dave_Current-Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended April 1, 2018

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0‑21625


Picture 2

FAMOUS DAVE’S of AMERICA, INC.

(Exact name of registrant as specified in its charter)

Minnesota

41‑1782300

(State or other jurisdiction of
incorporation or organization)

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

 

12701 Whitewater Drive, Suite 190

Minnetonka, MN  55343

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code (952) 294‑1300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):

Large Accelerated Filer ☐

 

Accelerated Filer ☐

 

 

 

Non-Accelerated Filer ☐   (Do not check if a smaller reporting company)

 

Smaller Reporting Company 

 

 

 

Emerging Growth Company ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of May 11, 2018, 9,069,358 shares of the registrant’s Common Stock were outstanding.

 

 

 


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC.

TABLE OF CONTENTS

 

    

 

Page

PART I 

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1 

 

Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets as of April 1, 2018 and December 31, 2017

3

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended April 1, 2018 and April 2, 2017

4

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended April 1, 2018

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended April 1, 2018 and April 2, 2017

6

 

 

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

Item 2 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

 

Item 3 

 

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

 

Item 4 

 

Controls and Procedures

25

 

 

 

 

PART II 

 

OTHER INFORMATION

 

 

 

 

 

Item 1 

 

Legal Proceedings

25

 

 

 

 

Item 1A 

 

Risk Factors

25

 

 

 

 

Item 5 

 

Other Information

26

 

 

 

 

Item 6 

 

EXHIBITS

26

 

 

 

 

 

 

SIGNATURES

27

 

 

 

 

 

 

CERTIFICATIONS

 

 

 

 

 


 

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

APRIL 1, 2018 AND DECEMBER 31, 2017

(in thousands, except per share data)
(Unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

April 1, 2018

    

December 31, 2017

Cash and cash equivalents

 

$

8,924

 

$

8,836

Restricted cash

 

 

1,249

 

 

1,590

Accounts receivable, net of allowance for doubtful accounts of $429,000 and $592,000, respectively

 

 

4,429

 

 

3,768

Inventories

 

 

594

 

 

633

Prepaid income taxes and income taxes receivable

 

 

385

 

 

689

Prepaid expenses and other current assets

 

 

1,308

 

 

793

Assets held for sale

 

 

677

 

 

475

Total current assets

 

 

17,566

 

 

16,784

 

 

 

 

 

 

 

Property, equipment and leasehold improvements, net

 

 

10,326

 

 

11,442

 

 

 

 

 

 

 

Other assets:

 

 

  

 

 

  

Intangible assets, net

 

 

1,431

 

 

1,840

Deferred tax asset, net

 

 

6,402

 

 

5,823

Other assets

 

 

1,298

 

 

1,018

 

 

$

37,023

 

$

36,907

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

  

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

  

 

 

  

Current portion of long-term debt and financing lease obligations

 

$

2,387

 

$

1,307

Accounts payable

 

 

4,397

 

 

4,365

Accrued compensation and benefits

 

 

1,166

 

 

1,545

Other current liabilities

 

 

2,688

 

 

3,118

Total current liabilities

 

 

10,638

 

 

10,335

 

 

 

  

 

 

  

Long-term liabilities:

 

 

  

 

 

  

Long-term debt, less current portion

 

 

7,738

 

 

7,932

Financing lease obligation, less current portion

 

 

 —

 

 

1,196

Other liabilities

 

 

5,454

 

 

3,963

Total liabilities

 

 

23,830

 

 

23,426

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

  

 

 

  

Common stock, $.01 par value, 100,000 shares authorized, 7,467 and 7,376 shares issued and outstanding at April 1, 2018 and December 31, 2017, respectively

 

 

71

 

 

70

Additional paid-in capital

 

 

1,895

 

 

1,460

Retained earnings

 

 

11,227

 

 

11,951

Total shareholders’ equity

 

 

13,193

 

 

13,481

 

 

$

37,023

 

$

36,907

 

See accompanying notes to consolidated financial statements.

-  3  -


 

Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS

APRIL 1, 2018 AND APRIL 2, 2017

(in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

    

 

   

April 1, 2018

    

April 2, 2017

 

Revenue:

 

 

  

 

 

  

 

Restaurant sales, net

 

$

8,713

 

$

12,949

 

Franchise royalty and fee revenue

 

 

3,408

 

 

3,782

 

Franchisee national advertising fund contributions

 

 

469

 

 

 —

 

Licensing and other revenue

 

 

254

 

 

217

 

Total revenue

 

 

12,844

 

 

16,948

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

  

 

 

  

 

Food and beverage costs

 

 

2,717

 

 

3,934

 

Labor and benefits costs

 

 

3,196

 

 

4,808

 

Operating expenses

 

 

2,841

 

 

4,106

 

Depreciation and amortization

 

 

393

 

 

563

 

General and administrative expenses

 

 

1,874

 

 

4,548

 

