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EX-32.1 - EXHIBIT 32.1 - Diversified Restaurant Holdings, Inc.ex32110k.htm
EX-31.1 - EXHIBIT 31.1 - Diversified Restaurant Holdings, Inc.ex31110k.htm
EX-32.2 - EXHIBIT 32.2 - Diversified Restaurant Holdings, Inc.ex32210k.htm
EX-31.2 - EXHIBIT 31.2 - Diversified Restaurant Holdings, Inc.ex31210k.htm
EX-23 - EXHIBIT 23 - Diversified Restaurant Holdings, Inc.ex23consent.htm
EX-21 - EXHIBIT 21 - Diversified Restaurant Holdings, Inc.exhibit21diversifiedrestau.htm


U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K

þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  
 
for the fiscal year ended December 27, 2015
 
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   þ
 
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  þ
 
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  þ    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  þ    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.  þ

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 þ
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  þ
 
The aggregate market value of the Registrant’s voting common stock held by non-affiliates was $51.6 million based on the per share closing price of the Company's common stock as reported on the NASDAQ stock market on June 28, 2015.
 
The number of shares outstanding of the registrant's common stock as of March 9, 2016 was 26,335,850 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 June 2, 2016 are incorporated by reference in Part III herein. The registrant intends to file such Proxy Statement with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this report on Form 10-K.






TABLE OF CONTENTS
 
  
Page
  
  
 
 
 
 
 
 
 
 
 
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 maintain our relationship with our franchisor on economically favorable terms;
the impact of future sales of our common stock in the public market, the exercise of stock options, and any additional capital raised by us through the sale of our common stock; 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.
 

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ITEM 1.     BUSINESS
 
Business Overview
 
DRH is a fast-growing restaurant company operating two complementary concepts: Buffalo Wild Wings ® Grill & Bar (“BWW”) and Bagger Dave’s Burger Tavern ® (“Bagger Dave’s”).  As the largest franchisee of BWW and as the creator, developer, and operator of Bagger Dave’s, 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 27, 2015, we had 80 restaurants in Florida, Illinois, Indiana, Michigan and Missouri.
 
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, Michigan and Missouri.

DRH is the largest BWW franchisees and currently operates 62 DRH-owned BWW restaurants (20 in Michigan, 15 in both Florida and Missouri, seven in Illinois, 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 Buffalo Wild Wings International, Inc.("BWLD") and expect to operate 77 DRH-owned BWW restaurants by the end of 2020, exclusive of potential additional BWW restaurant acquisitions. In 2014, DRH was awarded the Franchisee of the Year and our Chief Operating Officer received the Founders’ Award by BWLD.

DRH originated the Bagger Dave’s concept with our first restaurant opening in January 2008 in Berkley, Michigan.  Currently, there are 18 Bagger Dave’s restaurants, 16 in Michigan, one both in Indiana and Ohio.

The following organizational chart outlines the current corporate structure of DRH.  A brief textual description of the entities follows the organizational chart. DRH is incorporated in Nevada.

AMC was formed on March 28, 2007, and serves as our operational and administrative center. AMC renders management, operational support, and advertising services to WINGS, 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.
 

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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 December 2020 through December 2035, 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 2050.  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. Currently, DRH owns one property. Due to the closure of the restaurant, DRH will be selling this property in fiscal year 2016. Refer to Note 4 of the Consolidated Financial Statements for additional information on restaurant closures. DRH also owned two Bagger Dave’s restaurants, which were sold as part of the sale leaseback transaction that occurred in the Second and Third Quarters of 2015. Refer to Note 2 for additional information on the sale leaseback transactions of the Consolidated Financial Statements for additional information.
 
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
  
Buffalo Wild Wings® 
 
With 62 DRH-owned BWW restaurants (20 in Michigan, 15 in both Florida and Missouri, seven in Illinois and five in Indiana), including the nation’s largest BWW, based on square footage, in downtown Detroit, Michigan, DRH is the largest BWLD franchisee. As of December 27, 2015, BWLD reported over 1,100 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 Buffalo Wild Wings® menu specializes in 21 mouth-watering signature sauces and seasonings with flavor sensations ranging 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 2015, our average DRH-owned BWW restaurant derived 81.2% of its revenue from food, including non-alcoholic beverages, and 18.8% of its revenue from alcohol sales, primarily draft beer.

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 a friendly and memorable guest experience. As of the date of this report, there are 18 Bagger Dave's restaurants (16 in Michigan and one in both Indiana and Ohio).
 

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Bagger Dave’s specializes in locally-sourced, never-frozen 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 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 regular or petite size patties), Michigan ground turkey, farm-raised, cage-free grilled chicken breasts and black bean patties. Guests can choose from our list of chef-created 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 19 complimentary 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 hand-cut fries, Dave’s Sweet Potato Chips®, Amazingly Delicious Turkey Black Bean Chili® and our fresh, made from scratch 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 entrées such as an Awesome Grilled Cheese sandwich, a California BLT sandwich, Sloppy Dave’s sandwich and entrée-sized chopped salads with grilled chicken breast. 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 2015, our average Bagger Dave’s restaurant derived approximately 86.0% of its revenue from food, including non-alcoholic beverages, and 14.0% of its revenue from alcohol sales, primarily draft beer. 
  
Growth Strategy
 
We plan to drive top and bottom line growth through the development of new restaurant locations, achievement of positive same-store-sales in comparable restaurant locations, and the successful implementation of cost reduction initiatives at the restaurant and support level.
Our new restaurant growth strategy is to open DRH-owned BWW locations consistent with the ADA we have with BWLD, calling for 15 additional locations by the end of 2021, most of which will be located in the Florida market. With the exception of one new Bagger Dave’s location in early 2016, our focus at Bagger Dave's will be on sustaining higher average unit volumes and restaurant-level profitability for our current restaurants. We currently own 62 DRH-owned BWW restaurants in five states and 18 Bagger Dave’s in three states.
 
We intend to drive same-store-sales growth in all of our locations through the execution of local, traffic-driven marketing and advertising strategies, continued support of the community through sponsorship programs and local charities and delivery of quality food and service in a clean and modernized environment. One of our guiding principles is that a happy team member translates to a happy guest.  A happy guest drives repeat sales and word-of-mouth referrals; two key factors that are fundamental and directly support our local marketing strategy.   

We plan to improve our margins through a number of initiatives including; enhanced methods to manage cost of sales and hourly labor with use of technology and improve application of standards; consolidation of vendors (local-to-regional and regional-to national), leveraging our scale to obtain lower product pricing and distribution costs; bringing our accounting process in-house which significantly reduces cost, and also dramatically enhances our ability to provide granular information for more effective forecasting and cost control; working with all service vendors to obtain competitive pricing, optimal frequency of service and productive billing which includes minimizing the number of invoices and securing highly-predictable periodic pricing. 


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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 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-restaurant trainers at each existing location who provide both front- and back-of-house training on site.  We also have a seven-week training program for our restaurant managers, which consists of an average of four weeks of restaurant training and three weeks of cultural training. During their training, managers observe our established restaurants’ operations and guest interactions.  We believe our focus on guest-centric training is a core 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 five assistant managers depending on the sales volume of the restaurant. The managing partner is responsible for day-to-day operations and for maintaining the standards of quality and performance that define our corporate culture.  We utilize regional managing partners to oversee our managing partners and supervise the operation of our restaurants, including the continuing development of each restaurant’s management team.  Through regular visits to the restaurants and constant communication with the management team, the regional managing partners ensure adherence to all aspects of our concept, strategy and standards of quality.  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.  In 2013, after nine months of developing our new training program with the help of industry experts, we introduced our Hospitality Excellence Academy ("HEA"). To ensure success of our organization, HEA was designed to foster our culture of excellence by cultivating the leaders of tomorrow.

