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 September 30, 2018

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0‑21625


Picture 1

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 every Interactive Data File required to be submitted 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 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 ☐   

 

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 November 9, 2018, 9,091,926 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 September 30, 2018 and December 31, 2017

3

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and October 1, 2017

4

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2018

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and October 1, 2017

6

 

 

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

Item 2 

 

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

20

 

 

 

 

Item 3 

 

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

 

Item 4 

 

Controls and Procedures

28

 

 

 

 

PART II 

 

OTHER INFORMATION

 

 

 

 

 

Item 1 

 

Legal Proceedings

28

 

 

 

 

Item 1A 

 

Risk Factors

28

 

 

 

 

Item 5 

 

Other Information

29

 

 

 

 

Item 6 

 

EXHIBITS

29

 

 

 

 

 

 

SIGNATURES

30

 

 

 

 

 

 

CERTIFICATIONS

 

 

 

 

 


 

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2018 AND DECEMBER 31, 2017

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

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

September 30, 2018

    

December 31, 2017

Cash and cash equivalents

 

$

4,941

 

$

8,836

Restricted cash

 

 

1,132

 

 

1,590

Accounts receivable, net of allowance for doubtful accounts of $234,000 and $592,000, respectively

 

 

3,835

 

 

3,768

Held-to-maturity securities

 

 

7,012

 

 

 —

Inventories

 

 

657

 

 

633

Prepaid income taxes and income taxes receivable

 

 

 —

 

 

689

Prepaid expenses and other current assets

 

 

712

 

 

793

Assets held for sale

 

 

 —

 

 

475

Total current assets

 

 

18,289

 

 

16,784

 

 

 

 

 

 

 

Property, equipment and leasehold improvements, net

 

 

10,307

 

 

11,442

 

 

 

 

 

 

 

Other assets:

 

 

  

 

 

  

Intangible assets, net

 

 

1,419

 

 

1,840

Deferred tax asset, net

 

 

6,587

 

 

5,823

Other assets

 

 

1,596

 

 

1,018

 

 

$

38,198

 

$

36,907

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

  

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

  

 

 

  

Current portion of long-term debt and financing lease obligations

 

$

1,460

 

$

1,307

Accounts payable

 

 

4,182

 

 

4,365

Accrued compensation and benefits

 

 

1,221

 

 

1,545

Other current liabilities

 

 

2,607

 

 

3,118

Total current liabilities

 

 

9,470

 

 

10,335

 

 

 

  

 

 

  

Long-term liabilities:

 

 

  

 

 

  

Long-term debt, less current portion

 

 

2,448

 

 

7,932

Financing lease obligation, less current portion

 

 

 —

 

 

1,196

Other liabilities

 

 

4,847

 

 

3,963

Total liabilities

 

 

16,765

 

 

23,426

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

  

 

 

  

Common stock, $.01 par value, 100,000 shares authorized, 9,092 and 7,376 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

91

 

 

70

Additional paid-in capital

 

 

7,321

 

 

1,460

Retained earnings

 

 

14,021

 

 

11,951

Total shareholders’ equity

 

 

21,433

 

 

13,481

 

 

$

38,198

 

$

36,907

 

See accompanying notes to consolidated financial statements.

-  3  -


 

Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS

SEPTEMBER 30, 2018 AND OCTOBER 1, 2017

(in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

    

 

 

September 30, 2018

 

October 1, 2017

 

September 30, 2018

    

October 1, 2017

 

Revenue:

 

 

  

 

 

  

 

 

  

 

 

  

 

Restaurant sales, net

 

$

9,903

 

$

12,292

 

$

28,571

 

$

39,955

 

Franchise royalty and fee revenue

 

 

3,462

 

 

3,591

 

 

10,623

 

 

11,412

 

Franchisee national advertising fund contributions

 

 

497

 

 

 —

 

 

1,495

 

 

 —

 

Licensing and other revenue

 

 

211

 

 

183

 

 

766

 

 

696

 

Total revenue

 

 

14,073

 

 

16,066

 

 

41,455

 

 

52,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

Food and beverage costs

 

 

3,091

 

 

3,679

 

 

8,907

 

 

12,017

 