National advertising fund expenses

 

 

469

 

 

 —

 

Asset impairment, estimated lease termination (income) charges and other closing costs, net

 

 

(104)

 

 

1,133

 

Net (gain) loss on disposal of property

 

 

(1)

 

 

 1

 

Total costs and expenses

 

 

11,385

 

 

19,093

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

1,459

 

 

(2,145)

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

  

 

 

  

 

Interest expense

 

 

(145)

 

 

(187)

 

Interest income

 

 

 5

 

 

 —

 

Total other expense

 

 

(140)

 

 

(187)

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

1,319

 

 

(2,332)

 

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

 

(321)

 

 

904

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

 

998

 

 

(1,428)

 

Net income from discontinued operations, net of tax

 

 

 —

 

 

182

 

Net income (loss)

 

$

998

 

$

(1,246)

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

  

 

 

  

 

Basic net income (loss) per share - continuing operations

 

$

0.13

 

$

(0.21)

 

Basic net income per share - discontinued operations

 

 

 —

 

 

0.03

 

Basic net income (loss) per share

 

$

0.13

 

$

(0.18)

 

Diluted net income (loss) per share - continuing operations

 

$

0.13

 

$

(0.21)

 

Diluted net income per share - discontinued operations

 

 

 —

 

 

0.03

 

Diluted net income (loss) per share

 

$

0.13

 

$

(0.18)

 

Weighted average shares outstanding - basic

 

 

7,407

 

 

6,954

 

Weighted average shares outstanding - diluted

 

 

7,407

 

 

6,954

 

 

See accompanying notes to consolidated financial statements.

-  4  -


 

Table of Contents

 

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

APRIL 1, 2018

(in thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

 

 

 

    

Shares

    

Amount

    

Capital

    

Earnings

    

Total

Balance - December 31, 2017

 

7,376

 

$

70

 

$

1,460

 

$

11,951

 

$

13,481

Cumulative effect of change in accounting principle

 

 —

 

 

 —

 

 

 —

 

 

(1,722)

 

 

(1,722)

Exercise of stock options

 

76

 

 

 1

 

 

303

 

 

 —

 

 

304

Stock-based compensation

 

15

 

 

 —

 

 

132

 

 

 —

 

 

132

Net income

 

 —

 

 

 —

 

 

 —

 

 

998

 

 

998

Balance - April 1, 2018

 

7,467

 

$

71

 

$

1,895

 

$

11,227

 

$

13,193

 

See accompanying notes to consolidated financial statements

 

 

 

 

 

 

 

 

 

 

 

 

-  5  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

APRIL 1, 2018 AND APRIL 2, 2017

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

April 1, 2018

    

April 2, 2017

Cash flows from operating activities:

 

 

  

 

 

  

Net income (loss) from continuing operations

 

$

998

 

$

(1,428)

Adjustments to reconcile net income (loss) to cash flows provided by operations:

 

 

  

 

 

  

Depreciation and amortization

 

 

393

 

 

563

(Gain) loss from asset impairment and estimated lease termination and other closing costs

 

 

(185)

 

 

662

Net (gain) loss on disposal of property

 

 

(1)

 

 

 1

Amortization of deferred financing costs

 

 

10

 

 

 7

Amortization of lease interest assets

 

 

 9

 

 

 9

Deferred income taxes

 

 

 —

 

 

348

Deferred rent

 

 

(168)

 

 

137

Bad debts (recovery) expense

 

 

(147)

 

 

57

Stock-based compensation

 

 

47

 

 

107

Changes in operating assets and liabilities:

 

 

  

 

 

  

Restricted cash

 

 

341

 

 

(82)

Accounts receivable, net

 

 

61

 

 

(309)

Inventories

 

 

39

 

 

67

Prepaid income taxes and income taxes receivable

 

 

304

 

 

(1,314)

Prepaid expenses and other current assets

 

 

(515)

 

 

(629)

Other assets

 

 

178

 

 

28

Accounts payable

 

 

32

 

 

988

Accrued compensation and benefits

 

 

(441)

 

 

536

Other current liabilities

 

 

(289)

 

 

673

Other liabilities

 

 

(149)

 

 

(79)

Cash flows provided by continuing operating activities

 

 

517

 

 

342

Cash flows provided by discontinued operating activities

 

 

 —

 

 

522

Cash flows provided by operating activities

 

 

517

 

 

864

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

  

 

 

  

Proceeds from the sale of assets

 

 

 1

 

 

 —

Advances on notes receivable

 

 

(458)

 

 

 —

Purchases of property, equipment and leasehold improvements

 

 

(41)

 

 

(92)

Cash flows used for continuing investing activities

 

 

(498)

 

 

(92)

Cash flows used for discontinued investing activities

 

 

 —

 

 

(12)

Cash flows used for investing activities

 

 

(498)

 

 

(104)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

  

 

 

  

Payments for debt issuance costs

 

 

 —

 