We offer an incentive program that we believe is very competitive in the restaurant industry.  Aside from competitive base salaries and benefits, management is incentivized with a performance-based bonus program.  We also provide group health, dental, and vision insurance, a company-sponsored 401(k) plan with a discretionary matching contribution feature, a tuition reimbursement program, a referral bonus program and opportunities for career advancement.
 
We emphasize growth from within the organization 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 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 $1.7 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.


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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 have paused further development of our Bagger Dave’s concept until we feel confident that we can achieve and sustain average unit volumes that will provide adequate returns on investment.
 
We have a continuous capital improvement plan for our restaurants and plan major renovations every five 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 subsection entitled “Liquidity and Capital Resources; Expansion Plans”.

Quality Control and Purchasing
 
We strive to maintain high quality standards, protecting our food supply at all times.
 
Purchasing for DRH-owned BWW restaurants is primarily through channels established by BWLD corporate operations.  We do, however, negotiate directly with most of these channels a 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 2015, we spent approximately 2.0% 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.
 
BWW
 
We also pay an advertising fee to BWLD equal to 3.0% of net sales globally, 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 0.25% - 0.5% of net sales globally in a regional cooperative of BWW franchisees for certain metropolitan areas. The co-op was formed for the Indiana, Illinois and Michigan markets through coordinated local restaurant marketing efforts and operating strengths that focus on the guest experience.

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 telling our story through social media and Bagger Bucks loyalty rewards program.  We attribute a large part of our Bagger Dave’s growth through word-of-mouth.
 
Information Systems and Technology
 
Enhancing the security of our financial data and other personal information remains a high priority for us. We continue to innovate and modernize our technology infrastructure to provide improved efficiency, control and security. Our ability to accept credit cards as payment in our restaurants and for online gift card orders depends on us remaining compliant with standards set by the PCI Security Standards Council (“PCI”). The standards set by PCI contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. We maintain security measures that are designed to protect and prevent unauthorized access to such information.

We also believe that technology can provide a competitive advantage and enable our strategy for growth through efficient restaurant operations, information analysis and ease and speed of guest service. We have a standard point-of-sale system in our restaurants that is integrated to our corporate office through a web-based above-store business intelligence reporting and analysis tool. Our systems are designed to improve operating efficiencies, enable rapid analysis of marketing and financial information and improve administrative productivity. In 2012, we launched online ordering for our Bagger Dave’s restaurants and recently launched table-

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side ordering devices that allow 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 can D.J. and select the music played throughout the restaurant using their mobile device.
 
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.

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.  The majority of our licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at any time for cause, including violation by us or our team members of any law or regulation pertaining to alcoholic beverage control, such as those regulating the minimum age of team members or patrons who may serve or be served alcoholic beverages, the serving of alcoholic beverages to visibly intoxicated patrons, advertising, wholesale purchasing and inventory control.  In order to reduce this risk, restaurant team members are trained in standardized operating procedures designed to assure compliance with all applicable codes and regulations.  We have not encountered any material problems relating to alcoholic beverage licenses or permits to date.
 
We are also subject to laws governing our relationship with team members.  Our failure to comply with federal, state and local employment laws and regulations may subject us to losses and harm our 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, wages, hour requirements and payments to team members who receive gratuities, may divert financial and management resources and adversely affect operations.  The losses

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that may be incurred as a result of any violation of such governmental regulations by the Company are difficult to quantify.  To our knowledge, we are in compliance in all material respects with all applicable federal, state and local laws affecting our business.

The federal Patient Protection and Affordable Care Act (PPACA) was enacted in March 2010. On January 1, 2015, the employer portion of the PPACA went into effect. In addition to being required to provide full-time employees with medical insurance that meets minimum value and affordability standards, the employer mandate requires employers to provide covered employees and the Internal Revenue Service with specific reportable benefit information. The Company’s 2015 medical plan has been offered to all full-time employees and meets the minimum value and affordability requirements of the PPACA, and the Company believes that it will be able to meet the informational reporting requirements of the act when due.
  
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.

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 62 DRH-owned BWW restaurants and 18 Bagger Dave’s restaurant.  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;
 

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our guests’ failure to accept menu price increases that we may make to offset increases in certain operating costs;
 
 
our reputation and consumer perception of our concepts’ offerings in terms of quality, price, value, ambiance and service; and
 
 
our guests’ actual experiences from dining in our restaurants.
 
Our restaurants are also susceptible to increases in certain key operating expenses that are either wholly or partially beyond our control, including:
 
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.

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 landlord and construction or permitting delays.
  
We May Not Be Successful When Entering New Markets
 
When expanding the BWW and Bagger Dave's 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 taste, 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 concept, 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

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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.
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;

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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

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 $1.81 in 2015, $0.28 higher than the average of $1.53 in 2014.  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.
 

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There has been a marked increase in the use of social media platforms and similar devices, including weblogs (blogs), social media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons.  Consumers value readily available information concerning goods and services that they have or plan to purchase, and may act on such information without further investigation or authentication.  The availability of information on social media platforms is virtually immediate, as is its impact.  Many social media platforms immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted.  The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available.  Information concerning our Company may be posted on such platforms at any time.  Information posted may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or business.  The harm may be immediate without affording us an opportunity for redress or correction.  Such platforms also could be used for dissemination of trade secret information, compromising valuable company assets.  In summary, the dissemination of information online could harm our business, prospects, financial condition and results of operations, regardless of the information’s accuracy.
 
Regardless of whether any public allegations or complaints are valid, unfavorable publicity relating to a number of our restaurants, or only to a single restaurant, could adversely affect public perception of the entire brand.  Adverse publicity and its effect on overall consumer perceptions of food safety, or our failure to respond effectively to adverse publicity, could have a material adverse effect on our business.  We must protect and grow the value of our brands to continue to be successful in the future.  Any incident that erodes consumer trust in or affinity for our brands could significantly reduce their value.  If consumers 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 a team member receives in tips when calculating the team member’s hourly wage for minimum wage compliance purposes, have recently been and continue to be proposed and implemented at both federal and state government levels.  Continued minimum wage increases or changes to allowable tip credits may further increase our compensation costs or effective tax rate.

Various states in which we operate are considering or have already adopted new immigration laws, and the U.S. Congress and Department of Homeland Security from time to time consider or implement changes to federal immigration laws, regulations, or enforcement programs as well.  Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential team members.  Although we require all team members to provide us with government-specified documentation evidencing their employment eligibility, some of our team members may, without our knowledge, be unauthorized team members.  Unauthorized team members are subject to deportation and may subject us to fines or penalties, and if any of our team members are found to be unauthorized, we could experience adverse publicity that negatively impacts our brand and may make it more difficult to hire and keep qualified team members.  Termination of a significant number of team members that, unbeknownst to us, were unauthorized team members may disrupt our operations, cause temporary increases in our compensation costs as we train new team members and result in additional adverse publicity.  Our financial performance could be materially harmed as a result of any of these factors.
 
Changes in Public Health Concerns and Legislation and Regulations Requiring the Provision of Nutritional Information May Impact Our Performance
 
Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the health effects of consuming our menu offerings.  These changes have resulted in, and

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may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiring us to disclose the nutritional content of our food offerings.  For example, a number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information available to guests, or have enacted legislation restricting the use of certain types of ingredients in restaurants.  The U.S. health care reform law included nation-wide menu labeling and nutrition disclosure requirements as well, and our restaurants will be covered by these national requirements when they go into effect. The final rule was published on December 1, 2014 and required implementation by end of 2016. Although the federal legislation is intended to preempt conflicting state or local laws on nutrition labeling, until we are required to comply with the federal law, we will be subject to a patchwork of state and local laws and regulations regarding nutritional content disclosure requirements.  Many of these requirements are inconsistent or are interpreted differently from one jurisdiction to another.  The effect of such labeling requirements on consumer choices, if any, is unclear at this time.  We cannot make any assurances regarding our ability to 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.    