Labor and benefits costs

 

 

3,601

 

 

4,441

 

 

10,158

 

 

14,426

 

Operating expenses

 

 

3,011

 

 

3,484

 

 

8,746

 

 

11,845

 

Depreciation and amortization

 

 

281

 

 

1,207

 

 

983

 

 

2,311

 

General and administrative expenses

 

 

1,937

 

 

3,753

 

 

5,922

 

 

11,796

 

National advertising fund expenses

 

 

497

 

 

 —

 

 

1,495

 

 

 —

 

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

 

 

31

 

 

2,405

 

 

143

 

 

7,011

 

Net loss on disposal of property

 

 

 —

 

 

45

 

 

29

 

 

61

 

Total costs and expenses

 

 

12,449

 

 

19,014

 

 

36,383

 

 

59,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

1,624

 

 

(2,948)

 

 

5,072

 

 

(7,404)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest expense

 

 

(80)

 

 

(153)

 

 

(422)

 

 

(510)

 

Interest income

 

 

54

 

 

20

 

 

79

 

 

20

 

Total other expense

 

 

(26)

 

 

(133)

 

 

(343)

 

 

(490)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

1,598

 

 

(3,081)

 

 

4,729

 

 

(7,894)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

 

(196)

 

 

1,167

 

 

(937)

 

 

2,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

 

1,402

 

 

(1,914)

 

 

3,792

 

 

(4,984)

 

Net income from discontinued operations, net of tax

 

 

 —

 

 

100

 

 

 —

 

 

661

 

Net income (loss)

 

$

1,402

 

$

(1,814)

 

$

3,792

 

$

(4,323)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic net income (loss) per share - continuing operations

 

$

0.15

 

$

(0.28)

 

$

0.45

 

$

(0.72)

 

Basic net income per share - discontinued operations

 

 

 —

 

 

0.01

 

 

 —

 

 

0.10

 

Basic net income (loss) per share

 

$

0.15

 

$

(0.26)

 

$

0.45

 

$

(0.62)

 

Diluted net income (loss) per share - continuing operations

 

$

0.15

 

$

(0.28)

 

$

0.45

 

$

(0.72)

 

Diluted net income per share - discontinued operations

 

 

 —

 

 

0.01

 

 

 —

 

 

0.10

 

Diluted net income (loss) per share

 

$

0.15

 

$

(0.26)

 

$

0.45

 

$

(0.62)

 

Weighted average shares outstanding - basic

 

 

9,090

 

 

6,955

 

 

8,435

 

 

6,955

 

Weighted average shares outstanding - diluted

 

 

9,111

 

 

6,955

 

 

8,459

 

 

6,955

 

 

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

SEPTEMBER 30, 2018

(in thousands)

(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)

Common stock issued pursuant to rights offering

 

1,582

 

 

18

 

 

5,119

 

 

 —

 

 

5,137

Exercise of stock options

 

109

 

 

 2

 

 

432

 

 

 —

 

 

434

Stock-based compensation

 

25

 

 

 1

 

 

310

 

 

 —

 

 

311

Net income

 

 —

 

 

 —

 

 

 —

 

 

3,792

 

 

3,792

Balance - September 30, 2018

 

9,092

 

$

91

 

$

7,321

 

$

14,021

 

$

21,433

 

See accompanying notes to consolidated financial statements

 

-  5  -


 

Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SEPTEMBER 30, 2018 AND OCTOBER 1, 2017

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

    

September 30, 2018

    

October 1, 2017

Cash flows from operating activities:

 

 

  

 

 

  

Net income (loss) from continuing operations

 

$

3,792

 

$

(4,984)

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

 

 

  

 

 

  

Depreciation and amortization

 

 

983

 

 

2,311

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

 

 

(257)

 

 

4,976

Net loss on disposal of property

 

 

29

 

 

61

Amortization of deferred financing costs

 

 

96

 

 

26

Amortization of lease interest assets

 

 

27

 

 

27

Deferred income taxes

 

 

(185)

 

 

351

Deferred rent

 

 

(514)

 

 

285

Bad debts (recovery) expense

 

 

(35)

 

 

921

Stock-based compensation

 

 

225

 

