and its shareholders could possibly incur additional
tax liabilities, including penalties and interest.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our main office is located at 27680 Franklin Road, Southfield, Michigan 48034 and our telephone number is (248) 223-9160.
Our main office has approximately 5,340 square feet of office space. We occupy this facility under a lease that ends June 30,
2019. As of March 24, 2017, we operated 64 Company-owned restaurants, all of which are leased properties. Typically, our
operating leases contain renewal options under which we may extend the renewal lease terms for periods of five to 10 years.
Most of our leases include "exclusive use" provisions prohibiting our landlords from leasing space to other restaurants that fall
within certain specified criteria and incorporate incremental increases based on time passage and payment of certain occupancy-
related expenses.
We own all of the equipment, furnishings, and fixtures in our restaurants. The Company also owns a significant amount of
leasehold improvements in the leased facilities.
As of December 25, 2016, we operated restaurant properties for 20 locations in Michigan, 17 locations in Florida, 15 locations
in Missouri, seven locations in Illinois and five locations in Indiana. 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.
17
ITEM 3. LEGAL PROCEEDINGS
The following information is incorporated by reference: the information set forth under the heading "Legal Proceedings" in Note
14 "Commitments and Contingencies" of the "Notes to the Consolidated Financial Statements" of Part II, Item 8 to this Report
on Form 10-K.
In addition, we are occasionally a defendant in litigation arising in the ordinary course of our business, including claims arising
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. 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company's common stock is listed on the NASDAQ Capital Market under the symbol “SAUC”. The development and
maintenance of an active public trading market depends upon the existence of willing buyers and sellers, the presence of which
is beyond our control. While we are a publicly-traded company, the volume of trading activity in our stock is still relatively
limited.
The following table sets forth the high and low bid quotations for our common stock for the fiscal years ended December 25,
2016 and December 27, 2015, as reported by NASDAQ:
First Quarter ................................................................................... $
Second Quarter ..............................................................................
Third Quarter .................................................................................
Fourth Quarter ...............................................................................
2.65 $
2.13
1.90
1.69
1.26 $
1.18
0.91
0.70
5.16 $
4.46
4.41
3.19
3.94
3.59
2.57
2.40
2016
2015
High
Low
High
Low
Holders
As of March 24, 2017, there were approximately 441 record holders of 26,669,347 shares of the Company's common stock,
excluding shareholders whose stock is held either in nominee name and/or street name brokerage accounts.
Dividends
We have not declared or paid any cash dividends on our common stock. It is our policy to preserve cash for development and
debt reduction. DRH does not have plans to pay any cash dividends. Our future dividend policy will be determined by our Board
of Directors and will depend on various factors, including our results of operations, financial condition, anticipated cash needs,
debt levels and plans for expansion.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following discussion and analysis of our financial condition should be read in conjunction with our consolidated financial
statements and the related notes to those statements included elsewhere in this document. The following discussion contains, in
addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth
under the heading “Risk Factors” and elsewhere in this document.
Overview
DRH is a single-concept restaurant company operating 64 BWW franchises. As the largest franchisee of BWLD, we provide a
unique guest experience in a casual and inviting environment. We are committed to providing value to our guests by offering
generous portions of flavorful food in an upbeat and entertaining atmosphere. We believe BWW is a uniquely positioned
restaurant brand designed to maximize guest appeal, offering competitive price points and a family-friendly atmosphere, which
we believe enables strong performance through economic cycles. We were incorporated in Nevada in 2006 and are headquartered
in the Detroit metropolitan area. Our current 64 restaurants are located in Florida, Illinois, Indiana, Michigan, and Missouri.
19
Spin-Off of Bagger Dave’s
On December 25, 2016, DRH completed the Spin-Off of Bagger Dave’s into a new, independent publicly traded company. The
Spin-Off was achieved through the distribution of 100 percent of the outstanding capital stock of Bagger Dave’s pro rata to
holders of DRH common stock on a one-for-one basis. DRH decided to spin-off Bagger Dave's after considering all reasonable
strategic and structural alternatives because of the disparity between the operating models of its two brands, BWW as franchisee,
and Bagger Dave's as an owned concept. The management teams of Bagger Dave's and DRH agreed that the nature of the two
concepts varied greatly, and that each will be more valuable and operate more effectively independently of one another. Bagger
Dave's is a concept developed by the management team of DRH. In contrast to operating a franchised concept like BWW, it has
no development restrictions and the flexibility to enhance brand attributes such as logos, trade dress and restaurant design, change
its menu offering and improve its operational model in an effort to better align with guest expectations. To manage these functions
effectively, specific resources are required that are not necessary for a franchisee. For example, menu development, purchasing
and brand marketing are critical to the success of Bagger Dave's but not necessary for a BWW franchisee since these functions
are managed by the franchisor. Additional considerations were contemplated with respect to growth potential. As a start-up
brand, Bagger Dave's has a higher growth potential while BWW, being a mature brand and as a franchisee, has more limits to its
organic growth potential due to its development rights.
As part of the Spin-Off transaction, DRH agreed to fund a one-time $2 million cash distribution to Bagger Dave's and agreed
that, if deemed necessary within twelve months after the date of the Spin-Off, up to $1 million of additional cash funding may
be considered upon approval by DRH and its lenders. The transaction was structured such that Bagger Dave's was released as a
borrower under the DRH senior secured credit facility. Additionally, DRH retained substantially all of the tax benefits (net
operating loss and tax credit carryforwards) generated prior to the date of the transaction.
Our Growth Strategies and Outlook
Our strategy is comprised of the following key growth components:
●
●
●
pursue disciplined restaurant growth through a combination of both organic expansion and strategic acquisitions;
deliver comparable restaurant sales growth by providing our guest with an exceptional experience and executing
effective marketing and promotional strategies; and
leverage our infrastructure to grow profit margins.
We have a disciplined strategy for opening new restaurants. We also evaluate the potential for strategic acquisitions of Buffalo
Wild Wings franchises where we have an opportunity to leverage our infrastructure and operational expertise.
We will continue to grow our restaurant base under our current ADA, but likely will have fewer new restaurant openings than
previously agreed. We believe our historical track record of acquiring and integrating restaurants provides us with additional
future growth opportunities and we will seek to take advantage of strategic acquisitions that may be available in the marketplace.
The Company opened two new restaurants in 2016. Over the next five years, we expect to open 3-5 new BWW restaurants,
including one in 2017 (for additional discussion of our growth strategies and outlook, see the section entitled “Business - Growth
Strategy”).
Performance Indicators
We use several metrics to evaluate and improve each restaurant’s performance that include: sales growth, guest satisfaction,
hourly compensation costs and food, beverage and packaging costs. We also use the following key performance indicators in
evaluating restaurant performance:
●
●
Comparable Restaurant Sales. We consider a restaurant to be comparable following the eighteenth month of operation.
Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified
period of time. Changes in comparable sales can reflect changes in guest count trends, changes in average check size
and changes in pricing.
Restaurant-Level Contribution. Also referred to as Restaurant-Level EBITDA, this metric presents a restaurant's on-
going profit contribution and is defined as net revenue less costs of sales, labor, occupancy and operational expenses. It
20
is representative of a restaurant's cash flow and is often times presented and measured as a percentage of sales in
comparison to other restaurants.
Restaurant Openings
The following table outlines the restaurant unit information for each fiscal year from 2012 through 2016, excluding Bagger
Dave's restaurants.
2016
2015
2014
2013
2012
Restaurants open at the beginning of year ..........................
62
42
36
33
22
Openings/(Closures):
New Restaurant Openings ....................................................
Restaurant Acquisitions ........................................................
Restaurant Closures ..............................................................
Total restaurants open at the end of year ............................
2
—
—
64
3
18
(1)
62
3
3
—
42
3
—
—
36
3
8
—
33
Our Fiscal Year
The Company utilizes a 52- or 53-week accounting period that ends on the last Sunday in December. Fiscal year 2016 ended on
December 25, 2016 and fiscal year 2015 ended on December 27, 2015. Each fiscal year was comprised of 52 weeks.
Key Financial Definitions
Revenue. Revenue primarily consists of food and beverage sales, and merchandise sales, such as BWW sauce. Revenue is
presented net of discounts associated with each sale. Revenue in a given period is directly influenced by the number of operating
weeks in such period, the number of restaurants we operate and changes in restaurant sales.
Food, Beverage, Packaging and Merchandise Related Costs. The components of food, beverage packaging and merchandise
related costs are variable in nature, change with sales volume and are subject to increases or decreases based on fluctuations in
market prices and commodity costs.
Compensation Costs. Compensation costs include restaurant management salaries, front- and back-of-house hourly wages, and
restaurant-level manager bonuses, team member benefits and payroll taxes.
Occupancy Costs. Occupancy costs include rent charges, both fixed and variable, as well as common area maintenance costs,
property insurance and taxes, the amortization of tenant allowances and the adjustment to straight-line rent. These expenses are
generally fixed, but a portion may vary with an increase in sales if the lease contains a percentage rent provision.
Other Operating Costs. Other operating costs consist primarily of restaurant-related operating costs, such as supplies, utilities,
repairs and maintenance, travel cost, insurance, credit card fees, recruiting and security. This expense category also includes
franchise royalty and national advertising fund expenses. These costs generally increase with higher sales volume but decline as
a percentage of revenue.
General and Administrative Expenses. General and administrative expenses include costs associated with administrative and
operational support functions including senior and supervisory management and staff compensation costs (including share-based
compensation) and benefits, marketing and advertising expenses, travel, legal and professional fees, information systems, support
office rent and other related support costs.
Pre-Opening Costs. Restaurant pre-opening costs consist of expenses incurred prior to opening a new restaurant, including
manager salaries, relocation costs, supplies, recruiting expenses, initial new market public relations costs, pre-opening activities,
team member payroll and related training costs for new team members. Restaurant pre-opening expenses also include rent
recorded during the period between date of lease inception and the restaurant opening date. In addition, the Company includes
restaurant labor costs that exceed the historical average for the first three months of restaurant operations that are attributable to
training and initial staff turnover.
21
Depreciation and Amortization. Depreciation and amortization includes depreciation on fixed assets, including equipment and
leasehold improvements, and amortization of certain intangible assets for restaurants.
Interest Expense. Interest expense consists primarily of interest on our outstanding indebtedness and the amortization of our debt
issuance costs, reduced by capitalized interest.
Discontinued Operations. As a result of the Spin-Off of Bagger Dave’s effective December 25, 2016, the assets, liabilities,
results of operations and cash flows from operating and investing activities are presented as discontinued operations.
RESULTS OF OPERATIONS
The following table presents the consolidated statements of operations for the fiscal years ended December 25, 2016 and
December 27, 2015 with each line item in dollars and as a percentage of revenue.
Total revenue ........................................................................................................
100.0 %
100.0 %
Fiscal Years-Ended
2016
2015
Operating expenses
Food, beverage, and packaging ..............................................................................
Compensation .........................................................................................................
Occupancy ..............................................................................................................
Other operating costs ..............................................................................................
General and administrative expenses ......................................................................
Pre-opening costs ....................................................................................................
Depreciation and amortization ................................................................................
Loss on asset disposals ...........................................................................................
Total operating expenses ......................................................................................
28.1 %
24.8 %
6.8 %
20.9 %
5.6 %
0.4 %
8.8 %
0.2 %
95.6 %
Operating profit ....................................................................................................
4.4 %
Interest expense ......................................................................................................
Other income (expense), net ...................................................................................
(3.5)%
(0.1)%
Income (loss) from continuing operations before income taxes ........................
0.8 %
Income tax benefit ..................................................................................................
(1.4)%
Income (loss) from continuing operations .........................................................
2.2 %
Loss from discontinued operations before income taxes ........................................
Income tax benefit from discontinued operations ...................................................
Loss from discontinued operations .....................................................................
(6.1)%
(0.3)%
(5.8)%
28.1 %
24.4 %
6.2 %
21.6 %
7.9 %
1.0 %
8.2 %
0.7 %
98.1 %
1.9 %
(2.9 )%
0.5 %
(0.5 )%
(0.1 )%
(0.4 )%
(17.7 )%
(6.9 )%
(10.8 )%
Net loss ...................................................................................................................
(3.6)%
(11.2 )%
22
FISCAL YEAR 2016 COMPARED WITH FISCAL YEAR 2015
Revenue
Total revenue for Fiscal Year 2016 was $166.5 million, an increase of $21.7 million, or 15.0%, over revenue generated during
Fiscal Year 2015. The increase was attributable to the following: $20.9 million increase from the acquisition of 18 BWW
locations; $7.8 million increase from two new restaurant openings in 2016 and three in 2015; $1.2 million decrease from the
closure of 1 BWW location; and $5.8 million decrease in same-store sales. The decrease in same-store sales resulted from market
headwinds in the casual dining sector, exacerbated by a fourth quarter calendar shift relative to 2015.
Operating Expenses
Food, beverage, packaging and merchandise related costs increased by $6.1 million, or 14.9%, to $46.8 million in Fiscal Year
2016 from $40.7 million in Fiscal Year 2015 as a result of the increase in the number of restaurants. Food, beverage, and
packaging cost as a percentage of sales remained flat to Fiscal Year 2015 at 28.1%. Commodity cost inflation driven primarily
by bone-in chicken wing prices were offset by menu price increases and other commodity cost deflation. Average cost per pound
for bone-in chicken wings increased to $1.87 in Fiscal Year 2016 from $1.81 in Fiscal Year 2015.
Compensation costs increased by $6.0 million, or 17.1%, to $41.3 million in Fiscal Year 2016 from $35.3 million in Fiscal Year
2015. The increase was primarily due to the acquisition of 18 BWW locations occurring in the second half of 2015. Compensation
cost as a percentage of sales increased to 24.8% in Fiscal Year 2016 from 24.4% in Fiscal Year 2015 primarily due to higher
hourly and management wages.
Occupancy costs increased by $2.5 million, or 27.2%, to $11.4 million in Fiscal Year 2016 from $8.9 million in Fiscal Year
2015, primarily due to the increase in the number of restaurants operating in 2016, including the acquisition of 18 BWW
restaurants. Occupancy cost as a percentage of sales increased to 6.8% in Fiscal Year 2016 from 6.2% in Fiscal Year 2015. The
increase is driven primarily by rents from the sale leaseback of 7 previously owned properties.
Other operating costs increased by $3.5 million, or 11.3%, to $34.8 million in Fiscal Year 2016 from $31.3 million in Fiscal Year
2015 primarily due to the increase in the number of restaurants operating in 2016. Other operating cost as a percentage of sales
decreased to 20.9% in Fiscal Year 2016 from 21.6% in Fiscal Year 2015, as a result of cost savings initiatives.
General and administrative expenses decreased by $2.1 million, or (18.6)%, to $9.3 million in Fiscal Year 2016 from $11.4
million in Fiscal Year 2015. This decrease was primarily due to settlement costs and expenses related to a wage-claim litigation
occurring in 2015 and transitioning our accounting duties in house. General and administrative costs as a percentage of sales
decreased to 5.6% in Fiscal Year 2016 from 7.9% in Fiscal Year 2015.
Pre-opening costs decreased by $0.8 million, or 58.4%, to $0.6 million in Fiscal Year 2016 from $1.4 million in Fiscal Year
2015. The decrease in pre-opening costs was due to the timing, cost, and number of new restaurant openings during Fiscal Year
2016. The company opened two new restaurants in Fiscal Year 2016 versus two new restaurant openings and one relocation in
Fiscal Year 2015. As a percentage of sales, pre-opening costs decreased to 0.4% in Fiscal Year 2016 from 1.0% in Fiscal Year
2015.
Depreciation and amortization increased by $2.8 million, or 23.3%, to $14.7 million in Fiscal Year 2016 from $11.9 million in
Fiscal Year 2015, primarily due to the increase in the total number of restaurants operating in 2016. Depreciation and amortization
as a percentage of sales increased to 8.8% in Fiscal Year 2016 from 8.2% in Fiscal Year 2015 primarily due to the impact of the
18 acquired restaurants, which had higher average depreciation expenses as a percentage of sales.
Impairment and loss on asset disposal decreased by $0.7 million or 65.0%, to $0.3 million in Fiscal Year 2016 from $1.0 million
in Fiscal Year 2015. The decrease was primarily due to the closure of one restaurant in 2015 compared to none in 2016, and the
sale leaseback transaction in 2015. Loss on disposal of assets as a percentage of sales, decreased to 0.2% in Fiscal Year 2016
from 0.7% in Fiscal Year 2015.
Interest and Taxes
Interest expense was $5.8 million and $4.2 million during the years ended December 25, 2016 and December 27, 2015,
respectively. The increase was primarily due to the increased debt pertaining to the acquisition of 18 BWW locations occurring
in June 2015 in addition to building of new restaurants in 2016.
23
In Fiscal Year 2016 we recorded an income tax benefit of $2.3 million compared with an income tax benefit of $0.1 million in
Fiscal Year 2015. The increase in the income tax benefit is primarily related to tax credits and losses generated during 2016 and
retained by DRH as a result of a restructuring of the Bagger Dave's entities prior to the Spin-Off.
