U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended September 24, 2017

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from

 

Commission File No. 000-53577

 

BAGGER DAVE’S BURGER TAVERN, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		03-0606420
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

 

807 W. Front St., Suite B,

Traverse City, Michigan 49684

(Address of principal executive offices)

 

Registrant’s telephone number: (231) 486-0527

 

No change

(Former name, former address and former

fiscal year, if changed since last report)

 

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 [X] 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 [X] No [  ]

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,297,727 shares of $.0001 par value common stock outstanding as of November 1, 2017.

 

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.

 

Large accelerated filer	[  ]	Accelerated filer	[  ]
Non-accelerated filer	[  ]	Smaller reporting company	[X]
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [  ] No [  ]

 

 

 

INDEX

 

PART I. FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Cash Flows	5
Notes to Interim Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosure About Market Risks	23
Item 4. Controls and Procedures	23
PART II. OTHER INFORMATION	23
Item 1. Legal Proceedings	23
Item 1A. Risk Factors	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3. Defaults Upon Senior Securities	24
Item 4. Mine Safety Disclosures	24
Item 5. Other Information	24
Item 6. Exhibits	24

 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BAGGER DAVE’S BURGER TAVERN, INC.

CONSOLIDATED BALANCE SHEETS

 

		September 24, 2017				December 25, 2016
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	924,875			$	1,818,813
Accounts receivable			294,175				200,517
Inventory			253,925				367,988
Prepaid assets			104,576				173,358
Total current assets			1,577,551				2,560,676
Property and equipment, net			10,276,219				14,382,673
Intangible assets, net			562,604				640,275
Total assets		$	12,416,374			$	17,583,624
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	523,101			$	493,300
Accrued compensation			228,906				-
Other accrued liabilities			489,492				326,966
Current portion of deferred rent			140,131				140,431
Total current liabilities			1,381,630				960,697
Deferred rent, less current portion			825,394				1,035,795
Other liabilities			378,283				351,950
Deferred tax liabilities			75,585				-
Total liabilities			2,660,892				2,348,442
Commitments and contingencies (Notes 9 and 10)
Stockholders’ equity
Common stock $.0001 par value; 100,000,000 shares authorized; 27,297,727 and 26,692,119, respectively issued and outstanding at September 24, 2017 and December 25, 2016			46,527				2,669
Additional paid-in capital			15,247,135				15,232,513
Retained deficit			(5,538,180	)			-
Total stockholders’ equity			9,755,482				15,235,182
Total liabilities and stockholders’ equity		$	12,416,374			$	17,583,624

 

 

BAGGER DAVE’S BURGER TAVERN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		September 24,				September 25,				September 24,				September 25,
		2017				2016				2017				2016
Revenue		$	3,897,256			$	5,063,316			$	13,685,893			$	15,772,728
Operating expenses
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Food, beverage, and packaging costs			1,193,221				1,507,570				4,000,821				4,782,616
Compensation costs			1,581,048				1,936,343				5,238,234				6,003,101
Occupancy costs			518,961				282,647				1,414,608				1,219,000
Other operating costs			873,013				1,284,408				3,037,288				4,121,003
General and administrative expenses			500,738				1,149,648				1,494,671				2,817,159
Pre-opening costs			-				11,663				-				363,762
Depreciation and amortization			422,747				885,014				1,451,207				2,623,492
Impairment and (gain) loss on disposal of property and equipment			1,425,203				77,863				2,568,189				(649,911	)
Total operating expenses			6,514,932				7,135,157				19,205,018				21,280,222
Operating loss			(2,617,676	)			(2,071,841	)			(5,519,125	)			(5,507,494	)
Other income, net			3,788				1,019				56,530				9,905
Loss before income taxes			(2,613,888	)			(2,070,822	)			(5,462,595	)			(5,497,589	)
Provision for income taxes			-				-				75,585				-
Net loss from continuing operations		$	(2,613,888	)		$	(2,070,822	)		$	(5,538,180	)		$	(5,497,589	)
Basic loss per share		$	(0.10	)		$	(0.08	)		$	(0.20	)		$	(0.21	)
Fully diluted loss per share		$	(0.10	)		$	(0.08	)		$	(0.20	)		$	(0.21	)
Weighted average number of common shares
outstanding
Basic			27,297,727				26,625,615				27,095,538				26,461,825
Diluted			27,297,727				26,625,615				27,095,538				26,461,825

 

 

BAGGER DAVE’S BURGER TAVERN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

 

		Nine Months Ended
		September 24,				September 25,
		2017				2016
Cash flows provided by (used in) operating activities
Net loss		$	(5,538,180	)		$	(5,497,589	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			1,451,207				2,623,492
Impairment and (gain) loss on asset disposals			2,568,189				(649,911	)
Realized gain on sale-leaseback			(14,686	)			(14,686	)
Share based compensation			58,479				-
Deferred income taxes			75,585				-
Changes in operating assets and liabilities that provided (used) cash
Accounts receivable			(93,658	)			200,581
Inventory			114,063				(15,878	)
Prepaid expenses			68,782				(69,523	)
Other long-term assets			-				164,878
Accounts payable			29,801				(341,839	)
Accrued liabilities			432,451				(1,592,731	)
Deferred rent			(210,701	)			73,028
Net cash used in operating activities			(1,058,668	)			(5,120,178	)
Cash flows from investing activities
Proceeds from sale of property and equipment			177,317				1,134,717
Purchases of property and equipment			(12,587	)			(1,836,831	)
Net cash provided by (used in) investing activities			164,730				(702,114	)
Cash flows from financing activities
Net transfers from parent			-				5,472,105
Net cash provided by financing activities			-				5,472,105
Net decrease in cash and cash equivalents			(893,938	)			(350,187	)
Cash and cash equivalents, beginning of period			1,818,813				700,638
Cash and cash equivalents, end of period		$	924,875			$	350,451

 

 

BAGGER DAVE’S BURGER TAVERN, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

On August 4, 2016, Diversified Restaurant Holdings, Inc. (“DRH” or “the Parent”) announced that its Board of Directors unanimously approved a plan to pursue a tax-free Spin-off of its Bagger Dave’s business (the “Spin-off”). Specifically, DRH contributed its 100.0% owned entity, AMC Burgers, LLC and certain real estate entities into Bagger Dave’s Burger Tavern, Inc., a newly created Nevada corporation (“Bagger Dave’s” or “Bagger”), which was then spun-off into a stand-alone, publicly-traded company on the over-the-counter exchange. In connection with the Spin-off, DRH contributed to Bagger certain assets, liabilities, and employees related to its Bagger Dave’s businesses. Intercompany balances due to/from DRH, which included amounts from sales, were contributed to equity. Additionally, DRH contributed $2 million in cash to Bagger to provide working capital for its operations and is a guarantor for certain of Bagger’s lease obligations.