 

183

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

(49)

 

 

(441)

Inventories

 

 

(24)

 

 

432

Prepaid income taxes and income taxes receivable

 

 

689

 

 

(1,068)

Prepaid expenses and other current assets

 

 

81

 

 

(18)

Other assets

 

 

172

 

 

(23)

Accounts payable

 

 

(183)

 

 

349

Accrued compensation and benefits

 

 

(411)

 

 

1,013

Other current liabilities

 

 

(203)

 

 

(179)

Other liabilities

 

 

(409)

 

 

(789)

Cash flows provided by continuing operating activities

 

 

3,824

 

 

3,433

Cash flows provided by discontinued operating activities

 

 

 —

 

 

1,058

Cash flows provided by operating activities

 

 

3,824

 

 

4,491

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

  

 

 

  

Proceeds from the sale of assets

 

 

1,187

 

 

 —

Payments for acquired restaurants

 

 

(37)

 

 

 —

Advances on notes receivable

 

 

(750)

 

 

 —

Purchases of held to maturity securities

 

 

(6,995)

 

 

 —

Purchases of property, equipment and leasehold improvements

 

 

(597)

 

 

(252)

Cash flows used for continuing investing activities

 

 

(7,192)

 

 

(252)

Cash flows used for discontinued investing activities

 

 

 —

 

 

(49)

Cash flows used for investing activities

 

 

(7,192)

 

 

(301)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

  

 

 

  

Payments for debt issuance costs

 

 

 —

 

 

(15)

Payments on long-term debt and financing lease obligations

 

 

(6,625)

 

 

(1,206)

Proceeds from sale of common stock, net of offering costs

 

 

5,120

 

 

 —

Proceeds from exercise of stock options

 

 

520

 

 

 —

Cash flows used for financing activities

 

 

(985)

 

 

(1,221)

 

 

 

 

 

 

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

(4,353)

 

 

2,969

Cash, cash equivalents and restricted cash, beginning of period

 

 

10,426

 

 

6,164

Cash, cash equivalents and restricted cash, end of period

 

$

6,073

 

$

9,133

 

-  6  -


 

Table of Contents

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 2018

    

October 1, 2017

Supplemental Disclosures

 

 

 

 

 

 

Cash paid for interest

 

$

271

 

$

479

Cash paid (refunds received) for income taxes, net

 

 

 6

 

 

(1,613)

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

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

 

$

 —

 

$

55

Increase (decrease) in accrued property and equipment purchases

 

 

23

 

 

 3

 

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, owns, operates and franchises restaurants under the name "Famous Dave’s." As of September 30, 2018, there were 147 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 131 franchise-operated restaurants. An additional 63 franchise-operated restaurants were committed to be developed through signed area development agreements as of September 30, 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 September 30, 2018 and December 31, 2017, and for the three and nine months ended September 30, 2018 and October 1, 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 and nine months ended September 30, 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 $6.6 million and $5.8 million as of September 30, 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 September 30, 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

 

Nine Months Ended

 

 

 

September 30, 2018

 

October 1, 2017

    

September 30, 2018

    

October 1, 2017

 

Effective tax rate

 

 

12.3

%

 

37.9

%

 

19.8

%

 

36.9

%

 

The net decrease in the Company’s effective tax rate for the three and nine months ended September 30, 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%, and adjustments recorded as a result of the finalization of the Company's 2017 tax returns. 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 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 September 30, 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 $142,000 and $298,000 in restricted cash as of September 30, 2018 and December 31, 2017, respectively, related to these undrawn letters of credit.

Held to maturity securities

The Company maintains short-term U.S. treasury notes and has classified these investments as held-to-maturity at the time of purchase.  Held-to-maturity securities are those securities which the Company has the intent and ability to hold until maturity. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums and discounts. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security using a straight-line method. As of September 30, 2018, the Company had approximately $7.0 million of securities, which mature in November, 2018.  The carrying value of these securities approximated fair value as of September 30, 2018.  The Company did not have held-to-maturity securities at December 31, 2017.

Concentrations of Credit Risk

As of September 30, 2018, the Company had receivables from a franchisee of approximately $463,000.