 

(15)

Payments on long-term debt and financing lease obligations

 

 

(320)

 

 

(330)

Proceeds from exercise of stock options

 

 

389

 

 

 —

Cash flows provided by (used for) financing activities

 

 

69

 

 

(345)

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

 

88

 

 

415

Cash and cash equivalents, beginning of period

 

 

8,836

 

 

4,450

Cash and cash equivalents, end of period

 

$

8,924

 

$

4,865

 

 

-  6  -


 

Table of Contents

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

April 1, 2018

    

April 2, 2017

Supplemental Disclosures

 

 

 

 

 

 

Cash paid for interest

 

$

128

 

$

179

Cash paid for income taxes, net

 

 

 —

 

 

37

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

Change in deferred taxes, recognized in additional paid-in capital

 

$

 —

 

$

55

 

See accompanying notes to consolidated financial statements.

 

-  7  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)          Basis of Presentation

Basis of Presentation

Famous Dave’s of America, Inc. (“Famous Dave’s” or the “Company”) was incorporated in Minnesota on March 14, 1994. The Company develops, own, operates and franchises restaurants under the name "Famous Dave’s." As of April 1, 2018, there were 152 Famous Dave’s restaurants operating in 33 states, the Commonwealth of Puerto Rico, Canada, and the United Arab Emirates, including 16 Company-owned restaurants and 136 franchise-operated restaurants. An additional 59 franchise-operated restaurants were committed to be developed through signed area development agreements as of April 1, 2018.

These consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) Rules and Regulations. These unaudited consolidated financial statements represent the consolidated financial statements of the Company and its subsidiaries as of April 1, 2018 and December 31, 2017 and for the three months ended April 1, 2018 and April 2, 2017. The information furnished in these consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10‑K for the fiscal year ended December 31, 2017, as filed with the SEC on March 5, 2018.

Due to the seasonality of the Company’s business, revenue and operating results for the three months ended April 1, 2018 are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period’s presentation. These reclassifications did not have an impact on the reported net income (loss) for any of the periods presented.

Income Taxes

The Company maintains a federal deferred tax asset (“DTA”) in the amount of $6.4 million and $5.8 million as of April 1, 2018 and December 31, 2017, respectively. The Company evaluates the DTA on a quarterly basis to determine whether current facts and circumstances indicate that the DTA may not be fully realizable. As of April 1, 2018, the Company concluded that the DTA is fully realizable and that a valuation allowance was not considered necessary; however, the Company will continue to evaluate the asset on a quarterly basis until the DTA has been fully utilized.

The following table presents the Company’s effective tax rates for the periods presented:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

April 1,

    

April 2,

 

 

    

2018

    

2017

 

Effective tax rate

 

 

24.3

%

 

38.8

%

 

The net decrease in the effective tax rate for the three months ended April 1, 2018 was primarily a result of federal tax reform, signed into law on December 22, 2017, which reduced the Company’s federal statutory tax rate to 21%. The Company provides for income taxes based on its estimate of federal and state income tax liabilities. These estimates include, among other items, effective rates for state and local income taxes, allowable tax credits for items such as taxes paid on reported tip income, estimates related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items. The Company’s estimates are based on the information available at the time that the Company prepares the income tax provision. The Company generally files its annual income tax returns several months after its fiscal year-end. Income tax returns are subject to audit by federal, state, and local governments, generally years after the tax returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

-  8  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted cash and marketing fund

The Company has a system-wide marketing development fund, to which Company-owned restaurants, in addition to the majority of franchise-operated restaurants, contribute a percentage of net sales, currently 1.0%, for use in public relations and marketing development efforts. The assets held by this fund are considered to be restricted. Accordingly, the Company reflects the cash related to this fund within restricted cash and reflects the liability within accounts payable on the Company’s consolidated balance sheets. The Company had approximately $1 million and $1.3 million in this fund as of April 1, 2018 and December 31, 2017, respectively.

In conjunction with the Company’s credit agreements, the Company has deposited amounts for undrawn letters of credit in cash collateral accounts. The Company had approximately $246,000 and $298,000 in restricted cash as of April 1, 2018 and December 31, 2017, respectively, related to these undrawn letters of credit.

Concentrations of Credit Risk

As of April 1, 2018, the Company had receivables from a franchisee of approximately $454,000.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014‑09, Revenue from Contracts with Customers. The FASB issued ASU No. 2016‑08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” in March 2016, ASU 2016‑10 “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” in April 2016, ASU 2016‑11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014‑09 and 2014‑16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting” in May 2016 and ASU 2016‑12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” in May 2016. These new standards provide for a single, principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date of ASU 2014‑09 until annual and interim periods beginning on or after December 15, 2017. The new guidance permits the use of either a full retrospective or modified retrospective transition method and early adoption was permitted. The Company has adopted this standard beginning with fiscal year 2018 utilizing the modified retrospective transition method, applied to all contracts.

