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EX-32.2 - EXHIBIT 32.2 - Diversified Restaurant Holdings, Inc.ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Diversified Restaurant Holdings, Inc.ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Diversified Restaurant Holdings, Inc.ex31-2.htm
EX-10.13 - EXHIBIT 10.13 - Diversified Restaurant Holdings, Inc.ex10-13.htm
EX-23 - EXHIBIT 23 - Diversified Restaurant Holdings, Inc.ex23.htm
EX-21 - EXHIBIT 21 - Diversified Restaurant Holdings, Inc.ex21.htm
EX-31.1 - EXHIBIT 31.1 - Diversified Restaurant Holdings, Inc.ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - Diversified Restaurant Holdings, Inc.Financial_Report.xls

 

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 28, 2014

 

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)

 

Nevada

  

03-0606420

(State or other jurisdiction of incorporation

  

(I.R.S. Employer Identification No.)

or organization)

  

  

 

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.  ☑

  

 
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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 $64.7 million based on the per share closing price of the Company's common stock as reported on the NASDAQ stock market on June 27, 2014.

 

The number of shares outstanding of the registrant's common stock as of March 6, 2015 was 26,187,199 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 21, 2015 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.

 

 
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TABLE OF CONTENTS

 

  

Page

  

  

PART I

4

  

  

Item 1. Business

5

  

  

Item 1A. Risk Factors

12

  

  

Item 1B. Unresolved Staff Comments

21

  

  

Item 2. Properties

21

  

  

Item 3. Legal Proceedings

21

  

  

Item 4. Mine Safety Disclosures

21

  

  

PART II

22

  

  

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

22

  

  

Item 6. Selected Financial Data

24

  

  

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation

25

  

  

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

34

  

  

Item 8. Consolidated Financial Statements and Supplementary Data

34

  

  

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

64

  

  

Item 9A. Controls and Procedures

65

  

  

Item 9B. Other Information

66

  

  

PART III

68

  

  

Item 10. Directors, Executive Officers and Corporate Governance

68

  

  

Item 11. Executive Compensation

68

  

  

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

68

  

  

Item 13. Certain Relationships and Related Transactions, and Director Independence

68

  

  

Item 14. Principal Accountant Fees and Services

68

  

  

PART IV

69

  

  

Item 15. Exhibits and Financial Statement Schedules

69

  

  

SIGNATURES

71

 

 Exhibit 10.13

 Exhibit 21

 Exhibit 23

 Exhibit 31.1

 Exhibit 31.2

 Exhibit 32.1

 Exhibit 32.2

 

 

 
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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:

 

the success of our existing and new restaurants;

 

our ability to identify appropriate sites and develop and expand our operations;

 

changes in economic conditions, including continuing effects from the recent recession;

 

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 on 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;

 

the impact of litigation;

 

the adequacy of our insurance coverage and fluctuating insurance requirements and costs;

 

 
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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;

 

our ability to main 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; and

 

the effect of changes in accounting principles applicable to us.

 

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 fast-growing restaurant company operating two complementary concepts:  Bagger Dave’s Burger Tavern ® (“Bagger Dave’s”) and Buffalo Wild Wings ® Grill & Bar (“BWW”).  As the creator, developer, and operator of Bagger Dave’s and as one of the largest franchisees 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 28, 2014, we had 66 locations in Florida, Illinois, Indiana, and Michigan.

 

In 2008, DRH became publicly owned 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”), AMC Burgers, Inc. (“BURGERS”), and AMC Real Estate, Inc. (“REAL ESTATE”) own and operate Bagger Dave's and DRH-owned BWW restaurants located throughout Florida, Illinois, Indiana, and Michigan.

 

DRH originated the Bagger Dave’s concept with our first restaurant opening in January 2008 in Berkley, Michigan.  Currently, there are 26 Bagger Dave’s, 17 in Michigan and nine in Indiana. The Company expects to operate between 47 and 51 Bagger Dave’s locations by the end of 2017.

 

DRH is also one of the largest BWW franchisees and currently operates 42 DRH-owned BWW restaurants (19 in Michigan, 14 in Florida, four in Illinois, and five in Indiana), including the nation’s largest BWW, based on square footage, in downtown Detroit, Michigan. We remain on track to fulfill our area development agreement (“ADA”) with BWLD and expect to operate 52 DRH-owned BWW restaurants by the end of 2017, exclusive of potential additional BWW restaurant acquisitions. In 2014 DRH was awarded the Franchisee of Year and our COO recieved the Founders’ Award by Buffalo Wild Wings International (“BWLD”).

 

 
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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.

 

 

 
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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, BURGERS, 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.

 

BURGERS was formed on March 12, 2007 and serves as a holding company for our Bagger Dave’s restaurants.  Bagger Dave’s Franchising Corporation, a subsidiary of BURGERS, was formed to act as the franchisor for the Bagger Dave’s concept and has rights to franchise in Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio, and Wisconsin.  We do not intend to pursue franchise development at this time.  

 

WINGS was formed on March 12, 2007 and serves as a holding company for our DRH-owned BWW restaurants.  We are economically dependent on retaining our franchise rights with BWLD.  The franchise agreements have specific initial term expiration dates ranging from March 2020 through December 2034, 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 December 2049.  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 the real estate properties owned by DRH. REAL ESTATE’s portfolio currently includes three properties, two Bagger Dave’s restaurants, which will be sold as part of the sale leaseback transaction as described in Note 3 of the Consolidated Financial Statements, and one DRH-owned BWW restaurants. The restaurants at these locations are all owned and operated by DRH.

 

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 and www.baggerdaves.com.

 

Background

 

Restaurant Concepts

 

Bagger Dave’s Burger Tavern®

 

Launched in January 2008, Bagger Dave's is our first initiative to diversify our operations outside of the BWW concept by developing our own unique, full-service, ultra-casual restaurant and bar concept. We have worked to create a concept that provides a warm, inviting, and entertaining atmosphere through friendly and memorable guest experience. Currently, there are 26 restaurants (17 in Michigan and nine in Indiana).

 

Bagger Dave’s specializes in custom-built proprietary fresh prime rib recipe burgers, all-natural lean turkey burgers, hand-cut fries, locally crafted beers on draft, hand-dipped milk shakes, salads, black bean turkey chili, and much more, delivered in a warm, hip atmosphere with friendly "full" service. The concept differentiates itself from other full-service casual dining establishments by the absence of walk-in freezers and microwaves, substantiating our fresh food offerings. The concept focuses on local flair of the city in which the restaurant resides by showcasing historical photos. It also features an electric train that runs above the dining room and bar areas.   

 

The guiding principle of the Bagger Dave’s brand is to delight guests through fresh food offerings, exceptional service, and an entertaining atmosphere.   The menu is a-la-carte and focuses on burgers, with a variety of sides. Burgers are offered with a choice of four proteins; USDA, fresh premium prime-rib recipe beef (offered in 8oz patty or 4oz patty), Michigan ground turkey, farm-raised, cage-free grilled chicken breasts and black bean patties. Guests can choose from our list of burgers including the Train Wreck Burger ®, the Blues Burger ®, and Tuscan Chicken. Guests can also choose to “Create Your Own” which allows them to totally customize their experience by choosing from a variety of proteins, buns, cheeses, house-recipe sauces presenting bold and exciting new flavors, premium toppings such as bacon, egg, guacamole, and a variety of complementary toppings, such as sautéed mushrooms and onions, barbecue sauce, and other standard condiments.

  

To further customize their experience, guests can choose from a selection of sides including fresh-cut potato fries, Dave’s Sweet Potato Chips®, Amazingly Delicious Turkey Black Bean Chili® and our fresh, made-to-order Twisted Mac ‘N’ Cheese. The fries are cut in-house from domestic Northeastern potatoes and cooked in a cottonseed soy bean specialty oil, using a seven-step Belgian-style process producing a fry reminiscent of those served at community fairs. Dave’s Sweet Potato Chips ® are a Bagger Dave’s specialty using fresh-cut premium sweet potatoes from North Carolina.  Guests can choose from our own signature dipping sauces to complement their order entrée and sides. Since our fryers are dedicated to potatoes and there are no breaded, frozen products offered at Bagger Dave’s, our potato fries and sweet potato chips are gluten free and trans-fat free.

 

Beyond burger offerings, Bagger Dave’s offers other entrees such as a Tomato-Basil-Onion Grilled Cheese sandwich, a California BLT sandwich, Dave’s Signature Italian Beef sandwich, and entrée sized chopped salads with grilled chicken. Bagger Dave’s also offers hand-dipped ice cream and milkshakes with a variety of free mix-ins, adult shakes, sommelier-selected wines and a full selection of liquors. For fiscal year 2014, our average Bagger Dave’s restaurant derived approximately 86.3% of its revenue from food, including non-alcoholic beverages, and 13.7% of its revenue from alcohol sales, primarily draft beer. 