Statement of Cash Flows

Effective January 1, 2018, the Company adopted ASU No. 2016-18, “Statement of Cash Flows (Topic 230), Restricted Cash” (“ASU No. 2016-18”). ASU No. 2016-18 provides guidance on the presentation of restricted cash and restricted cash equivalents, which are now included with cash and cash equivalents when reconciling the beginning and ending cash amounts shown on the statements of cash flows. Using the retrospective transition method required under the standard, the Company has adjusted the presentation of its Condensed Consolidated Statements of Cash Flows for all periods presented. The adoption of ASU No. 2016-18 did not have any other impact on the Company’s Consolidated Financial Statements.

 

The following table provides additional details by financial statement line item of the restated presentation in the Company’s Condensed Consolidated Statement of Cash Flows for the period impacted:

 

 

 

 

 

 

 

 

 

 

 

October 1, 2017

(in thousands)

As Reported

 

2016-18 Impact

 

As Restated

Cash flows provided by operating activities:

 

 

 

 

 

 

 

 

Restricted cash

$

(7)

 

$

 7

 

$

 -

Net cash provided by operating activities

 

4,484

 

 

 7

 

 

4,491

Net increase in cash, cash equivalents and restricted cash

 

2,962

 

 

 7

 

 

2,969

Cash, cash equivalents and restricted cash as of the beginning of the period

 

4,450

 

 

1,714

 

 

6,164

Cash, cash equivalents and restricted cash as of the end of the period

$

7,412

 

$

1,721

 

$

9,133

 

 

 

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Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 permitted 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 $72,000 and $185,000 of franchise fee revenue related to the adoption of the new revenue standard during the three and nine months ended September 30, 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 $53,000 and $229,000 during the three and nine months ended September 30, 2018, which is reflected in the restaurant sales, net, line item of its consolidated statements of operations. As of September 30, 2018, gift cards payable of approximately $841,000 is expected to be recognized as revenue over the next 12 months, as they are redeemed.

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

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

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.

 

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Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 September 30, 2018:

 

 

 

 

(in thousands)

 

 

 

Balance, January 1, 2018

 

$

2,370

Revenue recognized

 

 

(185)

Balance, September 30, 2018

 

$

2,185

The following table illustrates estimated revenues expected to be recognized in the future related to unsatisfied performance obligations as of September 30, 2018:

 

 

 

 

(in thousands)

    

    

 

Fiscal Year

 

 

  

2018

 

$

55

2019

 

 

219

2020

 

 

211

2021

 

 

205

2022

 

 

189

Thereafter

 

 

1,306

Total

 

$

2,185

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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), which allows entities to initially apply the new lease standard as of the adoption date instead of at the beginning of the earliest period presented in the financial statements. The new lease standard provides for a modified retrospective approach or current period adjustment 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 believes that it will have a material impact because of the Company’s significant leasing activity. The Company has completed its analysis of leases and is currently evaluating the impact that the new leasing standard will have on its consolidated financial statements, and is beginning to develop controls around the implementation of Topic 842.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Under the updated standard, an entity should apply the requirements of Topic 718 to nonemployee awards, except for specific guidance on inputs to an option-pricing model and the attribution of cost. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in the grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling or goods or services as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company expects to adopt this new standard as of the effective date. The Company does not believe that adoption of the new standard will have a material impact on its consolidated financial statements.

(2)          Intangible Assets, net

The Company has intangible assets that consist of liquor licenses, lease interest assets and goodwill. The liquor licenses and goodwill 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.

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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 September 30, 2018 and December 31, 2017, respectively, are presented in the table below:

 

 

 

 

 

 

 

(in thousands)

 

September 30, 2018

    

December 31, 2017

Lease interest assets, gross carrying amount

 

$

1,091

 

$

1,091

Lease interest assets, accumulated amortization

 

 

(313)

 

 

(286)

Lease interest assets, net carrying amount

 

 

778

 

 

805

Goodwill

 

 

 6

 

 

 —

Liquor licenses

 

 

635

 

 

1,035

Intangible assets, net

 

$

1,419

 

$

1,840

The following table provides the projected future amortization of lease interest assets for the next five years, as of September 30, 2018:

 

 