The new guidance did not impact the timing of revenue recognition on franchise royalty revenues, restaurant and merchandise sales or licensing revenue. Although the recognition of contributions from franchisees to the Company’s system-wide Public Relations and Marketing Development Fund (the “NAF”) did not change, the Company, beginning in fiscal 2018, now reports these contributions on a gross basis within the franchisee national advertising fund contributions line item on the consolidated statements of operations.

Beginning in fiscal 2018, the Company recognizes franchise fee revenue on a straight-line basis over the life of the related franchise agreements and any exercised renewal periods. Cash payments are due upon the opening of a new restaurant or upon the execution of a renewal of the related franchise agreement. The Company’s performance obligation with respect to franchise fee revenues consists of a license to utilize the Company’s brand for a specified period of time, which is satisfied equally over the life of each franchise agreement.

Area development fees are deferred until a new restaurant is opened pursuant to the area development agreement, at which time revenue is recognized on a straight-line basis over the life of the franchise agreement. Cash payments for area development agreements are typically due when an area development agreement has been executed. Gift card breakage revenue is recognized proportionately as gift cards are redeemed utilizing an estimated breakage rate based on the Company’s historical experience. Gift card breakage revenue is reported within the licensing and other revenue line item of the consolidated statements of operations.

The Company’s revenue is generally disaggregated within the consolidated statements of operations; however, within the franchise fee revenue line item of the consolidated statements of operations, the Company recognized approximately $56,000 of franchise fee revenue related to the adoption of the new revenue standard during the three months ended April 1, 2018. Gift card breakage revenue was not material to the Company’s consolidated financial statements. The Company recognized revenue related to gift cards of approximately $108,000 during the three months ended April 1, 2018, which is reflected in the restaurant sales, net, line item of its consolidated statements of operations. Gift cards payable of approximately $900,000 is expected to be recognized as revenue over the next 12 months.

-  9  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the impact of the adoption of the new revenue standard on the Company’s previously reported consolidated balance sheets:

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

New revenue standard adjustments

 

January 1, 2018

Deferred tax asset, net

 

$

5,823

 

$

579

 

$

6,402

Other current liabilities

 

 

3,118

 

 

224

 

 

3,342

Other liabilities

 

 

3,963

 

 

2,077

 

 

6,040

Retained earnings

 

 

11,951

 

 

(1,722)

 

 

10,229

The increases to other current liabilities and other liabilities relate to deferred franchise fee revenue. The increase to deferred tax asset, net is related to the tax effects of these adjustments to deferred franchise fee revenue. These adjustments resulted in a net decrease to retained earnings as of the adoption date.

Contract liabilities consist of deferred revenue resulting from franchise fees paid by franchisees. We classify these liabilities within other current liabilities and other liabilities within our consolidated balance sheets based on the expected timing of revenue recognition associated with these liabilities. The following table reflects the change in contract liabilities between the date of adoption (January 1, 2018) and April 1, 2018:

 

 

 

 

(in thousands)

 

 

 

Balance, January 1, 2018

 

$

2,370

Revenue recognized

 

 

(56)

Balance, April 1, 2018

 

$

2,314

The following table illustrates estimated revenues expected to be recognized in the future related to unsatisfied performance obligations as of April 1, 2018:

 

 

 

 

(in thousands)

    

    

 

Fiscal Year

 

 

  

2018

 

$

169

2019

 

 

225

2020

 

 

218

2021

 

 

206

2022

 

 

190

Thereafter

 

 

1,306

Total

 

$

2,314

Adoption of the new revenue standard had no impact on the Company’s cash flows from operating, investing or financing activities.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016‑02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016‑02 requires lessees to recognize a lease liability and a right-of-use asset for all leases. Lessor accounting remains largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for all entities. ASU 2016‑02 requires a modified retrospective approach for all leases existing at, or entered into after the date of initial adoption, with an option to elect to use certain transition relief. The Company expects to adopt this new standard as of the effective date and is currently evaluating the impact of this new standard on its consolidated financial statements, but expects that it will have a material impact because of the Company’s significant leasing activity.

(2)          Intangible Assets, net

The Company has intangible assets that consist of liquor licenses and lease interest assets. The liquor licenses are indefinite-lived assets and are not subject to amortization. The lease interest assets are amortized to occupancy costs on a straight-line basis over the remaining term of each respective lease.