 

 
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To reinforce the Bagger Dave’s name and brand, our fresh-cut fries and sweet potato-chips are served in natural, brown bags decorated with our logo and served in a cake tin.

  

Buffalo Wild Wings

 

With 42 DRH-owned BWW restaurants (19 in Michigan, 14 in Florida, four in Illinois, and five in Indiana), including the nation’s largest BWW, based on square footage, in downtown Detroit, Michigan, DRH is one of the largest BWLD franchisees. As of December 28, 2014, BWLD reported over 1,000 BWW restaurants in North America that were either directly owned or franchised. The restaurants feature a variety of boldly-flavored, craveable menu items in a welcoming neighborhood atmosphere with an extensive multimedia social environment, a full bar, and an open layout designed to create a distinctive dining experience for sports fans and families alike. We believe the restaurants are differentiated by the social environment we create and the connection the restaurants make with our team members, guests, and the local community. The inviting and energetic environment of the restaurants is complemented by furnishings that can easily be rearranged to accommodate parties of various sizes. Guests have the option of watching various sporting events on projection screens or approximately 50 additional televisions, competing in Buzztime Trivia, or playing video games.

 

BWW restaurants have won dozens of “Best Wings” and “Best Sports Bar” awards across the country. We believe the BWW menu is competitively priced between the quick-casual and casual dining segments. The menu features traditional chicken wings, boneless wings, and other items including chicken tenders, Wild Flatbreads , popcorn shrimp, specialty hamburgers and sandwiches, wraps, Buffalito ® soft tacos, appetizers, and salads.  The made-to-order menu items are enhanced by the bold flavor profile of 16 signature sauces and five signature seasonings, which range in flavor from Sweet BBQ ® to Blazin’ ®.  The restaurants offer approximately 12 to 30 domestic and imported beers on tap, including several local or regional microbrews and a wide selection of bottled beer, wine, and liquor.  We believe the award-winning food and memorable experience drives guest visits and loyalty.  For fiscal year 2014, our average DRH-owned BWW restaurant derived approximately 80.9% of its revenue from food, including non-alcoholic beverages, and 19.1% of its revenue from alcohol sales, primarily draft beer.

   

Growth Strategy

 

We have a multi-layered growth strategy. We plan to grow by increasing the number of restaurants in each of the two concepts we currently offer and target opening a minimum of eight new restaurants per year.  

 

We have successfully expanded our Bagger Dave’s restaurant base from just three restaurants in 2010 to 26 company-owned locations as of March 13, 2015.  We believe that we are well positioned to grow throughout the Midwest and ultimately nationally.  We expect to open additional restaurants if suitable locations are found and appropriate financing can be secured.  We plan to operate between 47 and 51 Bagger Dave’s corporate locations by the end of 2017.

 

We currently operate 42 DRH-owned BWW restaurants: 19 in Michigan, 14 in Florida, four in Illinois, and five in Indiana. We have opened 24 DRH-owned BWW restaurants in fulfillment of our 32-resaturants ADA with BWLD. Including the remaining eight restaurants under the ADA, and two additional franchise agreements, we expect to operate 52 BWW restaurants by 2017, exclusive of potential acquisitions of additional BWW restaurants. 

 

We believe our track record of acquiring and integrating BWW restaurants affords us with a unique opportunity to take advantage of strategic accretive acquisitions in the marketplace. Throughout our history, we have demonstrated our proven ability to leverage our operational expertise, infrastructure, and systems to drive stronger profitability and unit volumes at acquired restaurants. The combination of our size and history with the Buffalo Wild Wings brand allows us to utilize best practices and optimize the performance of any restaurants that we may acquire.

 

One of our guiding principles is that a happy team member translates into a happy guest.  A happy guest drives repeat sales and word-of-mouth referrals – two key factors that are fundamental to our sales growth strategy.  We believe that our core areas of expertise include site selection, development, management, quality guest service, and operations.  

 

A center point in our expansion plan was opening the largest BWW, by square-footage, in downtown Detroit, Michigan, on December 23, 2012, to take advantage of the energy and positivity surrounding the revitalization and rebuilding of downtown Detroit.  It occupies two stories in the Odd Fellow Building and is within walking distance of Ford Field, Comerica Park, and Joe Louis Arena.   According to a New York Times article published on July 11, 2011, in the last 10 years, Downtown Detroit has experienced a 59.0% increase in the number of college-educated residents under the age of 35, creating a culture of trendy bars and restaurants.  Also driving the revitalization efforts is Detroit’s “15 by 15” initiative, a program focused on getting 15,000 young and talented households to move Downtown by 2015. To complement this location and further take advantage of the growth of downtown Detroit, a new, three-story Bagger Dave’s was opened adjacent to this BWW in November of 2013.

 

 
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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.   

 

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 economic thresholds.    

 

Restaurant Operations

 

We believe that retaining high quality restaurant managers, valuing our team members, and providing fast, friendly service to our guests 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-restaurants trainers at each existing location who provide both front- and back-of-house training on site.  We also have a seven-week training program of 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 aspect of our Company and reinforces our mission to delight our guests.  

 

Management and Staffing

 

The core values that define our corporate culture are cleanliness, service, and organization. Our restaurants are generally staffed with one managing partner and up to six 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.  We also have secret shoppers that visit our restaurants on a monthly basis and provide guest satisfaction scores for the criteria we define.

 

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.  Our team members undergo classroom training followed by job shadowing in order to prepare them for their role.

 

We offer an incentive program which 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 as much as possible, 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.  We strive for a balance of internal promotion and external hiring.

 

Restaurants

 

Our typical Bagger Dave's restaurants range in size from 3,800 to 6,100 square feet, with a historical square foot average of about 4,300. We anticipate future restaurants will be approximately 4,000 to 4,500 square feet in size, plus an outside seating area where feasible. We anticipate an average cash investment per restaurant of approximately $1.1 million to $1.4 million. From time to time, our restaurants may be smaller or larger or cost more or less 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 plan to continue development of this concept in the Michigan and Indiana and expand throughout the Midwest.  Expansion outside of Michigan and Indiana will begin in 2015, as we intend to open Bagger Dave’s restaurants in Ohio.   

 

Our typical DRH-owned BWW 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 5,500 to 6,500 square feet with an average cash investment per restaurant of approximately $1.9 million to $2.1 million. From time to time, our restaurants may be smaller or larger or cost more or less 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 plan major renovations every five years to 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 subsections entitled “Liquidity and Capital Resources; Expansion Plans”.

 

 
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Quality Control and Purchasing

 

We strive to maintain high quality standards, protecting our food supply at all times.

 

Purchasing for DRH-owned BWW restaurants is primarily through channels established by BWLD corporate operations.  We do, however, negotiate directly with most of these channels as to 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.  For Bagger Dave’s, we believe that we have been able to leverage our DRH-owned BWW purchasing power to develop supply sources at a more reasonable cost than would be expected for a smaller restaurant concept.

 

To maximize our purchasing efficiencies, our centralized purchasing staff negotiates, when available, fixed-price contracts (usually for a one-year period) or, where appropriate, commodity-price contracts.

 

Marketing and Advertising

 

In fiscal year 2014, we spent approximately 1.7% of all restaurant sales on marketing efforts.  In addition, charitable donations and local community sponsorships help us 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 for both DRH-owned BWW and Bagger Dave’s throughout the communities we serve.

 

Bagger Dave’s

 

The advertising and marketing plan for developing the Bagger Dave’s brand relies on local media, menu specials, promotions, and community events. We are also building our marketing reach with our current guests by enhancing our social media presence and our loyalty rewards program.  We attribute a large part of our Bagger Dave’s growth through word-of-mouth.

 

BWW

 

We pay a marketing fee to BWLD equal to 3.0% of revenue, which is supported by national advertising designed to build brand awareness. Some examples include television commercials on ESPN and CBS during key games for the NFL, MLB, NBA, and March Madness NCAA basketball tournaments. In addition, we invest in our own marketing initiatives, including 0.5% of DRH-owned BWW revenue which is allocated to a regional cooperative of BWW franchisees in the Detroit metropolitan area (for those DRH-owned BWW restaurants in the Detroit metropolitan area). We established the DRH-owned BWW restaurants in the Florida and Michigan markets through coordinated local restaurant marketing efforts and operating strengths that focus on the guest experience.

 

Information Systems and Technology

 

We 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. In 2012, we launched online ordering for our Bagger Dave’s restaurants and recently launched table side ordering devices that allows servers to create orders and send orders to the kitchen while standing with the customer. We believe the table side ordering will help decrease serving time and increase customer turnover and satisfaction since these devices also accommodate credit card swipes so that the card never has to leave the customer’s sight. Beginning in 2014, we also integrated the online ordering function for BWW and the Rockbot music experience where guests get to D.J. and select music played throughout the restaurant.

 

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. 

 

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, 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.