 

The spinoff was completed on December 25, 2016 via a one-for-one distribution of common shares in Bagger Dave’s to DRH shareholders of record on December 19, 2016.

 

The consolidated balance sheet at December 25, 2016 represents the assets and liabilities that were spun off from DRH to Bagger Dave’s. In addition, deferred tax assets were spun off, but a full valuation allowance was recorded prior to spin off.

 

Prior to the Spin-off, Bagger Dave’s was a co-obligor on a joint and several basis with DRH on DRH’s $155 million senior secured credit facility. DRH’s debt under the facility remained with DRH and Bagger Dave’s was released as a borrower. Additionally, DRH retained substantially all of the benefits (net operating loss and tax credit carryforwards) generated by Bagger Dave’s prior to the date of the Spin-off.

 

The Company headquarters are located at 807 W. Front St., Suite B, Traverse City, MI 49684. We can also be found on the Internet at www.baggerdaves.com.

 

DRH originated the Bagger Dave’s concept with the first restaurant opening in January 2008 in Berkley, Michigan. As of September 24, 2017, there were 15 Bagger Dave’s restaurants in operation, twelve in Michigan, one in Indiana and two in Ohio. Bagger Dave’s owns the right to the Bagger Dave’s concept and has rights to franchise the concept in Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio and Wisconsin. We do not intend to pursue franchise development at this time.

 

Bagger Dave’s is a 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.

 

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. Running above the dining room and bar, the concept features an electric train; a feature which was the genesis of Bagger Dave’s logo.

 

We follow accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets generally accepted accounting principles in the United States of America (“GAAP”) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“ASC”).

 

Basis of Presentation

 

These consolidated financial statements include the accounts of Bagger Dave’s Burger Tavern, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. Prior to the Spin-off, the financial statements included AMC Burgers, Inc. and certain real estate entities and were derived from the consolidated financial statements and accounting records of DRH, as if Bagger Dave’s operated on a standalone basis. As a subsidiary of DRH, we did not maintain our own legal, tax, and certain other corporate support functions. As more fully described in Note 6, the statements of operations for the three and nine months ended September 25, 2016 include expense allocations for certain functions provided by DRH. These expenses were allocated on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenue or headcount. The Company believes that the methods by which DRH allocated its costs are a reasonable reflection of the utilization of services by, or benefits provided to the Company to be incurred by Bagger Dave’s. The consolidated financial statements for the three and nine months ended September 25, 2016 contained herein may not be indicative of Bagger Dave’s financial position, operating results and cash flows in the future, or what they would have been if it had been a stand-alone company during all periods presented.

 

 

Fiscal Year

 

The Company utilizes a 52- or 53-week accounting period that ends on the last Sunday in December. Fiscal year 2016 ended on December 25, 2016 and fiscal year 2017 will end on December 31, 2017. Fiscal year 2016 was comprised of 52 weeks, while fiscal year 2017 will be comprised of 53 weeks. The fiscal quarters ended September 24, 2017 and September 25, 2016 were each comprised of 13 weeks. The nine month periods ended September 24, 2017 and September 25, 2016 were each comprised of 39 weeks.

 

Management’s Plan Regarding Going Concern

 

Management reviews the trend of our operations on a regular basis in an effort to understand and forecast future cash usage. During the most recent review, based on current trends discussed in greater detail below, we determined that our current cash balance and the cash we expect to generate from operations will likely not be sufficient to enable us to continue operating for the next twelve months. We will likely need an infusion of cash, either through a sale of shares and/or issuance of debt in order to continue operating. There can be no certainty that efforts to raise such cash will be successful. Any issuance of equity securities may dilute the holdings of current shareholders.

 

Previous plans that we implemented included:

 

Increasing restaurant-level profitability by:

 

	●	Driving increased average weekly volumes (“AWVs”) with a new menu design, improved net-promoter scores, enhanced kitchen processes (to ensure fast, consistent ticket times), new messaging and our first cable television advertising campaign.
	●	Reducing cost of sales and working closely with our vendors.
	●	Reducing labor costs through a comprehensive labor strategy.
	●	Reducing operating expenses.
	●	Closing unprofitable locations. The Company closed four in the nine months ended September 24, 2017.

 

Decrease in general and administration expense by:

 

	●	Reducing salary expense.
	●	Reducing marketing expense. Effective 2017, Bagger Dave’s marketing budget will be 3.0% or less of sales. In prior years, the marketing spend was between 4.0%-10.0% in any given period. We believe that, with a more efficient use of marketing funds, and higher focus on local store marketing initiatives, we can achieve a better return on our marketing investment though increased sales.

 

Managing of capital expenditures:

 

●

We undertook only maintenance-level capital expenditures

 

All of the foregoing cost cutting steps were implemented, resulting in $4.1 million in operating savings, net of depreciation, amortization, and losses on asset impairments. Our projections in prior quarters were based on the assumption that same store sales would improve fourth fiscal quarter by 3% over the fourth fiscal quarter in 2016. This was based on selected price increases and the fact that there is a 14^th week in the fourth quarter of 2017 versus 13 weeks in the fourth quarter of 2016. However, after an 8% decline in same store sales for the third fiscal quarter of 2017 over the same period in 2016, same store sales in the fourth quarter of 2017 have declined by 12% through the first six weeks. Our sales decline appears to be the result of a poor macro environment for fast casual dining establishments. As a result, we are forecasting a continuing decline in sales for at least the first two fiscal quarters of 2018. While we will continue to identify and implement cost cuts, it’s unlikely that these will enable us to generate enough cash to sustain operations for the next twelve months.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash on hand and demand deposits in banks. The Company considers all highly-liquid investments purchased with original maturities of three months or less to be cash and cash equivalents. The Company, at times throughout the year, may, in the ordinary course of business, maintain cash balances in excess of federally-insured limits. Management does not believe the Company is exposed to any unusual risks on such deposits.

 

Accounts Receivable

 

Accounts receivable primarily consist of amounts owing from credit card charges. There was no allowance for doubtful accounts necessary at September 24, 2017 and December 25, 2016.