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

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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 December 27, 2015, all of our restaurants are located on leased premises and are subject to varying lease-specific arrangements.  For example, some of the leases require base rent that is subject to increase based on market factors, and other leases include base rent with specified periodic increases.  Some leases are subject to renewals, which could involve substantial increases.  Additionally, a few leases require contingent rent based on a percentage of gross sales.   When our leases expire in the future, we will evaluate the desirability of renewing such leases.  While we currently expect to pursue all renewal options, no guarantee can be given that such leases will be renewed or, if renewed, that rents will not increase substantially.  The success of our restaurants depends in large part on their leased locations.  As demographic and economic patterns change, current leased 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 27, 2015, approximately 81.3% of our total restaurants are located in Illinois, Indiana, Michigan, Missouri and Ohio, which are particularly susceptible to snowfall, and approximately 18.7% of our total restaurants are located in Florida, which is particularly susceptible to hurricanes.

Legal Actions Could Have an Adverse Effect on Us
 
We have faced in the past and could face in the future legal action from government agencies, team members, guests, or other parties.  Many state and federal laws govern our industry, and if we fail to comply with these laws, we could be liable for damages or penalties.  In October 2015, the Company settled two collective actions alleging violations of fair labor standards acts and minimum wage laws. We are currently facing a similar claim and may face such claims in the future. Further, we may face litigation from guests alleging that we were responsible for an illness or injury they suffered at or after a visit to our restaurants, or alleging that we are not complying with regulations governing our food quality or operations.  We may also face employment-

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related litigation, including claims of age discrimination, sexual harassment, gender discrimination, immigration violations, or other local, state, and federal labor law violations In light of the potential cost and uncertainty involved in litigation, we may settle matters even when we believe we have a meritorious defense. Litigation and its related costs may have a material adverse effect on our results of operations and financial condition.
 
We May Not Be Able to Obtain and Maintain Licenses and Permits Necessary to Operate Our Restaurants
 
The restaurant industry is subject to various federal, state and local government licensure and permitting requirements, including those relating to the sale of food and alcoholic beverages.  The failure to obtain and maintain these licenses, permits and approvals, including food and liquor licenses, could adversely affect our operating results.  Difficulties or failure to obtain any required licenses, permits or other government approvals could delay or result in our decision to cancel the opening of new restaurants.  Local authorities may revoke, suspend or deny renewal of our food and liquor licenses if they determine that our conduct violates applicable regulations.
 
The Sale of Alcoholic Beverages at Our Restaurants Subjects Us to Additional Regulations and Potential Liability
 
For fiscal year 2015, approximately 18.0% of our consolidated restaurant sales were attributable to the sale of alcoholic beverages.  Our restaurants sell alcoholic beverages, and as such, we are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our restaurants are located.  Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays.  Typically, the licenses are renewed annually and may be revoked or suspended for cause at any time.  Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and team members, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages.  If we fail to comply with federal, state or local regulations, our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants.
 
In certain states, we are subject to “dram shop” statutes, which generally allow a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.  Some dram shop litigation against restaurant companies has resulted in significant judgments, including punitive damages.  

We 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

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financing may involve significant cash payment obligations, covenants and financial ratios that may restrict our ability to operate and grow our business.

There Can Be No Assurances That, in the Future, We Will Be in Compliance With All Covenants of Our Current or Future Debt Agreements or That Our Lenders Will Waive Any Violations of Such Covenants
 
Non-compliance with our debt covenants could have a material adverse effect on our business, results of operations, and financial condition.  Non-compliance may result in us being in default under our debt agreements, which could cause a substantial financial burden by requiring us to repay our debt earlier than otherwise anticipated.
 
Our Current Insurance May Not Provide Adequate Levels of Coverage Against Claims
 
We currently maintain insurance that is customary and required in our franchise agreements and leases.  However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure against, such as losses due to natural disasters.  Such damages could have a material adverse effect on our business and the results of operations.  Additionally, there is no assurance that we will be able to maintain our current coverage at acceptable premium rates or that any coverage will be available to us in the future.
  
An Impairment in the Carrying Value of Our Fixed Assets, Intangible Assets or Goodwill Could Adversely Affect Our Financial Condition and Consolidated Results of Operations
 
Goodwill represents the excess of cost over the fair value of identified net assets of 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 lease term, future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures and the expected lives of other related groups of assets. We cannot accurately predict the amount and timing of any impairment of assets. Should the value of fixed assets or intangible assets become impaired, there could be an adverse effect on our financial condition and consolidated results of operations. 
 
We May Incur Costs Resulting From Security Risks We Face in Connection With Our Electronic Processing and Transmission of Confidential Guest Information  
 
We accept electronic payment cards from our guests in our restaurants. For the fiscal year ended December 27, 2015, approximately 74.5% of our sales were attributable to credit/debit card transactions, and credit/debit card usage could continue to increase. A number of restaurant operators and retailers have experienced actual or potential security breaches in which credit/debit card information may have been stolen.  While we 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.
 

20


We also receive and maintain certain personal information about our guests and team members. The use of this information by us is regulated at the federal and state levels.  If our security and information systems are compromised or our team members fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as the results of operations, and could result in litigation against us or the imposition of penalties.  In addition, our ability to accept credit/debit cards as payment in our restaurants and online depends on us maintaining our compliance status with standards set by the PCI Security Standards Council.  These standards, set by a consortium of the major credit card companies, require certain levels of system security and procedures to protect our guests’ credit/debit card information as well as other personal information.  Privacy and information security laws and regulations change over time, and compliance with those changes may result in cost increases due to necessary system and process changes.

Failure to Establish and Maintain Our Internal Control Over Financial Reporting Could Harm Our Business and Financial Results.
 
Our management team members are responsible for establishing and maintaining effective internal control over financial reporting.  We previously identified a material weakness in connection with our assessment of the effectiveness of internal control over financial reporting as of December 28, 2014. As of December 27, 2015, management has remediated the underlying causes of the material weakness. However, 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.  Any failure to remediate a material weakness or the occurrence of 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.

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 11, 2016, we operated 80 Company-owned restaurants, all of which are leased properties. Typically, our operating leases contain renewal options under which we may extend the renewal lease terms for periods of five to 10 years. Most of our leases include "exclusive use" provisions prohibiting our landlords from leasing space to other restaurants that fall within certain specified criteria and incorporate incremental increases based on time passage and payment of certain occupancy-related expenses.
 
We own all of the equipment, furnishings, and fixtures in our restaurants. The Company also owns a significant amount of leasehold improvements in the leased facilities.
 
As of December 27, 2015, we operated restaurant properties for 36 locations in Michigan, 15 locations in both Florida and Missouri, seven locations in Illinois, six locations in Indiana, and one in Ohio. Our 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; 40 of our restaurants are situated in stand-alone buildings.
 


21


ITEM 3.        LEGAL PROCEEDINGS
The following information is incorporated by reference: the information set forth under the heading "Legal Proceedings" in Note 14 "Commitments and Contingencies" of the "Notes to the Consolidated Financial Statements" of Part II, Item 8 to this Report on Form 10-K.
In addition, we are occasionally a defendant in litigation arising in the ordinary course of our business, including claims arising from personal injuries, contract claims, dram shop claims, employment-related claims, and claims from guests or team members alleging injury, illness, or other food quality, health, or operational concerns. We have insured and continue to insure against most of these types of claims. A judgment on any claim not covered by or in excess of our insurance coverage could materially adversely affect our financial condition or results of operations.
 
ITEM 4.         MINE SAFETY DISCLOSURES
 
Not applicable.


22


PART II
 
ITEM 5.        MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
The Company's common stock is listed on the NASDAQ Capital Market under the symbol “SAUC”.  The development and maintenance of an active public trading market depends upon the existence of willing buyers and sellers, the presence of which is beyond our control. While we are a publicly-traded company, the volume of trading activity in our stock is still relatively limited.
 