-  10  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the Company’s intangible assets as of April 1, 2018 and December 31, 2017, respectively, are presented in the table below:

 

 

 

 

 

 

 

(in thousands)

 

April 1, 2018

    

December 31, 2017

Lease interest assets, gross carrying amount

 

$

1,091

 

$

1,091

Lease interest assets, accumulated amortization

 

 

(295)

 

 

(286)

Lease interest assets, net carrying amount

 

 

796

 

 

805

Liquor licenses

 

 

635

 

 

1,035

Intangible assets, net

 

$

1,431

 

$

1,840

 

The following table provides the projected future amortization of lease interest assets for the next five years, as of April 1, 2018:

 

 

 

 

(in thousands)

 

April 1, 2018

Fiscal 2018

 

$

27

Fiscal 2019

 

 

36

Fiscal 2020

 

 

36

Fiscal 2021

 

 

36

Fiscal 2022

 

 

36

Thereafter

 

 

625

 

 

$

796

 

 

 

(3)          Long-Term Debt and Financing Lease Obligations

Long-term debt

Long-term debt consisted approximately of the following at:

 

 

 

 

 

 

 

 

    

 

 

 

(in thousands)

    

April 1, 2018

 

December 31, 2017

Real Estate Loan

 

$

3,550

  

$

3,581

Term Loan

 

 

5,315

  

 

5,515

Less: deferred financing costs

 

 

(216)

  

 

(224)

Less: current portion of long-term debt

 

 

(911)

  

 

(940)

Long-term debt, less current portion

 

$

7,738

  

$

7,932

 

The weighted-average interest rate of debt outstanding as of April 1, 2018 and December 31, 2017 was 4.50% and 4.27%, respectively.

The Company is subject to various financial and non-financial covenants on its long-term debt, including a debt-service coverage ratio. As of April 1, 2018, the Company was in compliance with all of its covenants.

Financing Lease Obligation

Financing lease obligations consisted of the following at:

 

 

 

 

 

 

 

(in thousands)

    

April 1, 2018

    

December 31, 2017

Financing lease obligation

 

$

1,487

 

$

1,576

Less: deferred financing costs

 

 

(10)

 

 

(13)

Less: current portion of financing lease obligation

 

 

(1,477)

 

 

(367)

Financing lease obligation, less current portion

 

$

 —

 

$

1,196

 

 

-  11  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4)          Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following at:

 

 

 

 

 

 

 

(in thousands)

    

April 1, 2018

    

December 31, 2017

Prepaid expenses

 

$

631

 

$

362

Prepaid insurance

 

 

329

 

 

225

Deferred offering costs

 

 

348

 

 

206

 

 

$

1,308

 

$

793

 

 

(5)         Other Current Liabilities

Other current liabilities consisted of the following at:

 

 

 

 

 

 

 

(in thousands)

    

April 1, 2018

 

December 31, 2017

Gift cards payable

 

$

900

 

$

1,000

Miscellaneous other current liabilities

 

 

772

 

 

668

Lease reserves, current

 

 

409

 

 

1,165

Sales tax payable

 

 

250

 

 

242

Accrued real estate tax

 

 

115

 

 

26

Deferred franchise fees

 

 

225

 

 

 —

Accrued property and equipment purchases

 

 

17

 

 

17

Other current liabilities

 

$

2,688

 

$

3,118

 

 

 

(6)         Other Liabilities

Other liabilities consisted of the following at:

 

 

 

 

 

 

 

(in thousands)

    

April 1, 2018

 

December 31, 2017

Deferred rent

 

$

2,295

 

$

2,463

Deferred franchise fees

 

 

2,089

 

 

 —

Miscellaneous other liabilities

 

 

611

 

 

730

Asset retirement obligations

 

 

119

 

 

119

Accrual for uncertain tax position

 

 

15

 

 

15

Long term lease reserve

 

 

201

 

 

514

Long term deferred compensation

 

 

124

 

 

122

Other liabilities

 

$

5,454

 

$

3,963

 

(7)       Stock-based Compensation

Effective May 5, 2015, the Company adopted the 2015 Equity Incentive Plan (the “2015 Plan”), pursuant to which the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance stock units and other stock and cash awards to eligible participants. The Company also maintains an Amended and Restated 2005 Stock Incentive Plan (the “2005 Plan”). Together, the 2015 Plan and 2005 Plan are referred to herein as the “Plans.” The 2005 Plan prohibits the granting of incentives after May 12, 2015, the tenth anniversary of the date the 2005 Plan was approved by the Company’s shareholders. There were no shares available for grant pursuant to either of the Plans as of April 1, 2018. Nonetheless, the 2005 Plan will remain in effect until all outstanding incentives granted thereunder have either been satisfied or terminated. For purposes of earnings per share, there were approximately 430,000 and 614,000 stock options outstanding as of April 1, 2018 and April 2, 2017, respectively that were not included in the computation of diluted EPS because their impact was antidilutive. As of April 1, 2018, the total compensation cost related to unvested stock option awards was approximately $459,000, which is expected to be recognized over a period of approximately 2.65 years

Stock options granted to employees and directors generally vest over two to five years, in monthly or annual installments, as outlined in each agreement. Options generally expire ten years from the date of grant. Compensation expense equal to the grant date fair value of the options is recognized in general and administrative expense over the applicable service period.

-  12  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The incentive compensation of the Company’s Chief Executive Officer is tied to increases in the Company’s share price and calls for the issuance of freely tradable shares of the Company’s common stock upon the achievement of certain milestones.