 

 

Gift Cards

 

The Company records Bagger Dave’s gift card sales as a gift card liability when sold. When redeemed, the gift card liability account is offset by recording the transaction as revenue. Michigan law states that gift cards cannot expire and any post-sale fees cannot be assessed until 5 years after the date of gift card purchase by the consumer. There is no breakage attributable to Bagger Dave’s restaurants for the Company to record as of September 24, 2017 and September 25, 2016.

 

The Company’s gift card liability was $214,549 and $282,717 as of September 24, 2017 and December 25, 2016, respectively, and is included in other accrued liabilities on the Consolidated Balance Sheets.

 

Inventory

 

Inventory consists mainly of food and beverage products and is accounted for at the lower of cost or market using the first in, first out method of inventory valuation. Cash flows related to inventory sales are classified in net cash used by operating activities in the Consolidated Statements of Cash Flows.

 

Prepaid Assets and Other Long-Term Assets

 

Prepaid assets consist principally of prepaid rent, insurance and contracts and are recognized ratably as operating expense over the period of future benefit. Other long-term assets consist primarily of security deposits for operating leases and utilities.

 

Property and Equipment

 

Property and equipment are recorded at cost. Buildings, which includes buildings on leased land, are depreciated using the straight-line method over the shorter of the term of the lease or its estimated useful life, which ranges from 10-39 years. Equipment and furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements, which include the cost of improvements funded by landlord incentives or allowances, are amortized using the straight-line method over the lesser of the term of the lease, with consideration of renewal options if renewals are reasonably assured because failure to renew would result in an economic penalty, or the estimated useful lives of the assets, which is typically five - 15 years. Maintenance and repairs are expensed as incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the respective accounts and the related gains or losses are credited or charged to earnings.

 

The Company capitalizes items associated with construction but not yet placed into service, known as construction in progress (“CIP”). Items capitalized include fees associated with the design, build out, furnishing of the restaurants, leasehold improvements, construction period interest (when applicable), equipment, and furniture and fixtures. Restaurant CIP is not amortized or depreciated until the related assets are placed into service. Items are placed into service according to their asset category when the restaurant is open for service.

 

Intangible Assets

 

Amortizable intangible assets consist of trademarks and are stated at cost, less accumulated amortization. The trademarks are amortized on a straight-line basis over the estimated useful life of 15 years.

 

Liquor licenses, also a component of intangible assets, are deemed to have an indefinite life and, accordingly, are not amortized. Management reviews liquor license assets on an annual basis (at year-end) to determine whether carrying values have been impaired. We identify potential impairments for liquor licenses by comparing the fair value with its carrying amount. If the fair value exceeds the carrying amount, the liquor licenses are not impaired. If the carrying amount exceeds the fair value, an impairment loss is recorded for the difference. Impairments totaling $0.1 million and $0.0 million were recognized in the fiscal quarters ended September 24, 2017 and September 25, 2016. Impairments totaling $0.1 million were recognized in the nine months ended September 24, 2017, while no impairments were recognized in the nine months ended September 25, 2016.

 

 

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. Refer to Note 2 for additional information.

 

We account for exit or disposal activities, including restaurant closures, in accordance with ASC Topic 420, Exit or Disposal Cost Obligations. Such costs include the cost of disposing of the assets as well as other facility-related expenses from previously closed restaurants. These costs are generally expensed as incurred. Additionally, at the date we cease using a property under an operating lease, we record a liability for the net present value of any remaining lease obligations, net of estimated sublease income. Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred. Refer to Note 2 for additional information.

 

Impairments totaling $1.4 million and $0.0 million were recognized in the fiscal quarters ended September 24, 2017 and September 25, 2016. Impairments totaling $2.6 million were recognized in the nine months ended September 24, 2017, while no impairments were recognized in the nine months ended September 25, 2016.

 

Deferred Rent

 

Certain operating leases provide for minimum annual payments that increase over the life of the lease. Typically, our operating leases contain renewal options under which we may extend the initial lease terms for periods of five to 10 years. The aggregate minimum annual payments are expensed on a straight-line basis commencing when we gain control and extending over the term of the related lease, including option renewals as deemed reasonably assured. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the lease is accrued as deferred rent liability and reduced in later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts, in its straight-line computation, for the effect of any “rental holidays”, “free rent periods”, and “landlord incentives or allowances”.

 

Deferred Gains

 

Deferred gains on the sale leaseback transaction described in Note 3, are recognized as a reduction of rent expense over the life of the related operating lease agreements.

 

 

Revenue Recognition

 

Revenues from food and beverage sales are recognized and generally collected at the point of sale. All sales taxes are presented on a net basis and are excluded from revenue.

 

Advertising

 

Advertising expenses of $0.1 million and $0.1 million are included in general and administrative expenses in the Consolidated Statements of Operations for the fiscal quarters ended September 24, 2017 and September 25, 2016, respectively. Advertising expenses of $0.4 million and $0.4 million are included in general and administrative expenses in the Consolidated Statements of Operations for the nine months ended September 24, 2017 and September 25, 2016, respectively.

 

Pre-opening Costs

 

Pre-opening costs are those costs associated with opening new restaurants and will vary based on the number of new locations opening and under construction. The Company also reclassifies labor costs that exceed the historical average for the first three months of restaurant operations that are attributable to training. These costs are expensed as incurred. Pre-opening costs of $0 and $0.01 million and $0 and $0.36 million are included in the Consolidated Statements of Operations for the three and nine months ended September 24, 2017 and September 25, 2016, respectively. Excess labor cost incurred after restaurant opening and included in pre-opening cost were approximately $0 and $0 million and $0 and $0.15 million for the three and nine months ended September 24, 2017 and September 25, 2016, respectively.

 

Income Taxes

 

Prior to the Spin-off, the Company filed a consolidated tax return with DRH. 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 (income) is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Income tax expense for the three and nine months ended September 25, 2016 was determined as if the Company were filing a separate tax return.

 

The Company applies the provisions of FASB ASC 740, Income Taxes, (“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 September 24, 2017 and September 25, 2016.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

 

Recent Accounting Pronouncements

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Payments.” ASU 2016-15 provides guidance on eight specific cash flow issues with the objective of reducing diversity in practice. The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for any entity in any interim or annual period. We are currently evaluating the impact of the guidance, but do not believe it will materially impact our consolidated financial statements.