The following table sets forth the high and low bid quotations for our common stock for the fiscal years ended December 27, 2015 and December 28, 2014, as reported by NASDAQ:
 
 
 
2015
 
2014
 
 
High
 
Low
 
High
 
Low
First Quarter
 
$
5.16

 
$
3.94

 
$
5.85

 
$
4.42

Second Quarter
 
4.46

 
3.59

 
5.50

 
3.99

Third Quarter
 
4.41

 
2.57

 
5.00

 
4.19

Fourth Quarter
 
3.19

 
2.40

 
5.42

 
4.61

 
Holders
 
As of March 9, 2016, there were approximately 435 record holders of 26,335,850 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.
 

23


Performance Graph
 
The following graph compares the cumulative total stockholder return from April 15, 2013 through December 27, 2015. 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

 
12/27/2015

Diversified Restaurant Holdings, Inc.
 
$
100.00

 
$
95.40

 
$
99.80

 
$
52.20

S&P 600 Restaurants
 
100.00

 
138.17

 
174.54

 
167.33

NASDAQ Composite
 
100.00

 
127.93

 
147.24

 
154.64


Equity Compensation Plan Information
 
The following table sets forth information, as of December 27, 2015, 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 be issued upon
exercise of
outstanding options,
warrants and rights
 
Weighted-average exercise
price of outstanding
options, warrants and
rights
 
Number of securities
remaining available for
future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans approved by security holders 1
 

 
N/A

 
365,051

Equity compensation plans not approved by security holders 2
 
180,000

 
$
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.

24


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.
 
 
 
Fiscal Years Ended
 
 
December 27,
2015
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
 
December 25,
2011
Statements of Operations:
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
172,485,378

 
$
128,413,448

 
$
108,886,139

 
$
77,447,208

 
$
60,707,475

Operating profit (loss)
 
(22,789,283
)
 
(642,280
)
 
1,440,277

 
1,581,243

 
3,600,163

Net income (loss) attributable to DRH
 
(16,192,492
)
 
(1,268,497
)
 
134,308

 
180,099

 
1,842,186

 
 
 
 
 
 
 
 
 
 
 
Per Share:
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
(0.62
)
 
$
(0.05
)
 
$
0.01

 
$
0.01

 
$
0.10

Diluted earnings (loss) per share
 
$
(0.62
)
 
$
(0.05
)
 
$
0.01

 
$
0.01

 
$
0.10

 
 
 
 
 
 
 
 
 
 
 
Weighted average of common shares:
 
 
 
 
 
 
 
 
 
 
Basic
 
26,211,669

 
26,092,919

 
23,937,188

 
18,949,556

 
18,902,782

Diluted
 
26,211,669

 
26,092,919

 
24,058,072

 
19,091,849

 
19,055,500

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet:
 
 
 
 
 
 
 
 
 
 
Goodwill
 
$
50,097,081

 
$
10,998,630

 
$
8,578,776

 
$
8,578,776

 
$

Total assets
 
166,117,812

 
113,447,034

 
92,333,733

 
56,544,738

 
27,350,399

Total long term obligations
 
124,643,874

 
60,569,814

 
42,554,789

 
42,106,583

 
19,205,371

 
 
 
 
 
 
 
 
 
 
 
Statement of Cash Flows:
 
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in)
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
9,448,584

 
$
11,295,253

 
$
7,180,971

 
$
7,592,621

 
$
6,577,016

Investing activities
 
(78,026,376
)
 
(17,469,345
)
 
(33,950,993
)
 
(31,228,585
)
 
(8,215,522
)
Financing activities
 
64,090,039

 
15,299,900

 
33,632,167

 
24,798,795

 
1,817,622

 
The Company utilizes a 52- or 53-week accounting period that ends on the last Sunday in December.  Fiscal year 2015 ended on December 27, 2015, fiscal year 2014 ended on December 28, 2014, and fiscal year 2013 ended December 29, 2013. Each fiscal year was comprised of 52 weeks.


25


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: BWW and Bagger Dave’s. As the largest franchisee of BWLD and the developer and operator of Bagger Dave’s, we provide a unique guest experience in a casual and inviting environment.  We are committed to providing value to our guests by offering generous portions of flavorful food in an upbeat and entertaining atmosphere.  We believe BWW and Bagger Dave’s 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 Nevada in 2006 and are headquartered in the Detroit metropolitan area. Currently, we have 80 locations in Florida, Illinois, Indiana, Michigan, Missouri and Ohio.  
 
Our Growth Strategies and Outlook
 
Our strategy is comprised of the following key growth components:

pursue disciplined restaurant growth through a combination of both organic expansion and strategic acquisitions;
deliver comparable restaurant sales growth by providing our guest with an exceptional experience and executing effective marketing and 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 the fulfillment of our current franchise agreement with BWLD. We 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 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 future growth opportunities and will seek to take advantage of strategic acquisitions that may be available in the marketplace. We have suspended further development of our Bagger Dave’s concept until we feel confident that we can achieve and sustain average unit volumes that will provide adequate returns on investment.
 
The Company opened eight new restaurants, acquired 18 BWW locations and closed 12 underperforming restaurants in 2015. Over the next five years, we expect to open a minimum of 15 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 indicators in evaluating restaurant performance:
 

26


 
Comparable Restaurant Sales. We consider a restaurant to be comparable following the eighteenth or twenty-fourth month of operations for BWW and Bagger Dave's respectively. 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.
 
Restaurant-Level Contribution.  Also referred to as Restaurant-Level EBITDA, this metric presents a restaurant's on-going profit contribution and is defined as net revenue less costs of sales, labor, occupancy and operational expenses. It is representative of a restaurant's cash flow and is often times presented and measured as a percentage of sales in comparison to other restaurants.

Restaurant Openings
 
The following table outlines the restaurant unit information for each fiscal year from 2011 through 2015.
 
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
Summary of restaurants open at the beginning of year
 
 
 
 
 
 
 
 
 
 
 
DRH-owned BWW
 
42

 
36

 
33

 
22

 
19

 
Bagger Dave’s
 
24

 
18

 
11

 
6

 
3

 
Total
 
66

 
54

 
44

 
28

 
22

 
 
 
 
 
 
 
 
 
 
 
 
 
Openings:
 
 
 
 
 
 
 
 
 
 
 
DRH-owned BWW
 
3

 
3

 
3

 
3

 
3

 
Bagger Dave’s
 
5

 
6

 
7

 
5

 
3

 
BWW Acquisitions
 
18

 
3

 

 
8

 

 
Closures - Bagger Dave's
 
(11
)
 

 

 

 

 
Closures - DRH-owned BWW
 
(1
)
 

 

 

 

 
Total restaurants
 
80

 
66

 
54

 
44

 
28

 
 
Our Fiscal Year
 
The Company utilizes a 52- or 53-week accounting period that ends on the last Sunday in December.  Fiscal year 2015 ended on December 27, 2015, fiscal year 2014 ended on December 28, 2014 and fiscal year 2013 ended December 29, 2013. Each fiscal year comprised of 52 weeks.
 
Key Financial Definitions
 
Revenue. Revenue primarily consists of food and beverage sales, and merchandise sales, such as BWW sauce and Bagger Dave’s Craft Sodas. Revenue is presented net of discounts associated with each sale. Revenue in a given period is directly influenced by the number of operating weeks in such period, the number of restaurants we operate and 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.

27


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

Pre-Opening Costs.  Restaurant pre-opening costs consist of expenses incurred 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 costs 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 27, 2015, December 28, 2014, and December 29, 2013 with each line item in dollars and as a percentage of revenue. 
 