Loss from Operations of Discontinued Component
Loss from operations of discontinued component was $10.2 million and $25.6 million in 2016 and 2015, respectively. The
decrease was attributable to lower impairment and loss on asset disposal charges in 2016, and to improved operating results of
the discontinued component in 2016, both as result of the closure of 11 Bagger Dave’s underperforming locations in late-2015.
LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS
On June 29, 2015, the Company entered into a $155.0 million senior secured credit facility with a syndicate of lenders led by
Citizens (the “June 2015 Senior Secured Credit Facility”) with a senior lien on all the Company’s personal property and
fixtures. The June 2015 Senior Secured Credit Facility consists of a $120.0 million term loan (the “June 2015 Term Loan”), a
$30.0 million, subsequently amended to $23.0 million (see amendment details immediately following this paragraph),
development line of credit (the “June 2015 DLOC”) and a $5.0 million (see amendment details immediately following this
paragraph) revolving line of credit (the “June 2015 RLOC”). The Company used approximately $65.5 million of the June 2015
Term Loan to refinance existing outstanding debt and used approximately $54.0 million of the June 2015 Term Loan to finance
an acquisition discussed in Note 4. The remaining balance of the June 2015 Term Loan, approximately $0.5 million, was used
to pay the fees, costs, and expenses associated with the closing of the June 2015 Senior Secured Credit Facility. The June 2015
Term Loan is for a period of five years.
On December 23, 2016, the Company entered into an amendment agreement for purposes of, among other things, releasing the
Bagger Dave’s entities as borrowers and releasing all related liens on the Bagger Dave’s assets. In addition, the amendment (a)
converted the amounts then outstanding under the June 2015 DLOC to a development facility term loan (the “DF Term Loan”),
(b) canceled $6.8 million previously available under the June 2015 DLOC, and (c) extended the maturity date on the remaining
$5.0 million under the June 2015 DLOC to June 29, 2018.
Payments of principal are based upon a 12-year straight-line amortization schedule, with monthly principal payments totaling
$833,333 on the June 2015 Term and $126,385 on the DF Term Loan, plus accrued interest. The entire remaining outstanding
principal and accrued interest on the June 2015 Term Loan and the DF Term Loan is due and payable on the maturity date of
June 29, 2020. Availability under the June 2015 DLOC is subject to certain limitations relative to actual development costs, and
outstanding balances convert into an additional DF Term Loan based on the terms of the agreement, at which time monthly
principal payments will be due based on a 12-year, straight-line amortization schedule, plus interest, through maturity on June
29, 2020. There were no balances outstanding under the June 2015 DLOC at December 25, 2016. If the DLOC is not fully drawn
by the end of the two years term, the outstanding principal balance becomes due based on the 12 amortization period with final
payment due June 29, 2020. The June 2015 RLOC is for a term of five years.
The interest rate for each of the loans, as selected by the borrower, is based upon either a LIBOR or base rate (generally Prime
or Fed Funds) plus an applicable margin, which ranges from 2.25% to 3.5% for LIBOR loans and from 1.25% to 2.5% for base
rate loans, depending on the lease adjusted leverage ratio as defined in the agreement.
The current debt agreement contains various customary financial covenants generally based on the performance of the Company.
The financial covenants consist of a minimum required debt service coverage ratio and a maximum permitted lease adjusted
leverage ratio. As of December 25, 2016 the Company was in compliance with the loan covenants.
We believe that our current cash balance, in addition to our cash flow from operations and availability of credit, will be sufficient
to fund our present operations and meet our commitments on our existing debt. If suitable acquisition opportunities or working
capital needs arise that require additional financing, we believe that our financial position and earnings history provide a sufficient
base for obtaining additional financing resources at reasonable rates and terms. We may also issue additional shares or common
or preferred stock to raise funds.
Our capital requirements are primarily dependent upon the pace of our new restaurant growth plan. The new restaurant growth
plan is primarily dependent upon economic conditions, the real estate market and resources to both develop and operate new
restaurants. In addition to new restaurants, our capital expenditure outlays are also dependent on the cost and potential obligation
to invest in maintenance, facility upgrades, capacity enhancements, information technology and other general corporate capital
expenditures.
24
The amount of capital required to open a new restaurant is largely dependent on whether we build-out an existing leased space
or build from the ground up. Our preference is to find leased space for new restaurant locations, but depending on the availability
of real estate in specific markets, we will take advantage of alternative strategies, which may include land purchases, land leases,
and ground-up construction of a building to house our restaurant operation. We expect that a build-out of a new BWW restaurant
will require an estimated cash investment ranging from $1.7 million to $2.5 million (excluding potential tenant incentives). We
expect to spend up to $0.3 million per restaurant for pre-opening expenses. Depending on individual lease negotiations, we may
receive cash tenant incentives which have historically been as high as $0.4 million. The projected cash investment per restaurant
is based on recent opening costs and future projections and may fluctuate based on construction costs specific to new restaurant
locations.
We target a cash-on-cash payback on our initial total capital investment of less than four years. The expected payback is subject
to, among other things, how quickly we reach our target sales volume and the cost of construction.
Cash flow from continuing operations for fiscal 2016 and 2015 was $17.0 million and $16.8 million, respectively. Net cash
provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses.
For 2016, our capital expenditures were $12.5 million. Approximately 46.2% of the capital was used for new restaurant openings
and the remaining 53.8% for restaurant remodels, upgrades and other general corporate purposes.
Although investments in new restaurants are an integral part of our strategic and capital expenditures plan, we also believe that
reinvesting in existing restaurants is an important factor and necessary to maintain the overall positive dining experience for our
guests. Depending on the age of the existing restaurants, upgrades range from $50,000 (for minor interior refreshes) to $1.3
million (for a full extensive remodel of the restaurant). We target remodels of $0.6 million to upgrade a typical BWW restaurant
to the new Stadia design. Our strategy is to fully remodel existing BWW restaurants to the new Stadia design at the time of a
scheduled refresh or remodel, typically within seven years or less of opening.
After the Spin-Off of Bagger Dave’s, the Company retained certain tax benefits (net operating loss and tax credit carryforwards)
in an amount sufficient to offset pre-tax income totaling over $50 million at current estimated tax rates. We expect to incur federal
and/or state income tax liabilities when our tax benefits have become fully utilized.
Mandatory Upgrades
In fiscal 2016, all seven of the required remodels were completed. These were primarily funded through cash from operations,
supplemented by our development line of credit. We are planning to complete at least two remodels for BWW locations in 2017.
Discretionary Upgrades and Relocations
In fiscal year 2016, the Company invested additional capital to provide minor upgrades to a number of its existing locations, all
of which were funded by cash from operations. These improvements primarily consist of refreshing interior building finishes
audio/visual equipment upgrades, and patio upgrades. In fiscal 2016, we did not have any relocations. The decision to relocate
is typically driven by timing of our current lease agreements and the availability of real estate that we deem to be a better long-
term investment. Relocations and discretionary remodels are funded by a combination of cash from operations and borrowing
from our credit facility.
2017 Capital Plan
In 2017, we anticipate our capital expenses will range between $4.0 million and $6.0 million. Our capital expenses for 2017 will
include the development of one new BWW restaurant, which is currently under construction. Our remaining capital needs will
include two to four BWW remodels of existing locations and various maintenance-related capital expenditures. We expect to
fund a portion of the new restaurant development with our DLOC and all other capital needs out of our free cash flow. The core
element of our capital plan in 2017 is to improve our net debt leverage ratio by reducing our capital spending and using our free
cash flow to pay down debt.
25
Contractual Obligations
The following table presents a summary of our contractual obligations as of December 25, 2016:
Total
Less than
one year
1 - 3 years
3 - 5 years
After 5 years
Long-term debt 1 ....................................................... $ 121,186,020
69,316,114
Operating lease obligations ........................................
Commitments for restaurants under development 2 .......
5,111,805
11,313,112
8,826,295
1,718,555
22,642,927
16,122,432
300,000
87,229,981
14,252,537
300,000
—
30,114,850
2,793,250
195,613,939
21,857,962
39,065,359 101,782,518
32,908,100
1
2
Amount represents the expected principal cash payments relating to our long-term debt and do not include any fair value adjustments or
discounts/premiums or interest rate payments due to the variability of the rates. See Note 10 for additional details.
Amount represents capital expenditures DRH is obligated to pay for restaurants under development in addition to non-cancelable operating leases for
these restaurants.
Impact of Inflation
Our profitability is dependent, among other things, on our ability to anticipate and react to changes in the costs of key operating
resources, including food and other raw materials, labor, energy, and other supplies and services. Substantial increases in costs
and expenses could impact our operating results to the extent that such increases cannot be passed along to our restaurant
guests. The impact of inflation on food, labor, energy and occupancy costs can significantly affect the profitability of our
restaurant operations.
All of our restaurant staff members are paid hourly rates related to the federal minimum wage. Certain operating costs, such as
taxes, insurance and other outside services continue to increase with the general level of inflation or higher and may also be
subject to other cost and supply fluctuations outside of our control.
While we have been able to partially offset inflation and other changes in the costs of key operating resources by gradually
increasing prices for our menu items, more efficient purchasing practices, productivity improvements, and greater economies of
scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions
could limit our menu pricing flexibility. In addition, macroeconomic conditions could make additional menu price increases
imprudent. There can be no assurance that all future cost increases can be offset by increased menu prices or that increased menu
prices will be fully absorbed by our restaurant guests without any resulting changes in their visit frequencies or purchasing
patterns. There can be no assurance that we will continue to generate increases in comparable restaurant sales in amounts
sufficient to offset inflationary or other cost pressures.
OFF-BALANCE SHEET ARRANGEMENTS
The Company's ADA requires DRH to open 42 BWW restaurants within its designated development territory by April 1, 2021.
As of December 25, 2016, 29 of the required 42 restaurants under the ADA had been opened for business. We have one additional
restaurant in process and are in discussions with BWLD regarding the remaining 12 restaurants required by 2021. We expect the
Company may continue to open new locations, but at a lower number over a longer period of time, under an amended ADA.
In conjunction with the Spin-Off, DRH entered into a transition services agreement (the "TSA") with Bagger Dave's pursuant to
which DRH will provide certain information technology and human resources support, limited accounting support, and other
minor administrative functions at no charge. The TSA is intended to assist the discontinued component in efficiently and
seamlessly transitioning to stand on its own. The agreement expires in December 2017 at which time the parties may negotiate
which services will be required on an ongoing basis and the fees that will be charged for such services.
After the Spin-Off, the Company remains liable for guarantees of certain Bagger Dave’s leases. These guarantees cover 18
separate leases, several of which relate to restaurants previously closed and being operated by a new tenant under either a sub-
lease or a new lease.
The Company has determined that its maximum exposure resulting from the lease guarantees includes approximately $9.8 million
of future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance
requirements under the leases. The terms and conditions of the guarantees vary, and each guarantee has an expiration date which
may or may not correspond with the end of the underlying lease term. These expiration dates range from one (1) year to thirteen
26
(13) years as of December 25, 2016. In the event that the Company is required to perform under any of its lease guarantees, we
do not believe a liability to the Company would be material because it would first seek to minimize its exposure by finding a
suitable tenant to sub-lease the space. In many cases, a replacement tenant can be found and the lessor could agree to release the
Company from its future guarantee obligation. During 2015, 11 Bagger Dave’s locations were closed, 9 of which had DRH lease
guarantees. Of the 9 guaranteed leases, new tenants were found to step into the Company’s obligations for 5 locations in 3 to 14
months from the date of closure, 3 guarantees expired or were terminated, and 1 remains an obligation of the Company.
Further, in conjunction with the Spin-Off, DRH entered into a transition services agreement (the "TSA") with Bagger Dave's
pursuant to which DRH will provide certain information technology and human resources support, limited accounting support,
and other minor administrative functions at no charge. The TSA is intended to assist the discontinued component in efficiently
and seamlessly transitioning to stand on its own. The current terms of the TSA expire in December 2017 at which time the parties
may negotiate which services will be required on an ongoing basis and the fees that will be charged for such services, and at any
time thereafter the TSA can be terminated by the Company with 10 days written notice.
Critical Accounting Polices and Estimates
The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in
the United States of America (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating
results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in
its consolidated financial statements and accompanying notes. Note 1, “Nature of Business and Summary of Significant
Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the
significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements.
Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates, and such differences may be material. We consider an accounting estimate to be critical
if it requires assumptions to be made and changes in these assumptions could have a material impact on our consolidated financial
condition or results of operations.
Management considers these policies critical because they are both important to the portrayal of the Company’s financial
condition and operating results, and they require management to make judgments and estimates about inherently uncertain
matters. The Company’s management has reviewed these critical accounting policies and related disclosures with the Audit and
Finance Committee of the Company’s Board of Directors.
Impairment or Disposal of Long-Lived Assets
We review long-lived assets quarterly to determine if triggering events have occurred which would require a test to determine if
the carrying amount of these assets may not be recoverable based on estimated future cash flows. Assets are reviewed at the
lowest level for which cash flows can be identified, which is at the individual restaurant level. In the absence of extraordinary
circumstances, restaurants are included in the impairment analysis after they have been open for two years. We evaluate the
recoverability of a restaurant’s long-lived assets, including buildings, intangibles, leasehold improvements, furniture, fixtures
and equipment over the remaining life of the primary asset in the asset group, after considering the potential impact of planned
operational improvements, marketing programs, and anticipated changes in the trade area. In determining future cash flows,
significant estimates are made by management with respect to future operating results for each restaurant over the remaining life
of the primary asset in the asset group. If assets are determined to be impaired, the impairment charge is measured by calculating
the amount by which the asset carrying amount exceeds its fair value based on our estimate of discounted future cash flows. The
determination of asset fair value is also subject to significant judgment. For fiscal years ended December 25, 2016 and
December 27, 2015 no impairment losses were recognized in continuing operations.
We account for exit or disposal activities, including restaurant closures, in accordance with Financial Accounting Standards
Board ("FASB") Accounting Standards Codification ("ASC") Topic 420, Exit or Disposal Cost Obligations. Such costs include
the cost of disposing of the assets, as well as other facility-related expenses from previously closed restaurants. These costs are
generally expensed as incurred.
Indefinite-Lived Intangible Assets
Liquor licenses, also a component of intangible assets, are deemed to have an indefinite life and, accordingly, are not amortized.
Management reviews liquor license assets on an annual basis or more frequently if impairment indicators are present to determine
whether carrying values have been impaired. We identify potential impairments for liquor licenses by comparing the fair value
with its carrying amount. If the fair value exceeds the carrying amount, the liquor licenses are not impaired. If the carrying
27
amount exceeds the fair value, an impairment loss is recorded for the difference. If the fair value of the asset is less than the
carrying amount, an impairment is recorded. No impairments were recognized in fiscal 2016 or 2015 in continuing operations.
Goodwill
Goodwill is not amortized and represents the excess of cost over the fair value of identified net assets of businesses acquired.
Goodwill is subject to an annual impairment analysis or more frequently if indicators of impairment exist. At both December 25,
2016 and December 27, 2015, we had goodwill of $50.1 million. The goodwill is assigned to the Company's BWW reporting
unit, which, due to the Spin-Off of Bagger Dave's on December 25, 2016, represents the Company's only reporting unit.
The Company assesses goodwill for impairment on an annual basis by reviewing relevant qualitative and quantitative factors.
More frequent evaluations may be required if the Company experiences changes in its business climate or as a result of other
triggering events that take place. If carrying value exceeds fair value, a possible impairment exists and further evaluation is
performed.
ASC Topic 350-20, Intangibles - Goodwill and Other, gives companies the option to perform a one-step (Step zero) qualitative
assessment to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit
is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than
its carrying amount, we assess relevant events and circumstances. If, after assessing the totality of events and circumstances, we
determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, the first and
second steps of the goodwill impairment test would be necessary. Conversely, if it is not more likely than not that the fair value
of the reporting unit is less than the carrying amount, further action would not be required.
The quantitative impairment analysis, if necessary, consists of a two-step process. The first step is to compare the fair value of
the reporting unit to its carrying value, including goodwill. We estimate fair value using market information (market approach)
and discounted cash flow projections (income approach). The income approach uses the reporting unit’s projection of estimated
operating results and cash flows that is discounted using a weighted-average cost of capital that reflects market conditions. The
projection uses management’s best estimates of projected revenue, costs and cash expenditures, including an estimate of new
restaurant openings and related capital expenditures. Other significant estimates also include terminal growth rates and working
capital requirements. We supplement our estimate of fair value under the income approach by using a market approach which
estimates fair value by applying multiples to the reporting unit’s projected operating performance. The multiples are derived
from comparable publicly traded companies with similar characteristics to the reporting unit. If the fair value of the reporting
unit is less than its carrying value, the second step of the impairment analysis must be performed in order to determine the amount
of impairment loss, if any. The second step compares the implied fair value of goodwill with the carrying amount of that goodwill.
If the carrying amount of the goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to
that excess.
As of December 25, 2016, and as a result of step zero of the qualitative assessment, the Company has concluded that its goodwill
is recoverable. As of December 27, 2015, based on our quantitative analysis, goodwill was considered recoverable.
Income Taxes
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and liabilities.