 

In February 2016, FASB issued ASU 2016-02, Leases, ASU 2016-02 requires that lease arrangements longer than 12 months result in a lessee recognizing a lease asset and liability. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We believe the adoption of ASU 2016-02 will materially impact our consolidated financial statements by significantly increasing our non-current assets and our non-current liabilities on our consolidated balance sheet as it will require us to record the right of use assets and the related lease liabilities for our existing operating leases. We are currently unable to estimate the impact of the updated guidance on our consolidated financial statements.

 

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 “Revenue with Contracts from Customers (Topic 606).” ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-04, “Liabilities - Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products.” ASU 2016-04 provides specific guidance for the de-recognition of prepaid stored-value product liabilities. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” ASU 2016-08 provides specific guidance to determine whether an entity is providing a specified good or service itself or is arranging for the good or service to be provided by another party. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” ASU 2016-10 provides clarification on the subjects of identifying performance obligations and licensing implementation guidance.

 

The requirements for these standards relating to Topic 606 will be effective for interim and annual periods beginning after December 15, 2017. The Company expects to adopt these standards upon their effective date. While the Company's evaluation of the standard is ongoing, our preliminary assessment indicates that the new revenue recognition standard will not materially impact the recognition of restaurant sales, our primary source of revenue. As we continue the evaluation, documentation, and implementation of ASU 2016-09, other areas which could be impacted may be identified. Additionally, this guidance will require us to enhance our disclosures. With respect to the transition method for adoption, we expect to adopt this standard using the modified retrospective approach. We expect to complete our evaluation and documentation during the year ended December 31, 2017.

 

We reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to our operations or that no material effect is expected on our consolidated financial statements as a result of future adoption.

 

2. IMPAIRMENTS, DISPOSALS AND EXIT COSTS

 

Based on impairment indicators that existed at September 24, 2017, the Company performed an impairment analysis on its long-lived assets subject to amortization. $1.4 million of long-lived assets were deemed to be impaired for the three month period ended September 24, 2017 for one underperforming location. During the first fiscal quarter of 2017, the Company recorded a fixed asset impairment charge of $1.2 million related to one underperforming Bagger Dave’s location that reached the second anniversary since opening during the first quarter of 2017. The impairment charge was recorded to the extent that the carrying amount of the assets was not considered recoverable based on the estimated future cash flows of the location. The impairment charges are included in impairment and loss on asset disposals on the Consolidated Statements of Operations for the nine months ended September 24, 2017.

 

We are currently monitoring the valuation of long-lived assets at several restaurants and have developed plans to improve 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.

 

On January 9, 2017, we closed the Grand Rapids, Michigan Bagger Dave’s location. The assets for this location were fully impaired in the fourth quarter of fiscal 2016. There is no store closure liability recorded at September 24, 2017 as all such liabilities had been paid on or prior to that date. On August 1, 2017 we closed three locations in Ann Arbor, Michigan, Brighton, Michigan, and Woodhaven, Michigan. The balance sheet dated September 24, 2017 reflect a store closure liability of $0.1 million and $0.1 million in Other accrued liabilities and Other liabilities in the current and long term liabilities section of the balance sheet, respectively. The assets for these locations were fully impaired in prior periods.

 

 

3. PROPERTY AND EQUIPMENT, NET

 

Property and equipment are comprised of the following:

 

		September 24, 2017				December 25, 2016
Buildings			1,672,568				1,672,568
Equipment			3,876,478				4,704,891
Furniture and fixtures			1,111,854				1,406,772
Leasehold improvements			9,623,674				12,154,689
Total			16,284,574				19,938,920
Less accumulated depreciation			(6,008,355	)			(5,556,247	)
Property and equipment, net		$	10,276,219			$	14,382,673

 

Depreciation expense was $0.4 million and $0.9 million during the quarters ended September 24, 2017 and September 25, 2016, respectively. Depreciation expense was $1.5 million and $2.6 million during the nine months ended September 24, 2017 and September 25, 2016, respectively.

 

Sale leaseback transactions

 

On October 6, 2014, the Company entered into a sale leaseback agreement for $8.9 million with a third-party Real Estate Investment Trust (“REIT”). The arrangement included the sale of real estate on which six Bagger Dave’s locations operate. In the fourth quarter of 2014, we closed the sale of five of the six properties, with total proceeds of $6.9 million. We closed the sale of the remaining property in June 2015 with total proceeds of $2.0 million. Pursuant to the terms of each sale-leaseback transaction, we transferred title of the real property to the purchaser after final inspection and, in turn, entered into separate leases with the purchaser having a 15-year basic operating lease term plus four separate 5-year renewal options. Certain of the sale leaseback arrangements resulted in a gain which has been deferred. As of December 25, 2016, $0.03 million of the deferred gain was recorded in Other accrued liabilities and $0.3 million of the deferred gain was recorded in Other liabilities on the Consolidated Balance Sheets. As of September 24, 2017, $0.03 million of the deferred gain was recorded in Other accrued liabilities and $0.3 million of the deferred gain was recorded in Other liabilities on the Consolidated Balance Sheets. The gains will be recognized into income as an offset to rent expense over the life of the related lease agreements.

 

4. INTANGIBLE ASSETS

 

Intangible assets are comprised of the following:

 

		September 24, 2017				December 25, 2016
Amortized intangible assets
Trademarks		$	70,576			$	70,576
Less accumulated amortization			(22,446	)			(18,965	)
Amortized intangible assets, net			48,130				51,611
Unamortized intangible assets
Liquor licenses			514,474				588,664
Total intangible assets, net		$	562,604			$	640,275

 

 

Amortization expense for the quarters ended September 24, 2017 and September 25, 2016 was $1,160 and $1,160, respectively. Amortization expense for the nine months ended September 24, 2017 and September 25, 2016 was $3,656 and $3,440, respectively.

 

Based on the current intangible assets and their estimated useful lives, future intangible-related expense for the next five years and thereafter is projected as follows:

 

Year		Amount
Remainder of 2017		$	1,140
2018			4,601
2019			4,601
2020			4,601
2021			4,601
Thereafter			28,586
Total		$	48,130

 

The aggregate weighted-average amortization period for intangible assets is 10.8 years.