 

 
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Trademarks, Service Marks, and Trade Secrets

 

The BWW registered service mark is owned by BWLD.

 

Our domestically-registered trademarks and service marks include Bagger Dave’s Burger Tavern®, Sloppy Dave’s BBQ ®, Railhouse Burger Sauce ®, The Blues Burger ®, Train Wreck Burger, Dave’s Sweet Potato Chips ®, Meaningless Free Toppings ®, Sloppy Dave’s Fries ®, and Amazingly Delicious Turkey Black Bean Chili ®.  We place considerable value on our trademarks, service marks, trade secrets, and other proprietary rights and believe they are important to our brand-building efforts and the marketing of our Bagger Dave’s ® restaurant concept.  We intend to actively enforce and defend our intellectual property, however, we cannot predict whether the steps taken by us to protect our proprietary rights will be adequate to prevent misappropriation of these rights or the use by others of restaurant features based upon or similar to our concepts.  Although we believe we have sufficient protections concerning our trademarks and service marks, we may face claims of infringement that could interfere with our ability to market our restaurants and promote our brand.

 

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.  Majority of our licenses to sell alcoholic beverages must 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 brands.  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, wage, 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.

  

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

 

Future growth in our revenue and profits will depend on our ability to maintain or grow sales and efficiently manage costs in our existing and new restaurants.  Currently, we have 26 Bagger Dave’s restaurant and 42 DRH-owned 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 concepts in other locations.  Additionally, the success of one restaurant concept may not be indicative or predictive of the success of the other.

 

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:

 

economic conditions, including housing market downturns, rising unemployment rates, lower disposable income, credit conditions, fuel prices and 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, ambience 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:

 

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

 

expenses due to litigation against us.

 

 
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We May Not Be Able to Manage Our Growth

 

Our expansion strategy will depend upon our ability to 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 landlords, and construction or permitting delays.

  

We May Not Be Successful When Entering New Markets

 

When expanding the Bagger Dave's and BWW concepts, we will 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 tastes, and discretionary spending patterns within the new markets, as well as by our ability to generate market awareness of the Bagger Dave's and BWW 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.

  

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, burger establishments, casual dining concepts, and fast-casual establishments.  Competition from “better burger” establishments has recently been particularly intense.  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 or burger-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.

  

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.  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:

 

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.

 

We May Suffer Negative Consequences if New Restaurants Do Not Open in a Timely Manner

 

If we are unable to successfully open new restaurants in a timely manner, our revenue growth rate and profits may be adversely affected.  We must open restaurants in a timely and profitable manner to successfully expand our business.  In the past, we have experienced delays in restaurant openings and we may face similar delays in the future.  These delays may trigger material financial penalties assessed against us by BWLD as provided in our ADA.  These delays may also not meet market expectations, which may negatively affect our stock price.  Our ability to expand successfully and in a timely manner will depend on a number of factors, many of which are beyond our control.  A few of the factors are listed below:

 

Locating and securing quality locations in new and existing markets;

 

Negotiating acceptable leases or purchase agreements;

 

Securing acceptable financing for new locations;

 

Cost-effective and timely planning, design, and build-out of restaurants;

 

Attracting, recruiting, training, and retaining qualified team members;

 

Hiring reputable and satisfactory construction contractors;

 

Competition in new and existing markets;

 

Obtaining and maintaining required local, state, and federal government approvals and permits related to the construction of sites and the sale of food and alcoholic beverages;

 

Creating brand awareness in new markets; and

 

General economic conditions.

 

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.  In particular, we are highly dependent upon the services of T. Michael Ansley, David G. Burke, and Jason T. Curtis.  We do not have employment agreements with these individuals or any of our other team members.  Our inability to retain the full-time services of any of these people or to attract other qualified executives could have an adverse effect on us, and there would likely 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

 

 
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Fluctuations in the Cost of Food Could Impact Operating Results

 

Our primary food products are fresh bone-in chicken wings, ground beef, and potatoes.  Our food, beverage, and packaging costs could be significantly affected by increases in the cost of fresh chicken wings and ground beef, 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 or ground beef, and we are unable to successfully adjust menu prices or menu mix or otherwise make operational adjustments to account for the higher wing and beef 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 reasonable cost.  Chicken wing prices per pound averaged $1.53 in 2014, $0.23 lower than the average of $1.76 in 2013.  BWLD currently purchases and secures for its franchisees chicken wings at market price.  

 

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.

 

Our Success Depends Substantially on the Value of Our Brands and Unfavorable Publicity Could Harm Our Business

 

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 sum, 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 perceive or experience a reduction in food quality, service, ambiance, or in any way believe we failed to deliver a consistently positive experience, the value of our brands could suffer.

 

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 an 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.

 

 
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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 requires implementation by December 1, 2015. 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 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.

 

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, hamburgers and turkey burgers, 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.

 

Actions by Our Franchisor Could Negatively Affect Our Business and Operating Results

 

We are economically dependent on retaining our franchise rights with BWLD. Our DRH-owned 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.    

 

 
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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, 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 the date of December 28, 2014, 67 of our 68 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 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, and Michigan.  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 28, 2014, approximately 78.8% of our total restaurants are located in Illinois, Indiana and Michigan, which are particularly susceptible to snowfall, and approximately 21.2% of our total restaurants are located in Florida, which is particularly susceptible to hurricanes.

 

 
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Legal Actions Could Have an Adverse Effect on Us

 

We could face 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.  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.

 

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.

 

The Sale of Alcoholic Beverages at Our Restaurants Subjects Us to Additional Regulations and Potential Liability

 

For fiscal year 2014, approximately 18.2% of our consolidated restaurant sales were attributable to the sale of alcoholic beverages.  Our restaurants sell alcoholic beverages, 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 May Not Be Able to Protect Our Trademarks, Service Marks, and Trade Secrets

 

We place considerable value on our trademarks, service marks, and trade secrets. We intend to actively enforce and defend our intellectual property, although we may not always be successful. We attempt to protect our recipes as trade secrets by, among other things, requiring confidentiality agreements with our suppliers and executive officers.  However, we cannot be sure that we will be able to successfully enforce our rights under our marks or prevent competitors from misappropriating our recipes, nor can we be sure that out methods of safeguarding our information are adequate and effective.  We also cannot be sure that our marks are valuable; that using our marks does not, or will not, violate others' marks; that the registrations of our marks would be upheld if challenged; or that we would not be prevented from using our marks in areas of the country where others might have already established rights to them.  Any of these uncertainties could have an adverse effect on us and our expansion strategy.

 

We Are Dependent on Information Technology and Any Material Failure 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.  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.

 

 
18

 

 

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 business 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 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 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 28, 2014, approximately 66.6% 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 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.

 

 
19

 

 

We have Identified a Material Weakness in Our Internal Control Over Financial Reporting. Failure to Establish and Maintain Our Internal Control Over Financial Reporting Could Harm Our Business and Financial Results.

 

In connection with the preparation of the financial statements included in this Form 10-K, we identified a material weakness in our internal control over financial reporting for the year ended December 28, 2014.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Our management has determined that our internal control related to financial reporting was not effective to ensure the effective design of internal control and that an effective evaluation and review of complex accounting matters had occurred prior to presentation to our external auditors. Specifically, our initial evaluation of long-lived assets for potential impairment was not sufficient under generally accepted accounting principles. Further, our evaluation of the accounting for modifications made under our borrowing arrangements reached an incorrect conclusion and we did not adequately evaluate the realization of our deferred tax assets. While we do not believe that this affected the accuracy of our financial statements included in the Annual Report on Form 10-K, this control deficiency could result in a material misstatement of the financial statements that would not be prevented or detected. This material weakness was identified in connection with our assessment of the effectiveness of internal control over financial reporting as of December 28, 2014, and has not yet been remediated. However, our management team has reviewed and discussed the identified material weakness with the Audit Committee and is in the process of developing and implementing an action plan to resolve it.

 

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.  Failure to remediate this material weakness or additional material weaknesses in internal control over financial reporting could cause a loss of investor confidence and decline in the market price of our stock.

 

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 search engine marketing and social media platforms such as Facebook® and Twitter ® to attract and retain guests. We also are 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.

 

 
20

 

 

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 13, 2015, we operated 68 Company-owned restaurants, 66 of which are leased properties. Lease terms are between 10- and 20-years, and generally include options to extend the terms. 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 28, 2014, we operated restaurant properties for 35 locations in Michigan, 14 locations in Florida, 13 locations in Indiana, and four locations in Illinois. Our typical BWW restaurants range in size from 5,300 square feet to 13,500 square feet and our typical Bagger Dave’s restaurants range in size from 3,800 square feet to 6,100 square feet. The majority of our restaurants are located in end-cap positions in strip malls, with a few being inline; 23 of our restaurants are situated in a stand-alone building.