In accordance with the provisions of FASB ASC 740, Income Taxes, (“ASC 740”) a valuation allowance is established when it
is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent upon the
generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary
differences become deductible. We consider the reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies. On December 25, 2016 we completed the Spin-Off of Bagger Dave’s, which had previously generated
significant pre-tax losses. After the Spin-Off, the majority of the net deferred tax assets were retained by the Company, which in
its continuing operations has a history of profitability and is expected to continue to generate pre-tax income in the future. This
expected operating performance combined with the planned opening of additional BWW restaurants will provide future taxable
income that will enable the Company to utilize the tax benefits prior to their expirations, which begin in 2028. As a result, there
was no valuation allowance recorded for both fiscal years ended December 25, 2016 and December 27, 2015. Management
continually reviews the likelihood that deferred tax assets will be realized and the Company recognizes these benefits only as
reassessment indicates that it is more likely than not that such tax benefits will be realized. While there is no allowance recorded
28
against the deferred tax assets of the continuing operations, the Company incurred a one-time charge against the benefit for
income taxes of $1.8 million related to discontinued operations. This charge is the result of certain deferred tax assets relating to
discontinued operations that were determined to be unrealizable. The valuation allowance deferred tax charge was allocable to
continuing operations in accordance with ASC 740.
The Company applies the provisions of ASC 740, regarding the accounting for uncertainty in income taxes. The Company
classifies all interest and penalties as income tax expense. There are no accrued interest amounts or penalties related to uncertain
tax positions as of December 25, 2016 and December 27, 2015.
Interest Rate Swap Agreements
The Company utilizes interest rate swap agreements with Citizens Bank, N.A. (“Citizens”) to fix interest rates on a portion of
the Company’s portfolio of variable rate debt, which reduces exposure to interest rate fluctuations. Our derivative financial
instruments are recorded at fair value on the balance sheet. The effective portion of changes in the fair value of derivatives which
qualify for hedge accounting is recorded in accumulated other comprehensive income (loss) and is recognized in the statement
of operations when the hedged item affects earnings. Ineffective portion of the change in fair value of a hedge would be
recognized in income immediately. The Company does not use any other types of derivative financial instruments to hedge such
exposures, nor does it use derivatives for speculative purposes.
The interest rate swap agreements associated with the Company’s current debt agreements qualify for hedge accounting. As such,
the Company records the change in the fair value of its swap agreements as a component of accumulated other comprehensive
income (loss), net of tax. The Company records the fair value of its interest swaps on the Consolidated Balance Sheet in other
long-term assets or other liabilities depending on the fair value of the swaps. See Note 10, Note 17 and Note 18 for additional
information on the interest rate swap agreements.
Share-based Compensation
The Company estimates the fair value of stock option awards utilizing the Black-Scholes pricing model. The fair value of the
awards is amortized as compensation expense on a straight-line basis over the requisite service period of the award, which is
generally the vesting period. The fair value of restricted shares is equal to the number of restricted shares issued times the
Company’s stock price on the date of grant and is amortized as compensation expense on a straight-line basis over the service
period of the award.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
29
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes to Consolidated Financial Statements, and the Report of Independent Registered
Accounting Firm are included in this Annual Report and are incorporated herein by reference.
DIVERSIFIED RESTAURANT HOLDINGS, INC.
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ...............................................................
31
REPORT BY DIVERSIFIED RESTAURANT HOLDINGS, INC.'S MANAGEMENT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING ......................................................................................................................................
32
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS .....................................................................................................................
33
CONSOLIDATED STATEMENTS OF OPERATIONS ..............................................................................................
34
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS ...........................................................................
35
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) ....................................................
36
CONSOLIDATED STATEMENTS OF CASH FLOWS ..............................................................................................
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...................................................................................
38
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Diversified Restaurant Holdings, Inc. and Subsidiaries
Southfield, Michigan
We have audited the accompanying consolidated balance sheets of Diversified Restaurant Holdings, Inc. and Subsidiaries as of
December 25, 2016 and December 27, 2015 and the related consolidated statements of operations, comprehensive loss,
stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit as of December 25, 2016 and for the year then ended, included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Diversified Restaurant Holdings, Inc. and Subsidiaries at December 25, 2016 and December 27, 2015, and the results of its
operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 2 of the consolidated financial statements, on December 25, 2016, the Company completed the spin-off of
its Bagger Dave's business through a tax-free transaction. As a result of the spin-off, the financial position, results of operations
and cash flows related to the Bagger Dave's business have been presented as discontinued operations for all periods presented.
/s/ BDO USA, LLP
Troy, Michigan
March 27, 2017
31
REPORT BY DIVERSIFIED RESTAURANT HOLDINGS, INC.'S MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective system of internal control over financial reporting that
is designed to produce reliable financial statements presented in conformity with generally accepted accounting principles. There
are inherent limitations in the effectiveness of any system of internal control. Accordingly, even an effective system of internal
control can provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Company's system of internal control over financial reporting that is designed to produce reliable
financial statements presented in conformity with generally accepted accounting principles as of December 25, 2016. This
assessment was based on criteria for effective internal control over financial reporting described in Internal Control — Integrated
Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management believes that, as of December 25, 2016, Diversified Restaurant Holdings, Inc. maintained an
effective system of internal control over financial reporting that is designed to produce reliable financial statements presented in
conformity with generally accepted accounting principles based on those criteria.
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm
regarding internal control over financial reporting. We were not required to have, nor have we engaged our independent registered
public accounting firm to perform an audit of our internal control over financial reporting pursuant to the rules of the Securities
and Exchange Commission that permit us to provide only management's report in this Annual Report. Management’s report was
not subject to attestation by the Company’s registered public accounting firm pursuant to Section 404(c) of the Sarbanes-Oxley
Act.
Diversified Restaurant Holdings, Inc.
/s/ David G. Burke
David G. Burke
Chairman of the Board, President, Chief Executive
Officer, and Principal Executive Officer
/s/ Phyllis Knight
Phyllis Knight
Chief Financial Officer, Treasurer, Principal Financial
Officer, and Principal Accounting Officer
Dated: March 27, 2017
Dated: March 27, 2017
32
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 25,
2016
December 27,
2015
Current assets
Cash and cash equivalents ......................................................................................................................... $
4,021,126 $
13,499,890
ASSETS
Accounts receivable ..................................................................................................................................
Inventory ...................................................................................................................................................
Prepaid and other current assets ................................................................................................................
Current assets, discontinued operations .....................................................................................................
Total current assets .................................................................................................................................
Deferred income taxes ...............................................................................................................................
Property and equipment, net ......................................................................................................................
Intangible assets, net ..................................................................................................................................
Goodwill ....................................................................................................................................................
Other long-term assets ...............................................................................................................................
Long-term assets, discontinued operations ................................................................................................
Total assets ............................................................................................................................................... $
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable ...................................................................................................................................... $
Accrued compensation ..............................................................................................................................
Other accrued liabilities .............................................................................................................................
Current portion of long-term debt ..............................................................................................................
Current portion of deferred rent .................................................................................................................
Current liabilities, discontinued operations ...............................................................................................
Total current liabilities ............................................................................................................................
276,238
1,700,604
1,305,936
—
7,303,904
16,250,928
56,630,031
2,666,364
50,097,081
233,539
—
133,181,847 $
3,995,846 $
2,803,549
2,642,269
11,307,819
194,206
—
20,943,689
Deferred rent, less current portion .............................................................................................................
Unfavorable operating leases .....................................................................................................................
Other liabilities ..........................................................................................................................................
Long-term debt, less current portion ..........................................................................................................
Long-term liabilities, discontinued operations ...........................................................................................
Total liabilities .........................................................................................................................................
2,020,199
591,247
3,859,231
109,878,201
—
137,292,567
247,323
1,598,379
1,314,463
1,714,429
18,374,484
4,368,683
59,272,611
2,844,963
50,097,081
987,499
29,827,174
165,772,495
5,960,310
2,408,476
2,235,351
9,891,825
207,045
4,143,577
24,846,584
1,899,623
671,553
3,755,888
116,364,165
1,634,330
149,172,143
Commitments and contingencies (Notes 5, 13 and 14)
Stockholders' equity (deficit)
Common stock - $0.0001 par value; 100,000,000 shares authorized; 26,632,222 and 26,298,725,
respectively, issued and outstanding ......................................................................................................
2,610
Additional paid-in capital ..........................................................................................................................
21,355,270
Accumulated other comprehensive loss.....................................................................................................
(934,222)
2,597
36,136,319
(1,006,667)
Accumulated deficit ..................................................................................................................................
(24,534,378)
(18,531,897)
Total stockholders' equity (deficit) .........................................................................................................
(4,110,720)
16,600,352
Total liabilities and stockholders' equity (deficit) ................................................................................. $
133,181,847 $
165,772,495
See accompanying notes to consolidated financial statements.
33
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended
December 25,
2016
December 27,
2015
Revenue ............................................................................................................................................ $
166,520,925 $
144,800,046
Operating expenses
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Food, beverage, and packaging ....................................................................................................
Compensation costs .....................................................................................................................
Occupancy ...................................................................................................................................
Other operating costs ...................................................................................................................
General and administrative expenses .................................................................................................
Pre-opening costs ...............................................................................................................................
Depreciation and amortization ...........................................................................................................
Loss on asset disposals ......................................................................................................................
Total operating expenses .................................................................................................................
46,794,091
41,307,718
11,370,223
34,845,059
9,265,432
599,279
14,696,846
338,306
159,216,954
40,730,583
35,287,202
8,935,702
31,293,900
11,385,201
1,439,390
11,922,548
967,035
141,961,561
Operating profit ...............................................................................................................................
7,303,971
2,838,485
Interest expense .................................................................................................................................
Other income (expense), net ..............................................................................................................
(5,763,684)
(172,031)
(4,214,452)
785,591
Income (loss) from continuing operations before income taxes ........................................................
Income tax benefit .............................................................................................................................
Income (loss) from continuing operations ................................................................................
1,368,256
(2,270,792)
3,639,048
(590,376)
(83,514)
(506,862)
Discontinued operations
Loss from discontinued operations before income taxes .............................................................
Income tax benefit of discontinued operations ............................................................................
(10,226,996)
(585,467)
(25,588,123)
(9,902,493)
Loss from discontinued operations.................................................................................................
(9,641,529)
(15,685,630)
Net loss .............................................................................................................................................. $
(6,002,481) $
(16,192,492)
Basic earnings (loss) per share from:
Continuing operations ..................................................................................................................
Discontinued operations ..............................................................................................................
Basic net loss per share ......................................................................................................................
Fully diluted earnings (loss) per share from:
Continuing operations ..................................................................................................................
Discontinued operations ..............................................................................................................
Fully diluted net loss per share ..........................................................................................................
0.14
(0.37)
(0.23)
0.14
(0.37)
(0.23)
(0.02)
(0.60)
(0.62)
(0.02)
(0.60)
(0.62)
Weighted average number of common shares outstanding
Basic ..................................................................................................................................................
Diluted ...............................................................................................................................................
26,491,549
26,491,549
26,211,669
26,211,669
See accompanying notes to consolidated financial statements.
34
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Fiscal Years Ended
December 25,
2016
December 27,
2015
Net loss ............................................................................................................................... $
(6,002,481) $
(16,192,492)
Other comprehensive income (loss)
Unrealized changes in fair value of interest rate swaps, net of tax of ($37,319) and
$430,468 .....................................................................................................................
Unrealized changes in fair value of investments, net of tax of $0 and ($1,959) ...........
Total other comprehensive income (loss) ...........................................................................
72,445
—
72,445
(835,315)
3,804
(831,511)
Comprehensive loss .......................................................................................................... $
(5,930,036) $
(17,024,003)
See accompanying notes to consolidated financial statements.
35
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Total
Comprehensive
Accumulated
Stockholders'
Loss
Deficit
Equity (Deficit)
Balances - December 28, 2014 ..........
26,149,824
$
2,582
$
35,668,001
$
(175,156) $
(2,339,405) $
33,156,022
Issuance of restricted shares ................
131,752
Shares effectively repurchased for
required employee withholding
taxes .................................................
(1,387)
Forfeitures of restricted shares ............
(8,587)
Employee stock purchase plan ............
21,623
Share-based compensation ...................
—
—
—
—
1
13
—
(4,443)
—
71,614
424,401
Stock repurchase ..................................
(24,500)
(2)
(98,250)
Stock options exercised .......................
30,000
Other comprehensive loss ....................
Net loss from continuing operations ....
Net loss from discontinued
operations .........................................
—
—
—
3
—
—
—
74,996
—
—
—
—
—
—
—
—
—
—
(831,511)
—
—
—
—
—
—
—
—
—
(4,443)
—
71,615
424,414
(98,252)
74,999
(831,511)
—
(506,862)
(506,862)
—
(15,685,630)
(15,685,630)
Balances - December 27, 2015 ..........
26,298,725
$
2,597
$
36,136,319
$
(1,006,667) $
(18,531,897) $
16,600,352
Issuance of restricted shares ................
398,164
Forfeitures of restricted shares ............
(84,817)
—
—
—
—
Shares effectively repurchased for
required employee withholding
taxes .................................................
(8,114)
(1)
(12,391)
Employee stock purchase plan ............
28,264
Share-based compensation ...................
Other comprehensive income ..............
Spin-Off of Bagger Dave's ..................
Net income from continuing
operations .............................................
Net loss from discontinued
operations .........................................
—
—
—
—
—
4
10
—
—
—
—
40,599
435,845
—
72,445
(15,245,102)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(12,392)
40,603
435,855
72,445
(15,245,102)
3,639,048
3,639,048
(9,641,529)
(9,641,529)
Balances - December 25, 2016 ..........
26,632,222
$
2,610
$
21,355,270
$
(934,222) $
(24,534,378) $
(4,110,720)
See accompanying notes to consolidated financial statements.
36
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net loss .............................................................................................................................................................................. $
(6,002,481) $
(16,192,492)
Fiscal Years Ended
December 25, 2016
December 27, 2015
Net loss from discontinued operations .............................................................................................................................
Net income (loss) from continuing operations .................................................................................................................
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization ......................................................................................................................................
Amortization and write-off of debt discount and loan fees ..........................................................................................
9,641,529
3,639,048
14,696,846
238,784
Realized gain on sale leaseback ....................................................................................................................................
(128,782)
Loss on asset disposals .................................................................................................................................................
Share-based compensation ............................................................................................................................................
338,306
435,845
Deferred income taxes ..................................................................................................................................................
(2,270,792)
Changes in operating assets and liabilities that provided (used) cash
Accounts receivable ...................................................................................................................................................
Inventory ....................................................................................................................................................................
Prepaid assets .............................................................................................................................................................
Intangible assets .........................................................................................................................................................
Other long-term assets ...............................................................................................................................................
(28,915)
(102,225)
8,527
(73,150)
753,960
Accounts payable .......................................................................................................................................................
(1,771,388)
Accrued liabilities ......................................................................................................................................................
Deferred rent ..............................................................................................................................................................
Net cash provided by operating activities of continuing operations ..........................................................................
Net cash used in operating activities of discontinued operations ...............................................................................
Net cash provided by operating activities.....................................................................................................................
1,143,880
107,737
16,987,681
(5,863,807)
11,123,874
Cash flows from investing activities
Proceeds from sale of investments ...............................................................................................................................
—
Purchases of property and equipment ...........................................................................................................................
(12,499,507)
Acquisition of business, net of cash acquired ..............................................................................................................
Proceeds from sale leaseback transaction .....................................................................................................................
—
—
Net cash used in investing activities of continuing operations ...................................................................................
(12,499,507)
Net cash used in investing activities of discontinued operations ................................................................................
(907,890)
Net cash used in investing activities ..............................................................................................................................
(13,407,397)
Cash flows from financing activities
Proceeds from issuance of long-term debt ...................................................................................................................
11,109,154
Repayments of long-term debt......................................................................................................................................
(16,134,717)
Payment of loan fees .....................................................................................................................................................
Proceeds from employee stock purchase plan ..............................................................................................................
Repurchase of stock ......................................................................................................................................................
Stock options exercised ................................................................................................................................................
Tax withholding for restricted stock units ....................................................................................................................
Capital infusion to discontinued component ................................................................................................................
Net cash provided by (used in) financing activities .....................................................................................................
(197,889)
40,603
—
—
(12,392)
(2,000,000)
(7,195,241)
15,685,630
(506,862)
11,922,548
240,036
(127,836)
967,035
424,414
(83,514)
1,159,700
(226,825)
(990,885)
36,986
(695,189)
3,014,870
1,395,565
224,537
16,754,580
(7,886,772)
8,867,808
2,952,302
(20,155,132)
(54,041,489)
3,521,931
(67,722,388)
(10,303,988)
(78,026,376)
72,963,858
(8,166,667)
(751,071)
71,615
(98,252)
74,999
(4,443)
—
64,090,039
Net decrease in cash and cash equivalents ...................................................................................................................
(9,478,764)
(5,068,529)
Cash and cash equivalents, beginning of period ..............................................................................................................
13,499,890
18,568,419
Cash and cash equivalents, end of period .................................................................................................................... $
4,021,126
$
13,499,890
See accompanying notes to consolidated financial statements.