The Company utilizes the Black-Scholes option pricing model when determining the compensation cost associated with stock options issued using the following significant assumptions:

·

Stock price – Published trading market values of the Company’s common stock as of the date of grant.

·

Exercise price – The stated exercise price of the stock option.

·

Expected life – The simplified method as outlined in ASC 718.

·

Expected dividend – The rate of dividends that the Company expects to pay over the term of the stock option.

·

Volatility – Actual volatility over the most recent historical period equivalent to the expected life of the option.

·

Risk-free interest rate – The daily United States Treasury yield curve rate.

The Company recognized stock-based compensation expense in its consolidated statements of operations for the three months ended April 1, 2018 and April 2, 2017, respectively, as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

(in thousands)

    

April 1, 2018

    

April 2, 2017

 

Stock options

 

$

47

 

$

100

 

Restricted stock

 

 

 —

 

 

 7

 

 

 

$

47

 

$

107

 

Information regarding the Company’s stock options is summarized below:

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Remaining

 

 

Number of 

 

Weighted Average 

 

Contractual

(number of options in thousands)

    

Options

    

Exercise Price

    

Life in Years

Options outstanding at December 31, 2017

 

539

 

$

6.60

 

6.6

Granted

 

20

 

 

7.05

 

 

Exercised

 

(85)

 

 

5.39

 

 

Forfeited or expired

 

(44)

 

 

6.23

 

 

Options outstanding at April 1, 2018

 

430

 

$

6.78

 

6.6

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

April 1, 2018

 

April 2, 2017

 

Weighted-average fair value of options granted during the period

 

$

3.39

 

$

2.93

 

Expected life (in years)

 

 

6.1

 

 

5.0

 

Expected dividend

 

$

 —

 

$

 —

 

Expected stock volatility

 

 

46.66

%

 

65.70

%

Risk-free interest rate

 

 

2.7

%

 

2.0

%

 

 

 

 

(8)        Asset Impairment and Estimated Lease Termination and Other Closing Costs

The following is a summary of asset impairment, estimated lease termination, and other closing costs for the three months ended April 1, 2018 and April 2, 2017. These costs are included in asset impairment and estimated lease termination and other closing costs in the consolidated statements of operations.

 

 

 

 

 

 

 

 

 

Three Months Ended

(dollars in thousands)

    

April 1, 2018

    

April 2, 2017

Asset impairments, net

 

$

150

 

$

(56)

Lease termination (income) charges and related costs

 

 

(433)

 

 

1,182

Restaurant closure expenses

 

 

179

 

 

 7

Asset impairment, estimated lease termination (income) charges and other closing costs

 

$

(104)

 

$

1,133

-  13  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(9)        Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement framework establishes a three-tier hierarchy. The three levels, in order of priority, are as follows:

Level 1:  Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Level 1 measurements are determined by observable inputs which include data sources and market prices available and visible outside of the entity.

Level 2:  Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly.

Level 3:  Inputs that are used to estimate the fair value of the asset or liability. Level 3 measurements are determined by unobservable inputs, which include data and analysis developed within the entity to assess the fair value.

For assets and liabilities falling within Level 3 of the fair value hierarchy, a change in the input assumptions used could result in a change in the estimated fair value of the asset or liability. Transfers in and out of levels will be based on the Company’s judgment of the availability of unadjusted quoted prices in active markets, other observable inputs, and non-observable inputs.

The carrying amounts of cash and cash equivalents reported in the consolidated balance sheets approximates fair value based on current interest rates and short-term maturities. The carrying amount of accounts receivable approximates fair value due to the short-term nature of accounts receivable. The Company believes that the carrying amount of long-term debt approximates fair value due to the minimal difference between market interest rates and the fixed interest rate on a portion of the Company’s long-term debt, as well as that there has been no significant change in the credit risk or credit markets since origination.

The following table summarizes property and equipment, net and assets held for sale, measured at fair value in the Company’s consolidated balance sheets as of April 1, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Balance at April 1, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

  

 

 

  

 

 

  

 

 

  

Assets held for sale

 

$

 —

 

$

677

 

$

 —

 

$

677

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

  

 

 

  

 

 

  

 

 

  

Assets

 

 

  

 

 

  

 

 

  

 

 

  

Property and equipment, net

 

$

 —

 

$

 —

 

$

828

 

$

828

 

Assets held for sale at April 1, 2018 were recorded at fair value and were valued based upon negotiated sale price (Level 2). Property and equipment, net recorded at fair value was valued based upon a broker’s estimate of value or estimated discounted future cash flows (Level 3). These assets were adjusted to net realizable value based upon the decision to dispose of the property.