 

5. OTHER ACCRUED LIABILITIES, CURRENT

 

		September 24, 2017				December 25, 2016
Gift card liability		$	214,549			$	282,717
Sales tax payable			59,447				—
Store closure liability			127,480				—
Other			88,016				44,249
Total accrued other liabilities		$	489,492			$	326,966

 

 

6. RELATED PARTY TRANSACTIONS

 

In connection with the Spin-Off described in Note 1, the Company entered into a transition services agreement (the “TSA”) with DRH pursuant to which DRH will provide certain information technology and human resource support, limited accounting support, and other administrative functions at no charge. The TSA is intended to assist the Company in efficiently and seamlessly transitioning to operating on its own. The TSA expires in December, 2017 at which time the parties may negotiate which services will be required on an on-going basis and the fees that will be charged for such services. Additionally, as of the date of this filing, DRH is listed as the guarantor on 15 of the 18 Bagger Dave’s leases. The guarantees range from one month to 12 years and total approximately $8.8 million as of September 24, 2017.

 

 

Allocation of General Corporate Expenses

 

The Consolidated Statements of Operations for the three and nine months ended September 25, 2016 include expense allocations for certain functions previously provided by DRH. Historically, we have used the corporate functions of DRH for a variety of services including treasury, accounting, tax, legal, marketing and other shared services, which include the costs of payroll, employee benefits and related costs. Total shared services expense allocated to the Company was $1.1 million in the fiscal quarter ended September 25, 2016 (consisting of $0.4 million of compensation, $0.1 million of marketing costs and $0.6 million of other expenses). Total shared services expense allocated to the Company was $2.8 million in the nine months ended September 25, 2016 (consisting of $1.7 million of compensation, $0.4 million of marketing costs and $0.7 million of other expenses). Compensation allocations set forth in the financial statements are based upon estimated time spent by each individual of the DRH management team whose time was split between the entities. These individuals’ allocations to Bagger Dave’s were based on the estimated percentage of their time spent working with Bagger Dave’s. Marketing costs were allocated based upon actual Bagger Dave’s costs derived from a review of each expense incurred during the period. Other expenses were allocated on an estimated percentage based upon the service provided.

 

The expense allocations were determined on a basis that both the Company and DRH consider to be a reasonable reflection of the utilization of services provided or the benefit received during the period presented. The allocations may not, however, reflect the expense that would have been incurred at Bagger Dave’s as an independent, publicly-traded company for the period presented. Actual costs that may have been incurred if Bagger Dave’s had been a stand-alone company would depend on a number of factors, including the organization structure, the functions outsourced vs. performed by employees, and other strategic decisions.

 

Beginning in fiscal year 2017, no general corporate expenses were allocated from DRH because the Spin-off was completed on December 25, 2016.

 

Parent Company Equity

 

Prior to the Spin-off, the consolidated financial statements included an allocation of certain assets and liabilities that had historically been held at the DRH corporate level but which were specifically identifiable or allocable to Bagger Dave’s. Cash and cash equivalents and short-term investments held by DRH were not allocated to Bagger Dave’s unless the cash or investments were held by an entity that was directly attributable to and held by Bagger Dave’s. All intercompany transactions between DRH and Bagger Dave’s prior to the Spin-off were included in these consolidated financial statements and were considered to be effectively settled for cash. The total net effect of the settlement of these intercompany transactions during the first fiscal quarter of 2016 is reflected in the Consolidated Statements of Cash Flows as a financing activity. Upon Spin-off, the balance in Parent Company Investment was transferred to Common Stock and Additional Paid in Capital.

 

7. STOCK BASED COMPENSATION

 

On January 21, 2017, the Board of Directors approved the 2017 Stock Option and Restricted Stock Plan (“the Plan”). The persons eligible to receive awards under the Plan are the employees, directors and consultants of the Company and its affiliates. The purpose of the Plan is to provide a means by which eligible recipients may be given an opportunity to benefit from increases in value of the Company’s Common Stock through the granting of the following: (i) Incentive Stock Options, (ii) Nonqualified Stock Options, (iii) Stock awards (iv) Rights to acquire restricted stock, and (v) stock appreciation rights. The Company can reserve up to 10,000,000 shares of its Common Stock for issuance under this plan. Vesting provisions of up to three years will apply to any and all awards.

 

For the nine ended September 24, 2017, 692,500 restricted shares were issued to certain team members under the Plan at a weighted-average grant date fair value of $.19. Based on the Plan Agreement, shares typically vest ratably over either a three year period. Unrecognized share-based compensation expense of $73,097 at September 24, 2017 will be recognized over the remaining weighted-average vesting period of 1.8 years. The total fair value of shares vested during the nine month periods ended June 25, 2017 and June 26, 2016, was $58,478 and $0, respectively. Under the Plan, there were 9,307,500 shares available for future awards at September 24, 2017.

 

The following table presents the restricted shares transactions during the nine-month period ended September 24, 2017:

 

		Number of
		Restricted
		Stock Shares
Unvested, December 25, 2016			-
Granted			692,500
Vested			(230,833	)
Vested shares tax portion			138,500
Expired/Forfeited			-
Unvested, September 24, 2017			600,167

 

 

8. INCOME TAXES

 

The effective income tax rate for the three month periods ended September 24, 2017 and September 25, 2016 was 0.0%, and 0.0%, respectively, and, for the nine month periods ended September 24, 2017 and September 25, 2016 was 1.4% and 0.0% respectively, primarily due to the Company recording a full valuation allowance on its deferred tax assets. The valuation allowance was recorded due to the negative evidence of our recent years’ history of losses.

 

9. OPERATING LEASES

 

The Company’s lease terms generally include renewal options, and frequently require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds.

 

Total rent expense was $0.3 million and $0.4 million for the fiscal quarters ended September 24, 2017 and September 25, 2016, respectively. Total rent expense was $1.0 million and $0.9 million for the nine months ended September 24, 2017 and September 25, 2016, respectively.

 

Scheduled future minimum lease payments for each of the next five years and thereafter for non-cancelable operating leases for existing restaurants with initial or remaining lease terms in excess of one year at September 24, 2017 are summarized as follows:

 

Year		Amount
2017		$	403,554
2018			1,617,122
2019			1,575,604
2020			1,530,420
2021			1,440,834
Thereafter			9,011,681
Total		$	15,579,215

 

 

10. COMMITMENTS AND CONTINGENCIES

 

Bagger Dave’s sponsors a defined contribution 401(k) plan whereby eligible team members can contribute pre-tax wages in accordance with the provisions of the plan. Bagger Dave’s has the option to make an annual discretionary contribution to the 401(k) plan. No match was made during the three and nine months ended September 24, 2017.