 

ITEM 3.        LEGAL PROCEEDINGS

 

Occasionally we are a party to various legal actions arising in the ordinary course of our business including claims resulting from “slip and fall” accidents, employment related claims and claims from guests or team members alleging illness, injury or other food quality, health or operational concerns. These types of litigation, most of which are covered by insurance, have not had a material effect on the Company, and as of the date of this Annual Report, we are not a party to any material pending legal proceedings and are not aware of any claims that could have a materially adverse effect on our financial position, results of operations or cash flows.

 

ITEM 4.         MINE SAFETY DISCLOSURES

 

Not applicable.

 

 
21

 

 

 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 “BAGR”.  Prior to April 23, 2013, the date of our follow-on offering, our common stock was traded on the OTCQB where there was a history of minimal trading and relatively inactive public market for our stock.

 

The following table sets forth the high and low bid quotations for our common stock for the fiscal years ended December 28, 2014 and December 29, 2013 as reported by NASDAQ and OTCQB:

 

   

2014

   

2013

 
   

High

   

Low

   

High

   

Low

 

First Quarter

  $ 5.85     $ 4.42     $ 4.11     $ 3.95  

Second Quarter

    5.50       3.99       8.31       4.00  

Third Quarter

    5.00       4.19       8.24       6.03  

Fourth Quarter

    5.42       4.61       7.90       4.77  

 

Trading during Q1 2013 were very limited and sporadic while our stock was traded on the OTCQB. These bid prices reflect inter-dealer prices, without retail mark ups or mark downs or commissions and may not represent actual transactions.

 

Holders

 

As of March 6, 2015, there were approximately 457 record holders of 26,187,199 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 other working capital needs. Currently, 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, and plans for expansion.

 

Performance Graph

 

The following graph compares the cumulative total stockholder return from April 15, 2013 through December 28, 2014. The graph below shows the cumulative total stockholder return assuming the investment of $100 on the date specified (assuming reinvestment of dividends) in each of DRH common stock, the NASDAQ Composite Index and S&P 600 Restaurants Index. The comparisons in the graph below are based upon historical data and are not indicative of, or intended to forecast, future performance of our common stock.

 

 

 
   

4/15/2013

   

12/29/2013

   

12/28/2014

 

Diversified Restaurant Holdings, Inc.

  $100.00     $95.40     $99.80  

S&P 600 Restaurants

  100.00     138.17     174.54  

NASDAQ Composite

  100.00     127.93     147.24  

 

 
22

 

 

Equity Compensation Plan Information

 

The following table sets forth information, as of December 28, 2014, with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance, aggregated as follows:

 

Plan Category

 

Number of securities

to beissued 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))

 

Equity compensation plans approved by security holders 1

    -    

N/A

      544,102  
                         

Equity compensation plans not approved by security holders 2

    210,000     $ 2.50    

N/A

 

 

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 vest ratably over a three-year period and expire six years from issuance. The options can be exercised at a price of $2.50 per share.

 

 
23

 

 

ITEM 6.        SELECTED FINANCIAL DATA

 

The following selected consolidated financial and operating data for each of the five fiscal years and are derived from our audited consolidated financial statements. The following data should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and our audited financial statements included in Item 8, Consolidated Financial Statements and Supplementary Data, within this Form 10-K. Historical results are not necessarily indicative of future performance..

 

   

Twelve months ended

 
   

December 28

   

December 29

   

December 30

   

December 25

   

December 26

 
   

2014

   

2013

   

2012

   

2011

   

2010

 

Statements of Operations:

                                       

Revenue

  $ 128,413,448     $ 108,886,139     $ 77,447,208     $ 60,707,475     $ 45,248,018  

Operating profit (loss)

    (642,280 )     1,440,277       1,581,243       3,600,163       1,606,363  

Net income (loss) attributable to DRH

    (1,268,497 )     134,308       180,099       1,842,186       167,854  
                                         

Per Share:

                                       

Basic earnings (loss) per share

  $ (0.05 )   $ 0.01     $ 0.01     $ 0.10     $ 0.01  

Diluted earnings (loss) per share

  $ (0.05 )   $ 0.01     $ 0.01     $ 0.10     $ 0.01  

Weighted average of common shares

                                       

Basic

    26,092,919       23,937,188       18,949,556       18,902,782       18,871,879  

Diluted

    26,092,919       24,058,072       19,091,849       19,055,500       19,052,969  
                                         

Balance Sheet:

                                       

Goodwill

  $ 10,998,630     $ 8,578,776     $ 8,578,776     $ -     $ -  

Total assets

    113,447,034       92,333,733       56,544,738       27,350,399       22,354,392  

Total long term obligations

    60,569,814       42,554,789       42,106,583       19,205,371       17,926,317  
                                         

Statement of Cash Flows:

                                       

Cash flows provided by (used in)

                                       

Operating activities

  $ 11,295,253     $ 7,180,971     $ 7,592,621     $ 6,577,016     $ 4,548,762  

Investing activities

    (17,469,345 )     (33,950,993 )     (31,228,585 )     (8,215,522 )     (5,844,883 )

Financing activities

    15,299,900       33,632,167       24,798,795       1,817,622       994,403  

 

The Company utilizes a 52- or 53-week accounting period that ends on the last Sunday in December.  Fiscal year 2014 ended on December 28, 2014 and comprised 52 weeks, fiscal year 2013 ended on December 29, 2013 and comprised 52 weeks, and fiscal year 2012 ended December 30, 2012 and comprised 53 weeks.

 

 
24

 

 

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 fast-growing, multi-concept restaurant company operating two complementary concepts: Bagger Dave’s and BWW. As the developer, operator and franchisor of Bagger Dave’s and one of the largest franchisees of BWLD, we provide a unique guest experience in a casual and inviting environment.  We are committed to providing value to our guests through offering generous portions of flavorful food in an upbeat and entertaining atmosphere.  We believe Bagger Dave’s and BWW are uniquely positioned restaurant brands designed to maximize guest appeal.  Both restaurant concepts offer competitive price points and a family-friendly atmosphere, which we believe enables strong performance through economic cycles.  We were incorporated in 2006 and are headquartered in the Detroit metropolitan area. Currently, we have 68 locations in Florida, Illinois, Indiana, and Michigan.  

 

Our Growth Strategies and Outlook

 

Our multi-layered 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 advertising strategies; and

 

 

leverage our infrastructure to grow profit margins

 

We have an established growth pipeline and a disciplined strategy for opening new restaurants that includes aggressive new unit development for Bagger Dave’s and the fulfillment of our current franchise agreement with BWLD by opening an additional eight restaurants in our current markets. We will also evaluate the potential for strategic accretive acquisitions of Buffalo Wild Wings franchises where we have an opportunity to leverage our operational expertise.  

 

We will continue to expand Bagger Dave’s throughout the Midwest and our priority will be to open locations in markets where we have existing infrastructure. We will also grow our Buffalo Wild Wings restaurant base under our current ADA. In addition, we believe our historical track record of acquiring and integrating Buffalo Wild Wings restaurants provides us with an additional growth opportunity and will seek to take advantage of strategic acquisitions that may be available in the marketplace.

 

The Company opened nine new restaurants and acquired three BWW locations in 2014. Over the next three years, we expect to open between 21 and 25 new Bagger Dave’s restaurants and ten new DRH-owned BWW restaurants (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, ticket times, guest satisfaction, hourly compensation costs, and food, beverage, and packaging costs.

 

We also use the following key performance indicator in evaluating restaurant performance:

 

 

Comparable Restaurant Sales. We consider a restaurant to be comparable following the eighteenth month of operations. 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 also reflect changes in guest count trends and changes in average check.

 

 
25

 

 

Restaurant Openings

 

The following table outlines the restaurant unit information for each fiscal year from 2010 through 2015. From our inception in 2006, we managed, but did not own, nine BWW restaurants, which we acquired in February 2010.

 

   

2014

   

2013

   

2012

   

2011

   

2010

 

Summary of restaurants open at the beginning of year

                                       

DRH-owned BWW

    36       33       22       19       7  

Bagger Dave’s

    18       11       6       3       2  

BWW Acquisitions / affiliate restaurants under common control

    -       -       -       -       9  

Total

    54       44       28       22       18  
                                         

Openings:

                                       

DRH-owned BWW

    3       3       3       3       3  

Bagger Dave’s

    6       7       5       3       1  

BWW Acquisitions

    3       -       8       -       -  

Closures

    -       -       -       -       -  

Total restaurants

    66       54       44       28       22  

 

Our Fiscal Year

 

The Company utilizes a 52- or 53-week accounting period that ends on the last Sunday in December.  Fiscal year 2014 ended on December 28, 2014 and comprised 52 weeks, fiscal year 2013 ended on December 29, 2013 and comprised 52 weeks, and fiscal year 2012 ended December 30, 2012 and comprised 53 weeks.

 

Key Financial Definitions

 

Revenue. Revenue primarily consists of food and beverage sales, and merchandise sales, such as Bagger Dave’s Craft Sodas and BWW sauce. Revenue is presented net of discounts, such as management and team member meals, 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 comparable restaurant sales growth.

  

Food, Beverage, and Packaging Costs. Food, beverage, and packaging costs consist primarily of food, beverage, packaging, and merchandise-related costs. The components of food, beverage, and packaging costs are variable in nature, change with sales volume, and are subject to increases or decreases based on fluctuations in 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. These costs generally increase with sales volume but decline as a percentage of revenue.  For DRH-owned BWW restaurants, this expense category also includes franchise royalty and national advertising fund expense.

 

General and Administrative Expenses.  General and administrative expenses include costs associated with corporate and administrative functions that support our operations, including senior and supervisory management and staff compensation costs (including stock-based compensation) and benefits, marketing and advertising expenses, travel, legal and professional fees, information systems, corporate office rent, and other related corporate costs. 

 

 
26

 

 

Pre-Opening Costs.  Restaurant pre-opening costs consist of expenses incurred to open 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 possession and the restaurant opening date. In addition, the Company includes restaurant labor cost that exceed the historical average for the first three months of restaurant operations that are attributable to training and initial staff turnover.

 

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.

  

RESULTS OF OPERATIONS

 

The following table presents the consolidated statements of operations for the fiscal years ended December 28, 2014, December 29, 2013, and December 30, 2012 with each line item in dollars and as a percentage of revenue. 

 

   

Fiscal Years-Ended

 
                         
                         
   

2014

   

2013

   

2012

 
                         

Total revenue

    100.0

%

    100.0

%

    100.0

%

                         

Operating expenses

                       

Food, beverage, and packaging costs

    28.9

%

    30.0

%

    31.1

%

Compensation costs

    26.0

%

    25.8

%

    25.1

%

Occupancy costs

    5.6

%

    5.9

%

    5.5

%

Other operating costs

    21.2

%

    19.9

%

    19.4

%

General and administrative expenses

    6.8

%

    6.7

%

    8.5

%

Pre-opening costs

    2.7

%

    3.0

%

    2.3

%

Depreciation and amortization

    8.5

%

    7.3

%

    5.9

%

Loss on disposal of property and equipment

    0.8

%

    0.1

%

    0.1

%

Total operating expenses

    100.5

%

    98.7

%

    98.0

%

                         

Operating profit (loss)

    (0.5

)%

    1.3

%

    2.0

%

                         

Interest expense

    (1.8

)%

    (1.6

)%

    (1.7

)%

Other income, net

    0.0

%

    0.2

%

    0.0

%

                         

Income (loss) before income taxes

    (2.3

)%

    (0.1

)%

    0.3

%

                         

Income tax provision (benefit)

    (1.3

)%

    (0.2

)%

    0.0

%

                         

Net income

    (1.0

)%

    0.1

%

    0.3

%

                         

Less: (Income) attributable to noncontrolling interest

    0.0

%

    0.0

%

    (0.1

)%

                         

Net income attributable to DRH

    (1.0

)%

    0.1

%

    0.2

%

 

FISCAL YEAR 2014 COMPARED WITH FISCAL YEAR 2013

 

Revenue

 

Total revenue for Fiscal Year 2014 was $128.4 million, an increase of $19.5 million, or 17.9%, over revenue generated during Fiscal Year 2013.  The increase was attributable to increased same store sales, acquisition of three BWW restaurants, and the opening of nine DRH-owned restaurants (six Bagger Dave’s and three BWW restaurants). $3.4 million of the increase was attributable to 3.5% same store sales increase for 37 BWW and 12 Bagger Dave’s restaurants. $3.1 million of the increase in sales was attributable to the acquisition of three BWW restaurants on June 30, 2014. The remaining $13.0 million increase is a result of restaurants opening within the last 18-months, including 12 Bagger Dave’s and five BWW restaurants. Breaking down our same store sales increase of 3.5% into components, 3.4% was attributable to price increases from winter and fall menu rollouts and 0.1% was attributable to increased traffic in our comparable locations.

 

 
27

 

 

Operating Expenses

 

Food, beverage, and packaging costs increased by $4.3 million, or 13.3%, to $37.1 million in Fiscal Year 2014 from $32.7 million in Fiscal Year 2013 as a result of the increase in the number of restaurants and inflationary factors.  Food, beverage, and packaging cost as a percentage of sales decreased to 28.9% in Fiscal Year 2014 from 30.0% in Fiscal Year 2013 primarily due to lower bone-in chicken wing costs.  Average cost per pound for bone-in chicken wings decreased 13.1% to $1.53 in Fiscal Year 2014 from $1.76 in Fiscal Year 2013.

  

Compensation costs increased by $5.2 million, or 18.7%, to $33.3 million in Fiscal Year 2014 from $28.1 million in Fiscal Year 2013. The increase was primarily due to the increase in number of restaurants operating in 2014. Nine new restaurants were opened and three restaurants were acquired in Fiscal Year 2014.  Compensation cost as a percentage of sales increased to 26.0% in Fiscal Year 2014 from 25.8% in Fiscal Year 2013.

 

Occupancy costs increased by $0.8 million, or 12.9%, to $7.2 million in Fiscal Year 2014 from $6.4 million in Fiscal Year 2013 primarily due to the increase in the number of restaurants operating in 2014, including the acquisition of three BWW restaurants.  Occupancy cost as a percentage of sales decreased to 5.6% in Fiscal Year 2014 from 5.9% in Fiscal Year 2013 due to the increase of purchased real estate verse leasing of property in late fiscal 2013 and throughout fiscal 2104. In Fourth Quarter 2014, DRH finalized the sale-leaseback transaction for ten of the twelve Company owned properties, as further discussed in Note 3 of the Consolidated Financial Statements. We expect the impact of this transaction to increase our Fiscal 2015 occupancy cost by approximately 20.0%.

 

Other operating costs increased by $5.5 million, or 25.6%, to $27.2 million in Fiscal Year 2014 from $21.7 million in Fiscal Year 2013 primarily due to the increase in the number of restaurants operating in 2014.  Other operating cost as a percentage of sales increased to 21.2% in Fiscal Year 2014 from 19.9% in Fiscal Year 2013 due to implementing new information technology initiatives as well as increase in third party costs for hiring and accounts payable processing.

 

General and administrative expenses increased by $1.5 million, or 20.9%, to $8.8 million in Fiscal Year 2014 from $7.3 million in Fiscal Year 2013 due to additional hiring of support staff for our on-going growth, increased professional fees, a result of the Florida BWW acquisition, and increased marketing which historically ranges between 2.0% to 2.2% of sales. General and administrative costs as a percentage of sales increased to 6.8% in Fiscal Year 2014 from 6.7% in Fiscal Year 2013.

 

Pre-opening costs increased by $0.3 million, or 7.5%, to $3.5 million in Fiscal Year 2014 from $3.2 million in Fiscal Year 2013. The increase in pre-opening costs was due to the timing and costs to open new restaurants during Fiscal Year 2014.  The Company had nine new restaurant openings and two relocations in Fiscal Year 2014 versus ten new restaurant openings and one relocation openings in Fiscal Year 2013. As a percentage of sales, pre-opening costs decreased to 2.7% in Fiscal Year 2014 from 3.0% in Fiscal Year 2013.

 

Depreciation and amortization increased by $3.0 million, or 37.4%, to $11.0 million in Fiscal Year 2014 from $8.0 million in Fiscal Year 2013 primarily due to the increase in the total number of restaurants operating in 2014. Depreciation and amortization as a percentage of sales increased to 8.5% in Fiscal Year 2014 from 7.3% in Fiscal Year 2013 due to the increased investment in ground-up development of the restaurants.

 

Loss on disposal of property and equipment increased by $0.9 million, or 942.3%, to $1.0 million in Fiscal Year 2014 from $0.1 million in Fiscal Year 2013.  The increase was primarily due to a $0.5 million loss from our sale-leaseback transaction and $0.4 million of which was a direct consequence of transitioning all of our locations to a new point of sale system. Loss on disposal of property and equipment as a percentage of sales, increased to 0.8% in Fiscal Year 2014 from 0.1% in Fiscal Year 2013.

 

Interest and Taxes

 

Interest expense was $2.3 million and $1.7 million during the years ended December 28, 2014 and December 29, 2013, respectively. The increase is associated with the $77.0 million senior secured credit facility with RBS Citizens, N.A. (“RBS”), which was effective December 16, 2014 and includes the write-off of loan fees of $0.3 million. Increased borrowings for new restaurant development in 2014 was also a contributing factor. 

 

In Fiscal Year 2014, we recorded an income tax benefit of $1.7 million compared with Fiscal Year 2013, when we recorded an income tax benefit of $0.3 million.   The increase in the benefit is primarily due to the increased pre-tax loss and the increased tip credits.

 

 
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FISCAL YEAR 2013 COMPARED WITH FISCAL YEAR 2012

 

Revenue

 

Total revenue for Fiscal Year 2013 was $108.9 million, an increase of $31.4 million, or 40.6%, over revenue generated during Fiscal Year 2012.  The increase was attributable to $14.9 million from newer restaurants not meeting the criteria for same store sales, 11 of which opened in 2013 (seven Bagger Dave’s restaurants and four BWW restaurants), $13.4 million in sales from the acquisition of eight BWW locations in late September 2012, and $3.1 million from same store sales growth. Same store sales are defined as the year-over-year change in restaurant sales and are only applicable for restaurants that have operated for at least eighteen months.

 

Operating Expenses

 

Food, beverage, and packaging costs increased by $8.6 million, or 35.7%, to $32.7 million in Fiscal Year 2013 from $24.1 million in Fiscal Year 2012 as a result of the increase in the number of restaurants and inflationary factors.  Food, beverage, and packaging cost as a percentage of sales decreased to 30.0% in Fiscal Year 2013 from 31.1% in Fiscal Year 2012 primarily due to lower bone-in chicken wing costs.  Average cost per pound for bone-in chicken wings decreased 10.7% to $1.76 in Fiscal Year 2013 from $1.97 in Fiscal Year 2012.

  

Compensation costs increased by $8.7 million, or 44.5%, to $28.1 million in Fiscal Year 2013 from $19.4 million in Fiscal Year 2012.  The increase was primarily due to the increase in staffing required for 10 new restaurants and eight acquired restaurants.  Compensation costs as a percentage of sales increased from 25.1% for Fiscal Year 2012 to 25.8% in Fiscal Year 2013 primarily due to a buildup of restaurant management labor necessary to effectively open a greater number of restaurants.

 

Occupancy costs increased by $2.1 million, or 48.7%, to $6.4 million in Fiscal Year 2013 from $4.3 million in Fiscal Year 2012 primarily due to the increase in the number of restaurants.  Occupancy cost as a percentage of sales increased to 5.9% in Fiscal Year 2013 from 5.5% in Fiscal Year 2012.

 

Other operating costs increased by $6.7 million, or 44.4%, to $21.7 million in Fiscal Year 2013 from $15.0 million in Fiscal Year 2012 primarily due to the increase in the number of restaurants.  Other operating costs as a percentage of sales increased to 19.9% in Fiscal Year 2013 from 19.4% in Fiscal Year 2012.  

 

General and administrative expenses increased by $0.7 million, up 10.4%, to $7.3 million in Fiscal Year 2013 from $6.6 million in Fiscal Year 2012 due to increased marketing and advertising costs demanded by the increase in the number of new restaurants, enhancements to the corporate staff to support the Company’s growth plans, and non-recurring costs. General and administrative cost as a percentage of sales decreased to 6.7% in Fiscal Year 2013 from 8.5% in Fiscal Year 2012 due to the favorable leverage of general and administrative expenses over an expanded revenue base. 

 

Pre-opening costs increased by $1.4 million, or 80.2%, to $3.2 million in Fiscal Year 2013 from $1.8 million in Fiscal Year 2012. The increase in pre-opening costs was due to the timing and costs to open new restaurants during Fiscal Year 2013.  The Company had 10 new restaurant openings and one relocation in Fiscal Year 2013 versus eight restaurant openings in Fiscal Year 2012. As a percentage of sales, pre-opening costs increased to 3.0% in Fiscal Year 2013 from 2.3% in Fiscal Year 2012.  The increase in percent of sales is a consequence of the increased number of new restaurant openings and an increased average pre-opening cost per restaurant primarily due to our two downtown locations - Detroit, Michigan Bagger Dave’s and Chicago, Illinois BWW.

 

Depreciation and amortization increased by $3.4 million, or 73.8%, to $8.0 million in Fiscal Year 2013 from $4.6 million in Fiscal Year 2012 primarily due to the increase in the total number of restaurants and larger percentage of stand-alone buildings which require significantly more capital (vs. leasing). Depreciation and amortization as a percentage of sales increased slightly to 7.3% in Fiscal Year 2013 from 5.9% in Fiscal Year 2012.

 

Loss on disposal of property and equipment increased by $31,465, or 166.5%, to $98,162 in Fiscal Year 2013 from $36,833 in Fiscal Year 2012.  The increase was primarily due to the Fiscal Year 2013 voluntary renovations, which resulted in the disposal of assets that were not yet fully depreciated.  Loss on disposal of property and equipment as a percentage of sales was 0.1% for both Fiscal Year 2013 and Fiscal Year 2012.

 

Interest and Taxes

 

Interest expense was $1.7 million and $1.3 million during the years ended December 29, 2013 and December 30, 2012, respectively. Interest expense increased due to an increase in debt used for new restaurant development.

 

In Fiscal Year 2013, we recorded an income tax benefit of $261,450 compared with Fiscal Year 2012, when we recorded an income tax benefit of $167.   The increase in the benefit is primarily due to increased tip credits in 2013.

 

 
29

 

 

LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS

 

On December 16, 2014, the Company entered into a $77.0 million senior secured credit facility with RBS (the “December 2014 Senior Secured Credit Facility”).  The December 2014 Senior Secured Credit Facility consist of a $56.0 million term loan (the “December 2014 Term Loan”), a $20.0 million development line of credit (the “December 2014 DLOC”), and a $1.0 million revolving line of credit (the “December 2014 RLOC”). The Company used approximately $35.5 million of the December 2014 Term Loan to refinance existing outstanding debt with RBS and used approximately $20.0 million of the December 2014 Term Loan to refinance and term out the outstanding balance of the existing development line of credit loan between the Company and RBS.   The remaining balance of the December 2014 Term Loan, approximately $0.5 million, was used to pay the fees, costs, and expenses associated with the closing of the December 2014 Senior Secured Credit Facility.  The December 2014 Term Loan is for a period of five years.  Payments of principal are based upon an 84-month straight-line amortization schedule, with monthly principal payments of $666,667 plus accrued interest.  The interest rate for the December 2014 Term Loan is LIBOR plus an applicable margin, which ranges from 2.25% to 3.15%, depending on the lease adjusted leverage ratio defined in the terms of the agreement.  The entire remaining outstanding principal and accrued interest on the December 2014 Term Loan is due and payable on the maturity date of December 16, 2019.  The December 2014 DLOC is for a term of two years and is convertible upon maturity into a term note based on the terms of the loan agreement at which time monthly princpial payments will be due on a 84-month straight-line amortization schedule, plus interest through maturity on December 16, 2019. The December 2014 RLOC is for a term of two years and no amount was outstanding as of December 28, 2014.

 

We believe the cash flow from operations, the remaining proceeds from the registered offering, proceeds from the sale-lease-back agreement of $24.6 million, and availability of credit will be sufficient to meet our operational funding, development, and obligations for at least the next 12 months.

 

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 costs for maintenance, facility upgrades, capacity enhancements, information technology, and other general corporate capital expenditures.

 

The amount of capital required to open a new restaurant is largely dependent on whether we build-out an existing leased space or build from the ground up.  Our preference is to find leased space for new restaurant locations but depending on the availability of real estate in specific markets, we will take advantage of alternative strategies which may include land purchases, land leases, and ground up construction of a building to house our restaurant operation.  Excluding land and building, we expect the build-out of a new Bagger Dave’s restaurant will, on average, require a total cash investment of $1.1 million to $1.4 million (excluding potential tenant incentives). Similarly, we expect the build-out of a new DRH-owned BWW restaurant will require an estimated cash investment of $1.9 million to $2.1 million (excluding potential tenant incentives).  We expect to spend approximately $225,000 to $275,000 per restaurant for pre-opening expenses.  Depending on individual lease negotiations, we may receive cash tenant incentives of up to $400,000.  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 return on our initial total capital investment of less than four years. The expected payback is subject to how quickly we reach our target sales volume and the cost of construction.

  

Cash flow from operations for fiscal 2014, 2013, 2012 was $11.3 million, $7.2 million, and $7.6 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses.

 

Opening new restaurants, including real estate investments, is our primary use of capital and is estimated to be over 80.0% of our capital expenditures in 2015. For 2015, we estimate capital expenditures to be between $35.0 million and $40.0 million. We plan to use the capital as follows: one half for new restaurant openings, currently one Bagger Dave's and one DRH-owned BWW are under construction; one third for real estate (including the purchase of land and construction of buildings) associated with new restaurant openings; and the remaining for restaurant remodels, upgrades, relocations 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 $900,000 (for a full remodel of the restaurant). Restaurants are typically upgraded after approximately five to seven years of operation and fully remodeled after approximately 10 years of operation.

 

Contractual Obligations

 

The following table presents a summary of our contractual obligations as of December 28, 2014:

 

           

Less than

                         
   

Total

   

one year

   

1 - 3 years

   

3 - 5 years

   

After 5 years

 

Long-term debt 1

  $ 61,768,399     $ 8,155,903     $ 17,870,832     $ 35,741,664     $ -  
                                         

Operating lease obligations

    71,714,786       7,555,779       14,390,060       13,178,660       36,590,287  
                                         

Commitments for restaurants under development 2

    21,337,296       9,799,380       2,194,506       2,201,258       7,142,152  
    $ 154,820,481     $ 25,511,062     $ 34,455,398     $ 51,121,582     $ 43,732,439  

 

1

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 variable of the rates. See Note 8 for additional details.

 

 

2

Amount represents capital expenditures DRH is obligated to pay for restaurants under development in addition to noncancelable operating leases for these restaurants.

 

 
30

 

 

Mandatory Upgrades

 

In fiscal year 2014, we completed two mandatory remodels of existing DRH-owned BWW restaurant, which was funded with cash from operations. We have four mandatory remodels for DRH-owned BWW locations in 2015, which will also be funded with cash from operations.

 

Discretionary Upgrades and Relocations

 

In fiscal year 2014, 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 consisted of new carpentry, audio/visual equipment upgrades, patio upgrades, and point-of-sale system upgrades. In fiscal year 2014, we relocated two DRH-owned BWW locations in lieu of remodels; the relocations occurred in second quarter 2014. The decision to relocate is typically driven by timing of our current lease agreements and the availability of real estate that we deem to be a better long-term investment. Relocations are funded by a combination of cash from operations and borrowing from our credit facility.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company assumed, from a related entity, an ADA in which the Company was to open 23 BWW restaurants within its designated "development territory”. On December 12, 2008, this agreement was amended, adding nine additional restaurants and extending the date of fulfillment to March 1, 2017. Failure to develop restaurants in accordance with the schedule detailed in the agreement could lead to potential penalties of up to $50,000 for each undeveloped restaurant, payment of the initial franchise fees for each undeveloped restaurant, and loss of rights to development territory. As of December 28, 2014, 24 of the required 32 ADA restaurants had been opened for business. We remain on track to fulfill our obligation under the amended ADA, and we expect to operate a total of 52 BWW by the end of 2017, exclusive of potential acquisitions of additional BWW 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.

 

Critical Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company.  All significant intercompany accounts and transactions have been eliminated upon consolidation.

 

 
31

 

 

We consolidate all variable interest entities (“VIE”) where we are the primary beneficiary.  For VIEs, we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIEs.  The primary beneficiary of a VIE is the party that has the power to direct the activities that most significantly impact the performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity.    

 

Property and Equipment

 

Property and equipment are recorded at cost. Buildings are depreciated using the straight-line method over the estimated useful life, which is typically 39 years. 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, with consideration of renewal options if renewals are reasonably assured because failure to renew would result in an economic penalty, or the estimated useful lives of the assets, which is typically 5 - 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 unfavorable and unfavorable leases- over the term of the lease and Loan fees- over the term of the loan.

 

Impairment of Long-Lived Assets and Definite-Lived Intangible Assets

The Company reviews property and equipment, along with other long-lived assets subject to amortization, for impairment whenever events or changes in circumstances indicate that a potential impairment has occurred. No impairment loss was recognized for years ended December 28, 2014, December 29, 2013 and December 30, 2012.
 

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 (at year-end) 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 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 2014, 2013 or 2012.

 

We also 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. No impairments were recognized in fiscal 2014, 2013 or 2012. We are currently monitoring several restaurants in regards to the valuation of long-lived assets and have developed plans to improve operating results. Based on our current estimates of the future operating results of these restaurants, we believe that the assets at these restaurants are not impaired. As we periodically refine our estimated future operating results, changes in our estimates and assumptions may cause us to realize impairment charges in the future that could be material.

 

 
32

 

 

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 December 28, 2014 and December 29, 2013, we had goodwill of $11.0 million and $8.6 million that was assigned to our Buffalo Wild Wings reporting unit.

 

The 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. All goodwill was considered recoverable as of December 28, 2014 and December 29, 2013 based on our quantitative analysis.  

 

Investments

 

The Company’s investment securities are classified as available-for-sale. Investments classified as available-for-sale are available to be sold in the future in response to the Company’s liquidity needs, changes in market interest rates, tax strategies, and asset-liability management strategies, among other reasons. Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of taxes, reported in the accumulated other comprehensive income (loss) component of stockholders’ equity, and accordingly, have no effect on net income. Realized gains or losses on sale of investments are determined on the basis of specific costs of the investments. Dividend income is recognized when declared and interest income is recognized when earned. Discount or premium on debt securities purchased at other than par value are amortized using the effective yield method. See Note 4 for details. 

 

Interest Rate Swap Agreements

 

The Company utilizes interest rate swap agreements with RBS 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 other comprehensive income and is recognized in the statement of operations when the hedged item affects earnings. The ineffective portion of the change in fair value of a hedge is 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 8 and Note 15 for additional information on the interest rate swap agreements.

 

Stock 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.

 

 
33

 

 

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Debt Securities

 

We are exposed to market risk related to our debt securities. To manage our exposure, we have invested our excess cash in highly liquid short-term investments with maturities of less than one year. The investments are not held for trading or other speculative purposes. See Notes 1, 4, and 15 of our audited consolidated financial statements for additional information.

 

Interest Rate Risk

 

As a result of our normal borrowing activities, our operating results are exposed to fluctuations in interest rates. DRH has short-term and long-term debt with both fixed and variable interest rates. The short-term debt comprises the current portion of long-term debt maturing within twelve months from the balance sheet date. Long-term debt includes secured notes payable, one line of credit and a revolving line of credit which is used to finance working capital requirements. To manage our exposure, we have entered into interest rate swap agreements. The derivative instruments are not held for trading or other speculative purposes.

 

As of December 28, 2014, DRH had $61.8 million of variable-rate debt with a weighted average interest rate of 2.7%, which approximates fair value. Interest based on the debt agreement is based on one-month LIBOR plus an applicable margin, which ranges from 2.25% to 3.15%, depending on the lease adjusted leverage ratio defined in the terms of the agreement. DRH currently estimates that a 100 basis point fluctuation in LIBOR would result in an approximate $0.6 million fluctuation in pretax income. See Notes 1, 8 and 15 of our audited consolidated financial statements for additional information.

 

Inflation

 

The primary inflationary factors affecting our operations are food, labor, and restaurant operating costs. Substantial increases in these costs could impact operating results to the extent that such increases cannot be passed along through higher menu prices. A large number of our restaurant personnel are paid at rates based on the applicable federal and state minimum wages, and increases in the minimum wage rates and tip-credit wage rates could directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases.

 

Commodity Price Risk

 

Many of the food products purchased by us are affected by weather, production, availability, and other factors outside our control. We believe almost all of our food and supplies are available from several sources, which helps to control food product risks. Our purchasing department for Bagger Dave’s negotiates directly with our independent suppliers for our supply of food and paper products. As negotiated by BWLD, our DRH-owned BWW restaurants have a distribution contract with a BWLD selected vendor for our supply of food, paper, and non-food products. We have minimum purchase requirements with some of our vendors, but the terms of the contracts and our historical use of the products are such that we believe these minimum purchase requirements do not create a material market risk. One of the primary food products used by our BWW restaurants is chicken wings. We work to counteract the effect of the volatility of chicken wing prices, which can significantly change our cost of sales and cash flow, with the introduction of new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu price increases. We also explore purchasing strategies to reduce the severity of cost increases and fluctuations. For the periods ended December 28, 2014 and December 29, 2013 chicken wings accounted for approximately 29.7% and 33.6%, with an average price per pound of $1.53 and $1.76, respectively.

 

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 at pages 36 through 63 of this Annual Report and are incorporated herein by reference. 

 

 
34

 

 

DIVERSIFIED RESTAURANT HOLDINGS, INC.

 

Index to Consolidated Financial Statements

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

36

 

 

REPORT BY DIVERSIFIED RESTAURANT HOLDINGS, INC.'S MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

37

 

 

CONSOLIDATED FINANCIAL STATEMENTS:

 

 

 

CONSOLIDATED BALANCE SHEETS

38

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS

39

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

40

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

41

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

42

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

43

 

 
35

 

 

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 28, 2014 and December 29, 2013 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three fiscal years in the period ended December 28, 2014. 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. An audit 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 presentation of the financial statements. 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 28, 2014 and December 29, 2013, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 28, 2014, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Diversified Restaurant Holdings, Inc. and Subsidiaries’ internal control over financial reporting as of December 28, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 13, 2015 expressed an adverse opinion thereon.

 

 

/s/ BDO USA, LLP

 

Troy, Michigan

March 13, 2015

 

 
36

 

 

 March 13, 2015

 

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 28, 2014. This assessment was based on criteria for effective internal control over financial reporting described in   Internal Control — Integrated Framework   (1992 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, and the material weakness described below, management believes that, as of December 28, 2014, our system of internal control over financial reporting was not effective based on those criteria.
 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Our management has determined that our internal control related to financial reporting was not effective to ensure the effective design of internal control and that an effective evaluation and review of complex accounting matters had occurred prior to presentation to our external auditors. Specifically, our initial evaluation of long-lived assets for potential impairment was not sufficient under generally accepted accounting principles. Further, our evaluation of the accounting for modifications made under our borrowing arrangements reached an incorrect conclusion and we did not adequately evaluate the realization of our deferred tax assets. While we do not believe that this affected the accuracy of our financial statements included in the Annual Report on Form 10-K, this control deficiency could result in a material misstatement of the financial statements that would not be prevented or detected. Accordingly, our management, after discussion with our registered independent accounting firm, has concluded that this control deficiency constitutes a material weakness. This material weakness was identified in connection with our assessment of the effectiveness of internal control over financial reporting as of December 28, 2014, and has not yet been remediated. However, our management team has reviewed and discussed the identified material weakness with the Audit Committee and is in the process of developing and implementing an action plan to resolve it.

 

The Company’s independent auditors have issued an audit report on the effectiveness of the Company’s internal control over financial reporting as found on page 67.

 

 

Diversified Restaurant Holdings, Inc.

  

  

  

  

  

/s/ T. Michael Ansley

  

  

T. Michael Ansley

  

  

 

 

 

Chairman of the Board, President, Chief Executive Officer, and Principal Executive Officer

  

  

  

  

  

  

  

  

/s/ David G. Burke

  

  

David G. Burke

  

  

 

 

 

Chief Financial Officer, Treasurer, Principal Financial Officer, and Principal Accounting Officer

  

  

 

 
37

 

 

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 

   

December 28 

   

December 29

 

 

 

2014

   

2013

 
ASSETS                

Current assets

               

Cash and cash equivalents

  $ 18,688,281     $ 9,562,473  

Investments

    2,917,232       8,561,598  

Accounts receivable

    1,417,510       1,248,940  

Inventory

    1,335,774       1,017,626  

Prepaid assets

    397,715       555,144  

Total current assets

    24,756,512       20,945,781  
                 
                 

Deferred income taxes

    2,960,640       1,162,761  

Property and equipment, net

    71,508,950       58,576,734  

Intangible assets, net

    2,916,498       2,948,013  

Goodwill

    10,998,630       8,578,776  

Other long-term assets

    305,804       121,668  

Total assets

  $ 113,447,034     $ 92,333,733  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Current liabilities

               

Accounts payable

  $ 7,043,143     $ 4,416,092  

Accrued compensation

    2,786,830       2,060,082  

Other accrued liabilities

    1,357,510       809,104  

Current portion of long-term debt

    8,155,903       8,225,732  

Current portion of deferred rent

    377,812       306,371  

Total current liabilities

    19,721,198       15,817,381  
                 

Deferred rent, less current portion

    3,051,445       3,420,574  

Unfavorable operating leases

    693,497       759,065  

Other liabilities

    3,212,376       327,561  

Long-term debt, less current portion

    53,612,496       38,047,589  

Total liabilities

    80,291,012       58,372,170  
                 

Commitments and contingencies (Notes 11 and 12)

               
                 

Stockholders' equity

               

Common stock - $0.0001 par value; 100,000,000 shares authorized; 26,149,824 and 26,049,578, respectively, issued and outstanding

    2,582       2,580  

Additional paid-in capital

    35,668,001       35,275,255  

Accumulated other comprehensive loss

    (175,156 )     (245,364 )

Accumulated deficit

    (2,339,405 )     (1,070,908 )

Total stockholders' equity

    33,156,022       33,961,563  
                 

Total liabilities and stockholders' equity

  $ 113,447,034     $ 92,333,733  

 

 

See accompanying notes to consolidated financial statements.

 

 
38

 

 

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

   

Twelve Months Ended

 
   

December 28

   

December 29

   

December 30

 
   

2014

   

2013

   

2012

 
                         

Revenue

  $ 128,413,448     $ 108,886,139     $ 77,447,208  
                         

Operating expenses

                       

Restaurant operating costs (exclusive of depreciation and amortization shown separately below):

                       

Food, beverage, and packaging

    37,058,821       32,719,254       24,117,399  

Compensation costs

    33,337,000       28,096,721       19,448,210  

Occupancy

    7,205,420       6,381,052       4,289,966  

Other operating costs

    27,214,208       21,675,473       15,008,171  

General and administrative expenses

    8,786,520       7,270,597       6,585,908  

Pre-opening costs

    3,473,664       3,230,122       1,792,168  

Depreciation and amortization

    10,956,951       7,974,481       4,587,310  

Loss on disposal of property and equipment

    1,023,144       98,162       36,833  

Total operating expenses

    129,055,728       107,445,862       75,865,965  
                         

Operating profit (loss)

    (642,280 )     1,440,277       1,581,243  
                         

Change in fair value of derivative instruments

    -       -       (43,361 )

Interest expense

    (2,274,041 )     (1,718,711 )     (1,282,991 )

Other income (expense), net

    (58,912 )     151,292       20,081  
                         

Income (loss) before income taxes

    (2,975,233 )     (127,142 )     274,972  
                         

Income tax benefit

    (1,706,736 )     (261,450 )     (167 )
                         

Net income (loss)

    (1,268,497 )     134,308       275,139  
                         

Less: (Income) attributable to noncontrolling interest

    -       -       (95,040 )
                         

Net income (loss) attributable to DRH

  $ (1,268,497 )   $ 134,308     $ 180,099  
                         

Basic earnings per share

  $ (0.05 )   $ 0.01     $ 0.01  

Fully diluted earnings per share

  $ (0.05 )   $ 0.01     $ 0.01  
                         

Weighted average number of common shares outstanding

                       

Basic

    26,092,919       23,937,188       18,949,556  

Diluted

    26,092,919       24,058,072       19,091,849  

 

 

See accompanying notes to consolidated financial statements.

 

 
39

 

 

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

   

Twelve Months Ended

 
   

December 28

   

December 29

   

December 30

 
   

2014

   

2013

   

2012

 
                         

Net income (loss)

  $ (1,268,497 )   $ 134,308     $ 275,139  
                         

Other comprehensive income (loss)

                       

Unrealized changes in fair value of interest rate swaps, net of tax of $23,097, $35,084 and $146,457.

    44,836       68,106       (284,294 )

Unrealized changes in fair value of investments, net of tax of $13,071, $15,030 and $0.

    25,372       (29,176 )     -  
                         

Total other comprehensive income (loss)

    70,208       38,930       (284,294 )
                         

Comprehensive income (loss)

    (1,198,289 )     173,238       (9,155 )
                         

Less: Comprehensive (income) attributable to noncontrolling interest

    -       -       (95,040 )
                         

Comprehensive income (loss) attributable to DRH

  $ (1,198,289 )   $ 173,238     $ (104,195 )

 

 

See accompanying notes to consolidated financial statements.

 

 
40

 

 

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

 

                           

Accumulated

   

Retained

             
                   

Additional

   

Other

   

Earnings

           

Total

 
   

Common Stock

   

Paid-in

   

Comprehensive

   

(Accumulated

   

Noncontrolling

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Loss

   

Deficit)

   

Interest

   

Equity

 

Balances - December 25, 2011

    18,936,400     $ 1,888     $ 2,771,077     $ -     $ (1,253,831 )   $ 385,485     $ 1,904,619  
                                                         

Issuance of restricted shares

    28,800       -       -       -       -       -       -  
                                                         

Forfeitures of restricted shares

    (13,500 )     -       -       -       -       -       -  
                                                         

Share-based compensation

    -       -       220,449       -       -       -       220,449  
                                                         

Distributions from noncontrolling interest

    -       -       -       -       -       (40,000 )     (40,000 )
                                                         

Elimination of noncontrolling interest

    -       -       -       -       440,525       (440,525 )     -  
                                                         

Cash paid in excess of book value of noncontrolling interest, net of taxes

    -       -       -       -       (572,009 )     -       (572,009 )
                                                         

Other comprehensive loss

    -       -       -       (284,294 )     -       -       (284,294 )
                                                         

Net income

    -       -       -       -       180,099       95,040       275,139  
                                                         

Balances - December 30, 2012

    18,951,700     $ 1,888     $ 2,991,526     $ (284,294 )   $ (1,205,216 )   $ -     $ 1,503,904  
                                                         

Issuance of restricted shares

    145,575       -       -       -       -       -       -  
                                                         

Forfeitures of restricted shares

    (57,108 )     -       -       -       -       -       -  
                                                         

Sale of common stock from follow-on public offering, net of fees and expenses

    6,900,000       690       31,906,990       -       -       -       31,907,680