37
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Diversified Restaurant Holdings, Inc. (“DRH”) is a restaurant company operating a single concept, Buffalo Wild Wings® Grill
& Bar (“BWW”). As the largest franchisee of BWW, we provide a unique guest experience in a casual and inviting environment.
DRH currently operates 64 BWW restaurants (20 in Michigan, 17 in Florida, 15 in Missouri, seven in Illinois and five in Indiana),
including the nation’s largest BWW, based on square footage, in downtown Detroit, Michigan. We have an area development
agreement (“ADA”) with Buffalo Wild Wings International, Inc. ("BWLD") under which we have opened 29 restaurants out of
a total required of 42 by 2021. We have one additional restaurant in process and are in discussions with BWLD regarding the
remaining 12 restaurants. We may continue to open new restaurants but at a potentially lower number over a longer period of
time under an amended ADA.
On December 25, 2016, the Company completed a spin-off of 19 Bagger Dave's entities and certain real estate entities which
house the respective Bagger Dave's entities previously owned by DRH into a new independent publicly traded company, Bagger
Dave's Burger Tavern, Inc. ("Bagger Dave's"). For additional details refer to Note 2.
DRH and its wholly-owned subsidiaries (collectively, the “Company”), AMC Group, Inc. (“AMC”), AMC Wings, Inc.
(“WINGS”), and AMC Real Estate, Inc. (“REAL ESTATE”) own and operate BWW restaurants located throughout Florida,
Illinois, Indiana, Michigan and Missouri. The following organizational chart outlines the current corporate structure of DRH. A
brief textual description of the entities follows the organizational chart. DRH is incorporated in Nevada.
AMC was formed on March 28, 2007 and serves as our operational and administrative center. AMC renders management,
operational support, and advertising services to WINGS and REAL ESTATE and their subsidiaries. Services rendered by AMC
include marketing, restaurant operations, restaurant management consultation, hiring and training of management and staff, and
other management services reasonably required in the ordinary course of restaurant operations.
38
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WINGS was formed on March 12, 2007 and serves as a holding company for our BWW restaurants. We are economically
dependent on retaining our franchise rights with BWLD. The franchise agreements have specific initial term expiration dates
ranging from December 2020 through June 2036, depending on the date each was executed and the duration of its initial
term. The franchise agreements are renewable at the option of the franchisor and are generally renewable if the franchisee has
complied with the franchise agreement. When factoring in any applicable renewals, the franchise agreements have specific
expiration dates ranging from December 2025 through June 2051. We believe we are in compliance with the terms of these
agreements.
REAL ESTATE was formed on March 18, 2013, and serves as the holding company for any real estate properties owned by
DRH. Currently, DRH does not own any real estate after completing certain sale leaseback transactions. Refer to Note 3 of the
Consolidated Financial Statements for additional information on the sale leaseback transactions.
We follow accounting standards set by the Financial Accounting Standards Board ("FASB"). The FASB sets generally accepted
accounting principles in the United States of America ("GAAP") that we follow to ensure we consistently report our financial
condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB
Accounting Standards Codification ("ASC").
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All inter-company
accounts and transactions have been eliminated.
For Variable Interest Entities ("VIE(s)"), we assess whether we are the primary beneficiary as prescribed by the accounting
guidance on the consolidation of VIE. The primary beneficiary of a VIE is the party that has the power to direct the activities
that most significantly impact the performance of the entity and the obligation to absorb losses or the right to receive benefits
that could potentially be significant to the entity. See Note 5 to the accompanying notes to the consolidated financial statements
for more details.
Segment Reporting
As of December 25, 2016, as a result of the Spin-Off of Bagger Dave’s as further described in Note 2 to the consolidated financial
statements, the Company has one operating and reportable segment.
Fiscal Year
The Company utilizes a 52- or 53-week accounting period that ends on the last Sunday in December. Fiscal year 2016 ended on
December 25, 2016 and was comprised of 52 weeks. Fiscal year 2015 ended on December 27, 2015 was comprised of 52 weeks.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and demand deposits in banks. The Company considers all highly-liquid
investments purchased with original maturities of three months or less to be cash and cash equivalents. The Company, at times
throughout the year, may, in the ordinary course of business, maintain cash balances in excess of federally-insured limits.
Management does not believe the Company is exposed to any unusual risks on such deposits.
Accounts Receivable
Accounts receivable primarily consist of contractually determined receivables from BWLD for local media advertising
reimbursements and are stated at the amount management expects to collect. Balances that are outstanding after management has
used reasonable collection efforts are written off with a corresponding charge to bad debt expense or deferred rent as
applicable. There was no allowance for doubtful accounts necessary at December 25, 2016 and December 27, 2015.
39
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gift Cards
The Company records gift cards under a BWLD system-wide program. Gift cards sold are recorded as a gift card liability. When
redeemed, the gift card liability account is offset by recording the transaction as revenue. At times, gift card redemptions can
exceed amounts due to BWLD for gift card purchases resulting in an asset balance. Under this centralized system, any breakage
would be recorded by Blazin Wings, Inc., a subsidiary of BWLD, and is subject to the breakage laws in the state of Minnesota,
where Blazin Wings, Inc. is located. The Company's gift card liability was $0.1 million as of December 25, 2016. At
December 27, 2015, the Company had an asset of $0.1 million relating to gift cards.
Inventory
Inventory consists mainly of food and beverage products and is accounted for at the lower of cost or market using the first in,
first out method of inventory valuation. Cash flows related to inventory sales are classified in net cash provided by operating
activities in the Consolidated Statements of Cash Flows.
Prepaids and Other Long-Term Assets
Prepaid assets consist principally of prepaid rent, insurance and contracts and are recognized ratably as operating expense over
the period of future benefit. Other assets consist primarily of security deposits for operating leases and utilities.
Property and Equipment
Property and equipment are recorded at cost. Equipment and furniture and fixtures are depreciated using the straight-line method
over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements, which include the
cost of improvements funded by landlord incentives or allowances, are amortized using the straight-line method over the lesser
of the term of the lease, without consideration of renewal options, or the estimated useful lives of the assets, which is typically
five - 15 years. Maintenance and repairs are expensed as incurred. Upon retirement or disposal of assets, the cost and accumulated
depreciation are eliminated from the respective accounts and the related gains or losses are credited or charged to earnings.
The Company capitalizes items associated with construction but not yet placed into service, known as construction in progress
(“CIP”). Items capitalized include fees associated with the design, build out, furnishing of the restaurants, leasehold
improvements, construction period interest (when applicable), equipment, and furniture and fixtures. Restaurant CIP is not
amortized or depreciated until the related assets are placed into service. Items are placed into service according to their asset
category when the restaurant is open for service.
Intangible Assets
Amortizable intangible assets consist of franchise fees, trademarks, non-compete agreements, favorable and unfavorable
operating leases, and loan fees and are stated at cost, less accumulated amortization. Intangible assets are amortized on a straight-
line basis over the estimated useful life, as follows: Franchise fees- 10 – 20 years, Trademarks- 15 years, Non-compete- 3 years,
Favorable and unfavorable leases - over the term of the respective leases and Loan fees - over the term of the respective loan.
Liquor licenses, if transferable, are deemed to have an indefinite life and are carried at the lower of fair value or cost. We identify
potential impairments for liquor licenses by comparing the fair value with its carrying amount. If the fair value exceeds the
carrying amount, the liquor licenses are not impaired. If the fair value of the asset is less than the carrying amount, an impairment
charge is recorded. No impairments were recognized in fiscal years ended December 25, 2016 and December 27, 2015.
Impairment or Disposal of Long-Lived Assets
We review long-lived assets quarterly to determine if triggering events have occurred which would require a test to determine if
the carrying amount of these assets may not be recoverable based on estimated future cash flows. Assets are reviewed at the
lowest level for which cash flows can be identified, which is at the individual restaurant level. In the absence of extraordinary
circumstances, restaurants are included in the impairment analysis after they have been open for two years. We evaluate the
recoverability of a restaurant’s long-lived assets, including buildings, intangibles, leasehold improvements, furniture, fixtures,
and equipment over the remaining life of the primary asset in the asset group, after considering the potential impact of planned
operational improvements, marketing programs, and anticipated changes in the trade area. In determining future cash flows,
significant estimates are made by management with respect to future operating results for each restaurant over the remaining life
40
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the primary asset in the asset group. If assets are determined to be impaired, the impairment charge is measured by calculating
the amount by which the asset carrying amount exceeds its fair value based on our estimate of discounted future cash flows. The
determination of asset fair value is also subject to significant judgment. During the years ended December 25, 2016 and December
27, 2015, there were no impairments of long-lived assets pertaining to continuing operations.
We account for exit or disposal activities, including restaurant closures, in accordance with ASC Topic 420, Exit or Disposal
Cost Obligations. Such costs include the cost of disposing of the assets as well as other facility-related expenses from previously
closed restaurants. These costs are generally expensed as incurred. Additionally, at the date we cease using a property under an
operating lease, we record a liability for the net present value of any remaining lease obligations, net of estimated sublease
income. Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income
are recorded in the period incurred.
Goodwill
Goodwill is not amortized and represents the excess of cost over the fair value of identified net assets of businesses acquired.
Goodwill is subject to an annual impairment analysis or more frequently if indicators of impairment exist. At both December 25,
2016 and December 27, 2015, we had goodwill of $50.1 million. The goodwill is assigned to the Company's Buffalo Wild Wings
reporting unit, which, due to the Spin-Off of Bagger Dave's on December 25, 2016, represents the Company's only reporting
unit.
The Company assesses goodwill for impairment on an annual basis by reviewing relevant qualitative and quantitative factors.
More frequent evaluations may be required if the Company experiences changes in its business climate or as a result of other
triggering events that take place. If carrying value exceeds fair value, a possible impairment exists and further evaluation is
performed.
ASC Topic 350-20, Intangibles - Goodwill and Other, gives companies the option to perform a one-step (Step zero) qualitative
assessment to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit
is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than
its carrying amount, we assess relevant events and circumstances. If, after assessing the totality of events and circumstances, we
determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, the first and
second steps of the goodwill impairment test would be necessary. Conversely, if it is not more likely than not that the fair value
of the reporting unit is less than the carrying amount, further action would not be required.
The quantitative impairment analysis, if necessary, consists of a two-step process. The first step is to compare the fair value of
the reporting unit to its carrying value, including goodwill. We estimate fair value using market information (market approach)
and discounted cash flow projections (income approach). The income approach uses the reporting unit’s projection of estimated
operating results and cash flows that is discounted using a weighted-average cost of capital that reflects market conditions. The
projection uses management’s best estimates of projected revenue, costs and cash expenditures, including an estimate of new
restaurant openings and related capital expenditures. Other significant estimates also include terminal growth rates and working
capital requirements. We supplement our estimate of fair value under the income approach by using a market approach which
estimates fair value by applying multiples to the reporting unit’s projected operating performance. The multiples are derived
from comparable publicly traded companies with similar characteristics to the reporting unit. If the fair value of the reporting
unit is less than its carrying value, the second step of the impairment analysis must be performed in order to determine the amount
of impairment loss, if any. The second step compares the implied fair value of goodwill with the carrying amount of that goodwill.
If the carrying amount of the goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to
that excess. As of December 25, 2016, as a result of step zero of the qualitative assessment, the Company has concluded that its
goodwill is recoverable. As of December 27, 2015, based on our quantitative analysis, goodwill was considered recoverable.
Deferred Rent
Certain operating leases provide for minimum annual payments that increase over the life of the lease. Typically, our operating
leases contain renewal options under which we may extend the initial lease terms for periods of five to 10 years. The aggregate
minimum annual payments are expensed on a straight-line basis commencing at the start of our construction period and extending
over the term of the related lease, including option renewals as deemed reasonably assured. The amount by which straight-line
rent exceeds actual lease payment requirements in the early years of the lease is accrued as deferred rent liability and reduced in
later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts, in its
straight-line computation, for the effect of any "rental holidays", "free rent periods", and "landlord incentives or allowances".
41
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Gains
Deferred gains on the sale leaseback transaction described in Note 3, are recognized into income over the life of the related
operating lease agreements.
Revenue Recognition
Revenues from food, beverage and merchandise sales are recognized and generally collected at the point of sale. All sales taxes
are presented on a net basis and are excluded from revenue.
Advertising
Advertising expenses associated with contributions to the BWLD advertising fund (between 3.00% and 3.15% of total net sales)
are recorded as operating expenses as contributed, while all other advertising expenses are recorded in general and administrative
expenses as incurred. Advertising expenses of continuing operations of $2.0 million and $4.3 million are included in other
operating costs in the Consolidated Statements of Operations and advertising expense of $1.1 million and $0.9 million are
included in general and administrative expenses in the Consolidated Statements of Operations for the years ended December 25,
2016 and December 27, 2015, respectively. Advertising expenses in discontinued operations of $1.1 million and $2.7 million are
presented as such in the Consolidated Statements of Operations for the years ended December 25, 2016 and December 27, 2015,
respectively.
Pre-opening Costs
Pre-opening costs are those costs associated with opening new restaurants and will vary based on the number of new locations
opening and under construction. Pre-opening costs typically consist of manager salaries, relocation costs, supplies, recruiting
expenses, certain marketing costs and costs associated with team member training. The Company also reclassifies labor costs
that exceed the historical average for the first three months of restaurant operations that are attributable to training. These costs
are expensed as incurred. Pre-opening costs in continuing operations were $0.6 million and $1.4 million for the years ended
December 25, 2016 and December 27, 2015, respectively. Excess labor cost incurred after restaurant opening and included in
pre-opening cost were approximately $0.3 million and $0.6 million for the years ended December 25, 2016 and December 27,
2015, respectively.
Income Taxes
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and liabilities.
The Company applies the provisions of ASC Topic 740, Income Taxes, regarding the accounting for uncertainty in income taxes.
The Company classifies all interest and penalties as income tax expense. There are no accrued interest amounts or penalties
related to uncertain tax positions as of December 25, 2016 and December 27, 2015.
Earnings Per Common Share
Earnings per share are calculated under the provisions of FASB ASC 260, Earnings per Share, which requires a dual presentation
of "basic" and "diluted" earnings per share on the face of the Consolidated Statements of Operations. Basic earnings per common
share excludes dilution and is computed by dividing the net earnings available to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted earnings per common share include dilutive common stock
equivalents consisting of stock options determined by the treasury stock method. Restricted stock awards contain non-forfeitable
rights to dividends, making such awards participating securities. The calculation of basic and diluted earnings per share uses an
earnings allocation method to consider the impact of restricted stock.
42
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-based Compensation
The Company estimates the fair value of stock option awards utilizing the Black-Scholes pricing model. The fair value of the
awards is amortized as compensation expense on a straight-line basis over the requisite service period of the award, which is
generally the vesting period. The fair value of restricted shares is equal to the number of restricted shares issued times the
Company’s stock price on the date of grant and is amortized as compensation expense on a straight-line basis over the service
period of the award.
Concentration Risks
Approximately 77.4% and 76.1% of the Company's continuing revenues for the years ended December 25, 2016 and
December 27, 2015, respectively, were generated from food and beverage sales from restaurants located in the Midwest region.
The remaining 22.6% and 23.9% of the Company's continuing revenues for the years ended December 25, 2016 and
December 27, 2015, respectively, were generated from food and beverage sales from restaurants located in Florida.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Interest Rate Swap Agreements
The Company utilizes interest rate swap agreements with Citizens Bank, N.A. (“Citizens”) to fix interest rates on a portion of
the Company’s portfolio of variable rate debt, which reduces exposure to interest rate fluctuations. Our derivative financial
instruments are recorded at fair value on the Consolidated Balance Sheets. The effective portion of changes in the fair value of
derivatives which qualify for hedge accounting is recorded in other comprehensive income and is recognized in the Consolidated
Statements of Operations when the hedged item affects earnings. Ineffective portion of the change in fair value of a hedge would
be recognized in income immediately. The Company does not use any other types of derivative financial instruments to hedge
such exposures, nor does it use derivatives for speculative purposes.
The interest rate swap agreements associated with the Company’s current debt agreements qualify for hedge accounting. As such,
the Company records the change in the fair value of its swap agreements as a component of accumulated other comprehensive
income (loss), net of tax. The Company records the fair value of its interest swaps on the Consolidated Balance Sheets in other
long-term assets or other liabilities depending on the fair value of the swaps. See Note 10 and Note 17 for additional information
on the interest rate swap agreements.
Recent Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-04, Topic 350: Intangibles - Goodwill and Other:
Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplified wording and removes step 2 of the
goodwill impairment test. A goodwill impairment will now be the amount by which a reporting units carrying value exceeds its
fair value, not to exceed the carrying amount of goodwill. The FASB also eliminated the requirements for any reporting unit with
a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step 2 of
the goodwill test. We do not expect the standard will have a significant impact. ASU 2017-04 is effective for annual or interim
goodwill impairment tests in fiscal years beginning after December 15, 2020, with early adoption permitted for interim or annual
goodwill impairment tests on testing dates after January 1, 2017.