 
 
Fiscal Years-Ended
 
 
2015
 
2014
 
2013
 
Total revenue
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Food, beverage and packaging costs
 
28.7
 %
 
28.9
 %
 
30.0
 %
 
Compensation costs
 
26.9
 %
 
26.0
 %
 
25.8
 %
 
Occupancy costs
 
7.2
 %
 
5.6
 %
 
5.9
 %
 
Other operating costs
 
21.9
 %
 
21.2
 %
 
19.9
 %
 
General and administrative expenses
 
8.9
 %
 
6.8
 %
 
6.7
 %
 
Pre-opening costs
 
1.9
 %
 
2.7
 %
 
3.0
 %
 
Depreciation and amortization
 
9.6
 %
 
8.5
 %
 
7.3
 %
 
Impairment and loss on asset disposal
 
8.3
 %
 
0.8
 %
 
0.1
 %
 
Total operating expenses
 
113.2
 %
 
100.5
 %
 
98.7
 %
 
 
 
 
 
 
 
 
 
Operating profit (loss)
 
(13.2
)%
 
(0.5
)%
 
1.3
 %
 
 
 
 
 
 
 
 
 
Interest expense
 
(2.4
)%
 
(1.8
)%
 
(1.6
)%
 
Other income, net
 
0.5
 %
 
0.0
 %
 
0.1
 %
 
 
 
 
 
 
 
 
 
Loss before income taxes
 
(15.2
)%
 
(2.3
)%
 
(0.1
)%
 
 
 
 
 
 
 
 
 
Income tax benefit
 
(5.8
)%
 
(1.3
)%
 
(0.2
)%
 
 
 
 
 
 
 
 
 
Net income (loss)
 
(9.4
)%
 
(1.0
)%
 
0.1
 %
 
 
FISCAL YEAR 2015 COMPARED WITH FISCAL YEAR 2014
 
Revenue

28


 
Total revenue for Fiscal Year 2015 was $172.5 million, an increase of $44.1 million, or 34.3%, over revenue generated during Fiscal Year 2014.  The increase was attributable to increased same store sales, two BWW acquisitions (three restaurants in the Tampa, FL market June 28, 2014 and 18 restaurants in the St. Louis, MO market on June 29, 2015), and the opening of eight DRH-owned restaurants (five Bagger Dave's and three BWW restaurants). $3.8 million of the increase was attributable to 2.9% same store sales for 55 BWW and 10 Bagger Dave's restaurants. $24.1 million of the increase in sales was attributable to the acquisition of 21 total BWW restaurants. The remaining $16.2 million increase is a result of restaurants opening prior to entering the comparable sales base (18 months and 24 months for BWW and Bagger Dave's, respectively), including eight Bagger Dave's and seven BWW restaurants. Same store sales increase by concept was 1.3% and 3.0% for Bagger Dave's and BWW, respectively.

Operating Expenses
 
Food, beverage and packaging costs increased by $12.4 million, or 33.4%, to $49.4 million in Fiscal Year 2015 from $37.1 million in Fiscal Year 2014 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 28.7% in Fiscal Year 2015 from 28.9% in Fiscal Year 2014 primarily due to increased menu pricing and waste reduction efforts which offset net commodity cost inflation driven primarily by bone-in chicken wing prices.  Average cost per pound for bone-in chicken wings increased 18.3% to $1.81 in Fiscal Year 2015 from $1.53 in Fiscal Year 2014.
  
Compensation costs increased by $13.0 million, or 38.9%, to $46.3 million in Fiscal Year 2015 from $33.3 million in Fiscal Year 2014. The increase was primarily due to the increase in the number of restaurants operating in 2015. Eight new restaurants were opened and 18 restaurants were acquired in Fiscal Year 2015.  Compensation cost as a percentage of sales increased to 26.9% in Fiscal Year 2015 from 26.0% in Fiscal Year 2014. A variance of 0.2% was attributable to the rollout of the new chef-inspired menu at Bagger Dave's, 0.1% variance is due to increased hourly wages, primarily tipped wages, 0.3% is a result of our investment into the guest experience at Bagger Dave's by mandating minimum staffing levels, and the remaining 0.2% is a result of turnover and productivity.
 
Occupancy costs increased by $5.2 million, or 71.8%, to $12.4 million in Fiscal Year 2015 from $7.2 million in Fiscal Year 2014 primarily due to the increase in the number of restaurants operating in 2015, including the acquisition of 18 BWW restaurants.  Occupancy cost as a percentage of sales increased to 7.2% in Fiscal Year 2015 from 5.6% in Fiscal Year 2014. Approximately 100 basis points pertain to rents from the sale leaseback of the 12 previously owned properties and approximately 40 basis points pertain to the one-time expense for lease liability of the12 restaurants closed restaurants.
 
Other operating costs increased by $10.5 million, or 38.6%, to $37.7 million in Fiscal Year 2015 from $27.2 million in Fiscal Year 2014 primarily due to the increase in the number of restaurants operating in 2015.  Other operating cost as a percentage of sales increased to 21.9% in Fiscal Year 2015 from 21.2% in Fiscal Year 2014 primarily due to one-time expenses, much of which is related to the Company's efforts to ensure that the 18 acquired restaurants operate to DRH standards. Investing in equipment repairs and maintenance, restaurant supplies, team member incentives and leading-edge technology allows for enhanced team member and guest experience which we anticipate will drive incremental sales in the St. Louis market.
 
General and administrative expenses increased by $6.6 million, or 74.7%, to $15.4 million in Fiscal Year 2015 from $8.8 million in Fiscal Year 2014. During fiscal year 2015. we executed two sale leasebacks, pursued several acquisitions, successfully closed on a $54.0 million 18-restaurant acquisition, settled a class-action lawsuit for $1.9 million and transitioned accounting in-house. General and administrative costs as a percentage of sales increased to 8.9% in Fiscal Year 2015 from 6.8% in Fiscal Year 2014 of which 2.0% was a result of the aforementioned projects and acquisition-related expenses.
 
Pre-opening costs decreased by $0.2 million, or 6.6%, to $3.2 million in Fiscal Year 2015 from $3.5 million in Fiscal Year 2014. The decrease in pre-opening costs was due to the timing and costs to open new restaurants during Fiscal Year 2015.  The Company opened eight new restaurants and relocated one in Fiscal Year 2015 versus nine new restaurant openings and two relocations openings in Fiscal Year 2014. As a percentage of sales, pre-opening costs decreased to 1.9% in Fiscal Year 2015 from 2.7% in Fiscal Year 2014.
 
Depreciation and amortization increased by $5.6 million, or 51.3%, to $16.6 million in Fiscal Year 2015 from $11.0 million in Fiscal Year 2014 primarily due to the increase in the total number of restaurants operating in 2015. Depreciation and amortization as a percentage of sales increased to 9.6% in Fiscal Year 2015 from 8.5% in Fiscal Year 2014 partially due to the 18 acquired restaurants and the cost of constructing a restaurant from the ground-up versus a build-out on existing buildings.
 

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Impairment and loss on asset disposal increased by $13.2 million, or 1,292.1%, to $14.2 million in Fiscal Year 2015 from $1.0 million in Fiscal Year 2014.  The increase was primarily due to the closure of 12 restaurants and the $10.0 million write down of their remaining assets. In addition, we impaired $2.8 million of assets for four Bagger Dave's locations. Loss on disposal of assets as a percentage of sales, increased to 8.3% in Fiscal Year 2015 from 0.8% in Fiscal Year 2014.
 
Interest and Taxes
 
Interest expense was $4.2 million and $2.3 million during the years ended December 27, 2015 and December 28, 2014, respectively. Of the increase, $0.4 million is a result of expensing extinguished loan fees and expensing a portion of the current loan fees and discounts and the remaining increase was a result of increased debt due to the acquisition and building of new restaurants.
 
In Fiscal Year 2015, we recorded an income tax benefit of $10.0 million compared with Fiscal Year 2014, when we recorded an income tax benefit of $1.7 million.  The increase in the benefit is primarily due to the increased pre-tax loss.

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.
 
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 costs 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 versus 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 2 of the Consolidated Financial Statements.
 