 

 

(in thousands)

 

September 30, 2018

Fiscal 2018

 

$

 9

Fiscal 2019

 

 

36

Fiscal 2020

 

 

36

Fiscal 2021

 

 

36

Fiscal 2022

 

 

36

Thereafter

 

 

625

 

 

$

778

 

 

(3)          Long-Term Debt and Financing Lease Obligations

Long-term debt

The Company repaid its term loan during the nine months ended September 30, 2018. Long-term debt consisted of the following at:

 

 

 

 

 

 

 

 

    

 

 

 

(in thousands)

    

September 30, 2018

 

December 31, 2017

Real Estate Loan

 

$

2,744

  

$

3,581

Term Loan

 

 

 —

  

 

5,515

Less: deferred financing costs

 

 

(135)

  

 

(224)

Less: current portion of long-term debt

 

 

(161)

  

 

(940)

Long-term debt, less current portion

 

$

2,448

  

$

7,932

 

The weighted-average interest rate of long-term debt outstanding as of September 30, 2018 and December 31, 2017 was 4.60% 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 September 30, 2018, the Company was compliant with all of its covenants.

Financing Lease Obligation

Financing lease obligations consisted of the following at:

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2018

    

December 31, 2017

Financing lease obligation

 

$

1,303

 

$

1,576

Less: deferred financing costs

 

 

(5)

 

 

(13)

Less: current portion of financing lease obligation

 

 

(1,298)

 

 

(367)

Financing lease obligation, less current portion

 

$

 —

 

$

1,196

 

 

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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)

    

September 30, 2018

    

December 31, 2017

Prepaid expenses and deferred costs

 

$

585

 

$

362

Prepaid insurance

 

 

127

 

 

225

Deferred offering costs

 

 

 —

 

 

206

 

 

$

712

 

$

793

 

 

(5)         Other Current Liabilities

Other current liabilities consisted of the following at:

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2018

 

December 31, 2017

Gift cards payable

 

$

841

 

$

1,000

Accrued expenses

 

 

1,114

 

 

694

Lease reserves, current

 

 

212

 

 

1,165

Sales tax payable

 

 

215

 

 

242

Deferred franchise fees

 

 

225

 

 

 —

Accrued property and equipment purchases

 

 

 —

 

 

17

Other current liabilities

 

$

2,607

 

$

3,118

 

 

 

(6)         Other Liabilities

Other liabilities consisted of the following at:

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2018

 

December 31, 2017

Deferred rent

 

$

1,927

 

$

2,463

Deferred franchise fees

 

 

1,960

 

 

 —

Miscellaneous other liabilities

 

 

492

 

 

730

Asset retirement obligations

 

 

16

 

 

119

Accrual for uncertain tax position

 

 

10

 

 

15

Long term lease reserve

 

 

263

 

 

514

Long term deferred compensation

 

 

179

 

 

122

Other liabilities

 

$

4,847

 

$

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. Nonetheless, the 2005 Plan will remain in effect until all outstanding incentives granted thereunder have either been satisfied or terminated. As of September 30, 2018, there were 290,677 shares available for grant pursuant to the 2015 Plan. For purposes of net income (loss) per share, there were approximately 103,000 and 524,000 stock options outstanding as of September 30, 2018 and October 1, 2017, respectively that were not included in the computation of diluted net income (loss) per share because their impact was antidilutive. As of September 30, 2018, the total compensation cost related to unvested stock option awards was approximately $525,000, which is expected to be recognized over a period of approximately 3.06 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.

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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 and nine months ended September 30, 2018 and October 1, 2017, respectively, as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in thousands)

 

September 30, 2018

 

October 1, 2017

    

September 30, 2018

    

October 1, 2017

 

Stock options

 

$

58

 

$

57

 

$

225

 

$

173

 

Restricted stock

 

 

 —

 

 

(5)

 

 

 —

 

 

10

 

 

 

$

58

 

$

52

 

$

225

 

$

183

 

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

 

90

 

 

7.67

 

 

Exercised

 

(129)

 

 

5.28

 

 

Forfeited or expired

 

(98)

 

 

5.54

 

 

Options outstanding at September 30, 2018

 

402