In August 2016, the FASB issued ASU 2016-15, Topic 230: Statement of Cash Flows: Classification of Certain Cash Receipts
and Cash Payments ("ASU 2016-15"). ASU 2016-15 clarifies current GAAP that is either unclear or does not include specific
guidance on a number of specific issues. The amendments set forth are an improvement to GAAP because they provide guidance
for each issue and reduce the current and potential future diversity in practice. ASU 2016-15 is effective for public business
entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is
permitted, including adoption in an interim period. We are currently evaluating the pending adoption of ASU 2016-15 and the
impact it will have on our consolidated financial statements.
43
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2016, the FASB issued ASU 2016-09, Topic 718: Compensation - Stock Compensation: Improvements to Employee
Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of accounting for share-based
payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and
classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016, with early adoption permitted. Beginning in fiscal 2017, the tax effects of awards will be
recognized in the statement of operations. In addition, the Company will account for forfeitures as they occur.
In February 2016, FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that lease arrangements longer than 12 months
result in a lessee recognizing a lease asset and liability. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the income statement. The updated guidance is effective for interim and annual
periods beginning after December 15, 2018, and early adoption is permitted. We believe the adoption of ASU 2016-02 will
materially impact our consolidated financial statements by significantly increasing our non-current assets and non-current
liabilities on our consolidated balance sheets in order to record the right of use assets and related lease liabilities for our existing
operating leases. We are currently unable to estimate the impact of the updated guidance on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes
nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when
promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects
to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing
so, more judgment and estimates may be required within the revenue recognition process than are required under existing
GAAP. Most recent updates to the standard delay the required adoption by one year, now effective for annual periods beginning
after December 15, 2018, and interim periods therein. We are currently evaluating the impact of our pending adoption of ASU
2014-09, although based on the nature of our business we do not expect the standard will have a significant impact on our
consolidated financial statements.
We reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to
our operations or that no material effect is expected on our consolidated financial statements as a result of future adoption.
Recently Adopted Accounting Pronouncements
In November 2015, the FASB issued ASU 2015-17, Topic 740: Balance Sheet Classification of Deferred Taxes (“ASU No.
2015-17”), which simplifies the presentation of deferred income taxes. ASU No. 2015-17 provides presentation requirements to
classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. The Company adopted this
standard as of December 27, 2015, with prospective application. The adoption of ASU No. 2015-17 had no impact on the
Company’s Consolidated Statements of Operations and Comprehensive Loss.
In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent
Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This ASU adds paragraphs pursuant to the
SEC Staff Announcement at the June 18, 2015 Emerging Issues Task Force meeting about the presentation and subsequent
measurement of debt issuance costs associated with line-of-credit arrangements. ASU 2015-15 states that given the absence of
authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would
not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt
issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings
on the line-of-credit. The Company has historically recorded and will continue to record, debt issuance costs associated with the
line-of-credit as an asset and subsequently amortize the deferred costs over the term of the line-of-credit, with there being no
impact on previously issued financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest, which updates guidance on the presentation
of debt issuance costs. The guidance requires debt issuance costs to be presented as a direct deduction of debt balances on the
statement of financial position, similar to the presentation of debt discounts. The guidance is effective for fiscal years, and for
interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. We retrospectively
adopted this guidance in First Quarter 2016. This resulted in a reclassification of the December 27, 2015 Consolidated Balance
Sheet of $345,317 from Intangible assets, net to Current portion of long-term debt and Long-term debt, in the amounts of $27,002
and $318,315, respectively.
44
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. DISCONTINUED OPERATIONS
Spin-Off of Bagger Dave's
On August 4, 2016, DRH announced that its Board of Directors unanimously approved a plan to pursue a tax-free spin-off of its
Bagger Dave's business. Pursuant to this plan, DRH contributed its 100.0% owned entity, AMC Burgers, LLC and certain real
estate entities into Bagger Dave's Burger Tavern, Inc., a newly created Nevada company, which was then spun-off into a stand-
alone, publicly traded company on the over-the-counter exchange. AMC Burger, Inc. owns and operates all of the Bagger Dave's
Burger Tavern ® restaurants and the real estate entities held certain real estate related to the restaurants before the real estate was
sold in 2014 and 2015. In connection with the Spin-Off, DRH contributed certain assets, liabilities and employees currently
related to its Bagger Dave's businesses. Intercompany balances due to/from DRH, which included amounts from sales, were
contributed to equity of Bagger Dave's. The Spin-Off was effected on December 25, 2016 via a one-for-one distribution of
common shares in Bagger Dave's to DRH holders of record on December 19, 2016.
As part of the Spin-Off transaction, DRH agreed to fund a one-time $2.0 million cash distribution to Bagger Dave's and agreed
that, if deemed necessary within twelve months after the date of the Spin-Off, up to $1 million of additional cash funding may
be considered upon approval by DRH and its lenders.
Prior to the Spin-Off, Bagger Dave’s was a co-obligor on a joint and several basis with the Company on its $155.0 million senior
secured credit facility. The Company’s debt under this facility remained with the Company and Bagger Dave’s was released as
a borrower. As a result, this debt was not assigned to discontinued operations. Additionally, DRH retained substantially all of
the tax benefits (net operating loss and tax credit carryforwards) generated by Bagger Dave's prior to the date of the transaction
representing an amount sufficient to offset pre-tax income totaling over $50 million at current estimated tax rates. See Note 12
for additional information related to income taxes.
DRH decided to spin-off Bagger Dave's after considering all reasonable strategic and structural alternatives because of the
disparity between the operating models of its two brands, BWW as franchisee, and Bagger Dave's as an owned concept. The
management teams of Bagger Dave's and DRH agreed that the nature of the two concepts varied greatly, and that each will be
more valuable and operate more effectively independently of one another. Bagger Dave's is a concept developed by the
management team of DRH. In contrast to operating a franchised concept like BWW it has no development restrictions and the
flexibility to enhance brand attributes such as logos, trade dress and restaurant design, change its menu offering and improve its
operational model in an effort to better align with guest expectations. To manage these functions effectively, specific resources
are required that are not necessary for a franchisee. For example, menu development, purchasing and brand marketing are critical
to the success of Bagger Dave's but not necessary for a BWW franchisee since these functions are managed by the franchisor.
Additional considerations were contemplated with respect to growth potential. As a start-up brand, Bagger Dave's has a higher
growth potential while BWW, being a mature brand and as a franchisee, has more limits to its organic growth potential due to
its development rights.
In conjunction with the Spin-Off, DRH entered into a transition services agreement (the "TSA") with Bagger Dave's pursuant to
which DRH will provide certain information technology and human resources support, limited accounting support, and other
minor administrative functions at no charge. The TSA is intended to assist the discontinued component in efficiently and
seamlessly transitioning to stand on its own. The agreement expires in December 2017 at which time the parties may negotiate
which services will be required on an ongoing basis and the fees that will be charged for such services.
45
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information related to Bagger Dave's has been reflected in the accompanying consolidated financial statements as follows:
●
●
●
Consolidated Balance Sheets - as a result of the Spin-Off of Bagger Dave's, effective December 25, 2016, the Bagger
Dave's assets and liabilities as of December 27, 2015 have been presented as discontinued operations.
Consolidated Statements of Operations - Bagger Dave's results of operations for the years ended December 25, 2016
and December 27, 2015 have been presented as discontinued operations. There was no gain or loss on the transaction
recorded.
Consolidated Statements of Cash Flows - The Bagger Dave's cash flows from operating and investing activities for the
years ended December 25, 2016 and December 27, 2015 have been presented separately on the face of the cash flow
statements. The Bagger Dave's cash flows from financing activities for these years have not been separately reported on
the consolidated statements of cash flows since there was only one financing function for both entities.
The following are major classes of line items constituting pre-tax loss from discontinued operations:
Fiscal Years Ended
Revenue ......................................................................................................... $
December 25, 2016 December 27, 2015
27,685,331
20,741,427 $
Restaurant operating costs (exclusive of depreciation and
amortization) .........................................................................................
General and administrative expenses .......................................................
Depreciation and amortization .................................................................
Pre-opening costs .....................................................................................
Other income ............................................................................................
Restaurant Impairment and loss on asset disposals ..................................
Loss from discontinued operations before income taxes ...............................
Income tax benefit ....................................................................................
(21,436,377)
(2,881,467)
(3,353,194)
(362,064)
11,066
(2,946,387)
(10,226,996)
(585,467)
(29,606,736)
(3,966,240)
(4,659,689)
(1,804,768)
39,649
(13,275,670)
(25,588,123)
(9,902,493)
Total loss from discontinued operations .................................................... $
(9,641,529) $
(15,685,630)
The operating results of the discontinued operations include only direct expenses incurred by Bagger Dave’s. Discontinued
operations exclude certain corporate functions that were previously allocated to Bagger Dave’s. Interest expense was not
allocated to discontinued operations because the Company’s debt under the $155 million secured credit facility remained with
the Company.
46
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are major classes of line items for assets and liabilities of discontinued operations at December 27, 2015:
ASSETS
Current assets, discontinued operations:
Cash and cash equivalents ................................................................................................................. $
Accounts receivable ..........................................................................................................................
Inventory ...........................................................................................................................................
Prepaid assets ....................................................................................................................................
Total current assets, discontinued operations ....................................................................................
Long-term assets, discontinued operations:
Property and equipment, net ..............................................................................................................
Deferred tax assets, net ......................................................................................................................
Intangible assets, net .........................................................................................................................
Other long-term assets .......................................................................................................................
Total long-term assets, discontinued operations ................................................................................ $
LIABILITIES
Current liabilities, discontinued operations:
Accounts payable .............................................................................................................................. $
Accrued compensation ......................................................................................................................
Other accrued liabilities ....................................................................................................................
Current portion of deferred rent ........................................................................................................
Total current liabilities, discontinued operations ..............................................................................
Long-term liabilities, discontinued operations:
Deferred rent .....................................................................................................................................
Other liabilities ..................................................................................................................................
Total long-term liabilities, discontinued operations .......................................................................... $
700,638
373,619
336,205
303,967
1,714,429
19,917,050
8,951,494
793,753
164,877
29,827,174
1,847,242
679,408
1,427,859
189,068
4,143,577
926,587
707,743
1,634,330
During 2015, the Company closed 11 underperforming Bagger Dave's locations. The Company recorded expenses totaling $10.8
million, consisting of property and equipment impairment charges, exit costs associated with lease obligations, employee
terminations costs and other obligations in connection with the closures. These expenses are reflected in discontinued operations
in the Consolidated Statements of Operations for the fiscal year ended December 27, 2015.
The following table summarizes the Company’s accrual activity related to facility closures during the fiscal years ended
December 25, 2016 and December 27, 2015:
Beginning of the year ........................................................................................ $
Charges ..............................................................................................................
Cash payments ...................................................................................................
1,247,186 $
—
(1,140,033)
End of the year ................................................................................................... $
107,153 $
—
1,322,308
(75,122)
1,247,186
Fiscal 2016
Fiscal 2015
47
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The closure liability of $0.1 million was retained by the Company after the Spin-Off of Bagger Dave's, as it is responsible for
certain ongoing lease payments associated with the closures.
At December 25, 2016 and December 27, 2015, there were $0 and $0.9 million, respectively, of fixed and intangible assets for
the closed locations held for sale.
Based on impairment indicators that existed in the fourth quarter of 2016, the Company performed an impairment analysis on
certain long-lived assets relating to Bagger Dave's and recorded an impairment charge of $3.5 million related to seven locations
where the carrying amount of the assets was not considered recoverable based on the estimated future cash flows of the
restaurants. An impairment analysis relating to certain Bagger Dave's long-lived assets was also performed in 2015 and an
impairment charge of $2.8 million relating to four locations was recorded. The impairment charges for both years are recorded
in discontinued operations.
The following is a summary of the expenses recognized in discontinued operations in the Consolidated Statement of Operations
during the years ended December 25, 2016 and December 27, 2015 related to the restaurant closures and impairment of property
and equipment:
Description
Property and equipment impairments ................................................................ $
Facility closure and other expenses ...................................................................
Severance expense .............................................................................................
Fiscal 2016
Fiscal 2015
3,548,515 $
—
—
$
3,548,515 $
12,701,875
733,834
154,764
13,590,473
During 2016 and 2015, Bagger Dave's recorded other asset disposal gains of $0.6 million and losses of $0.6 million, respectively,
in discontinued operations.
Prior to the Spin-Off, Bagger Dave's was a reportable segment of the Company. Following the Spin-Off, there were no assets or
liabilities remaining from the Bagger Dave's operations as of December 25, 2016. See Note 5 for a discussion of involvement
the Company will continue to have with Bagger Dave's after the Spin-Off.
3. SIGNIFICANT BUSINESS TRANSACTIONS
Sale leaseback transactions
On October 6, 2014, the Company entered into a sale leaseback agreement for $15.7 million with a third-party Real Estate
Investment Trust (“REIT”) and included the sale of six locations. In Q4 2014, we closed on 5 of the 6 properties, with total
proceeds of $12.2 million. In connection with the closing of the sale-leaseback transactions in Q4 2014, the Company recorded
losses of approximately $0.2 million, which is included in loss on asset disposals on the Consolidated Statements of Operations.
The Company also recorded deferred gains of $1.9 million for the properties sold at a gain as of December 28, 2014. We closed
on the remaining property in August 2015 and received total proceeds of $3.5 million and recorded losses of $0.2 million, which
is recorded in loss on asset disposals on the Consolidated Statements of Operations. Pursuant to the terms of each sale-leaseback
transaction, we transferred title of the real property to the purchaser after final inspection and, in turn, entered into separate leases
with the purchaser having a 15-year basic operating lease term plus four separate 5-year renewal options. At December 25, 2016
and December 27, 2015, $0.1 million and $0.1 million of the deferred gain was recorded in other accrued liabilities, respectively,
and $1.5 million and $1.7 million of the deferred gain was recorded in other liabilities, respectively, on the Consolidated Balance
Sheets. The gains will be recognized into income as an offset to rent expense over the life of the related lease agreements.
4. ACQUISITIONS
St. Louis - June 29, 2015
On June 29, 2015, the Company completed the acquisition of substantially all of the assets of A Sure Wing, LLC, a Missouri
limited liability company (“ASW”). The assets acquired consist primarily of 18 existing BWW restaurants, 15 in Missouri and
three in Illinois. As consideration for the acquisition of the assets, the Company paid $54.0 million in cash at closing, subject to
adjustment for cash on hand, inventory and certain prorated items. The Seller reimbursed the Company for one-half of all fees
48
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
imposed by BWLD under its franchise agreements for the transfer of these restaurants. The acquisition not only provides greater
geographic diversity to the Company’s restaurant portfolio, but also control of an entire market, as no other franchisee or BWLD
restaurants compete in the St. Louis metropolitan area.
The following table summarizes the fair values of net assets acquired and liabilities assumed:
Working capital .......................................................................................................................................... $
Fixed assets .................................................................................................................................................
Intangible assets ..........................................................................................................................................
Favorable lease ...........................................................................................................................................
Unfavorable lease .......................................................................................................................................
Goodwill .....................................................................................................................................................
Net Cash paid for acquisition .................................................................................................................. $
413,232
13,993,000
505,000
112,344
(58,797)
39,098,451
54,063,230
The excess of the purchase price over the aggregate fair value of assets acquired is allocated to goodwill, which will be deductible
for tax purposes. The results of operations of these locations are included in our Consolidated Statements of Operations from the
date of acquisition.
The following table summarizes the unaudited pro forma financial information from continuing operations as if the acquisition
had occurred at the beginning of the fiscal year ended December 27, 2015:
Revenue .................................................................................................................................................... $
Net income................................................................................................................................................
Basic net income per share .......................................................................................................................
Diluted net income per share ....................................................................................................................
December 27, 2015
165,795,995
435,110
0.02
0.02
The results of operations from the acquisition are included in the Company's results beginning June 29, 2015. The actual amounts
of revenue and net income that are included in continuing operations in the accompanying Consolidated Statements of Operations
for the period of June 29, 2015 to December 27, 2015 is $20.9 million and $25,095, respectively. For additional information
pertaining to the ASW acquisition refer to the 8-K/a filed on September 3, 2015.
5. UNCONSOLIDATED VARIABLE INTEREST ENTITIES
After the Spin-Off of Bagger Dave’s and the related discontinuation of its operations described in Note 2, the Company remains
involved with certain activities that result in Bagger Dave’s being considered a variable interest entity (VIE). This conclusion
results primarily from the existence of guarantees by the Company of certain Bagger Dave’s leases as described below under
"Lease Guarantees". While the Company holds a variable interest in Bagger Dave’s, it is not considered to be its primary
beneficiary
because it does not have the power to direct the activities of Bagger Dave’s. Specifically, we considered the fact that, although
two of the Company’s board members are currently also on Bagger Dave’s board and a third Bagger Dave’s director is currently
also an executive officer of the Company, there are no agreements in place that require these board members and executive
officer to vote in the interests of the Company. In other words, these board members and executive officer do not represent the
Company in their capacity as Bagger Dave’s directors. Furthermore, these directors remain on the board of Bagger Dave’s so
long as the shareholders annually elect them. At any time, these board members can be replaced by a vote of the Bagger Dave’s
shareholders. As a result, the Company does not consolidate the VIE.