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 costs 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 increased 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 costs, which historically ranges between 2.0% to 2.2% of sales. General and administrative cost as a percentage of sales increased to 6.8% in Fiscal Year 2014 from 6.7% in Fiscal Year 2013.
 

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Pre-opening costs increased by $0.3, 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%.
 
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 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.
 
Impairment and loss on asset disposal 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 Citizens, N.A. ("Citizens") 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.

LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS

On June 29, 2015, the Company, entered into a $155.0 million Senior Secured Credit Facility with Citizens (the “June 2015 Senior Secured Credit Facility”). The June 2015 Senior Secured Credit Facility consists of a $120.0 million Term Loan (the "June 2015 Term Loan"), a $30.0 million development line of credit (the "June 2015 DLOC") and a $5.0 million revolving line of credit (the "June 2015 RLOC"). The Company immediately used approximately $65.5 million of the June 2015 Term Loan to refinance existing outstanding debt and $54.0 million of the June 2015 Term Loan to finance the acquisition. The remaining balance of the June 2015 Term Loan, approximately $0.5 million, was used to pay the fees, costs and expenses arising in connection with the closing of the loans constituting the June 2015 Senior Secured Credit Facility. The June 2015 Term Loan is for a term of five years. Payments of principal shall be based upon a 12-year straight-line amortization schedule, with monthly principal payments of $833,333 plus accrued interest. The interest rate for the Term Loan is LIBOR plus an applicable margin which ranges from 2.25% to 3.5%. The entire remaining outstanding principal and accrued interest on the Term Loan is due and payable on the Term Loan maturity date of June 29, 2020. The June 2015 DLOC is for a term of two years and is convertible upon maturity into a term note based on the terms of the agreement at which time monthly principal payments will be due based on a 12-year straight-line amortization schedule, plus interest, through maturity on June 29, 2020. The June 2015 RLOC is for a term of five years and bears interest at LIBOR plus an applicable margin, no amount was outstanding as of December 27, 2015.
 
The current debt agreement contains various customary financial covenants generally based on the performance of the specific borrowing entity and other related entities. The financial covenants consist of a minimum debt service coverage ratio and a maximum lease adjusted leverage ratio. In connection with the closure of three locations discussed in Note 4, during the Third Quarter the Company violated one of its non-financial loan covenants related to the number of allowable restaurant closures. In the Third Quarter our primary lender modified our covenants within our debt agreement to allow for the closure of specified locations and one time transaction fees associated with the St. Louis acquisition and the wage-claim settlement, discussed in Note 14 of the Consolidated Financial Statements. As of December 27, 2015 the Company was in compliance with the loan covenants.

We believe that along with our current cash balance, the cash flow from operations and availability of credit will be sufficient to meet our operational, development and debt 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 the cost and potential obligation

31


to invest in maintenance, facility upgrades, capacity enhancements, information technology and other general corporate capital expenditures.

The amount of capital required to open a new restaurant is largely dependent on whether we build-out an existing leased space or build from the ground up.  Our preference is to find leased space for new restaurant locations, but depending on the availability of real estate in specific markets, we will take advantage of alternative strategies, which may include land purchases, land leases, and ground-up construction of a building to house our restaurant operation.  We expect that a build-out of a new DRH-owned BWW restaurant will require an estimated cash investment of $1.7 million to $2.1 million (excluding potential tenant incentives). 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).  We expect to spend up to $0.3 million per restaurant for pre-opening expenses.  Depending on individual lease negotiations, we may receive cash tenant incentives of up to $0.4 million.  The projected cash investment per restaurant is based on recent opening costs and future projections and may fluctuate based on construction costs specific to new restaurant locations.
 
We target a cash on cash payback on our initial total capital investment of less than four years. The expected payback is subject to how quickly we reach our target sales volume and the cost of construction.
  
Cash flow from operations for fiscal 2015, 2014, and 2013 was $9.4 million, $11.3 million and $7.2 million respectively. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses.
 
Opening new restaurants, including construction of the buildings associated with the new restaurant openings, is our primary use of capital and was 65.0% of our capital expenditures in 2015. For 2016, capital expenditures are anticipated to be between $14.0 million and $16.0 million. We plan to use the capital as follows: 35.0% for new restaurant openings, 15.0% for construction of buildings associated with new restaurant openings; and the remaining 50.0% for restaurant remodels, upgrades and other general corporate purposes.
 
Although investments in new restaurants are an integral part of our strategic and capital expenditures plan, we also believe that reinvesting in existing restaurants is an important factor and necessary to maintain the overall positive dining experience for our guests. Depending on the age of the existing restaurants, upgrades range from $50,000 (for minor interior refreshes) to $1.3 million (for a full extensive remodel of the restaurant), we target remodels of $0.6 million to upgrade a typical BWW restaurant to the new Stadia design. The strategy of the Company is to fully remodel existing BWW restaurants to the new Stadia design at time of scheduled refresh or remodel typically within seven years or less of opening.

Mandatory Upgrades
 
In fiscal 2015, we began seven mandatory remodels of existing DRH-owned BWW restaurants and completed four, which were funded with cash from operations. We have four mandatory remodels for DRH-owned BWW locations in 2016 including three additional remodels that began in 2015 and carried over in 2016. All upgrades were funded with cash from operations.

Discretionary Upgrades and Relocations
 
In fiscal year 2015, the Company invested additional capital to provide minor upgrades to a number of its existing locations, all of which were funded by cash from operations. These improvements primarily consist of refreshing interior building finishes audio/visual equipment upgrades, and patio upgrades. In fiscal 2015, we completed three discretionary remodels. In First Quarter 2015, we relocated one DRH-owned BWW location in lieu of a remodel. The decision to relocate is typically driven by timing of our current lease agreements and the availability of real estate that we deem to be a better long-term investment. Relocations and discretionary remodels are funded by a combination of cash from operations and borrowing from our credit facility.

2016 Capital Plan

We previously stated that we expected to operate between 35 and 39 Bagger Dave’s restaurants by the end of 2017, however, we have paused the development of Bagger Dave's restaurants beginning in 2016, and as a result have shifted our focus primarily to the growth of our BWW portfolio, which represents the overwhelming majority of both our revenue and restaurant profit.  Accordingly, we will not commit to further development of Bagger Dave’s restaurants beyond the one restaurant currently under construction.  We believe that following this strategy will significantly reduce our capital needs and increase operating cash flow in the near term.  In 2016, we anticipate our capital expenses to range between $14.0 million and $16.0 million, nearly half of the 2015 capital expenditures. Our capital expenses for 2016 will include the development of two BWW restaurants and one Bagger

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Dave’s restaurant, all of which are under construction.  Our remaining capital needs will include four BWW Stadia remodels of existing locations and various maintenance capital expenditures. Remodels and refreshes represent roughly 50.0% of our current 2016 plan and although we can borrow on these items, we intend on funding these remodels and refreshes using cash from operations.  Additionally, we expect to increase profitability by reducing preopening expenses, including training costs, and through gains in efficiency as we focus on improving operations and cost management initiatives.  Finally, we expect to improve our net debt coverage ratios by reducing our borrowing needs for the development of new restaurants and by using excess cash to pay down debt.  

Contractual Obligations
 
The following table presents a summary of our contractual obligations as of December 27, 2015:
 
 
 
Total
 
Less than
one year
 
1 - 3 years
 
3 - 5 years
 
After 5 years
Long-term debt 1
 
$
126,601,307

 
$
9,918,827

 
$
21,522,363

 
$
95,160,117

 
$

Operating lease obligations
 
90,043,523

 
10,259,154

 
20,235,327

 
17,799,737

 
41,749,305

Commitments for restaurants under development 2
 
11,146,773

 
5,966,476

 
680,000

 
1,043,692

 
3,456,605

 
 
$
227,791,603

 
$
26,144,457

 
$
42,437,690

 
$
114,003,546

 
$
45,205,910

 
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 10 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.