 

The Company is subject to ordinary and routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the ordinary course of its business. The ultimate outcome of any litigation is uncertain. We have insured and continue to insure against most of these types of claims. A judgment on any claim not covered by or in excess of our insurance coverage could materially adversely affect our financial condition or results of operations.

 

11. SUPPLEMENTAL CASH FLOWS INFORMATION

 

Other Cash Flows Information

 

No cash paid for interest during the three and nine months ended September 24, 2017 and September 25, 2016 respectively.

 

No cash paid for income taxes during the three and nine months ended September 24, 2017 and September 25, 2016 respectively.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated interim financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results from Operations contained in our Form 10-K, for the fiscal year ended December 25, 2016. Information included in this discussion and analysis includes commentary on company-owned restaurants, restaurant sales, and same store sales.

 

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

Statements contained in this “Quarterly Report on Form 10-Q” may contain information that includes or is based upon certain “forward-looking statements” relating to our business. These forward-looking statements represent management’s current judgment and assumptions, and can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are frequently accompanied by the use of such words as “anticipates,” “plans,” “believes,” “expects,” “projects,” “intends,” and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, while it is not possible to predict or identify all such risks, uncertainties, and other factors, those relating to our ability to secure the additional financing adequate to execute our business plan; our ability to locate and start up new restaurants; acceptance of our restaurant concepts in new marketplaces; and the cost of food and other raw materials. Any one of these or other risks, uncertainties, other factors, or any inaccurate assumptions may cause actual results to be materially different from those described herein or elsewhere by us. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they were made. Certain of these risks, uncertainties, and other factors may be described in greater detail in our filings from time to time with the Securities and Exchange Commission (“SEC”), which we strongly urge you to read and consider. Subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above and elsewhere in our reports filed with the SEC. We expressly disclaim any intent or obligation to update any forward-looking statements.

 

Overview

 

Launched in January 2008, Bagger Dave’s is a 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.

 

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. Running above the dining room and bar, the concept features an electric train; a feature which was the genesis of the Bagger Dave’s logo.

 

We currently operate 15 locations, 12 in Michigan, 2 in Ohio, and 1 in Indiana.

 

RESULTS OF OPERATIONS

 

Results of Operations for the Three Months Ended September 24, 2017 and September 25, 2016

 

For the three month period ended September 24, 2017, revenue was generated from the operations of 15 Bagger Dave’s restaurants for the entire time period and from three other stores that were closed on August 1, 2017. Revenues for the three stores that were closed on August 1, 2017 totaled $0.2 million for the three months ended September 24, 2017. Additionally, one other store was closed on January 9, 2017. Revenues for the four locations closed in 2017 totaled $0.8 million for the three months ended September 25, 2016. For the three months ended September 25, 2016, the results of operations were derived from the consolidated financial statements and accounting records of DRH as if Bagger Dave’s operated on a standalone basis. As a result, the results of operations for the three months ended September 25, 2016 include expense allocations for certain functions provided by DRH. No such allocations were made for the three months ended September 24, 2017. Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including the timing and number of new restaurant openings and related expenses, increases or decreases in same store sales, changes in commodity prices, general economic conditions, and seasonal fluctuations. As a result, our quarterly results of operations are not necessarily indicative of the results that may be achieved for any future period.

 

 

Total revenue for the Third Quarter 2017 was $3.9 million, a decrease of $1.2 million, or 23%, from revenue generated during Third Quarter 2016 due primarily to significantly lower guest count at 11 of our 15 locations as well as a lower average check size and four fewer locations.

 

Food, beverage and packaging costs decreased by $0.3 million, or 21%, to $1.2 million in Third Quarter 2017 from $1.5 million in Third Quarter 2016 as a result of lower sales and better cost management partially offset by inflationary factors. Food, beverage, and packaging cost as a percentage of sales increased to 30.6% in Third Quarter 2017 from 29.8% in Third Quarter 2016 primarily due to net commodity cost inflation partially offset by better sourcing.

 

Compensation costs decreased by $0.4 million, or 18.3%, to $1.5 million in Third Quarter 2017 from $1.9 million in Second Quarter 2016. The decrease was primarily due to improved labor staffing management and the operation of one less location for the entire quarter and the operation of three fewer locations for the last nine weeks of the quarter. Compensation cost as a percentage of sales increased to 40.6% in Third Quarter 2017 from 38.2% in Third Quarter 2016 due primarily to severance payments associated with the closures partially offset by improved labor staffing management.

 

Occupancy costs increased by $0.2 million, or 83.6%, to $0.5 million in Third Quarter 2017, from $ 0.3 million in Third Quarter 2016 due primarily to the recording of a store closure liability related to the closure of our Woodhaven, Michigan location, recognizing the remaining expenses for that location through the contractual end of the lease in the current fiscal quarter. There were lease terminations associated with the closure of the locations in Ann Arbor, Michigan, Brighton, Michigan, and Woodhaven, Michigan on August 1, 2017. Occupancy cost as a percentage of sales increased to 13.3% in Third Quarter 2017 from 5.6% in Third Quarter 2016 due to the decrease in sales as well as the increase in Occupancy costs related to lease termination expenses.

 

Other operating costs decreased by $0.4 million, or 32.0%, to $0.9 million in Third Quarter 2017, from $ 1.3 million in Third Quarter 2016 due primarily to the closure of the Grand Rapids, Michigan location on January 9, 2017 and the closure of locations in Ann Arbor, Michigan, Brighton, Michigan, and Woodhaven, Michigan on August 1, 2017 as well as improved management focus on such costs in 2017. Other operating costs as a percentage of sales decreased to 22.4% in Third Quarter 2017 from 25.4% in Third Quarter 2016 primarily due to the increased management focus on such costs partially offset by an increase in prices for supplies and maintenance.

 

General and administrative expenses decreased by $0.6 million, or 56.4%, to $0.5 million in Third Quarter 2017, from $ 1.1 million in Third Quarter 2016. This was due primarily to the smaller management team now in place and our Third Quarter 2016 expenses including allocations from DRH. General and administrative costs as a percentage of sales decreased to 12.8% in Third Quarter 2017 from 22.7% in Third Quarter 2016.

 

Pre-opening costs decreased by $0.01 million to $0.0 million in Third Quarter 2017 from Third Quarter 2016. This was due to the fact that the Company completed the opening of one new restaurant in Third Quarter 2016 and none in Third Quarter 2017. As a percentage of sales, pre-opening costs decreased to 0.0% in Third Quarter 2017 from 0.2% in Third Quarter 2016.

 

Depreciation and amortization decreased by $0.5 million, or 52.2%, to $0.4 million in Third Quarter 2017, from $0.9 million in Third Quarter 2016 primarily due to the impairment of five locations between the Fourth Quarter of 2016 and the First Quarter of 2017. This resulted in a lower fixed asset base. Depreciation and amortization as a percentage of sales decreased to 10.8% in Third Quarter 2017 from 17.5% in Third Quarter 2016.

 

Impairment and (gain) loss on asset disposal increased by $1.3 million, to $1.4 million in Third Quarter 2017, from $0.1 million in Third Quarter 2016. This is due primarily to managements’ analysis and determination that the recovery of the net book value of the assets in one location in Michigan is uncertain due to the operating performance of that location.

 

Interest and Taxes

 

Bagger Dave’s had no interest expense during the Third Quarters of 2017 or 2016. Bagger Dave’s had approximately $0.1 million and $0 income tax expense during the Third Quarters of 2017 and 2016, respectively.

 

 

Results of Operations for the Nine Months Ended September 24, 2017 and September 25, 2016

 

For the nine month period ended September 24, 2017, revenue was generated from the operations of 15 Bagger Dave’s restaurants for the entire time period, from three other stores that were closed on August 1, 2017, and from one store that was closed on January 9, 2017. Revenues for the three stores that were closed on August 1, 2017 totaled $1.45 million while revenues for the location closed in January of 2017 were $0.02 million for the nine months ended September 24, 2017. Revenues for the four locations closed in 2017 totaled $2.6 million for the nine months ended September 25, 2016. For the nine months ended September 25, 2016, the results of operations were derived from the consolidated financial statements and accounting records of DRH as if Bagger Dave’s operated on a standalone basis. As a result, the results of operations for the nine months ended September 25, 2016 include expense allocations for certain functions provided by DRH. No such allocations were made for the nine months ended September 24, 2017. Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including the timing and number of new restaurant openings and related expenses, increases or decreases in same store sales, changes in commodity prices, general economic conditions, and seasonal fluctuations. As a result, our nine month results of operations are not necessarily indicative of the results that may be achieved for any future period.

 

Total revenue for the nine months ended September 24, 2017 was $13.7 million, a decrease of $2.1 million, or 13.2% from the $15.8 million in revenue generated during the nine months ended September 25, 2016. The decrease was due primarily to significantly lower guest count at 11 of our 15 locations as well as a lower average check size and four fewer locations as discussed in the preceding paragraph.

 

Food, beverage and packaging costs decreased by $0.8 million, or 16.3%, to $4.0 million in the nine months ended September 24, 2017 from $4.8 million in the nine months ended September 25, 2016 as a result of lower sales and better cost management partially offset by inflationary factors. Food, beverage, and packaging cost as a percentage of sales decreased to 29.2% in the nine months ended September 24, 2017 from 30.3% in the nine months ended September 25, 2016 primarily due to better sourcing partially offset by net commodity cost inflation.

 

Compensation costs decreased by $0.8 million, or 12.8%, to $5.2 million in the nine months ended September 24, 2017 from $6.0 million in the nine months ended September 25, 2016. The decrease was primarily due to lower sales volume and the focus of management on reducing these costs in addition to the operation of one less location for nearly all of the nine month time period and another three fewer locations for two months of the nine month time period. Compensation cost as a percentage of sales increased to 38.3% in the nine months ended September 24, 2017 from 38.1% in the nine months ended September 25, 2016 due primarily to the decrease in revenues partially offset by management focus on these expenses.

 

Occupancy costs increased by $0.2 million, or 16.0%, to $1.4 million for the nine months ended September 24, 2017, from $ 1.2 million for the nine months ended September 25, 2016 due primarily to the recording of a store closure liability related to the closure of our Woodhaven, Michigan location, recognizing the remaining expenses for that location through the contractual end of the lease in the current fiscal quarter. There were lease terminations associated with the closure of the locations in Ann Arbor, Michigan, Brighton, Michigan, and Woodhaven, Michigan on August 1, 2017. Occupancy cost as a percentage of sales increased to 10.3% in the nine months ended September 24, 2017 from 7.7% in the nine months ended September 25, 2016 related to lease termination expenses.

 

Other operating costs decreased by $1.1 million, or 26.3%, to $3.0 million in the nine months ended September 24, 2017, from $ 4.1 million in the nine months ended September 25, 2016 due primarily to the closure of the Grand Rapids, Michigan location on January 9, 2017 and the closure of locations in Ann Arbor, Michigan, Brighton, Michigan, and Woodhaven, Michigan on August 1, 2017 as well as improved management focus on such costs in 2017. Other operating costs cost as a percentage of sales decreased to 22.2% in the nine months ended September 24, 2017 from 26.1% in the nine months ended September 25, 2016 primarily due to the increased management focus on such costs partially offset by an increase in prices for supplies and maintenance.

 

General and administrative expenses decreased by $1.3 million, or 46.9%, to $1.5 million in the nine months ended September 24, 2017, from $ 2.8 million in the nine months ended September 25, 2016. This was due primarily to the smaller management team now in place and our expenses for the nine months ended September 25, 2016 including allocations from DRH. General and administrative costs as a percentage of sales decreased to 10.9% in the nine months ended September 24, 2017 from 17.9% in the nine months ended September 25, 2016.

 

Pre-opening costs decreased by $0.4 million to $0.0 million in the nine months ended September 24, 2017 from the nine months ended September 25, 2016. This was due to the fact that the Company completed the opening of one new restaurant in the nine months ended September 25, 2016 and none in the nine months ended September 24, 2017. As a percentage of sales, pre-opening costs decreased to 0.0% in the nine months ended September 24, 2017 from 2.3% in the nine months ended September 25, 2016.

 

Depreciation and amortization decreased by $1.1 million, or 44.7%, to $1.5 million in the nine months ended September 24, 2017, from $ 2.6 million in the nine months ended September 25, 2016 primarily due to the impairment of five locations between the Fourth Quarter of 2016 and the First Quarter of 2017. This resulted in a lower fixed asset base. Depreciation and amortization as a percentage of sales decreased to 10.6% in the nine months ended September 24, 2017 from 16.6% in the nine months ended September 25, 2016.

 

Impairment and (gain) loss on asset disposal increased by $3.2 million, to a loss of $2.6 million in the nine months ended September 24, 2017 from $0.6 million gain in the nine months ended September 25, 2016. The change was due entirely to the fact that we impaired $2.6 million of assets for two Bagger Dave’s locations in the nine months ended September 24, 2017 while, in the nine months ended September 25, 2016, we realized a gain on the sale of land and building that housed a Bagger Dave’s restaurant in June, 2016 that had been fully impaired in Fiscal Year 2015.

 

Interest and Taxes

 

Bagger Dave’s had no interest expense during the nine months of 2017 or 2016. Bagger Dave’s had approximately $0.1 million and $0 in income tax expense during the nine months ended September 24, 2017 and September 25, 2016, respectively. The income tax expense in the first nine months of 2017 is a result of the Company recording a deferred tax liability associated with the indefinitely-lived liquor licenses owned by the Company. We also have a full valuation allowance on our deferred tax assets due to the negative evidence of our recent years’ history of losses.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Management reviews the trend of our operations on a regular basis in an effort to understand and forecast future cash usage. During the most recent review, based on current trends discussed in greater detail below, we determined that our current cash balance and the cash we expect to generate from operations will likely not be sufficient to enable us to continue operating for the next twelve months. We will likely need an infusion of cash, either through a sale of shares and/or issuance of debt in order to continue operating. There can be no certainty that efforts to raise such cash will be successful. Any issuance of equity securities may dilute the holdings of current shareholders.

 

Previous plans that we implemented included:

 

Increasing restaurant-level profitability by:

 

	●	Driving increased average weekly volumes (“AWVs”) with a new menu design, improved net-promoter scores, enhanced kitchen processes (to ensure fast, consistent ticket times), new messaging and our first cable television advertising campaign.
	●	Reducing cost of sales and working closely with our vendors.
	●	Reducing labor costs through a comprehensive labor strategy.
	●	Reducing operating expenses.
	●	Closing unprofitable locations. The Company closed four in the nine months ended September 24, 2017.

 

Decrease in general and administration expense by:

 

	●	Reducing salary expense.
	●	Reducing marketing expense. Effective 2017, Bagger Dave’s marketing budget will be 3.0% or less of sales. In prior years, the marketing spend was between 4.0%-10.0% in any given period. We believe that, with a more efficient use of marketing funds, and higher focus on local store marketing initiatives, we can achieve a better return on our marketing investment though increased sales.

 

Managing of capital expenditures:

 

●

We undertook only maintenance-level capital expenditures

 

All of the foregoing cost cutting steps were implemented, resulting in $4.1 million in operating savings, net of depreciation, amortization, and losses on asset impairments. Our projections in prior quarters were based on the assumption that same store sales would improve fourth fiscal quarter by 3% over the fourth fiscal quarter in 2016. This was based on selected price increases and the fact that there is a 14^th week in the fourth quarter of 2017 versus 13 weeks in the fourth quarter of 2016. However, after an 8% decline in same store sales for the third fiscal quarter over the same period in 2016, same store sales in the fourth quarter have declined by 12% through the first six weeks. Our sales decline appears to be the result of a poor macro environment for fast casual dining establishments. As a result, we are forecasting a continuing decline in sales for at least the first two fiscal quarters of 2018. While we will continue to identify and implement cost cuts, it’s unlikely that these will enable us to generate enough cash to sustain operations for the next twelve months.

 

Cash used in operations for the nine months ended September 24, 2017 was $1.1 million compared with cash used in operations of $5.1 million for the nine months ended September 25, 2016. Net cash used by operating activities in the nine months ended September 24, 2017 consisted primarily of net loss adjusted for non-cash expenses as well as positive changes in working capital accounts. Net cash used by operating activities in the nine months ended September 25, 2016 consisted primarily of net loss adjusted for non-cash expenses and negative changes in working capital.

 

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

 

We have no off balance sheet arrangements.

 

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 financial statements and accompanying notes. Note 1, “Nature of Business and Summary of Significant Accounting Policies,” of the Notes to Interim Financial Statements describes the significant accounting policies and methods used in the preparation of the Company’s 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.

 

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 impairment analysis, we recognized a fixed asset impairment of $2.6 million related to two underperforming locations for the nine months ending September 24, 2017. The impairment charge was recorded, to the extent that the carrying amount of the assets were not considered recoverable based on the estimated discounted cash flows and the underlying fair value of the assets, in impairment and loss on asset disposals on the Consolidated Statements of Operations for the of the nine months ended September 24, 2017.

 

 

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.

 

Indefinite-Lived Intangible Assets

 

Liquor licenses, 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 exceeds the fair value, an impairment loss is recorded for the difference. No impairments were recognized during the three and nine months ended September 24, 2017 and September 25, 2016.

 

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 and projected future taxable income as tax planning strategies. We have recorded a full valuation allowance on our deferred tax assets given the negative evidence of our recent years’ history of losses.

 

The Company applies the provisions of ASC 740 regarding the 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 September 24, 2017 and December 25, 2016.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

 

Not Applicable.

 

Item 4. Controls and Procedures.

 

(a)	Evaluation of disclosure controls and procedures.

 

As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934, the Company’s principal executive officer and principal financial officer has evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation this officer has concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective and were adequate to insure that the information required to be disclosed by the Company in reports it files or submits under the Exchange Act were recorded, processed, summarized and reported within the time period specified in the Commission’s rules and forms. It is also important to point out that all internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect all material misstatements. Therefore even those systems determined to be effective can only provide reasonable assurance with respect to financial reporting reliability and financial statements preparation and presentation.

 

(b)	Changes in internal controls.

 

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13(a)-15(d) and 15d – 15(d) under the Exchange Act that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The following information is incorporated by reference: the information set forth under the heading “Legal Proceedings” in Note 10 “Commitments and Contingencies” of the “Notes to the Interim Consolidated Financial Statements” of Part I, Item 1 to this Report on Form 10-Q.

 

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. To date, none of these types of litigation, most of which are entirely or predominantly covered by insurance, has had a material effect on our financial condition or results of operations. 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. As of the date of this Quarterly Report, we are not a party to any material pending legal proceedings and are not aware of any claims that could have a materially adverse effect on our financial position, results of operations or cash flows.

 

 

Item 1A. Risk Factors

 

Not applicable for smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Not Applicable.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The Exhibit Index following the signature page hereto is incorporated by reference under this item.

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.