(10)        Discontinued Operations

On November 1, 2017, the Company entered into agreements to sell eight restaurants in Maryland and Virginia (the “Mid-Atlantic Restaurants”) to Commonwealth Blue Ribbon Restaurants LLC and Capital Blue Ribbon Restaurants LLC (the “Mid-Atlantic Purchasers”). Pursuant to the first agreement (“Seven Restaurants Agreement”), the contract purchase price was $2,350,000 and included a repairs and maintenance credit of $750,000, which must be exhausted within one year. Also pursuant to the Seven Restaurants Agreement, the Company and the Mid-Atlantic Purchasers entered into a line of credit agreement for a maximum of $750,000 (the “LOC Agreement”) on which the Mid-Atlantic Purchasers can draw funds to pay for necessary repairs and maintenance work. The LOC Agreement has a four-year term with interest payable at a rate of 4.25% per annum. As of April 1, 2018, the outstanding balance on the LOC Agreement was approximately $458,000.

-  14  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pursuant to the second agreement (the “Frederick Agreement”) to effect the sale of the Company’s Frederick, Maryland (“Frederick”) restaurant to Capital Blue Ribbon Restaurants, LLC, the contract purchase price for Frederick shall be an amount equal to (i) 50% of the rent, fees, charges, taxes and other amounts payable to the landlord or another third party pursuant to the lease agreement, plus (ii) 50% of that portion of Frederick’s EBITDA (as defined in the Frederick APA) attributable to Frederick that exceeds $25,000 in any 12-month period and $37,500 in any 18-month period; however, the Company has guaranteed the 12-month and 18-month EBITDA performance of Frederick. The Company expects to recognize a liability and corresponding expense related to this guarantee based on the amount that the Company would owe to the Mid-Atlantic Purchasers in the event that the restaurant was closed. As of April 1, 2018, the Company had reserved approximately $54,000 related to this guarantee.

The Mid-Atlantic Purchasers also purchased the inventory and petty cash on hand of the Mid-Atlantic Restaurants as of the closing date. The transaction resulted in the Company’s complete exit from the Mid-Atlantic market. There were no assets or liabilities related to the Mid-Atlantic Restaurants remaining as of April 1, 2018 or December 31, 2017.

The following table provides certain information from the Company’s consolidated statements of operations related to the Mid-Atlantic Restaurants:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

(in thousands)

    

April 1, 2018

    

April 2, 2017

    

Restaurant sales, net

 

$

 —

 

$

5,027

 

Cost of sales

 

 

 —

 

 

(4,631)

 

General and administrative expenses

 

 

 —

 

 

(45)

 

Depreciation and amortization

 

 

 —

 

 

(193)

 

Operating income

 

 

 —

 

 

158

 

Gain (loss) on disposal attributable to discontinued operations

 

 

 —

 

 

 —

 

Income attributable to discontinued operations, before tax

 

 

 —

 

 

158

 

Income attributable to discontinued operations, tax effect

 

 

 —

 

 

24

 

Income attributable to discontinued operations, net of tax

 

$

 —

 

$

182

 

 

 

 

(11)        Variable Interest Entities

A variable interest holder is considered to be the primary beneficiary of a variable interest entity (“VIE”) if it has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. Once an entity is determined to be a VIE, the primary beneficiary is required to consolidate the entity. The Company has an installment agreement with one of its franchisees as the result of refranchising its Lincoln, Nebraska restaurant. This franchisee is a VIE; however, the owners of the franchise operations are the primary beneficiaries of the entities, not the Company. Therefore, the franchise operations are not required to be consolidated in the Company’s consolidated financial statements.

On August 11, 2015, the Company consummated the sale of its Greenwood, Indiana restaurant. In conjunction with that agreement, the Company entered into a lease assignment agreement with the purchaser and landlord, releasing the Company of its obligations except in the event of default by the purchaser. As of April 1, 2018, the amount of the future lease payments for which the Company would be liable in the event of a default are approximately $74,000. An accrual related to any future obligation was not considered necessary as of April 1, 2018 as the Company has determined the fair value of this guarantee was zero as there was no indication that the purchasers would not be able to pay the required lease payments. While this franchise meets the definition of a VIE, the owners of the franchise operations are the primary beneficiaries of the entities, not the Company. Therefore, the franchise operations are not required to be consolidated in the Company’s consolidated financial statements.

On March 1, 2016, the Company consummated the sale of its Chicago, Illinois-area restaurants. In conjunction with that agreement, the Company entered into lease assignment agreements with the respective purchasers and three of the landlords, releasing the Company of its obligations except in the event of default by the purchasers. As of April 1, 2018, the amount of the future lease payments for which the company would be liable in the event of a default is approximately $566,000. As of April 1, 2018, the Company had accrued approximately $499,000 related to the future obligations of these restaurants. While this franchise meets the definition of a VIE, the owners of the franchise operations are the primary beneficiaries of the entities, not the Company. Therefore, the franchise operations are not required to be consolidated in the Company’s consolidated financial statements.