Impact of Inflation
 
Our profitability is dependent, among other things, on our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy, and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our restaurant guests.  The impact of inflation on food, labor, energy and occupancy costs can significantly affect the profitability of our restaurant operations.
 
All of our restaurant staff members are paid hourly rates related to the federal minimum wage.  Certain operating costs, such as taxes, insurance and other outside services continue to increase with the general level of inflation or higher and may also be subject to other cost and supply fluctuations outside of our control.
 
While we have been able to partially offset inflation and other changes in the costs of key operating resources by gradually increasing prices for our menu items, more efficient purchasing practices, productivity improvements, and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our menu pricing flexibility.  In addition, macroeconomic conditions could make additional menu price increases imprudent.  There can be no assurance that all future cost increases can be offset by increased menu prices or that increased menu prices will be fully absorbed by our restaurant guests without any resulting changes in their visit frequencies or purchasing patterns. There can be no assurance that we will continue to generate increases in comparable restaurant sales in amounts sufficient to offset inflationary or other cost pressures.

OFF-BALANCE SHEET ARRANGEMENTS
 
The Company's ADA requires DRH to open 42 BWW restaurants within its designated "development territory” by April 1, 2021. As of December 27, 2015, 27 of the required 42 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 77 BWW restaurants by the end of 2020, exclusive of potential acquisitions of additional BWW restaurants. 
 

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Critical Accounting Polices and Estimates

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, “Nature of Business and Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material. We consider an accounting estimate to be critical if it requires assumptions to be made and changes in these assumptions could have a material impact on our consolidated financial condition or results of operations.
 
Management considers these policies critical because they are both important to the portrayal of the Company’s financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. The Company’s management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Company’s Board of Directors.

Impairment or Disposal of Long-Lived Assets

We review long-lived assets quarterly to determine if triggering events have occurred which would require a test to determine if the carrying amount of these assets may not be recoverable based on estimated future cash flows. Assets are reviewed at the lowest level for which cash flows can be identified, which is at the individual restaurant level. In the absence of extraordinary circumstances, restaurants are included in the impairment analysis after they have been open for two years. We evaluate the recoverability of a restaurant’s long-lived assets, including buildings, intangibles, leasehold improvements, furniture, fixtures and equipment over the remaining life of the primary asset in the asset group, after considering the potential impact of planned operational improvements, marketing programs, and anticipated changes in the trade area. In determining future cash flows, significant estimates are made by management with respect to future operating results for each restaurant over the remaining life of the primary asset in the asset group. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value based on our estimate of discounted future cash flows. The determination of asset fair value is also subject to significant judgment. Based on management's quantitative analysis, an impairment of $2.8 million was recorded for four Bagger Dave's locations as of December 27, 2015. Refer to Note 4 of the Consolidated Financial Statements for additional information. For fiscal years ended December 28, 2014 and December 29, 2013 no impairment losses were recognized.

We are currently monitoring several restaurants in regards to the valuation of long-lived assets and have developed plans to continue improvement of operating results. 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.

We account for exit or disposal activities, including restaurant closures, in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")Topic 420, Exit or Disposal Cost Obligations. Such costs include the cost of disposing of the assets, as well as other facility-related expenses from previously closed restaurants. These costs are generally expensed as incurred. Additionally, at the date we cease using a property under an operating lease, we record a liability for the net present value of any remaining lease obligations, net of estimated sublease income. Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred. In June 2015, DRH management had determined three Bagger Dave's locations were underperforming and it was best to reallocate valuable resources to higher performing locations. In late July 2015, the Board of Directors approved the closure of these three Bagger Dave's locations. The restaurants closed on August 7, 2015. Additionally, in the Fourth Quarter 2015, DRH management determined nine additional restaurants were to be closed due to under-performance. The Board of Directors approved the closure of the locations on December 15, 2015. Closures occurred on December 27, 2015. Refer to Note 4 for additional details.

Indefinite-Lived Intangible Assets

Liquor licenses, also a component of intangible assets, are deemed to have an indefinite life and, accordingly, are not amortized. Management reviews liquor license assets on an annual basis or more frequently if impairment indicators are present to determine whether carrying values have been impaired. We identify potential impairments for liquor licenses by comparing the fair value with its carrying amount. If the fair value exceeds the carrying amount, the liquor licenses are not impaired. If the carrying amount

34


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 20152014 or 2013.

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 27, 2015 and December 28, 2014, we had goodwill of $50.1 million and $11.0 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. As of December 27, 2015 and December 28, 2014 , based on our quantitative analysis, goodwill was considered recoverable. 
 
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 5 for details. 
 
Income Taxes
 
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

In accordance with the provisions of FASB ASC 740, Income Taxes, (“ASC 740”) a valuation allowance is established when it is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Since we believe sufficient future taxable income will be generated to utilize the benefits of the deferred tax assets, a valuation allowance has not been recognized. In fiscal 2015, we had undergone significant changes to our company structure. This includes the disposition and acquisition of assets, namely the closure of 12 underperforming restaurants, impairment of four Bagger Dave’s restaurants and acquisition of 18 profitable BWW restaurants. As such, we believe the changes to our company in fiscal 2015 combined with the planned opening of additional BWW restaurants will provide future taxable income prior to the expirations of carryfowards, which begin in 2028. Management continually reviews the likelihood that deferred tax assets will be realized and the Company recognizes these benefits only as reassessment indicates that it is more likely than not that such tax benefits will be realized. 

 

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The Company applies the provisions of ASC 740, regarding the accounting for uncertainty in income taxes. The Company classifies all interest and penalties as income tax expense. There are no accrued interest amounts or penalties related to uncertain tax positions as of December 27, 2015 and December 28, 2014.

Interest Rate Swap Agreements
 
The Company utilizes interest rate swap agreements with Citizens Bank, N.A. (“Citizens”) to fix interest rates on a portion of the Company’s portfolio of variable rate debt, which reduces exposure to interest rate fluctuations.  Our derivative financial instruments are recorded at fair value on the balance sheet. The effective portion of changes in the fair value of derivatives which qualify for hedge accounting is recorded in accumulated other comprehensive income (loss) and is recognized in the statement of operations when the hedged item affects earnings. Ineffective portion of the change in fair value of a hedge would be recognized in income immediately. The Company does not use any other types of derivative financial instruments to hedge such exposures, nor does it use derivatives for speculative purposes.  
  
The interest rate swap agreements associated with the Company’s current debt agreements qualify for hedge accounting. As such, the Company records the change in the fair value of its swap agreements as a component of accumulated other comprehensive income (loss), net of tax. The Company records the fair value of its interest swaps on the Consolidated Balance Sheet in other long-term assets or other liabilities depending on the fair value of the swaps. See Note 10 and Note 17 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.


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ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
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 27, 2015, DRH had $126.6 million of variable-rate debt with a weighted average interest rate of 3.86%, 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 $1.3 million fluctuation in pretax income. See Notes 1, 10 and 17 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 fiscal years ended December 27, 2015 and December 28, 2014, chicken wings accounted for approximately 34.3% and 29.7%, with an average price per pound of $1.81 and $1.53, respectively.
 

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ITEM 8.        CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The Consolidated Financial Statements, Notes to Consolidated Financial Statements, and the Report of Independent Registered Accounting Firm are included in this Annual Report and are incorporated herein by reference. 

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
 Index to Consolidated Financial Statements
 


39


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 27, 2015 and December 28, 2014 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 27, 2015. 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diversified Restaurant Holdings, Inc. and Subsidiaries at December 27, 2015 and December 28, 2014, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 27, 2015, 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 27, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 11, 2016 expressed an unqualified opinion thereon.
 
 
/s/ BDO USA, LLP
 
Troy, Michigan
March 11, 2016
 

40


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 27, 2015. This assessment was based on criteria for effective internal control over financial reporting described in   Internal Control — Integrated Framework   (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 27, 2015, Diversified Restaurant Holdings, Inc. maintained an effective system of internal control over financial reporting that is designed to produce reliable financial statements presented in conformity with generally accepted accounting principles based on those criteria.

The Company’s independent auditors have issued an audit report on the effectiveness of the Company’s internal control over financial reporting.
 
 
Diversified Restaurant Holdings, Inc.
  
  
  
  
  
/s/ T. Michael Ansley
Dated:
March 11, 2016
T. Michael Ansley
  
  
Chairman of the Board, President, Chief Executive Officer, and Principal Executive Officer
  
  
  
  
  
  
  
  
/s/ David G. Burke
Dated:
March 11, 2016
David G. Burke
  
  
Chief Financial Officer, Treasurer, Principal Financial Officer, and Principal Accounting Officer
  
  



















41


DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
 
December 27, 2015
 
December 28, 2014
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
14,200,528

 
$
18,688,281

Investments
 

 
2,917,232

Accounts receivable
 
620,942

 
1,417,510

Inventory
 
1,934,584

 
1,335,774

Prepaid assets
 
1,618,429

 
397,715

Total current assets
 
18,374,483

 
24,756,512

 
 
 
 
 
Deferred income taxes
 
13,320,177

 
2,960,640

Property and equipment, net
 
79,189,661

 
71,508,950

Intangible assets, net
 
3,984,033

 
2,916,498

Goodwill
 
50,097,081

 
10,998,630

Other long-term assets
 
1,152,377

 
305,804

Total assets
 
$
166,117,812

 
$
113,447,034

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
7,807,552

 
$
7,043,143

Accrued compensation
 
3,087,883

 
2,786,830

Other accrued liabilities
 
3,663,211

 
1,357,510

Current portion of long-term debt
 
9,918,827

 
8,155,903

Current portion of deferred rent
 
396,113

 
377,812

Total current liabilities
 
24,873,586

 
19,721,198

 
 
 
 
 
Deferred rent, less current portion
 
2,826,210

 
3,051,445

Unfavorable operating leases
 
671,553

 
693,497

Other liabilities
 
4,463,631

 
3,212,376

Long-term debt, less current portion
 
116,682,480

 
53,612,496

Total liabilities
 
149,517,460

 
80,291,012

 
 
 
 
 
Commitments and contingencies (Notes 13 and 14)
 

 

 
 
 
 
 
Stockholders' equity
 
 
 
 
Common stock - $0.0001 par value; 100,000,000 shares authorized; 26,298,725 and 26,149,824, respectively, issued and outstanding
 
2,584

 
2,582

Additional paid-in capital
 
36,136,332

 
35,668,001

Accumulated other comprehensive loss
 
(1,006,667
)
 
(175,156
)
Accumulated deficit
 
(18,531,897
)
 
(2,339,405
)
Total stockholders' equity
 
16,600,352

 
33,156,022

 
 
 
 
 
Total liabilities and stockholders' equity
 
$
166,117,812

 
$
113,447,034

 
 
See accompanying notes to consolidated financial statements.

42


DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
Fiscal Years Ended
 
 
December 27, 2015
 
December 28, 2014
 
December 29, 2013
Revenue
 
$
172,485,378

 
$
128,413,448

 
$
108,886,139

 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
 
 
 
 
 
 
Food, beverage, and packaging
 
49,437,576

 
37,058,821

 
32,719,254

Compensation costs
 
46,315,042

 
33,337,000

 
28,096,721

Occupancy
 
12,377,659

 
7,205,420

 
6,381,052

Other operating costs
 
37,723,846

 
27,214,208

 
21,675,473

General and administrative expenses
 
15,351,440

 
8,786,520

 
7,270,597

Pre-opening costs
 
3,244,157

 
3,473,664

 
3,230,122

Depreciation and amortization
 
16,582,236

 
10,956,951

 
7,974,481

Impairment and loss on asset disposals
 
14,242,705

 
1,023,144

 
98,162

Total operating expenses
 
195,274,661

 
129,055,728

 
107,445,862

 
 
 
 
 
 
 
Operating profit (loss)
 
(22,789,283
)
 
(642,280
)
 
1,440,277

 
 
 
 
 
 
 
Interest expense
 
(4,211,255
)
 
(2,274,041
)
 
(1,718,711
)
Other income (expense), net
 
822,039

 
(58,912
)
 
151,292

 
 
 
 
 
 
 
Loss before income taxes
 
(26,178,499
)
 
(2,975,233
)
 
(127,142
)
 
 
 
 
 
 
 
Income tax benefit
 
(9,986,007
)
 
(1,706,736
)
 
(261,450
)
 
 
 
 
 
 
 
Net income (loss)
 
$
(16,192,492
)
 
$
(1,268,497
)
 
$
134,308

 
 
 
 
 
 
 
Basic earnings per share
 
$
(0.62
)
 
$
(0.05
)
 
$
0.01

Fully diluted earnings per share
 
$
(0.62
)
 
$
(0.05
)
 
$
0.01

 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
Basic
 
26,211,669

 
26,092,919

 
23,937,188

Diluted
 
26,211,669

 
26,092,919

 
24,058,072











 
 
See accompanying notes to consolidated financial statements.

43


DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
 
 
Fiscal Years Ended
 
 
December 27, 2015
 
December 28, 2014
 
December 29, 2013
Net income (loss)
 
$
(16,192,492
)
 
$
(1,268,497
)
 
$
134,308

 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
Unrealized changes in fair value of interest rate swaps, net of tax of $430,468, $23,097 and $35,084.
 
(835,315
)
 
44,836

 
68,106

Unrealized changes in fair value of investments, net of tax of $1,959, $13,071 and $15,030.
 
3,804

 
25,372

 
(29,176
)
Total other comprehensive income (loss)
 
(831,511
)
 
70,208

 
38,930

 
 
 
 
 
 
 
Comprehensive income (loss)
 
$
(17,024,003
)
 
$
(1,198,289
)
 
$
173,238

 
 




































See accompanying notes to consolidated financial statements.

44


DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
 
 
 
 
Additional
 
Accumulated
Other
 

 
Total
 
Common Stock
 
Paid-in
 
Comprehensive
 
Accumulated
 
Stockholders'
 
Shares
 
Amount
 
Capital
 
Loss
 
Deficit
 
Equity
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

 
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
104,638

 
2

 
74,997

 

 

 
74,999

 
 
 
 
 
 
 
 
 
 
 
 
Employee stock purchase plan
4,773

 

 
23,452

 

 

 
23,452

 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation

 

 
278,290

 

 

 
278,290

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 
38,930

 

 
38,930

 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
134,308

 
134,308

 
 
 
 
 
 
 
 
 
 
 
 
Balances - December 29, 2013
26,049,578

 
$
2,580

 
$
35,275,255

 
$
(245,364
)
 
$
(1,070,908
)
 
$
33,961,563

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of restricted shares
91,966

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Forfeitures of restricted shares
(2,735
)
 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Employee stock purchase plan
11,015

 
2

 
53,936

 

 

 
53,938

 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation

 

 
338,810

 

 

 
338,810

 
 

 
 

 
 

 
 

 
 

 
 

Other comprehensive income

 

 

 
70,208

 

 
70,208

 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 
(1,268,497
)
 
(1,268,497
)
 
 
 
 
 
 
 
 
 
 
 
 
Balances - December 28, 2014
26,149,824

 
$
2,582

 
$
35,668,001

 
$
(175,156
)
 
$
(2,339,405
)
 
$
33,156,022

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of restricted shares
131,752

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Forfeitures of restricted shares
(8,587
)
 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Shares effectively repurchased for required employee withholding taxes
(1,387
)
 

 
(4,443
)
 

 

 
(4,443
)
 
 
 
 
 
 
 
 
 
 
 
 
Employee stock purchase plan
21,623

 
1

 
71,614

 

 

 
71,615

 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation

 

 
424,414