Lease Guarantees
At December 25, 2016 the Company is a guarantor for eighteen (18) leases, two of which now relate to an unaffiliated party. In
the event the respective lessees cannot make their lease payments, the Company may become responsible for the payments under
its guarantee.
49
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with ASC 460, Guarantees, the Company evaluated its liability from the Bagger Dave's lease guarantees first by
estimating the non-contingent component representing the estimated fair market value of the guarantees at inception, and
recorded a liability in the amount of $0.3 million as of December 25, 2016, which is included in other liabilities on the
Consolidated Balance Sheet. No liability had previously been recorded as a result of the affiliate relationship between the
Company and Bagger Dave’s.
Secondly, the Company considered the contingent component of the guarantees and concluded that, as of December 25, 2016,
no loss exposure under the guarantees was probable because, among other things, each of the Bagger Dave's restaurants subject
to the leases is either currently operating or the lease has been assigned or sublet to another tenant who is responsible for, and
making, the lease payments.
The Company has determined that its maximum exposure resulting from the lease guarantees includes approx. $9.8 million of
future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance
requirements under the leases. The terms and conditions of the guarantees vary, and each guarantee has an expiration date which
may or may not correspond with the end of the underlying lease term. These expiration dates range from one (1) year to thirteen
(13) years as of December 25, 2016. In the event that the Company is required to perform under any of its lease guarantees, we
do not believe a liability to the Company would be material because we would first seek to minimize its exposure by finding a
suitable tenant to sub-lease the space. In many cases, a replacement tenant can be found and the lessor could agree to release the
Company from its future guarantee obligation. During 2015, 11 Bagger Dave’s locations were closed, 9 of which had DRH lease
guarantees. Of the 9 guaranteed leases, new tenants were found to step into the Company’s obligations for 5 locations in 3 to 14
months from the date of closure, 3 guarantees expired or were terminated, and 1 remains an obligation of the Company. In
reaching our conclusion, we also considered the following:
●
●
●
●
the financial condition of Bagger Dave’s, including its ability to service the lease payments on the locations it continues
to operate;
its recent history of incurring operating losses, along with the more recent trends in its business after completing the
closure of 11 underperforming locations and rationalizing the cost structure both of its remaining 18 restaurants and its
general and administrative costs;
its liquidity position and the actions available to it should its liquidity deteriorate to such a degree that its ability to
service required lease payments is threatened; and
the actions available to the Company to avoid or mitigate potential losses should Bagger become unable to service one
or more of the leases that the Company guarantees.
50
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a detailed listing of all Bagger Dave's leases that include a guarantee by the Company as of December 25, 2016:
Location of lease
Status of
location
Guarantee
expiry date
Liability recognized
on balance sheet
Future guaranteed
lease payments
Grandville, MI ..................................................... Closed
Holland, MI ......................................................... Closed
Bloomfield, MI .................................................... Open
Shelby Township, MI .......................................... Open
West Chester Township, MI ................................ Open
Woodhaven, MI ................................................... Open
Traverse City, MI ................................................ Open
Fort Wayne, IN .................................................... Open
Grand Blanc, MI .................................................. Open
Centerville, MI .................................................... Open
Chesterfield Township, MI .................................. Open
E. Lansing, MI ..................................................... Open
Birch Run, MI ...................................................... Open
Berkley, MI.......................................................... Open
Cascade Township, MI ........................................ Open
Avon, IL .............................................................. Closed
Greenwood, IL ..................................................... Closed
Canton, MI ........................................................... Open
05/12/17
10/09/17
01/14/18
01/31/18
02/01/18
11/30/18
01/31/19
01/31/19
01/31/20
11/30/20
12/31/20
09/10/21
12/31/24
06/08/29
06/08/29
06/30/29
06/30/29
06/30/30
$
893 $
2,101
2,788
2,623
2,866
4,426
5,887
5,424
6,759
13,293
8,092
2,334
23,557
32,532
29,856
48,658
50,372
63,541
Totals ..................................................................
$
306,000 $
6. PROPERTY AND EQUIPMENT, NET
Property and equipment are comprised of the following:
28,698
67,500
89,583
84,270
92,083
142,217
189,167
174,273
217,167
427,135
260,000
75,000
756,925
1,045,320
959,334
1,563,484
1,618,560
2,041,689
9,832,405
Equipment.......................................................................................................... $
Furniture and fixtures ........................................................................................
Leasehold improvements ...................................................................................
Restaurant construction in progress ...................................................................
Total ...................................................................................................................
Less accumulated depreciation ..........................................................................
Property and equipment, net .......................................................................... $
December 25, 2016 December 27, 2015
26,547,394
6,426,708
58,252,782
782,219
92,009,103
(32,736,492)
59,272,611
29,426,476 $
7,275,923
63,449,082
94,595
100,246,076
(43,616,045 )
56,630,031 $
Depreciation expense for the year ended December 25, 2016 was $18.1 million, of which $14.7 million related to continuing
operations and $3.4 million related to discontinued operations. Depreciation expense for the year ended December 27, 2015 was
$16.6 million, of which $11.9 million related to continuing operations and $4.7 million related to discontinued operations.
51
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
December 25, 2016 December 27, 2015
Amortized intangible assets
Franchise fees .................................................................................................... $
Trademark..........................................................................................................
Non-compete .....................................................................................................
Favorable operating leases .................................................................................
Loan fees ...........................................................................................................
Total ...................................................................................................................
1,290,642 $
2,500
76,560
351,344
368,083
2,089,129
1,278,142
2,500
76,560
351,344
368,083
2,076,629
Less accumulated amortization ..........................................................................
Amortized intangible assets, net .....................................................................
(718,517 )
1,370,612
(510,875)
1,565,754
Unamortized intangible assets
Liquor licenses ...................................................................................................
Total intangible assets, net .............................................................................. $
1,295,752
2,666,364 $
1,279,209
2,844,963
Amortization expense for both years ended December 25, 2016 and December 27, 2015 was $0.1 million. Amortization of
favorable/unfavorable leases and loan fees are reflected as part of occupancy and interest expense, respectively. Loan fees written
off to interest expense during both years ended December 25, 2016 and December 27, 2015 was $0.1 million.
Based on the current intangible assets and their estimated useful lives, future intangible-related expense for the next five years
and thereafter is projected as follows:
Year
2017 ............................................................................................................................................................ $
2018 ............................................................................................................................................................
2019 ............................................................................................................................................................
2020 ............................................................................................................................................................
2021 ............................................................................................................................................................
Thereafter ...................................................................................................................................................
Total ........................................................................................................................................................... $
Amount
175,281
173,606
173,048
135,811
87,094
625,772
1,370,612
The aggregate weighted-average amortization period for intangible assets is 9.9 years.
52
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. OTHER ACCRUED LIABILITES
Sales tax payable ................................................................................................... $
Accrued interest .....................................................................................................
Accrued property taxes ..........................................................................................
Other ......................................................................................................................
December 25, 2016 December 27, 2015
854,264
495,865
320,189
565,033
816,215 $
442,976
490,809
892,269
Total accrued other liabilities .......................................................................... $
2,642,269 $
2,235,351
9. RELATED PARTY TRANSACTIONS
Fees for monthly accounting and financial statement services are paid to an entity owned by a member of the DRH Board of
Directors and a stockholder of the Company. Fees paid during the years ended December 25, 2016 and December 27, 2015 were
$64,296 and $596,856, respectively. As of December 25, 2016 and December 27, 2015, we had unpaid fees of $0 and $14,631,
respectively.
10. LONG-TERM DEBT
Long-term debt consists of the following obligations:
$120.0 million term loan - the rate at December 25, 2016 and December 27, 2015 was
4.12% and 3.86%, respectively. ....................................................................................... $
99,698,616 $
115,833,333
December 25, 2016 December 27, 2015
$30.0 million development line of credit, converted to $18.2 million facility term loan in
December 2016 - the rate at December 25, 2016 and December 27, 2015 was 4.21%
and 3.86%, respectively. ...................................................................................................
18,199,476
11,090,323
$5.0 million revolving line of credit - the rate at December 25, 2016 was 6.25%. ..............
4,000,000
—
Unamortized discount and debt issuance costs ....................................................................
(712,072)
(667,666)
Total debt .............................................................................................................................
121,186,020
126,255,990
Less current portion .............................................................................................................
(11,307,819)
(9,891,825)
Long-term debt, net of current portion ........................................................................... $
109,878,201 $
116,364,165
On June 29, 2015, the Company entered into a $155.0 million senior secured credit facility with a syndicate of lenders led by
Citizens (the “June 2015 Senior Secured Credit Facility”) with a senior lien on all the Company’s personal property and
fixtures. The June 2015 Senior Secured Credit Facility consists of a $120.0 million term loan (the “June 2015 Term Loan”), a
$30.0 million, subsequently amended to $23.0 million (see amendment details immediately following this paragraph),
development line of credit (the “June 2015 DLOC”) and a $5.0 million (see amendment details immediately following this
paragraph) revolving line of credit (the “June 2015 RLOC”). The Company used approximately $65.5 million of the June 2015
Term Loan to refinance existing outstanding debt and used approximately $54.0 million of the June 2015 Term Loan to finance
the acquisition discussed in Note 4. The remaining balance of the June 2015 Term Loan, approximately $0.5 million, was used
to pay the fees, costs, and expenses associated with the closing of the June 2015 Senior Secured Credit Facility. The June 2015
Term Loan is for a period of five years.
53
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 23, 2016, the Company entered into an amendment agreement for purposes of, among other things, releasing the
Bagger Dave’s entities as borrowers and releasing all related liens on the Bagger Dave’s assets. In addition, the amendment (a)
converted the amounts then outstanding under the June 2015 DLOC to a development facility term loan (the “DF Term Loan”),
(b) canceled $6.8 million previously available under the June 2015 DLOC, and (c) extended the maturity date on the remaining
$5.0 million under the June 2015 DLOC to June 29, 2018.
Payments of principal are based upon a 12-year straight-line amortization schedule, with monthly principal payments totaling
$833,333 on the June 2015 Term and $126,385 on the DF Term Loan, plus accrued interest. The entire remaining outstanding
principal and accrued interest on the June 2015 Term Loan and the DF Term Loan is due and payable on the maturity date of
June 29, 2020. Availability under the June 2015 DLOC is subject to certain limitations relative to actual development costs, and
outstanding balances convert into an additional DF Term Loan based on the terms of the agreement, at which time monthly
principal payments will be due based on a 12-year straight-line amortization schedule, plus interest, through maturity on June
29, 2020. There were no balances outstanding under the June 2015 DLOC at December 25, 2016. If the DLOC is not fully drawn
by the end of the two years term, the outstanding principal balance becomes due based on the 12- year amortization period with
final payment due June 29, 2020. The June 2015 RLOC is for a term of five years.
The interest rate for each of the loans, as selected by the borrower, is based upon either a LIBOR or base rate (generally Prime
or Fed Funds) plus an applicable margin, which ranges from 2.25% to 3.5% for LIBOR loans and from 1.25% to 2.5% for base
rate loans, depending on the lease adjusted leverage ratio as defined in the agreement
Fees related to the term debt are recorded as debt discount and fees related to the DLOC and RLOC are capitalized as intangible
assets. Debt issuance costs represents legal, consulting and financial costs associated with debt financing. As a result of the
December 2016 Amendment, the Company incurred $197,889 of debt issuance costs recorded as a part of debt discount. Debt
discount and debt issuance cost related to term debt, net of accumulated amortization, totaled $712,072 and $667,666, at
December 25, 2016 and December 27, 2015, respectively. The unamortized portion of capitalized debt issuance costs related to
the DLOC and RLOC totaled $244,336 and $324,256, at December 25, 2016 and December 27, 2015, respectively. Debt discount
and debt issuance cost are amortized over the life of the debt and are recorded in interest expense using the effective interest
method.
Based on the long-term debt terms that existed at December 25, 2016, the scheduled principal maturities, net of unamortized
discount, for the next five years and thereafter are summarized as follows:
2017 ............................................................................................................................................................ $
2018 ............................................................................................................................................................
2019 ............................................................................................................................................................
2020 ............................................................................................................................................................
2021 ............................................................................................................................................................
Thereafter ...................................................................................................................................................
Amount
11,307,819
11,319,774
11,319,034
87,239,393
—
—
Total ........................................................................................................................................................... $
121,186,020
Interest expense was $5.8 million and $4.2 million for the years ended December 25, 2016 and December 27, 2015, respectively.
The current debt agreement contains various customary financial covenants generally based on the performance of the specific
borrowing entity and other related entities. The more significant covenants consist of a minimum debt service coverage ratio and
a maximum lease adjusted leverage ratio. As of December 25, 2016 the Company was in compliance with the loan covenants.
At December 25, 2016, the Company has six interest rate swap agreements to fix a portion of the interest rates on its variable
rate debt. The swap agreements all qualify for hedge accounting. Under the swap agreements, the Company receives interest at
the one-month LIBOR and pays a fixed rate. Since these swap agreements qualify for hedge accounting, the changes in fair value
are recorded in other comprehensive income (loss), net of tax. See Note 1 and Note 17 for additional information pertaining to
interest rate swaps.
54
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the fair values of derivative instruments designated as cash flow hedges which were outstanding:
December 25, 2016
Interest rate swaps
Rate
April 2012 ................... 1.4%
October 2012 ............... 0.9%
July 2013 ..................... 1.4%
May 2014 .................... 1.5%
January 2015 ............... 1.8% December 2019
August 2015 ................ 2.3%
Expires
April 2019
October 2017
April 2018
April 2018
June 2020
5,333,333 $
2,357,143
4,761,905
9,285,714
21,119,048
49,696,875
Notional amounts Derivative assets
$
Derivative liabilities
21,037
723
18,949
58,359
271,144
1,045,279
— $
—
—
—
—
—
Total .................................
$
92,554,018 $
— $
1,415,491
December 27, 2015
Interest rate swaps
Rate
April 2012 ................... 1.4%
October 2012 ............... 0.9%
July 2013 ..................... 1.4%
May 2014 .................... 1.5%
January 2015 ............... 1.8% December 2019
August 2015 ................ 2.3%
Expires
April 2019
October 2017
April 2018
April 2018
June 2020
7,619,048 $
3,214,286
8,190,476
11,428,571
20,547,619
49,696,875
Notional amounts Derivative assets
$
Derivative liabilities
56,280
3,027
60,164
122,716
415,459
867,609
— $
—
—
—
—
—
Total .................................
$
100,696,875 $
— $
1,525,255
11. SHARE-BASED COMPENSATION
The Company established a Stock Incentive Plan in 2011 (“Stock Incentive Plan”) to attract and retain directors, consultants, and
team members and to align their interests with the interests of the Company’s shareholders through the opportunity for increased
stock ownership. The plan permits the grant and award of 750,000 shares of common stock by way of stock options and/or
restricted stock. Stock options must be awarded at exercise prices at least equal to or greater than 100.0% of the fair market
value of the shares on the date of grant. The options will expire no later than 10 years from the date of grant, with vesting terms
to be defined at grant date, ranging from a vesting schedule based on performance to a vesting schedule that extends over a period
of time as selected by the Compensation Committee of the Board of Directors (the “Committee”) or another committee as
determined by the Board of Directors. The Committee also determines the grant, issuance, retention, and vesting timing and
conditions of awards of restricted stock. The Committee may place limitations, such as continued employment, passage of time,
and/or performance measures, on restricted stock. Awards of restricted stock may not provide for vesting or settlement in full of
restricted stock over a period of less than one year from the date the award is made.
Restricted stock awards
During fiscal 2016 and 2015, restricted shares were issued to certain team members at a weighted-average grant date fair value of
$1.47 and $3.56, respectively. Based on the Stock Award Agreement, shares typically vest ratably over either a one or three year
period, or on the third anniversary of the grant date, as determined by the Committee. Unrecognized share-based compensation
expense of $0.5 million and $0.6 million at December 25, 2016 and December 27, 2015, respectively, will be recognized over
the remaining weighted-average vesting period of 1.9 years. The total fair value of shares vested during years ended December 25,
2016 and December 27, 2015 was $0.3 million and $0.2 million, respectively. Under the Stock Incentive Plan, there are 69,791
and 365,051 shares available for future awards at December 25, 2016 and December 27, 2015, respectively.
55
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the restricted stock transactions for fiscal 2016:
Unvested, December 27, 2015 ..........................................................................................................
Granted ...............................................................................................................................................
Vested .................................................................................................................................................
Vested shares tax portion ....................................................................................................................
Forfeited .............................................................................................................................................
Unvested, December 25, 2016 ..........................................................................................................
Number of Restricted
Stock Shares
241,124
398,164
(72,966)
(8,114)
(84,817)
473,391
As a result of the Spin-Off of Bagger Dave’s, all restricted shares previously awarded to Bagger Dave’s employees were vested
on a pro rata basis for time served through December 25, 2016, and were otherwise forfeited.
The following table presents the restricted stock transactions for fiscal 2015:
Unvested, December 28, 2014 ..........................................................................................................
Granted ...............................................................................................................................................
Vested .................................................................................................................................................
Vested shares tax portion ....................................................................................................................
Forfeited .............................................................................................................................................
Unvested, December 27, 2015 ..........................................................................................................
Number of Restricted
Stock Shares
164,867
131,752
(45,521)
(1,387)
(8,587)
241,124
On July 30, 2010, prior to the Stock Incentive Plan, DRH granted options for the purchase of 210,000 shares of common stock
to the directors of the Company. These options are fully vested and originally expired six years from issuance. On August 13,
2015, 30,000 shares were exercised at a price of $2.50 per share. The intrinsic value of the options exercised was $6,300. On
July 28, 2016, the Stock Option Agreement of 2010 was amended to extend the expiration date of these options to July 31,
2019. The options can be exercised at a price of $2.50 per share. At December 25, 2016, 180,000 shares of authorized common
stock are reserved for issuance to provide for the exercise of the remaining options. The intrinsic value of outstanding options
was negligible as of both December 25, 2016 and December 27, 2015.
Employee stock purchase plan
The Company also reserved 250,000 shares of common stock for issuance under the Employee Stock Purchase Plan (“ESPP”).
The ESPP is available to team members subject to employment eligibility requirements. Participants may purchase common
stock at 85.0% of the lesser of the start or end price for the offering period. The plan has four offering periods, each start/end
dates coincide with the fiscal quarter and are awarded on the last day of the offering period. During the December 25, 2016
and December 27, 2015 we issued 28,264 and 21,623 shares, respectively. Under the ESPP, there are 184,325 shares available
for future purchase at December 25, 2016.
Share repurchase program
In March 2015, the Board of Directors authorized a program to repurchase up to $1.0 million of the Company's common stock
in open market transactions at market prices or otherwise. In April 2015, we repurchased $0.1 million in outstanding shares,
representing 24,500 shares. The weighted average purchase price per share was $4.01. Upon receipt, the repurchased shares were
retired and restored to authorized but unissued shares of common stock.
56
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-based compensation
Share-based compensation of $0.4 million and $0.4 million, was recognized during the years ended December 25, 2016 and
December 27, 2015, respectively, as compensation costs in the Consolidated Statements of Operations and as additional paid-in
capital on the Consolidated Statements of Stockholders' Equity to reflect the fair value of shares vested.
Preferred stock
The Company has authorized 10,000,000 shares of preferred stock at a par value of $0.0001. No preferred shares are issued or
outstanding as of December 25, 2016. Any preferences, rights, voting powers, restrictions, dividend limitations, qualifications,
and terms and conditions of redemption shall be set forth and adopted by a Board of Directors' resolution prior to issuance of any
series of preferred stock.
12. INCOME TAXES
As of and for the fiscal year ended December 27, 2015, the 2015 provision for income taxes (benefit) was reallocated among
continuing operations and discontinued operations based upon a revised computation of income tax from continuing operations
and a reallocation of the difference to discontinued operations as required by ASC 740. Reallocating the majority of the 2015 tax
benefit to discontinued operations is consistent with the split of pretax income (loss), using the same assumptions and estimates
originally used to prepare the provisions, and considering that the Bagger Dave's entities were separate legal entities and
subsidiaries of the consolidated group. The allocation of income taxes (benefit) for the fiscal year ended December 25, 2016 was
determined based on pretax income and the outcome of a restructuring completed prior to the Spin-Off which effectively triggered
a tax status change of the legal entities making up the Bagger Dave's business in a manner which enables the continuing business
parent entity to retain the majority of the tax benefits from losses and credits. Following the status change, the Company
contributed all of the hard assets and liabilities of the Bagger Dave's entities into a newly formed entity, Bagger Dave's Burger
Tavern, Inc., the stock of which was ultimately spun-off to shareholders. The income tax benefit allocated to discontinued
operations for 2016 related to benefits generated during the period between the date that the Company contributed the hard assets
and liabilities of the Bagger Dave's entities to Bagger Dave's Burger Tavern, Inc. and the date that the Spin-Off was completed.
A valuation allowance reserve was deemed necessary for the net deferred tax assets of Bagger Dave's Burger Tavern, Inc., and
the resulting deferred tax expense was allocated to continuing operations as required by ASC 740.
The income tax benefit from continuing operations consists of the following components for the fiscal years ended December 25,
2016 and December 27, 2015:
Fiscal Years Ended
December 25, 2016
December 27, 2015
Federal
Current .................................................................................................... $
Deferred ..................................................................................................
19,911 $
(1,823,443 )
State
Current ....................................................................................................
Deferred ..................................................................................................
Income tax benefit ................................................................................... $
(81,500 )
(385,760 )
(2,270,792) $
—
(80,469)
—
(3,045)
(83,514)
57
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The benefit for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to
loss before income loss. The items causing this difference are as follows:
Fiscal Years Ended
December 25, 2016
December 27, 2015
Income tax expense (benefit) at federal statutory rate ............................... $
State income tax, net of federal benefit .....................................................
Permanent differences ...............................................................................
Tax credits .................................................................................................
Benefit resulting from restructuring ..........................................................
Change in valuation allowance (Bagger Dave's) .......................................
Income tax benefit ................................................................................... $
465,207 $
132,740
70,206
(1,748,632 )
(3,016,513 )
1,826,200
(2,270,792) $
(200,728)
1,592
1,508,666
(1,393,044)
—
—
(83,514)
For the fiscal year ended December 25, 2016, the Company recorded an expense of $1.8 million relating to Bagger Dave's
deferred tax assets that were not expected to be realized. Due to the restructuring involving a tax status change that occurred prior
to the Spin-Off, the continuing operations retained tax benefits that were generated by discontinued operations amounting to $3.0
million for the fiscal year ended December 25, 2016.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. The Company expects the deferred tax assets to
be fully realizable prior to expiration. Significant components of the Company's deferred income tax assets and liabilities are
summarized as follows:
December 25, 2016
December 27, 2015
Deferred tax assets:
Net operating loss carry-forwards .......................................................... $
Deferred rent expense .............................................................................
Start-up costs ..........................................................................................
Tax credit carry-forwards .......................................................................
Interest rate swaps ..................................................................................
Sale leaseback deferred gain ...................................................................
Share-based compensation ......................................................................
Accrued closure liabilities ......................................................................
Other .......................................................................................................
Total deferred tax assets ......................................................................... $
11,223,494 $
752,897
129,152
6,559,392
481,267
629,924
239,925
36,432
967,812
21,020,295 $
Deferred tax liabilities:
Tax depreciation in excess of book.........................................................
Goodwill amortization in excess of book ...............................................
Total deferred tax liabilities ....................................................................
2,366,739
2,402,628
4,769,367
3,315,739
124,764
138,832
4,522,041
518,589
579,600
457,680
31,281
375,758
10,064,284
4,486,770
1,208,831
5,695,601
Net deferred income tax assets ............................................................... $
16,250,928 $
4,368,683
In accordance with the provisions of ASC 740, a valuation allowance is established when it is more likely than not that some
portion of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or
the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider
the reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. On December 25, 2016 we
completed the Spin-Off of Bagger Dave’s, which had previously generated significant pre-tax losses. After the Spin-Off, the
majority of the net deferred tax assets were retained by the Company, which in its continuing operations has a history of
58
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
profitability and is expected to continue to generate pre-tax income in the future. This expected operating performance combined
with the planned opening of additional BWW restaurants will provide future taxable income that will enable the Company to
utilize the tax benefits prior to their expirations, which begin in 2028. Management continually reviews the likelihood
that deferred tax assets will be realized and the Company recognizes these benefits only as reassessment indicates that it is more
likely than not that such tax benefits will be realized. There was no valuation allowance recorded for both fiscal years ended
December 25, 2016 and December 27, 2015. While there is no allowance recorded against the deferred tax assets of the continuing
operations, the Company incurred a one-time charge against the benefit for income taxes of $1.8 million. This charge is the result
of certain deferred tax assets relating to discontinued operations that were determined to be unrealizable by Bagger Dave's and
is allocable to continuing operations as required by ASC 740.
The Company expects to use the net operating loss and general business tax credit carryforwards before their 20-year expiration.
A significant portion of the net operating loss carry forwards were created in the past three years with expiration dates between
2034 and 2036. As of December 25, 2016 and December 27, 2015, the Company has available federal and state net operating
loss carryforwards of approximately $33.0 million and $21.4 million, respectively. Of these amounts, approximately $0.7 million
and $0.5 million, respectively, relates to share-based compensation tax deductions in excess of book compensation expense. Net
operating losses relating to such benefits are not included in the table above. General business tax credits of $6.6 million will
expire between 2028 and 2037.
The Company applies the provisions of ASC 740 regarding the accounting for uncertainty in income taxes. There are no amounts
recorded on the Company's consolidated financial statements for uncertain positions. The Company classifies all interest and
penalties as income tax expense. There are no accrued interest amounts or penalties related to uncertain tax positions as of
December 25, 2016.
The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions, and is subject to
U.S. Federal, state, and local income tax examinations for tax years 2012 through 2015. The Company is currently under IRS
exam for the 2014 fiscal year.
13. OPERATING LEASES
The Company's lease terms generally include renewal options, and frequently require us to pay a proportionate share of real
estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental
payments based on sales thresholds.
Total rent expense was $8.7 million and $7.0 million for the fiscal years ended December 25, 2016 and December 27, 2015,
respectively.
Scheduled future minimum lease payments for each of the five years and thereafter for non-cancelable operating leases for
existing restaurants with initial or remaining lease terms in excess of one year at December 25, 2016 are summarized as follows:
Year
2017 ............................................................................................................................................................ $
2018 ............................................................................................................................................................
2019 ............................................................................................................................................................
2020 ............................................................................................................................................................
2021 ............................................................................................................................................................
Thereafter ...................................................................................................................................................
Total ........................................................................................................................................................... $
Amount
8,826,295
8,421,826
7,700,606
7,561,189
6,691,348
30,114,850
69,316,114
59
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled future minimum lease payments for each of the five years and thereafter for non-cancelable operating leases for
restaurants under development, with initial or remaining lease terms in excess of one year at December 25, 2016 are summarized
as follows:
Year
2017 ............................................................................................................................................................ $
2018 ............................................................................................................................................................
2019 ............................................................................................................................................................
2020 ............................................................................................................................................................
2021 ............................................................................................................................................................
Thereafter ...................................................................................................................................................
Total ........................................................................................................................................................... $
Amount
87,500
150,000
150,000
150,000
150,000
2,793,250
3,480,750
14. COMMITMENTS AND CONTINGENCIES
Refer to Note 5 for a discussion of lease guarantees provided by the Company.
The Company’s ADA requires DRH to open 42 restaurants by April 1, 2021. As of December 25, 2016, we have opened 29 of
the restaurants required by the ADA. The Company has one additional restaurant under development and is currently in
discussion with BWLD with respect to both the timing and desirability of building the remaining 12 restaurants pursuant to the
current ADA.
The Company is required to pay BWLD royalties (5.0% of net sales) and advertising fund contributions (3.00% - 3.15% of net
sales). In addition, the Company is required to spend an additional 0.25% - 0.5% of regional net sales related to advertising
cooperatives for certain metropolitan markets for the term of the individual franchise agreements. The Company incurred $8.3
million and $7.2 million in royalty expense for the fiscal years ended December 25, 2016 and December 27, 2015, respectively.
Advertising fund contribution expenses were $5.5 million and $4.6 million for the fiscal years ended December 25, 2016 and
December 27, 2015, respectively. Amounts are recorded in Other operating costs on the Consolidated Statement of Operations.
The Company is required by its various BWLD franchise agreements to modernize the restaurants during the term of the
agreements. The individual agreements generally require improvements between the fifth and tenth year to meet the most current
design model that BWLD has approved. The modernization costs for a restaurant are expected to range from $0.6 million to
$0.8 million depending on an individual restaurant's needs.
In 2016 and 2015, we had a defined contribution 401(k) plan whereby eligible team members could contribute pre-tax wages in
accordance with the provisions of the plan. Each year the Company considers a discretionary contribution to the 401(k) plan. For
fiscal 2016 and 2015, the discretionary match was 100.0% of 2.0% contributed, which equated to $0.2 million in both years.
In connection with the Spin-Off of Bagger Dave’s, the Company’s Board of Directors approved a cash distribution of $2.0 million
to $3.0 million to Bagger Dave’s within twelve months of the transaction date. On December 25, 2016, the Company contributed
$2.0 million in cash to Bagger Dave’s as part of the Spin-Off. The additional $1.0 million of funding by the Company would
only be considered if deemed necessary, and would only be made if approved by the Company’s lenders.
In October 2015, the Company settled two collective actions alleging violations of fair labor standards acts and minimum wage
laws. The first action, Tammy Wolverton et al v. Diversified Restaurant Holdings, Inc. et al, was filed on March 31, 2014, in the
United States District Court for the Eastern District of Michigan and made allegations regarding employees in Michigan. The
second action, Lisa Murphy & Andre D. Jordan, Jr. v. Diversified Restaurants Holdings, Inc., et al, was filed on May 19, 2014,
in United States District Court for the Northern District of Illinois, and made allegations involving employees in Illinois, Indiana
and Florida.
The actions, in which the plaintiffs were represented by the same legal counsel, contained mirror allegations that tipped servers
and bartenders in the Company’s restaurants were required to perform general preparation and maintenance duties, or “non-
tipped work,” for which they should be compensated at the minimum wage.
60
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, the Company and A Sure Wing, LLC settled a third collective action that was filed on December 18, 2015
against AMC Wings, Inc. and the Company in the U.S. District Court for the Southern District of Illinois by plaintiffs, David,
et. al. A Sure Wing, LLC, the seller of the 18 St. Louis BWW restaurants acquired by the Company on June 29, 2015, was also
named as a defendant. Plaintiffs primarily alleged that former and current tipped workers at the above-mentioned companies
were assigned to perform tasks outside the scope of their tipped positions, in violation of Illinois and federal law. The Company
filed an indemnity claim against A Sure Wing, LLC and received a reciprocal indemnity claim from A Sure Wing, LLC.
We believe that the Company’s wage and hour policies comply with the law and that we had meritorious defenses to the
substantive claims in each of these matters. However, in light of the potential cost and uncertainty involved, we settled with the
plaintiffs from the October 2015 collective actions for $1.9 million plus payroll taxes. A Sure Wing, LLC settled with the
plaintiffs in the December 2015 matter and funded the settlement. As a result, the Company released its indemnity claim against
A Sure Wing, LLC.
Additionally, the Company is subject to ordinary and routine legal proceedings, as well as demands, claims and threatened
litigation, which arise in the ordinary course of its business. The ultimate outcome of any litigation is uncertain. We have insured
and continue to insure against most of these types of claims. A judgment on any claim not covered by or in excess of our insurance
coverage could materially adversely affect our financial condition or results of operations.
15. EARNINGS PER COMMON SHARE
The following is a reconciliation of basic and fully diluted earnings per common share for the fiscal years ended December 25,
2016 and December 27, 2015:
Income (loss) from continuing operations ......................................................... $
Loss from discontinued operations ....................................................................
Net loss .............................................................................................................. $
December 25, 2016 December 27, 2015
(506,862)
(15,685,630)
(16,192,492)
3,639,048 $
(9,641,529 )
(6,002,481 ) $
Weighted-average shares outstanding ...............................................................
Effect of dilutive securities ................................................................................
Weighted-average shares outstanding - assuming dilution ..........................
26,491,549
—
26,491,549
26,211,669
—
26,211,669
Earnings per common share from continuing operations .................................. $
Earnings per common share from discontinued operations ...............................
Earnings per common share ........................................................................... $
0.14 $
(0.37 )
(0.23 ) $
Earnings per common share - assuming dilution - from continuing
operations .......................................................................................................
0.14
Earnings per common share - assuming dilution - from discontinued
operations .......................................................................................................
Earnings per common share - assuming dilution .......................................... $
(0.37 )
(0.23 ) $
(0.02)
(0.60)
(0.62)
(0.02)
(0.60)
(0.62)
For the year ended December 25, 2016 and December 27, 2015, 473,391 and 241,124 shares, respectively, of unvested restricted
stock were excluded from the calculation of diluted earnings per share because such shares were anti-dilutive.
16. SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest was $5.5 million and $3.1 million during the years ended December 25, 2016 and December 27, 2015,
respectively. Cash paid for income taxes was $0.1 million during the years ended December 25, 2016 and December 27, 2015,
respectively.
61
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The guidance for fair value measurements, FASB ASC 820, Fair Value Measurements and Disclosures, establishes the
authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures
regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs
as follows:
● Level 1 Quoted market prices in active markets for identical assets and liabilities;
● Level 2
Inputs, other than level 1 inputs, either directly or indirectly observable; and
● Level 3 Unobservable inputs developed using internal estimates and assumptions (there is little or no market data) which
reflect those that market participants would use.
As of December 25, 2016 and December 27, 2015, respectively, our financial instruments consisted of cash and cash equivalents;
including money market funds, accounts receivable, accounts payable, interest rate swaps, lease guarantee liability, and debt.
The fair value of cash and cash equivalents, accounts receivable, and accounts payable approximate carrying value, due to their
short-term nature.
The fair value of our interest rate swaps is determined based on valuation models, which utilize quoted interest rate curves to
calculate the forward value and then discount the forward values to the present period. The Company measures the fair value
using broker quotes which are generally based on market observable inputs including yield curves and the value associated with
counterparty credit risk. Our interest rate swaps are classified as a Level 2 measurement as these securities are not actively traded
in the market, but are observable based on transactions associated with bank loans with similar terms and maturities. See Note 1
and Note 10 for additional information pertaining to interest rates swaps.
The fair value of our lease guarantee liability is determined by calculating the present value of the difference between the
estimated rate at which the Company and Bagger Dave’s could borrow money in a duration similar to the underlying lease
guarantees. Our lease guarantees are classified as a Level 2 measurement as there is no actively traded market for such
instruments.
As of December 25, 2016 and December 27, 2015, our total debt was approximately $121.2 million and $126.3 million,
respectively, which approximated fair value because the applicable interest rates are adjusted frequently based on short-term
market rates (Level 2).
There were no transfers between levels of the fair value hierarchy during the fiscal years ended December 25, 2016 and
December 27, 2015, respectively.
The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 25,
2016:
FAIR VALUE MEASUREMENTS
Description
Level 1
Interest rate swaps .............................................. $
Lease guarantee liability ....................................
Level 2
(1,415,491) $
(306,000)
— $
—
Level 3
Asset/(Liability)
Total
(1,415,491)
(306,000)
— $
—
Total .................................................................... $
— $
(1,721,491) $
— $
(1,721,491)
62
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 27,
2015:
FAIR VALUE MEASUREMENTS
Description
Level 1
Level 2
Level 3
Cash equivalents .................................................. $
Interest rate swaps ...............................................
2,000,000 $
— $
—
(1,525,255)
Asset /
(Liability) Total
2,000,000
(1,525,255 )
— $
—
Total ..................................................................... $
2,000,000 $
(1,525,255) $
— $
474,745
18. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes each component of Accumulated Other Comprehensive Loss ("OCL"):
Year Ended December 25, 2016
Beginning balance ............................................................................... $
Gain recorded to other comprehensive income ...................................
Tax benefit (expense) ..........................................................................
Other comprehensive income ..............................................................
Interest Rate
Swaps
(1,006,667) $
109,764
(37,319)
72,445
Investments
— $
—
Total
(1,006,667 )
109,764
(37,319 )
72,445
Accumulated OCL ............................................................................. $
(934,222) $
— $
(934,222 )
Year Ended December 27, 2015
Interest Rate
Swaps
Investments
Total
Beginning balance ............................................................................... $
Gain (loss) recorded to other comprehensive loss ...............................
Tax benefit (expense) ..........................................................................
(171,352) $
(1,265,783)
430,468
(3,804) $
5,763
(1,959)
(175,156)
(1,260,020)
428,509
Other comprehensive income (loss) ....................................................
(835,315)
3,804
(831,511)
Accumulated OCL ............................................................................. $
(1,006,667) $
— $
(1,006,667)
63
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SUMMARY QUARTERLY FINANCIAL DATA (unaudited)
Fiscal Quarters
March 27,
2016
June 26,
2016
September 25,
2016
December 25,
2016
Revenue ................................................................ $
43,143,252 $
40,951,181 $
41,625,312 $
40,801,180
Operating profit (loss) .........................................
3,115,981
1,387,085
1,946,629
854,276
Income (loss) before income taxes ......................
1,710,783
(17,202)
519,205
(844,530)
Net income (loss) from continuing operations ... $
1,292,429 $
234,344 $
596,709 $
1,515,566
Net income (loss) from discontinued
operations .......................................................... $
(862,025) $
(416,770) $
(1,985,834) $
(6,376,900)
Net income (loss) .................................................. $
430,404 $
(182,426) $
(1,389,125) $
(4,861,334)
Basic earnings per share from:
Continuing operations ......................................
Discontinued operations ...................................
Basic net loss per share .......................................
Fully diluted earnings per share from:
Continuing operations ......................................
Discontinued operations ...................................
Fully diluted net loss per share ...........................
Weighted average number of common shares
outstanding
0.05
(0.03)
0.02
0.05
(0.03)
0.02
0.01
(0.02)
(0.01)
0.01
(0.02)
(0.01)
0.02
(0.07)
(0.05)
0.02
(0.07)
(0.05)
0.06
(0.24)
(0.18)
0.06
(0.24)
(0.18)
Basic ......................................................................
Diluted ...................................................................
26,298,034
26,298,034
26,379,065
26,379,065
26,625,615
26,625,615
26,664,409
26,664,409
64
DIVERSIFIED RESTAURANT HOLDINGS AND SUBSIDIARIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Quarters
March 29,
2015
June 28,
2015
September 27,
2015
December 27,
2015
Revenue ................................................................ $
31,852,089 $
29,610,702 $
41,033,963 $
42,303,292
Operating profit (loss) .........................................
3,115,605
(868,414)
311,877
279,417
Income (loss) before income taxes ......................
2,694,928
(728,452)
(1,498,159)
(1,058,693)
Net income (loss) from continuing operations ...
1,548,301
(496,127)
(915,059)
(643,977)
Net income (loss) from discontinued
operations ..........................................................
(1,285,659)
(2,822,216)
(2,666,476)
(8,911,279)
Net income (loss) .................................................. $
262,642 $
(3,318,343) $
(3,581,535) $
(9,555,256)
Basic earnings per share from:
Continuing operations ...................................... $
Discontinued operations ...................................
Basic net loss per share ....................................... $
Fully diluted earnings per share from:
Continuing operations ...................................... $
Discontinued operations ...................................
Fully diluted net loss per share ........................... $
Weighted average number of common shares
outstanding
0.06 $
(0.05)
0.01 $
0.06 $
(0.05)
0.01 $
(0.02) $
(0.11)
(0.13) $
(0.02) $
(0.11)
(0.13) $
(0.04) $
(0.10)
(0.14) $
(0.04) $
(0.10)
(0.14) $
(0.02)
(0.34)
(0.36)
(0.02)
(0.34)
(0.36)
Basic ......................................................................
Diluted ...................................................................
26,149,184
26,248,337
26,151,853
26,151,853
26,251,621
26,251,621
26,294,530
26,294,530
20. SUBSEQUENT EVENTS
None.
65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 25, 2016, an evaluation was performed under the supervision of and with the participation of our management,
including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our management, including our principal executive and principal financial
and accounting officers, concluded that our disclosure controls and procedures were effective as of December 25, 2016.
Evaluation of Internal Control and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rules 13a-15(f). There are inherent limitations in the effectiveness of any system of internal control.
Accordingly, even an effective system of internal control can provide only reasonable assurance with respect to financial
statement preparation.
Under the supervision and with the participation of our management, including our principal executive and principal financial
and accounting officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of
December 25, 2016. This evaluation was based on criteria for effective internal control over financial reporting described in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 Framework). Based on our evaluation under the framework in Internal Control — Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of December 25, 2016. Refer to the management's
report in Item 8 "Consolidated Financial Statements" of this Annual Report.
The Company is not required to have an audit of its internal control over financial reporting. As such, this annual report does not
include an attestation report of the Company’s registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to
Section 404(c) of the Sarbanes-Oxley Act.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the year ended
December 25, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and
effectiveness of established controls and procedures and the remediation of any deficiencies that may be identified during this
process.
ITEM 9B. OTHER INFORMATION
Not applicable.
66
Certain information required by this Part III is omitted from this report and is incorporated by reference to our Definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to
be held in 2016 (the “Proxy Statement”).
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the Proxy Statement.
Equity Compensation Plan Information
The following table sets forth information, as of December 25, 2016, with respect to compensation plans (including individual
compensation arrangements) under which our equity securities are authorized for issuance, aggregated as follows:
Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants and
rights
Weighted-
average
exercise
price of
outstanding
options,
warrants and
rights
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
—
180,000 $
N/A
2.50
69,791
N/A
Plan Category
Equity compensation plans approved by security holders 1 .................
Equity compensation plans not approved by security holders 2 ...........
1 In 2011, our Board of Directors and Stockholders approved the Stock Incentive Plan of 2011 (the “2011 Incentive Plan”)
authorizing the grant of equity-based incentives to employees. The 2011 Incentive Plan permits the grant and award of 750,000
shares of common stock by way of stock options and/or restricted stock.
2 On July 31, 2010, the Company granted options for the purchase of 210,000 shares of common stock to the directors of the
Company. These options vested ratably over a three-year period and were originally for a term of six years from issuance. On
July 28, 2016, the agreement was amended to extend the expiration date of the remaining 180,000 shares to July 31, 2019. The
options can be exercised at a price of $2.50 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the Proxy Statement.
67
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements. The following financial statements and reports of independent registered public accounting firms
of Diversified Restaurant Holdings and its subsidiaries are filed as part of this report:
●
●
●
●
●
●
●
●
Report of Independent Registered Public Accounting Firm — BDO USA, LLP
Report by Diversified Restaurant Holdings, Inc.’s Management on Internal Control Over Financial Reporting
Consolidated Balance Sheets as of December 25, 2016 and December 27, 2015
Consolidated Statements of Operations for the Fiscal Years Ended December 25, 2016 and December 27, 2015
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended December 25, 2016 and December 27,
2015
Consolidated Statements of Stockholders' Equity (Deficit) for the Fiscal Years Ended December 25, 2016, and
December 27, 2015
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 25, 2016 and December 27, 2015
Notes to Consolidated Financial Statements
The consolidated financial statements, the notes to the consolidated financial statements, and the report of independent registered
public accounting firm listed above are contained in Item 8 of this report.
(2) Financial Statement Schedules
Not applicable
(b) Index to Exhibits required by Item 601 of Regulation S-K:
The Exhibit Index following the Signatures Page hereto is incorporated by reference under this item.
68
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 2017
DIVERSIFIED RESTAURANT HOLDINGS, INC.
By:
/s/ David G. Burke
David G. Burke
President, Chief Executive Officer, Director
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/ David G. Burke
David G. Burke
President, Chief Executive Officer, Director (Principal Executive Officer)
/s/ Phyllis A. Knight
Phyllis A. Knight
Treasurer, Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Michael T. Ansley
Michael T. Ansley
Executive Chairman of the Board of Directors
/s/ Jay Alan Dusenberry
Jay Alan Dusenberry
Director
/s/ David Ligotti
David Ligotti
Director
/s/ Gregory J. Stevens
Gregory J. Stevens
Director
/s/ Joseph M. Nowicki
Joseph M. Nowicki
Director
/s/ Philip Friedman
Philip Friedman
Director
69
Dated: March 27, 2017
Dated: March 27, 2017
Dated: March 27, 2017
Dated: March 27, 2017
Dated: March 27, 2017
Dated: March 27, 2017
Dated: March 27, 2017
Dated: March 27, 2017
EXHIBIT NO.
EXHIBIT DESCRIPTION
2.7
3.1
3.2
3.3
3.4
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Asset Purchase Agreement dated May 13, 2015 (incorporated by reference to Exhibit 2.1 of our Form 8-K filed
August 19, 2015)
Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of our registration statement on Form SB-
2 (SEC File Number 333-145316) filed on August 10, 2007)
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of our Form 8-K filed August 29, 2012)
First Amendment to Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of our Form 8-K
filed October 31, 2012)
Second Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of our Form
8-K filed July 29, 2016)
Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 of our registration statement on Form SB-
2 (SEC File Number 333-145316) filed on August 10, 2007)
Buffalo Wild Wings Area Development Agreement dated July 18, 2003, by and between Buffalo Wild Wings
International, Inc. and MCA Enterprises, Inc. (subsequently assigned to AMC Wings, Inc., a wholly-owned
subsidiary of the Company) (incorporated by reference to Exhibit 10.3 of our Form 10-Q filed November 12,
2010)
Amendment to Buffalo Wild Wings Area Development Agreement dated December 27, 2003 (incorporated by
reference to Exhibit 10.12 of our Form 10-Q filed November 12, 2010)
Amendment to Buffalo Wild Wings Area Development Agreement dated March 20, 2007 (incorporated by
reference to Exhibit 10.5 of our Form 10-Q filed November 12, 2010)
Amendment to Buffalo Wild Wings Area Development Agreement dated November 5, 2007 (incorporated by
reference to Exhibit 10.5 of our Form 10-Q filed November 12, 2010)
Form of Stock Option Agreement (incorporated by reference to Exhibit 10.1 of our Form 8-K filed August 5,
2010)*
Diversified Restaurant Holdings, Inc. Performance Bonus Plan (incorporated by reference to Exhibit 10.1 of our
Form 8-K filed March 11, 2013)*
2013 Diversified Restaurant Holdings, Inc. Short-Term Incentive Program (incorporated by reference to Exhibit
10.2 of our Form 8-K filed March 11, 2013)*
$77.0M Senior Secured Credit Facility with RBS Citizens, N.A., as administrative agent, dated December 16,
2014
Amendment to Area Development Agreement, dated August 13, 2015 (incorporated by reference to Exhibit 10.1
of our Form 8-K filed August 19, 2015)
10.10
Credit Agreement dated June 29, 2015 (incorporated by reference to Exhibit 10.1 of our Form 8-K filed July 1,
2015)
70
10.11
10.12
10.13
10.14
10.15
21
23
Employment Agreement between Diversified Restaurant Holdings, Inc. and David G. Burke, dated May 19,
2016 (incorporated by reference to Exhibit 10.1 of our Form 8-K filed May 24, 2016)
Form of Second Amendment to the Diversified Restaurant Holdings, Inc. Stock Option Agreement of 2010
(incorporated by reference to Exhibit 10.1 of our Form 8-K filed July 29, 2016)
Employment Agreement between Diversified Restaurant Holdings, Inc. and Phyllis A. Knight, dated October
20, 2016 (incorporated by reference to Exhibit 10.1 of our Form 8-K filed October 24, 2016)
Transition Services Agreement, dated as of December 23, 2016 (incorporated by reference to Exhibit 10.1 of our
Form 8-K filed December 29, 2016)
Amendment No. 4 to Credit Agreement and Limited Consent, dated as of December 23, 2016 (incorporated by
reference to Exhibit 10.1 of our Form 8-K filed December 29, 2016)
Subsidiaries of Diversified Restaurant Holdings, Inc.
Consent of BDO USA, LLP
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101.INS
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Document
101.DEF
XBRL Taxonomy Extension Definition Document
101.LAB XBRL Taxonomy Extension Labels Document
101.PRE
XBRL Taxonomy Extension Presentation Document
*
Management contract or compensatory plan
71
This Page Intentionally Left Blank
LEADERSHIP
LEADERSHIP
David G. Burke
President and Chief Executive Officer
Phyllis A. Knight
Chief Financial Officer and Treasurer
Jason Curtis
Chief Operating Officer
Toni Werner
Controller
Misty Sirch
Director of Real Estate
Justin Smith
Director of Information Systems & Technology
Julie Hollenbeck
Director of Human Resources
2016 ANNUAL REPORT
BOARD OF DIRECTORS
T. Michael Ansley
Executive Chairman of the Board of Directors,
President and Chief Executive Officer –
Bagger Dave’s Burger Tavern, Inc.
David G. Burke
President and Chief Executive Officer –
Diversified Restaurant Holdings, Inc.
Jay Alan Dusenberry 1,2,*
Vice President – Marisa Manufacturing
Philip Friedman 1,2
Chief Executive Officer – Salsarita’s Fresh Cantina
David Ligotti
Owner – Oakwood Business Services, LLC
Joseph M. Nowicki 1,*
Executive Vice President and Chief Financial Officer –
Beacon Roofing Supply
Gregory J. Stevens 2
Strategic Engineer and Partner – Cold Heading Company
1 Audit Committee
2 Compensation Committee
* Committee Chairman
SHAREHOLDER’S INFORMATION
CORPORATE HEADQUARTERS
Diversified Restaurant Holdings, Inc.
27680 Franklin Road
Southfield, Michigan 48034
248.223.9160
www.diversifiedrestaurantholdings.com
ANNUAL MEETING
Diversified Restaurant Holdings’ Annual Meeting of
Shareholders will be held on Thursday, May 18, 2017
at 10:00 am at:
1218 Randolph St.,
Detroit, Michigan 48226
INVESTOR RELATIONS
Investors, stockbrokers, security
analysts and others seeking information about
Diversified Restaurant Holdings should contact:
Deborah K. Pawlowski
Kei Advisors LLC
716-843-3908
dpawlowski@keiadvisors.com
ATTORNEYS
Dickinson Wright PLLC
Troy, Michigan
TRANSFER AGENT
For services such as change of address, replacement of
lost certificates and changes in registered ownership,
or for inquiries as to your account, contact:
INDEPENDENT AUDITORS
BDO USA, LLP
Troy, Michigan
Computershare
250 Royall St.
Canton, Massachusetts 02021
(800) 368-5948
www.computershare.com/investor
STOCK INFORMATION
Diversified Restaurant Holdings’ stock is quoted on the
NASDAQ Capital Market under the symbol SAUC.
27680 Franklin Road • Southfield, MI 48034 • 248.223.9160
www.diversifiedrestaurantholdings.com
NASDAQ: SAUC