-  15  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On November 1, 2017, the Company sold its Frederick, Maryland restaurant. Pursuant to the terms of the Frederick Agreement, the Company remained the primary obligor of the lease. As of April 1, 2018, the amount of future lease payments for which the Company would be liable in the event of a default are approximately $711,000. An accrual related to the future lease obligation was not considered necessary as of April 1, 2018. See Note 10 “Discontinued Operations.”

(12)        Litigation

In the normal course of business, the Company is involved in a number of litigation matters that are incidental to the operation of the business. These matters generally include, among other things, matters with regard to employment and general business-related issues. The Company currently believes that the resolution of any of these pending matters will not have a material adverse effect on its financial position or liquidity, but an adverse decision in more than one of the matters could be material to its consolidated results of operations.

The Company filed a complaint on July 14, 2015, against a group of former franchisees in California seeking injunctive relief and damages for: (1) Federal Trademark Infringement; (2) Federal Trademark Dilution; (3) Federal Unfair Competition; (4) Federal Trade Dress Dilution; (5) Trademark Infringement under California Business and Professions Code § 14200; (6) Trademark Dilution under California Business and Professions Code §14200; (7) Common Law Trademark Infringement; (8) Unfair Competition under California Business and Professions Code § 17200; (9) False Advertising; (10) Breach of Contract; (11) Breach of Implied Covenant of Good Faith and Fair Dealing; and (12) Intentional Interference with Contract. The claims stem from the former franchisees’ breaches of their franchise agreements, including the failure to pay franchise fees and their continued operation of five restaurants utilizing Famous Dave’s intellectual property without authorization. After two defendants in the case, Kurt Schneiter and M Mart 1, filed a demurrer to the Complaint, Famous Dave’s filed an Amended Complaint on October 9, 2015, reasserting the same claims. The case is captioned Famous Dave’s of America, Inc., v. SR El Centro FD, Inc., et al., Case No. BC589329, and is currently pending before the Honorable Elihu M. Berle in the Superior Court of Los Angeles. By court order, dated June 6, 2016, Famous Dave’s successfully obtained a preliminary injunction, enjoining the former franchisee defendants from using Famous Dave’s intellectual property, including its trademarks and restaurant system. The preliminary injunction was the subject of an interlocutory appeal.  The appeal was fully briefed and oral argument took place on August 10, 2017.  On October 23, 2017, the California Court of Appeal rendered its decision in the appeal in Famous Dave’s favor, affirming and upholding in full the trial court’s preliminary injunction order.  Famous Dave’s intends to vigorously pursue all remaining claims in the trial court.  No trial date has been set as of yet.

On July 28, 2015, this group of former franchisees (the “Plaintiffs”) filed a complaint against Famous Dave’s in the South Judicial District of the Superior Court of the County of Los Angeles. On March 10, 2016, Plaintiffs re-filed this Complaint as a First Amended Cross-Complaint Famous Dave’s of America, Inc. v. SR El Centro, Inc., et al., Superior Court of the State of California, County of Los Angeles, Central Division, Case No. BC589329 alleging that Famous Dave’s breached the Franchise Agreements for these restaurants by failing to provide certain marketing support and access to customer contact data, vendors, internet reporting and support to Plaintiffs, and failing to provide operations and preferred practices training to Plaintiffs’ designated representative. Plaintiffs further allege that such conduct by Famous Dave’s is a breach of the covenant of good faith and fair dealing. Plaintiffs also allege that Famous Dave’s aided and abetted John and Allan Gantes in breach of their fiduciary duty to Plaintiffs. Plaintiffs are seeking compensatory damages in amount not less than $20 million, punitive damages, costs and attorneys’ fees. The Company has not recognized a liability with respect to the Plaintiffs’ claim because the Company does not believe that it is probable that it will incur a related material loss as of April 1, 2018. Famous Dave’s intends to vigorously defend against these claims.  No trial date has been set as of yet.

(13)        Related Party Transactions

Anand D. Gala is a franchisee of the Company and currently serves as a director of the Company. Mr. Gala is the Founder, President and Chief Executive Officer of Gala Holdings International, a diversified holding company that conducts consulting, restaurant development and management operations.

Charles Davidson is a franchisee of the Company and is the beneficial owner of approximately 18.7% of the Company’s common stock as of the date that these financial statements were available to be issued, by virtue of his ownership interest in Wexford Capital. The Company recently completed a rights offering, in which Wexford Capital purchased 352,845 shares of the Company’s common stock. See Note 14 “Subsequent Events.”

-  16  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table outlines amounts received from related parties during the three months ended April 1, 2018 and April 2, 2017:

 

 

 

 

 

 

 

Three Months Ended

(in thousands)

April 1, 2018

    

April 2, 2017

Revenues and NAF contributions - Anand Gala

$

382

 

$

494

Revenues and NAF contributions - Charles Davidson

 

75

 

 

 —

The following table outlines accounts receivable from related parties as of April 1, 2018 and December 31, 2017: