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Table of Contents

UNITED STATES

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 July 3, 2016

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-21625

 

 

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 200

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  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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 definition of “large accelerated filer,” “accelerate filer” and “smaller reporting 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

  

x

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

As of August 12, 2016, 6,957,628 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 July 3, 2016 and January 3, 2016

   3
  

Consolidated Statements of Operations For the three and six months ended July 3, 2016 and June 28, 2015

   4
  

Consolidated Statements of Cash Flows For the six months ended July 3, 2016 and June 28, 2015

   5
  

Notes to Consolidated Financial Statements

   6

Item 2

  

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

   21

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

   30

Item 4

  

Controls and Procedures

   31

PART II

  

OTHER INFORMATION

  

Item 1

  

Legal Proceedings

   31

Item 1A

  

Risk Factors

   32

Item 5

  

Other Information

   32

SIGNATURES

  

CERTIFICATIONS

  

 

- 2 -


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JULY 3, 2016 AND JANUARY 3, 2016

(in thousands, except per share data)

 

     July 3,
2016
(Unaudited)
     January 3,
2016
 
ASSETS   

Current assets:

     

Cash and cash equivalents

   $ 6,308       $ 5,300   

Restricted cash

     2,868         1,087   

Accounts receivable, net

     5,041         4,677   

Inventories

     1,940         2,070   

Deferred tax assets

     181         181   

Prepaid expenses and other current assets

     1,659         1,671   

Assets held for sale

     88         2,211   
  

 

 

    

 

 

 

Total current assets

     18,085         17,197   

Property, equipment and leasehold improvements, net

     30,121         32,491   

Other assets:

     

Intangible assets, net

     2,878         2,902   

Deferred tax assets

     4,411         4,411   

Other assets

     1,259         824   
  

 

 

    

 

 

 
   $ 56,754       $ 57,825   
  

 

 

    

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Current liabilities:

     

Current portion of long-term debt and financing lease obligation

   $ 2,819       $ 2,193   

Accounts payable

     6,239         5,685   

Accrued compensation and benefits

     1,387         1,390   

Deferred tax liabilities

     101         101   

Other current liabilities

     3,408         3,406   

Liabilities held for sale

             1,747   
  

 

 

    

 

 

 

Total current liabilities

     13,954         14,522   

Long-term liabilities:

     

Line of credit

     1,855           

Long-term debt, less current portion

     6,992         10,200   

Financing lease obligation, less current portion

     2,539         2,757   

Other liabilities

     8,299         8,285   
  

 

 

    

 

 

 

Total liabilities

     33,639         35,764   
  

 

 

    

 

 

 

Shareholders’ equity:

     

Common stock, $0.01 par value, 100,000 shares authorized, 6,958 shares issued and outstanding at July 3, 2016 and January 3, 2016, respectively

     66         66   

Retained earnings

     23,049         21,995   
  

 

 

    

 

 

 

Total shareholders’ equity

     23,115         22,061   
  

 

 

    

 

 

 
   $ 56,754       $ 57,825   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

- 3 -


Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

JULY 3, 2016 AND JUNE 28, 2015

(in thousands, except per share data)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     July 3,     June 28,     July 3,     June 28,  
     2016     2015     2016     2015  

Revenue:

        

Restaurant sales, net

   $ 23,022      $ 27,509      $ 42,014      $ 51,253   

Franchise royalty revenue

     4,686        4,620        8,851        8,951   

Franchise fee revenue

            250        135        255   

Licensing and other revenue

     336        335        584        520   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     28,044        32,714        51,584        60,979   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Food and beverage costs

     7,089        8,332        13,112        15,506   

Labor and benefits costs

     7,401        8,672        14,254        16,658   

Operating expenses

     6,353        7,719        12,063        14,420   

Depreciation and amortization

     956        1,144        1,936        2,323   

General and administrative expenses

     4,836        4,937        8,611        9,786   

Asset impairment and estimated lease termination and other closing costs

     1,056        881        1,064        976   

Pre-opening expenses

                          1   

Net loss (gain) on disposal of property

     19        48        (185     25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     27,710        31,733        50,855        59,695   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     334        981        729        1,284   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense:

        

Interest expense

     (225     (220     (403     (421

Interest income

     1               2        5   

Other income, net

     1        2        1          
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (223     (218     (400     (416
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     111        763        329        868   

Income tax benefit (expense)

     2        (216     (67     (212
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     113        547        262        656   

Net income from discontinued operations, net of tax

     27        107        708        195   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 140      $ 654      $ 970      $ 851   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share from continuing operations

   $ 0.02      $ 0.07      $ 0.04      $ 0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share from discontinued operations

   $      $ 0.02      $ 0.10      $ 0.03   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share

   $ 0.02      $ 0.09      $ 0.14      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share from continuing operations

   $ 0.02      $ 0.07      $ 0.04      $ 0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share from discontinued operations

   $      $ 0.02      $ 0.10      $ 0.03   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share

   $ 0.02      $ 0.09      $ 0.14      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding — basic

     6,949        6,974        6,949        7,016   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding — diluted

     6,958        6,993        6,958        7,037   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

- 4 -


Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

JULY 3, 2016 AND JUNE 28, 2015

(in thousands)

(Unaudited)

 

     Six Months Ended  
     July 3,     June 28,  
     2016     2015  

Cash flows from operating activities:

    

Net income

   $ 262      $ 656   

Adjustments to reconcile net income to cash flows provided by operations:

    

Depreciation and amortization

     1,936        2,323   

Asset impairment and estimated lease termination and other closing costs

     1,064        976   

Net (gain) loss on disposal of property

     (185     25   

Amortization of deferred financing costs

     27        41   

Deferred rent

     360        440   

Stock-based compensation

     83        324   

Tax benefit for equity awards issued

            (153

Changes in operating assets and liabilities:

    

Restricted cash

     (1,782     177   

Accounts receivable, net

     (517     (798

Inventories

     71        55   

Prepaid expenses and other current assets

     7        (220

Deposits

     (277     (10

Accounts payable

     260        42   

Accrued compensation and benefits

     (145     (783

Other current liabilities

     (133     (322

Other liabilities

     (33     1   

Long-term deferred compensation

            (74
  

 

 

   

 

 

 

Cash flows provided by continuing operating activities

     998        2,700   

Cash flows (used for) provided by discontinued operating activities

     (783     406   
  

 

 

   

 

 

 

Cash flows provided by operating activities

     215        3,106   

Cash flows used for investing activities:

    

Proceeds from the sale of assets

     1,053          

Purchases of property, equipment and leasehold improvements

     (442     (2,722
  

 

 

   

 

 

 

Cash flows provided by (used for) continuing investing activities

     611        (2,722

Cash flows provided by (used for) discontinued investing activities

     1,150        (86
  

 

 

   

 

 

 

Cash flows provided by (used for) investing activities

     1,761        (2,808

Cash flows used for financing activities:

    

Proceeds from line of credit

     1,855        14,200   

Payments on line of credit

            (8,700

Payments for debt issuance costs

     (23     (128

Payments on long-term debt and financing lease obligation

     (2,800     (451

Tax benefit for equity awards issued

            153   

Repurchase of common stock

            (5,672
  

 

 

   

 

 

 

Cash flows used for financing activities

     (968     (598
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     1,008        (300

Cash and cash equivalents, beginning of period

     5,300        2,133   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 6,308      $ 1,833   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

We, Famous Dave’s of America, Inc. (“Famous Dave’s” or the “Company”), were incorporated in Minnesota on March 14, 1994. We develop, own, operate and franchise restaurants under the name “Famous Dave’s”. As of July 3, 2016, there were 179 Famous Dave’s restaurants operating in 33 states, the Commonwealth of Puerto Rico, Canada, and United Arab Emirates, including 37 company-owned restaurants and 142 franchise-operated restaurants. An additional 62 franchise restaurants were committed to be developed through signed Area Development Agreements as of July 3, 2016.

We prepared these consolidated financial statements in accordance with Securities and Exchange Commission (“SEC”) Rules and Regulations. These unaudited financial statements represent the consolidated financial statements of Famous Dave’s and its subsidiaries as of July 3, 2016 and January 3, 2016 and for the three and six month periods ended July 3, 2016 and June 28, 2015, respectively. The information furnished in these financial statements includes normal recurring adjustments and reflects all adjustments, which are, in our opinion, necessary for a fair presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 our Form 10-K for the fiscal year ended January 3, 2016 as filed with the SEC.

Due to the seasonality of our business, revenue and operating results for the three and six months ended July 3, 2016 are not necessarily indicative of the results to be expected for the full year.

(2) Net Income Per Common Share

Basic net income per common share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the reporting period. Diluted EPS equals net income divided by the sum of the weighted average number of shares of common stock outstanding plus all additional common stock equivalents, such as stock options, when dilutive.

 

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Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Following is a reconciliation of basic and diluted net income per common share:

 

     Three Months Ended      Six Months Ended  
(in thousands, except per share data)    July 3,      June 28,      July 3,      June 28,  
   2016      2015      2016      2015  

Net income per common share — basic:

           

Net income from continuing operations, net of taxes

   $ 113       $ 547       $ 262       $ 656   

Net income from discontinued operations, net of taxes

     27         107         708         195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 140       $ 654       $ 970       $ 851   

Weighted average shares outstanding

     6,949         6,974         6,949         7,016   

Net income from continuing operations per common share — basic

   $ 0.02       $ 0.07       $ 0.04       $ 0.09   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income from discontinued operations per common share — basic

   $       $ 0.02       $ 0.10       $ 0.03   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share — basic

   $ 0.02       $ 0.09       $ 0.14       $ 0.12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share — diluted:

           

Net income from continuing operations, net of taxes

   $ 113       $ 547       $ 262       $ 656   

Net income from discontinued operations, net of taxes

     27         107         708         195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 140       $ 654       $ 970       $ 851   

Weighted average shares outstanding

     6,949         6,974         6,949         7,016   

Dilutive impact of common stock equivalents outstanding

     9         19         9         21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average shares outstanding

     6,958         6,993         6,958         7,037   

Net income from continuing operations per common share — diluted

   $ 0.02       $ 0.07       $ 0.04       $ 0.09   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income from discontinued operations per common share — diluted

   $       $ 0.02       $ 0.10       $ 0.03   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share — diluted

   $ 0.02       $ 0.09       $ 0.14       $ 0.12   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were 659,000 options outstanding as of July 3, 2016 that were not included in the computation of diluted EPS for the three and six months ended July 3, 2016 because they were anti-dilutive. All options outstanding as of June 28, 2015 were included in the computation of diluted earnings per share for the three and six months ended June 28, 2015.

(3) Restricted Cash and Marketing Fund

We have a system-wide Public Relations and 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 throughout the system. The assets held by this fund are considered restricted. Accordingly, we reflect the cash related to this fund in restricted cash and reflect the liability in accounts payable on our consolidated balance sheets as of July 3, 2016 and January 3, 2016. We had approximately $1.7 million and $1.1 million in this fund as of July 3, 2016 and January 3, 2016, respectively.

In conjunction with the Company’s Credit Agreement, we have deposited 105% of the face amount of the undrawn letters of credit in a cash collateral account with the Administrative Agent. We had approximately $1.2 million and $0.0 million in restricted cash as of July 3, 2016 and January 3, 2016, respectively, related to these undrawn letters of credit.

(4) Allowance for Doubtful Accounts

Accounts Receivable, Net — We provide an allowance for uncollectible accounts on accounts receivable based on historical losses and existing economic conditions, when relevant. We provide for a general bad debt reserve for franchise receivables due to increases in days sales outstanding and deterioration in general economic market conditions. This general reserve is based on the aging of receivables meeting specified criteria and is adjusted each quarter based on past due receivable balances. Additionally, we have periodically established a specific reserve on certain receivables as necessary. Any changes to the reserve are recorded in general and administrative expenses. The allowance for uncollectible accounts was approximately $553,000 and $246,000, at

 

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Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

July 3, 2016 and January 3, 2016, respectively. Accounts receivable are written off when they become uncollectible, and payments subsequently received on such receivables are credited to allowance for doubtful accounts. Accounts receivable balances written off have not exceeded allowances provided. We believe all accounts receivable in excess of the allowance are fully collectible. If accounts receivable in excess of provided allowances are determined uncollectible, they are charged to expense in the period that determination is made. Outstanding past due accounts receivable are subject to a monthly interest charge on unpaid balances which is recorded as interest income in our consolidated statements of operations. In assessing recoverability of these receivables, we make judgments regarding the financial condition of the franchisees based primarily on past and current payment trends, as well as other variables, including annual financial information, which the franchisees are required to submit to us, as well as other variables.

(5) 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. Amortization of the lease interest assets is expected to be approximately $47,500 per year, for the remaining useful life.

A reconciliation of beginning and ending amounts of intangible assets at July 3, 2016 and January 3, 2016, respectively, are presented in the table below:

 

(in thousands)    Remaining
estimated
useful life
(years)
     Original
Cost
     Accumulated
Amortization
    Net
Book
Value
     Less
Current
Portion(1)
    Non-
Current
Portion
 

Balance at July 3, 2016

               

Lease interest assets

     23.6       $ 1,417       $ (301   $ 1,116       $ (48   $ 1,068   

Liquor licenses

        1,810                1,810                1,810   
     

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

      $ 3,227       $ (301   $ 2,926       $ (48   $ 2,878   
     

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
(in thousands)    Remaining
estimated
useful life
(years)
     Original
Cost
     Accumulated
Amortization
    Net
Book
Value
     Less
Current
Portion(1)
    Non-
Current
Portion
 

Balance at January 3, 2016

               

Lease interest assets

     24.1       $ 1,417       $ (277   $ 1,140       $ (48   $ 1,092   

Liquor licenses

        1,810                1,810                1,810   
     

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

      $ 3,227       $ (277   $ 2,950       $ (48   $ 2,902   
     

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) 

The current portion is included in prepaid expenses and other current assets on the consolidated balance sheets.

 

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Table of Contents

FAMOUS DAVE’S OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(6) Credit Facility, Long-Term Debt and Debt Covenants

On June 10, 2016, the Company and its subsidiaries (each, a “Borrower” and collectively, the “Borrowers”) entered into a Waiver and Second Amendment (the “Second Amendment”) to the Third Amended and Restated Credit Agreement, as amended (the “Credit Agreement”) with Wells Fargo, National Association as administrative agent and lender) the “Administrative Agent”). The Second Amendment Effective Date, as defined in the Second Amendment, is June 10, 2016. Pursuant to the Second Amendment, the Credit Agreement was amended and restated to terminate the revolving credit loan commitment (the “Facility”), change the maturity date of the revolving credit loans and the term loan from December 31, 2018 to December 31, 2017, and obligate monthly payments of $200,000 to reduce the principal amount of the loans. Additionally, the Borrowers deposited 105% of the face amount of the outstanding letters of credit in a cash collateral account with the Administrative Agent which is included in restricted cash on our Consolidated Balance Sheet.

At July 3, 2016, the principal amount outstanding under the Facility and the Term Loan was $1.9 million and $9.4 million, respectively, along with approximately $1.1 million in letters of credit for real estate locations. The Credit Agreement allows for termination by the Borrower without penalty at any time. Under the Credit Agreement, the Borrowers have granted the Lender a security interest in all current and future personal property of the Borrower.

Principal amounts outstanding under the Facility bear interest either at an adjusted Eurodollar rate or “Base Rate” plus an applicable margin. For the six months ended July 3, 2016 and June 28, 2015, our weighted average interest rate for the Facility was 3.70% and 2.76%, respectively.

Principal amounts outstanding under the Term Loan bear interest at the same rate as the Facility. The weighted average interest rate of the Term Loan for the six months ended July 3, 2016 was 3.68%. There was no Term Loan at June 28, 2015.

The Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type. For more information regarding the details of the customary affirmative and negative covenants, please refer to the full text of the Third Amended and Restated Credit Agreement dated May 8, 2015 filed as Exhibit 10.2 to our Form 10-Q for the quarter ended March 29, 2015, which was filed on May 8, 2015, the First Amendment to the Credit Agreement filed as Exhibit 10.1 to our Current Report on Form 8-K, which was filed on December 11, 2015, and the Waiver and Second Amendment to the Credit Agreement filed as Exhibit 10.1 to our Current Report on Form 8-K filed on June 10, 2016.

We were in compliance with all covenants of the Credit Agreement for the quarter ended July 3, 2016 except the Adjusted Leverage Ratio. Under the Credit Agreement, the Adjusted Leverage Ratio must not exceed 5.50:1.00 for the quarter ended July 3, 2016 and the Adjusted Leverage Ratio as recalculated was 5.74:1.00. On August 16, 2016, we received a waiver of this covenant default from the Lender and have paid $500,000 in outstanding principle under the Facility.

 

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(7) Other Current Liabilities

Other current liabilities consisted of the following at:

 

(in thousands)    July 3,
2016
     January 3,
2016
 

Gift cards payable

   $ 1,408       $ 1,616   

Other liabilities

     903         869   

Sales tax payable

     491         674   

Accrued real estate taxes

     256         33   

Deferred franchise fees

     212         134   

Income tax payable

     136         40   

Accrued property and equipment purchases

     2         40   
  

 

 

    

 

 

 
   $ 3,408       $ 3,406   
  

 

 

    

 

 

 

(8) Other Liabilities

Other liabilities consisted of the following at:

 

(in thousands)    July 3,
2016
     January 3,
2016
 

Deferred rent

   $ 7,506       $ 7,191   

Other liabilities

     382         455   

Long term lease reserve

     183         258   

Long term deferred compensation

     115         258   

Asset retirement obligations

     111         111   

Income taxes payable

     2         12   
  

 

 

    

 

 

 
   $ 8,299       $ 8,285   
  

 

 

    

 

 

 

(9) Performance Shares, Stock Options, Other Forms of Compensation, and Common Share Repurchases

Stock-based Compensation

Effective May 5, 2015, we adopted a 2015 Equity Plan (the “2015 Plan”), pursuant to which we 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. We also maintain 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.” Under the 2015 Plan, an aggregate of 40,851 shares of our Company’s common stock remained unreserved and available for issuance at July 3, 2016. The 2005 Plan prohibits the granting of incentives after May 12, 2015, the tenth anniversary of the date such Plan was approved by the Company’s shareholders. Nonetheless, the 2005 Stock Incentive Plan will remain in effect until all outstanding incentives granted thereunder have either been satisfied or terminated.

 

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We recognized stock-based compensation expense in our consolidated statements of operations for the three and six months ended July 3, 2016 and June 28, 2015, respectively, as follows:

 

     Three Months Ended      Six Months Ended  
(in thousands)    July 3,
2016
     June 28,
2015
     July 3,
2016
     June 28,
2015
 

Performance Stock Units

   $       $ 8       $       $ 36   

Stock Options(1)(2)

     121         84         53         256   

Restricted Stock and Restricted Stock Units

     15         15         30         30   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 136       $ 107       $ 83       $ 322   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The three and six months ended June 28, 2015 included the recapture of previously recorded stock-based compensation of approximately $45,000 due to employee departures.

(2) 

The six months ended July 3, 2016 included the recapture of previously recorded stock-based compensation of approximately $126,000 due to the departure of our former CFO Mr. Pawlowski.

Board of Directors’ Compensation

We recognized board of directors’ compensation expense in our consolidated statement of operations for the three and six months ended July 3, 2016 and June 28, 2015, respectively, as follows:

 

     Three Months Ended      Six Months Ended  
(in thousands)    July 3,
2016
     June 28,
2015
     July 3,
2016
     June 28,
2015
 

Stock-based compensation

   $ 15       $ 15       $ 30       $ 30   

Stock option compensation

     31         62         47         130   

Cash compensation

     22         77         35         153   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total board of directors’ compensation

   $ 68       $ 154       $ 112       $ 313   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock Options

On February 10, 2014, Edward H. Rensi was named Interim Chief Executive Officer by the Company’s board of directors. Pursuant to the agreement governing Mr. Rensi’s employment, the Company granted him 25,000 share, five-year stock options. These options vested in two equal installments of 12,500 shares on February 10, 2014 and February 10, 2015. The compensation expense for this grant was recognized under general and administrative expense in our consolidated statements of operations through the applicable service period. The options will expire one year following Mr. Rensi’s resignation as a director of the Company on July 11, 2015.

On January 15, 2015, Edward H. Rensi was granted 75,000 stock options. These options were forfeited upon his resignation from the position of Chief Executive Officer on June 18, 2015.

On June 2, 2014, Richard A. Pawlowski was named Chief Financial Officer by the Company’s board of directors. Pursuant to the agreement governing Mr. Pawlowski’s employment, the Company granted 78,000 stock options. These options vested in equal annual installments over a period of three years, expiring five years from the grant date. The compensation expense for this grant was recognized under general and administrative expense in our consolidated statements of operations through the applicable service period. Upon his resignation effective April 11, 2016, any unvested options were forfeited.

 

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On January 15, 2016, the Company granted Mr. Pawlowski 6,000 stock options vesting in three equal installments dependent upon the achievement of certain Milestones and expire on April 1, 2017. The compensation expense for this grant will be recognized under general and administrative expense in our consolidated statements of operations through the applicable service period.

Effective July 11, 2015, July 13, 2015, and July 15, 2015, Edward H. Rensi, Brett D. Heffes, and David J. Mastrocola, respectively, resigned as members of the Board of Directors, forfeiting any unvested options previously granted to them.

On August 31, 2015, Abelardo Ruiz became the Company’s Chief Operating Officer. Pursuant to the agreement governing Mr. Ruiz’s employment, the Company granted 71,324 stock options. These options will vest in equal monthly installments over a period of four years and expire five years from the grant date. The compensation expense for this grant will be recognized under general and administrative expense in our consolidated statements of operations through the applicable service period.

Effective January 1, 2016, Adam J. Wright was appointed the Company’s Chief Executive Officer, removing his prior interim title. Pursuant to the agreement governing Mr. Wright’s employment, the Company granted 50,000 stock options. These options will vest in equal monthly installments over a period of two years and expire ten years from the grant date. The compensation expense for this grant will be recognized under general and administrative expense in our consolidated statements of operations through the applicable service period.

On February 12, 2016, Alfredo Martel became the Company’s Chief Marketing Officer. Pursuant to the agreement governing Mr. Martel’s employment, the Company granted 35,000 stock options. These options will vest in equal monthly installments over a period of four years and expire five years from the grant date. The compensation expense for this grant will be recognized under general and administrative expense in our consolidated statements of operations through the applicable service period.

On April 11, 2016, Dexter Newman became the Company’s Chief Financial Officer. Pursuant to the agreement governing Mr. Newman’s employment, the Company granted 70,000 stock options. These options will vest in equal monthly installments over a period of four years and expire ten years from the grant date. The compensation expense for this grant will be recognized under general and administrative expense in our consolidated statements of operations through the applicable service period.

On May 3, 2016, the Company made a one-time grant of 20,000 stock options to Ananda Gala and Bryan Wolf, respectively, as board members. These options will vest in equal annually installments over a period of 5 years and expire ten years from the grant date. The compensation expense for this grant will be recognized under general and administrative expense in our consolidated statements of operations through the applicable service period.

Other options granted to certain non-officer employees vest in equal annual installments over a period of four years and expire five years from the grant date. Compensation expense equal to the grant date fair value is generally recognized for these awards over the vesting period.

Options granted to certain non-employees in exchange for future services vest in monthly installments over a period of approximately two years and expire either five or ten years from the grant date. Expense equal to the current fair value is recognized over the vesting period, with the value being marked to market in each accounting period for any unvested portions of the awards.

 

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The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation method with the assumptions noted in the table below. Due to a lack of recent historical share option exercise experience, the Company uses a simplified method for estimating the expected life, as outlined in Accounting Standards Codification 718, calculated using the following formula: (vesting term + original contract term)/2. Expected volatilities are based on the movement of the Company’s common stock over the most recent historical period equivalent to the expected life of the option. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. maturities over the expected life at the time of grant.

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

 

(number of options in thousands)    Number of
Options
    Weighted Average
Exercise  Price
     Weighted
Average
Remaining
Contractual
Life in Years
 

Options outstanding at January 3, 2016

     507      $ 16.66         5.3   

Granted

     53        17.66      

Forfeited

     (53     32.02      
  

 

 

   

 

 

    

 

 

 

Options outstanding at April 3, 2016

     507      $ 13.95         5.2   
  

 

 

   

 

 

    

 

 

 

Granted

     206        5.60      

Forfeited

     (3     28.53      

Expired

     (26     32.05      
  

 

 

   

 

 

    

 

 

 

Options outstanding at July 3, 2016

     684      $ 10.65         5.9   
  

 

 

   

 

 

    

 

 

 

Options exercisable at July 3, 2016

     190      $ 14.20         4.5   

Weighted-average values and assumptions for valuing grants made:

 

     Six Months
Ended July  3,
2016
    Fiscal 2015  

Weighted average fair value of options granted

   $ 2.15      $ 4.90   

Expected life (in years)

     5.6        3.3   

Expected stock volatility

     39.8     51.2

Risk-free interest rate

     1.3     1.9

(10) Retirement Savings Plans

401(k) Plan

We have a pre-tax salary reduction/profit-sharing plan under the provisions of Section 401(k) of the Internal Revenue Code, which covers employees meeting certain eligibility requirements. In fiscal 2016 and 2015, we matched 25.0% of the employee’s contribution up to 4.0% of their earnings. Employee contributions were approximately $95,000 and $91,000 for the second quarter of fiscal years 2016 and 2015, respectively. The employer match was $7,000 and $16,000, respectively, for the second quarter of fiscal years 2016 and 2015. For the six months ended July 3, 2016 and June 28, 2015, eligible participants contributed approximately $187,000 and $207,000, respectively, to the plan and the Company provided matching funds of approximately $14,000 and $35,000, respectively. There were no discretionary contributions to the plan during the first six months of fiscal year 2016 and 2015.

 

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Non-Qualified Deferred Compensation Plan

We have a Non-Qualified Deferred Compensation Plan effective as of February 25, 2005 (the “Deferred Compensation Plan”). Eligible participants are those employees who are at the “director” level and above and who are selected by the Company to participate in the Deferred Compensation Plan. Participants must complete a deferral election each year to indicate the level of compensation (salary, bonus and commissions) they wish to have deferred for the coming year. This deferral election is irrevocable except to the extent permitted by the Deferred Compensation Plan administrator, and the applicable regulations promulgated by the IRS. In fiscal 2016 and 2015, we matched 25.0% of the first 4.0% contributed and paid a declared interest rate of 6.0% on balances outstanding. The board of directors administers the Deferred Compensation Plan and may change the rate or any other aspects of the Deferred Compensation Plan at any time.

Deferral periods are limited to the earlier of termination of employment or not less than three calendar years following the end of the applicable plan year. Extensions of the deferral period for a minimum of five years are allowed provided an election for extension is made at least one year before the first payment affected by the change. Payments can be in a lump sum or in equal payments over a two-, five- or ten-year period, plus interest from the commencement date.

The Deferred Compensation Plan assets are kept in an unsecured account that has no trust fund. In the event of bankruptcy, participants entitled to future payments under the Deferred Compensation Plan would have no greater rights than that of an unsecured general creditor of the Company and the Deferred Compensation Plan confers no legal rights for interest or claim on any specific assets of the Company. Benefits provided by the Deferred Compensation Plan are not insured by the Pension Benefit Guaranty Corporation under Title IV of the Employee Retirement Income Security Act of 1974 (“ERISA”), because the pension insurance provisions of ERISA do not apply to the Deferred Compensation Plan.

For the quarters ended July 3, 2016 and June 28, 2015, eligible participants contributed approximately $7,000 and $5,000 to the Deferred Compensation Plan, respectively. The Company provided matching funds and interest of approximately $5,000 and $8,000 for the quarters ended July 3, 2016 and June 28, 2015, respectively. Distributions for the quarters ended July 3, 2016 and June 28, 2015 were $21,000 and $57,000, respectively. For the six months ended July 3, 2016 and June 28, 2015, eligible participants contributed approximately $13,000 and $23,000, respectively, to the Deferred Compensation Plan and the Company provided matching funds and interest of approximately $10,000 and $17,000, respectively. Distributions for the six months ended July 3, 2016 and June 28, 2015 were $108,000 and $15,000, respectively. The balance of the Plan for the quarters ended July 3, 2016 and January 3, 2016 was approximately $280,000 and $547,000, respectively. Of this balance approximately $165,000 and $109,000 was recorded in current liabilities and the remaining balance was recorded in other liabilities at July 3, 2016 and January 3, 2016, respectively.

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

In accordance with Financial Accounting Standards Board Accounting Standards Codification for Property, Plant, and Equipment, we evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired, the loss is measured by the amount by which the carrying amount of the restaurant’s assets exceeds its fair value. Fair value is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms, discount

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

rate and other factors. If these assumptions change in the future, we may be required to take additional impairment charges for the related assets. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates. Restaurant sites that are operating but have been previously impaired are reported at the lower of their carrying amount or fair value less estimated costs to sell. Following is a summary of these events for the three and six months ended July 3, 2016 and June 28, 2015.

     

 

Asset Impairment and Estimated Lease Termination and Other Closing Costs (in thousands):

 

Restaurants

  

Reason

   Three Months
Ended
July 3, 2016
     Six Months
Ended
July 3, 2016
 

Held for Sale

  

Asset Impairment(1)

   $ 868       $ 868   

Richmond, VA area

  

Costs for closed restaurants

     14         19   

Software

  

Asset Impairment(2)

     171         171   

Miscellaneous

  

Costs for closed restaurants

     3         6   
     

 

 

    

 

 

 

Total

      $ 1,056       $ 1,064   
     

 

 

    

 

 

 

 

(1) 

Asset impairment calculated at July 3, 2016 based upon anticipated sale of a Virginia restaurant.

(2) 

Asset impairment calculated at July 3, 2016 related to a software implementation project that was discontinued.

Asset Impairment and Estimated Lease Termination and Other Closing Costs (in thousands):

 

Restaurants

  

Reason

   Three  Months
Ended
June 28, 2015
    Six  Months
Ended
June 28, 2015
 

Smithtown, NY

  

Asset impairment(1)

   $ 935      $ 935   

Richmond, VA area

  

Costs for closed restaurants

     36        128   

Décor Warehouse

  

Asset impairment(2)

     (13     (10

Eden Prairie, MN

  

Costs for closed restaurants(3)

     (77     (77
     

 

 

   

 

 

 

Total

      $ 881      $ 976   
     

 

 

   

 

 

 

 

(1) 

Asset impairment calculated at June 28, 2015 based upon anticipated sale of Smithtown restaurant.

(2) 

The three months ended June 28, 2015 include approximately $13,000 in proceeds from the sale of the remaining inventory of the Décor Warehouse.

(3) 

The three months ended June 28, 2015 include approximately $115,000 in benefits from the recapture of deferred rent benefits.

(12) 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.

 

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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.

Transfers in and out of levels will be based on our judgment of the availability of unadjusted quoted prices in active markets, other observable inputs, and non-observable inputs.

The following table (in thousands) summarizes the assets held for sale and property and equipment, in each case measured at fair value in our consolidated balance sheet as of January 3, 2016 and July 3, 2016:

 

     Level 1      Level 2      Level 3      Total  

Balance at January 3, 2016

           

Assets

           

Assets Held for Sale

   $       $ 1,431       $ 780       $ 2,211   

Property and Equipment

   $       $       $ 507       $ 507   

Balance at July 3, 2016

           

Assets

           

Assets Held for Sale

   $       $ 88       $       $ 88   

Property and Equipment

   $       $       $ 465       $ 465   

Assets Held for Sale were recorded at fair value and were valued based upon a Real Estate Broker’s Estimate of Value for the properties (Level 3) or negotiated sale price (Level 2). Property and Equipment, recorded at fair value were valued based upon a Broker’s Estimate of Value or estimated discounted future cash flows (Level 3). These assets were adjusted to net realizable based upon the decision to dispose of the property. Total assets held for sale were reduced during the six months ended July 3, 2016 due to the disposal of FDA’s Chicago operations sites (see note 13) and of one of the Richmond restaurants. The remaining assets held for sale at July 3, 2016 reflect the net realizable value of one of our Virginia restaurants (see note 11).

(13) Discontinued Operations

On December 14, 2015, Famous Dave’s of America, Inc. and certain of its subsidiaries (collectively, the “Company”) entered into an Asset Purchase Agreement and related Real Estate Purchase Agreement (the “Purchase Agreements”) with Windy City Restaurant Holdings LLC and its affiliate (together, the “Purchaser”) pursuant to which the Company agreed to sell the assets comprising its seven Chicago, Illinois area Company-owned restaurants located in Addison, Algonquin, Bolingbrook, Evergreen Park, North Riverside, Orland Park and Oswego (collectively, “Purchased Restaurants”) to the Purchaser.

Pursuant to the terms of this agreement, the Company received a total purchase price of $1.15 million during the quarter ended April 3, 2016, plus approximately $315,000 for the purchase of inventory on hand on the closing date. The Purchaser also assumed specified liabilities of the Company, including the Company’s existing leases for the Purchased Restaurants located in Bolingbrook, North Riverside and Orland Park, Illinois.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

As a result of this asset sale, the Company recognized a pretax $1.1 million gain during the quarter ended April 3, 2016, primarily due to the write-off of the remaining $1.3 million deferred rent liability associated with the leases assumed by the Purchaser, discussed above.

The net assets and liabilities of the Purchased Restaurants associated with this transaction were included in assets and liabilities held for sale on the accompanying Consolidated Balance Sheets at January 3, 2016. No related assets or liabilities remained at July 3, 2016. The carrying value of the assets and liabilities included in the asset sale was as follows (in thousands):

 

(in thousands)    January 3,
2016
 

Accounts receivable, net

   $ 65   

Inventories

     344   

Prepaid expenses and other current assets

     30   
  

 

 

 

Total current assets

     439   

Property, equipment and leasehold improvements, net

     991   
  

 

 

 

Total assets

   $ 1,430   
  

 

 

 

Accounts payable

   $ 10   

Accrued compensation and benefits

     96   

Other current liabilities

     389   
  

 

 

 

Total current liabilities

     495   

Other liabilities

     1,252   
  

 

 

 

Total liabilities

   $ 1,747   
  

 

 

 

The operating results of the Purchased Restaurants for the three and six months ended July 3, 2016 and June 28, 2015 are summarized below. These results include costs directly attributable to the components of the businesses which were divested. Interest expense of $32,000 and $14,000 were allocated to discontinued operations for the six months ended July 3, 2016 and June 28, 2015, respectively, based upon the portion of the borrowing base associated with discontinued operations. Income tax expense of $385,000 and $180,000 for the six months ended July 3, 2016 and June 28, 2015, respectively have also been allocated to discontinued operations. These adjustments have been made for all periods presented.

 

     Three Months Ended      Six Months Ended  
(in thousands)    July 3, 2016      June 28, 2015      July 3, 2016      June 28, 2015  

Revenue

   $       $ 4,694       $ 2,365       $ 9,057   

Income from operations

   $ 15       $ 180       $ 1,042       $ 389   

Income from discontinued operations, net of income taxes

   $ 27       $ 107       $ 708       $ 195   

 

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(14) Variable Interest Entities

Once an entity is determined to be a variable interest entity (VIE), the party with the controlling financial interest, the primary beneficiary, is required to consolidate it. The Company has an installment agreement with a franchisee as the result of refranchising its Lincoln, Nebraska restaurant. While the 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 August 11, 2015, the Company consummated the sale of its Greenwood, Indiana and Florence, Kentucky restaurants. In conjunction with that agreement, the Company entered into lease assignment agreements with the respective purchasers and landlords, releasing the Company of its obligations except in the event of default by the purchasers. As of July 3, 2016, the amount of the future lease payments for which the Company would be liable in the event of a default are approximately $475,000. An accrual related to any future obligation was not considered necessary at July 3, 2016 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 Chicago, Illinois 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 July 3, 2016, the amount of the future lease payments for which the company would be liable in the event of a default are approximately $2.1 million. An accrual related to any future obligation was not considered necessary at July 3, 2016 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.

(15) 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Famous Dave’s of America, Inc.’s (“Famous Dave’s”) 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 is currently the subject of a pending interlocutory appeal which Famous Dave’s intends to oppose vigorously.

On July 28, 2015, these 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.

(16) Supplemental Cash Flow Information

 

     Six Months Ended  
     July 3,      June 28,  
(in thousands)    2016      2015  

Cash paid for interest

   $ 400       $ 364   

Cash paid for income taxes, net of refunds

   $ 136       $ 334   

Non-cash investing and financing activities:

     

Increase in accrued property and equipment purchases

   $ 31       $ 8   

(17) Recently Issued Accounting Pronouncement

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). 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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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. It will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. It permits the use of either a retrospective or cumulative effect transition method and early adoption is not permitted. We have not yet selected a transition method and are in the process of evaluating the effect this standard will have on our consolidated financial statements and related disclosures.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items.” This update eliminates from Generally Accepted Accounting Principles (“GAAP”) the concept of extraordinary items. ASU 2015-01 is effective for the first interim period within fiscal years beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. A reporting entity may apply the amendments prospectively or retrospectively to all prior periods presented in the financial statements. The Company adopted this ASU in the first quarter of 2016, but it had no impact on the consolidated financial statements.

In April 2015, the FASB issued guidance on the financial statement presentation of debt issuance costs. This guidance requires debt issuance costs to be presented in the balance sheet as a reduction of the related debt liability rather than as an asset. The standard will become effective for annual periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016. Early adoption is permitted. The standard requires companies to apply the guidance retrospectively to all prior periods. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

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 is currently evaluating the impact of this new standard on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Famous Dave’s of America, Inc. was incorporated as a Minnesota corporation in March 1994 and opened its first restaurant in Minneapolis in June 1995. As of July 3, 2016, there were 179 Famous Dave’s restaurants operating in 33 states, the Commonwealth of Puerto Rico, Canada, and United Arab Emirates including 37 Company-owned restaurants and 142 franchise-operated restaurants. An additional 62 franchise restaurants were committed to be developed through signed Area Development Agreements as of July 3, 2016.

Fiscal Year

Our fiscal year ends on the Sunday closest to December 31st. Our fiscal year is generally 52 weeks; however, it periodically consists of 53 weeks. The fiscal year ending January 1, 2017 (fiscal 2016) is a 52 week fiscal year while fiscal year ended January 3, 2016 (fiscal 2015) was a 53 week fiscal year.

Revenue

Our revenue consists of restaurant sales, franchise-related revenue, and licensing and other revenue. Our franchise-related revenue is comprised of three separate and distinct earnings processes: area development fees, initial franchise fees, and continuing royalty payments. Currently, our domestic area development fee for domestic growth consists of a one-time, non-refundable payment of approximately $10,000 per restaurant in consideration for the services we perform in preparation of executing each area development agreement. For our foreign area development agreements, the one time, non-refundable payment is negotiated on a per development basis and is determined based on the costs incurred to arrange for the sale of that development area. Substantially all of these services, which include, but are not limited to, conducting market and trade area analysis, a meeting with Famous Dave’s Executive Team, and performing potential franchise background investigations, are completed prior to our execution of the area development agreement and receipt of the corresponding area development fee. As a result, we recognize this fee upon receipt of the signed development agreement. Currently, our initial, non-refundable, franchise fee for domestic growth is $45,000 per restaurant, of which approximately $5,000 is recognized immediately when a franchise agreement is signed, reflecting the commission earned and expenses incurred related to the sale. The remaining non-refundable fee is included in deferred franchise fees and is recognized as revenue when we have performed substantially all of our obligations, which generally occurs upon the franchise entering into a lease agreement for the restaurant(s). Finally, franchisees are also required to pay us a monthly royalty equal to a percentage of their net sales, which has historically varied from 4% to 5%. In general, new franchises pay us a monthly royalty of 5% of their net sales.

Costs and Expenses

Restaurant costs and expenses include food and beverage costs, labor and benefits costs, operating expenses which include occupancy costs, repair and maintenance costs, supplies, advertising and promotion, and restaurant depreciation and amortization. Certain of these costs and expenses are variable and will increase or decrease with sales volume. The primary fixed costs are restaurant management salaries and occupancy costs. Our experience is that when a new restaurant opens, it incurs higher than normal levels of labor and food costs until operations stabilize, usually during the first three to six months of operation. As restaurant management and staff gain experience following a restaurant’s opening, labor scheduling, food cost management and operating expense control typically improve to levels similar to those at our more established restaurants.

 

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General and Administrative Expenses

General and administrative expenses include all corporate and administrative functions that provide an infrastructure to support existing operations and support future growth. Salaries, bonuses, team member benefits, legal fees, accounting fees, consulting fees, travel, rent and general insurance are major items in this category. Additionally, we record expense for Managers In Training (“MIT’s”) in this category for approximately six weeks prior to a restaurant opening. We also provide franchise services for which the revenue is included in other revenue and the expenses are included in general and administrative expenses.

The following table presents items in our unaudited consolidated statements of operations as a percentage of net restaurant sales or total revenue, as indicated, for the following periods:

 

     Three Months Ended     Six Months Ended  
     July 3,     June 28,     July 3,     June 28,  
     2016     2015     2016     2015  

Food and beverage costs(1)

     30.8     30.3     31.2     30.3

Labor and benefits costs(1)

     32.1     31.5     33.9     32.5

Operating expenses(1)

     27.6     28.1     28.7     28.1

Restaurant level operating margin(1)(3)

     9.5     10.1     6.2     9.1

Depreciation & amortization(2)

     3.4     3.5     3.8     3.8

General and administrative expenses(2)

     17.2     15.1     16.7     16.0

Income from operations(2)

     1.2     3.0     1.4     2.1

 

(1) 

As a percentage of restaurant sales, net

 

(2)

As a percentage of total revenue

 

(3) 

Restaurant level operating margin is equal to restaurant sales, net less restaurant level food and beverage costs, labor and benefit costs, and operating expenses.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and notes, and the audited consolidated financial statements and notes included in our Form 10-K for the fiscal year ended January 3, 2016.

Results of Operations – Three and Six months ended July 3, 2016 compared to Three and Six months ended June 28, 2015.

Total Revenue

Total revenue of approximately $28.0 million for the second quarter of fiscal 2016 decreased approximately $4.7 million, or 14.3%, from $32.7 million for the comparable quarter in fiscal 2015. For the six months ended July 3, 2016, total revenue of approximately $51.6 million decreased approximately $9.4 million, or 15.4%, from revenue of approximately $61.0 million, for the six months ended June 28, 2015.

Restaurant Sales, net

Restaurant sales were approximately $23.0 million for the second quarter of fiscal 2016 compared to approximately $27.5 million for the same period in fiscal 2015, reflecting a 16.3% decrease driven by the refranchising of five and closure of one Company-owned restaurant since the end of second quarter of 2015 and a comparable sales decrease. Comparable sales for Company-owned restaurants open 24 months or more decreased 6.4% compared to a decrease of 10.8% for the same period in 2015. This reflected a 5.7% comparable sales decline in on-premises sales on a weighted basis, averaged with a weighted 0.7% decrease in catering comparable sales.

 

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Restaurant sales for the six months ended July 3, 2016 were approximately $42.0 million compared to approximately $51.3 million for the six months ended June 28, 2015, reflecting a 18.0% decrease. This decline was due to the refranchising of five and closure of one Company-owned restaurant since the end of the second quarter of 2015 and a year-to-date comparable restaurant sales decline of 7.0% as compared to an 9.1% decline in the same period of 2015.

Franchise-Related Revenue

Franchise-related revenue consists of royalty revenue and franchise fees, which include initial franchise fees and area development fees. Franchise-related revenue was approximately $4.7 million for the second quarter of fiscal 2016, compared to $4.9 million for the second quarter of fiscal 2015. This approximately $200,000 decline is primarily due to our receipt of $250,000 in area development fees during the second quarter of fiscal 2015, associated with a new international development agreement for the United Arab Emirates partially offset by a year over year increase in franchise royalty revenue.

Franchise-related revenue was approximately $9.0 million for the six months ended July 3, 2016 which reflects a decrease in franchise-related revenue of approximately $220,000 from the six months ended June 28, 2015. This decrease is primarily due to our receipt of $250,000 in area development fees associated with a new international development agreement for the United Arab Emirates during the six months ended June 28, 2015 partially offset by a year over year increase in franchise royalty revenue.

Licensing and Other Revenue

Licensing revenue includes royalties from a retail line of business, including sauces, rubs, marinades and seasonings. Other revenue includes payments for opening assistance and training services that we provide to our franchisees. For the second quarter of fiscal 2016, licensing royalty revenue was approximately $300,000 compared to approximately $319,000 for the comparable period of fiscal 2015. Licensing royalty revenue was approximately $514,000 for the six months ended July 3, 2016, as compared to $506,000 for the comparable period of fiscal 2015.

Other revenue for the fiscal 2016 second quarter was approximately $36,000 compared to $16,000 for the comparable prior year’s second quarter. Other revenue for the six months ended July 3, 2016 was approximately $70,000, compared to approximately $14,000 for the comparable period of fiscal 2015. This increase was due to the opening assistance provided to an international franchisee.

Comparable Restaurant Net Sales

It is our policy to include restaurants that are open year round and have been open at least 24 months in our comparable restaurant net sales base. Comparable restaurant net sales for Company-owned restaurants for the second quarter of fiscal 2016 decreased 6.4% from that of the same period in the prior year, compared to fiscal 2015’s second quarter decrease of 10.8% over the comparable fiscal 2014 period. At the end of the second quarter of fiscal 2016 and the second quarter of fiscal 2015, there were 37 and 40 restaurants included in the Company-owned comparable sales base, respectively.

Comparable restaurant net sales for Company-owned restaurants open at least 24 months for the six months ended July 3, 2016 decreased 7.0% from that of the prior year period, compared to fiscal 2015’s decrease of 9.1% over the comparable fiscal 2014 period. For the six months ended July 3, 2016 and June 28, 2015, there were 37 and 40 restaurants included in the company-owned comparable sales base, respectively.

 

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Comparable restaurant net sales for franchise-operated restaurants for the second quarter of fiscal 2016 decreased 4.3% from that of the prior year period compared to fiscal 2015’s second quarter decrease of 3.3% over the comparable fiscal 2014 period. For the second quarter of 2016 and the second quarter of 2015, there were 120 and 122 restaurants included in the franchise-operated comparable sales base.

Comparable restaurant net sales for franchise-operated restaurants for the first six months of fiscal 2016 decreased 5.6% and increased 1.4% for the first six months of fiscal 2015, from their respective comparable prior year periods. For the first six months of fiscal 2016 and fiscal 2015, there were 120 and 123 restaurants, respectively, included in the franchise-operated 24 month comparable sales base.

Comparable restaurant net sales for franchise-operated restaurants are not revenues of the Company and are not included in the Company’s consolidated financial statements. The Company’s management believes that disclosure of comparable restaurant net sales for franchise-operated restaurants provides useful information to investors because historical performance and trends of Famous Dave’s franchisees relate directly to trends in franchise royalty revenues that the Company receives from such franchisees and have an impact on the perceived success and value of the Famous Dave’s brand. It also provides a comparison against which management and investors can evaluate whether and the extent to which Company-owned restaurant operations is realizing its revenue potential.

Average Weekly Net Sales and Operating Weeks

The following table shows company-owned and franchise-operated average weekly net sales and company-owned and franchise-operated operating weeks for the three and six months ended July 3, 2016 and June 28, 2015:

 

     Three Months Ended      Six Months Ended  
     July 3,      June 28,      July 3,      June 28,  
     2016      2015      2016      2015  

Average Weekly Net Sales:

           

Company-owned

   $ 47,862       $ 49,300       $ 43,674       $ 45,884   

Full-Service (32)

   $ 49,098       $ 49,619       $ 47,286       $ 47,998   

Counter-Service (5)

   $ 39,949       $ 39,695       $ 36,864       $ 36,721   

Franchise-operated(1)

   $ 48,953       $ 54,013       $ 47,356       $ 52,118   

Operating Weeks:

           

Company-owned

     481         558         962         1,117   

Franchise-operated

     1,841         1,736         3,596         3,488   

 

(1) 

Weekly net sales for franchise-operated restaurants are not revenues of the Company and are not included in the Company’s consolidated financial statements. The Comparable restaurant net sales for franchise-operated restaurants are not revenues of the Company and are not included in the Company’s consolidated financial statements. The Company’s management believes that disclosure of weekly net sales for franchise-operated restaurants provides useful information to investors because historical performance and trends of Famous Dave’s franchisees relate directly to trends in franchise royalty revenues that the Company receives from such franchisees and have an impact on the perceived success and value of the Famous Dave’s brand. It also provides a comparison against which management and investors can evaluate whether and the extent to which Company-owned restaurant operations is realizing its revenue potential.

 

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Food and Beverage Costs

Food and beverage costs for the second quarter of fiscal 2016 were approximately $7.1 million or 30.8% of net restaurant sales, compared to approximately $8.3 million or 30.3% of net restaurant sales for the second quarter of fiscal 2015. This year-over-year percentage increase was the result of increases in portion size and a shift in product mix as a result of the additional affordable menu options partially offset by contract deflation.

Food and beverage costs for the first six months of fiscal 2016 were approximately $13.1 million or 31.2% of net restaurant sales compared to approximately $15.5 million or 30.3% of net restaurant sales for the comparable period of fiscal 2015. This year-over-year percentage increase was the result of increased challenges with protein product yields, increases in portion size and a shift in product mix as a result of the additional affordable menu options partially offset by contract deflation.

Labor and Benefits Costs

Labor and benefits costs for the second quarter ended July 3, 2016 were approximately $7.4 million or 32.1% of net restaurant sales, compared to approximately $8.7 million or 31.5% of net restaurant sales for the three months ended June 28, 2015. This increase as a percent of net restaurant sales was primarily due to sales deleverage on fixed and management labor costs.

Labor and benefits for the six months ended July 3, 2016 were approximately $14.3 million, or 33.9% of net restaurant sales, compared to approximately $16.7 million, or 32.5% of net restaurant sales, for the six months ended June 28, 2015. This increase as a percent of net restaurant sales was due to sales deleverage on fixed labor costs.

Operating Expenses

Operating expenses for the second quarter of fiscal 2016 were approximately $6.4 million, or 27.6% of net restaurant sales, compared to operating expenses of approximately $7.7 million, or 28.1% of net restaurant sales, for the second quarter of fiscal 2015. This decrease in operating expenses both in dollars and as a percentage of net sales was the result of a year over year decline in advertising spend partially offset by sales deleverage. Additionally, there was lower repairs and maintenance costs.

During the second quarter of 2016, advertising as a percentage of net sales was 2.6%, compared to 3.3% in the comparable period of 2015. In both periods there was a 1.0% marketing contribution.

Operating expenses for the six months ended July 3, 2016 were approximately $12.1 million, or 28.7% of net restaurant sales, compared to approximately $14.4 million, or 28.1% of net restaurant sales, for the six months ended June 28, 2015. This increase as a percentage of sales is the result of sales deleverage on fixed operating costs and higher supply costs partially offset by a year over year decline in advertising spend, utility and repairs and maintenance costs.

Depreciation and Amortization

Depreciation and amortization expense for the second quarter of 2016 was approximately $1.0 million, or 3.4% of total revenue, compared to $1.1 million, or 3.5% of total revenue in the second quarter of fiscal 2015. Depreciation and amortization expense for the six months ended July 3, 2016 and June 28, 2015 was approximately $1.9 million and $2.3 million, respectively, and was 3.8% and 3.8%, respectively, of total revenue. This decrease in both dollars and as a percent of revenue is due to the closure and refranchising of company restaurants.

 

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Pre-opening Expenses

Pre-opening expenses consist of labor, food, utilities, training and occupancy costs incurred prior to the opening of a new restaurant. Included in pre-opening costs is the cost of rent incurred, if any, prior to the restaurant opening. We did not incur any pre-opening costs during the second quarter of either 2016 or 2015 or during the six months ended July 3, 2016. During the six months ended June 28, 2015, we incurred pre-opening expenses of $1,000.

Asset Impairment and Estimated Lease Termination and Other Closing Costs

In accordance with Financial Accounting Standards Board Accounting Standards Codification for Property, Plant, and Equipment, we evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the net book value of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the net book value of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired, the loss is measured by the amount by which the net book value of the restaurant’s assets exceeds its fair value. Fair value is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms, discount rate and other factors. If these assumptions change in the future, we may be required to take additional impairment charges for the related assets. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates. Restaurant sites that are operating but have been previously impaired are reported at the lower of their carrying amount or fair value less estimated costs to sell. Following is a summary of these events for the three and six months ended July 3, 2016 and June 28, 2015:

Asset Impairment and Estimated Lease Termination and Other Closing Costs (in thousands):

 

         

Three Months

Ended

    

Six Months

Ended

 

Restaurants

  

Reason

   July 3, 2016      July 3, 2016  

Held for Sale

  

Asset Impairment(1)

   $ 868       $ 868   

Richmond, VA area

  

Costs for closed restaurants

     14         19   

Software

  

Asset Impairment(2)

     171         171   

Miscellaneous

  

Costs for closed restaurants

     3         6   
     

 

 

    

 

 

 

Total

      $ 1,056       $ 1,064   
     

 

 

    

 

 

 

 

(1) 

Asset impairment calculated at July 3, 2016 based upon anticipated sale of a Virginia restaurant.

(2) 

Asset impairment calculated at July 3, 2016 related to a software implementation project that was discontinued.

 

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Asset Impairment and Estimated Lease Termination and Other Closing Costs (in thousands):

 

          Three Months
Ended
    Six Months
Ended
 

Restaurants

  

Reason

   June 28, 2015     June 28, 2015  

Smithtown, NY

  

Asset impairment(1)

   $ 935      $ 935   

Richmond, VA area

  

Costs for closed restaurants

     36        128   

Décor Warehouse

  

Asset impairment(2)

     (13     (10

Eden Prairie, MN

  

Costs for closed restaurants(3)

     (77     (77
     

 

 

   

 

 

 

Total

      $ 881      $ 976   
     

 

 

   

 

 

 

 

(1) 

Asset impairment calculated at June 28, 2015 based upon anticipated sale of Smithtown restaurant.

(2) 

The three months ended June 28, 2015 include approximately $13,000 in proceeds from the sale of the remaining inventory of the Décor Warehouse.

(3) 

The three months ended June 28, 2015 include approximately $115,000 in benefits from the recapture of deferred rent benefits.

General and Administrative Expenses

General and administrative expenses for the second quarter of 2016 were approximately $4.8 million, or 17.2% of total revenue, compared to approximately $4.9 million, or 15.1% of total revenue, for the second quarter of fiscal 2015. This year over year increase as a percent of revenue was the result of revenue deleveraging as well as increased legal costs for franchise related matters. These increases were partially offset by professional fees related to brand development which were not repeated in the second quarter of 2016.

General and administrative expenses for the first six months of fiscal 2016 were approximately $8.6 million, or 16.7% of total revenue, compared to approximately $9.8 million, or 16.0% of total revenue, for the first six months of fiscal 2015. This increase as a percent of revenue was the result of revenue deleveraging as well as increased legal costs for franchise related matters. These increases were partially offset by professional fees related to brand development which were not repeated in the first six months of 2016.

Interest Expense

Interest expense was approximately $225,000, or 0.8% of total revenue, for the second quarter of fiscal 2016, compared to approximately $220,000, or 0.7% of total revenue, for the comparable fiscal 2015. This increase reflects a higher average interest rate on the credit facility. This category includes interest expense for our term loan, financing lease obligations, line of credit, and interest for deferrals made under our non-qualified deferred compensation plan.

Interest expense was approximately $403,000, or 0.8% of total revenue, for the first six months of fiscal 2016 and approximately $421,000, or 0.7% of total revenue, for the first six months of fiscal 2015.

Provision for Income Taxes

For the second quarter of 2016, we recorded an estimated tax benefit of approximately $2,000, or -1.8% of income before income taxes. This compares to an estimated tax expense of approximately $216,000, or 28.3% of income before income taxes, for the second quarter of 2015. For the six months ended July 3, 2016, our tax provision was approximately $67,000 , or 20.4% of income before income taxes. This compares to an estimated tax expense of approximately $212,000 , or 24.4% of income before income taxes, for the six months ended June 28, 2015.

 

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Basic and Diluted Net Income Per Common Share

Net income for the three months ended July 3, 2016 was approximately $140,000, or $0.02 per basic and diluted share, respectively, on approximately 6,949,000 weighted average basic shares outstanding and 6,958,000 weighted average diluted shares outstanding, respectively. Net income for the three months ended June 28, 2015 was approximately $654,000 , or $0.09 per basic and diluted on approximately 6,974,000 weighted average basic shares outstanding and 6,993,000 weighted average diluted shares outstanding, respectively.

Net income for the six months ended July 3, 2016 was approximately $970,000, or $0.14 per basic and diluted share, respectively, on approximately 6,949,000 weighted average basic shares outstanding and approximately 6,958,000 weighted average diluted shares outstanding, respectively. Net income for the six months ended June 28, 2015 was approximately $851,000 , or $0.12 per basic and diluted share on approximately 7,016,000 weighted average basic shares outstanding and approximately 7,037,000 weighted average diluted shares outstanding, respectively.

Financial Condition, Liquidity and Capital Resources

Our balance of unrestricted cash and cash equivalents was approximately $6.3 million at July 3, 2016 and approximately $5.3 million at January 3, 2016.

Our current ratio, which measures our immediate short-term liquidity, was 1.30 at July 3, 2016 and 1.18 at January 3, 2016. The current ratio is computed by dividing total current assets by total current liabilities. The increase in our current ratio was primarily due to the increase in our cash on hand and restricted cash required for the collateralization of the undrawn letters of credit, as well as declines in liabilities held for sale partially offset by declines in assets held for sale.

Net cash provided by operating activities for the six months ended July 3, 2016 was approximately $1.0 million which reflects net income of approximately $262,000. Included in net income is non-cash depreciation and amortization of approximately $1.9 million and non-cash impairment charges of $1.1 million. This was offset by a $1.8 million increase in restricted cash.

Net cash provided by operating activities for the six months ended June 28, 2015 was approximately $2.7 million, reflecting net income of approximately $656,000, non-cash depreciation and amortization of approximately $2.3 million, and non-cash impairment charges of $1.0 million. These increases were partially offset by $798,000 decrease in accounts receivable and a $783,000 reduction in other current liabilities.

Net cash provided by investing activities was approximately $611,000 for the first six months of fiscal 2016, reflecting $1.1 million in proceeds from the sale of assets, offset by $442,000 in capital expenditures. For the first six months of fiscal 2015, net cash used by investing activities totaled approximately $2.7 million for capital expenditures for our existing restaurants and other infrastructure projects.

Net cash used by financing activities was approximately $968,000 in the first six months of fiscal 2016. Net cash used by financing activities was approximately $598,000 for the comparable period in fiscal 2015. During the first six months of 2016, we made draws of $1.9 million on our line of credit and made repayments of $2.8 million on our long-term debt. During the six months ended June 28, 2015, we made draws of $14.2 million on our line of credit and made repayments of $8.7 million. We also used approximately $5.7 million during that period to repurchase 195,899 shares under the May 2012 share repurchase program.

The Company and certain of its subsidiaries (collectively known as the “Borrower”) have a Waiver and Second Amendment (the “Second Amendment”) to their Third Amended and Restated Credit Agreement, as amended (the “Credit Agreement”), with Wells Fargo Bank, National Association as administrative agent and lender (the “Lender”). The Credit Agreement will mature on December 31, 2017. The borrower is obligated to

 

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make monthly payments of $200,000 to reduce the principal amount of the loans. Additionally, the Borrowers deposited 105% of the face amount of the outstanding letters of credit in a cash collateral account with the Administrative Agent. At July 3, 2016, the principal amounts outstanding under the Facility and the Term Loans were $1.9 million and $9.8 million, respectively, along with approximately $1.1 million in letters of credit for real estate locations. The Credit Agreement allows for the termination of the Facility by the Borrower without penalty at any time. Under the Credit Agreement, the Borrower has granted the Lender a security interest in all current and future personal property of the Borrower.

Principal amounts outstanding under the Facility bear interest either at an adjusted Eurodollar rate or “Base Rate” plus an applicable margin. For the six months ended July 3, 2016 and June 28, 2015, our weighted average interest rate for the Facility was 3.70% and 2.76%, respectively.

The Facility contains various financial covenants as well as customary affirmative and negative covenants for credit facilities of this type. For more information regarding the details of the customary affirmative and negative covenants, please refer to the full text of the Third Amended and Restated Credit Agreement dated May 8, 2015 filed as Exhibit 10.2 to our Form 10-Q for the quarter ended March 29, 2015, which was filed on May 8, 2015, the First Amendment to the Credit Agreement filed as Exhibit 10.1 to our Current Report on Form 8-K, which was filed on December 11, 2015, and the Waiver and Second Amendment to the Credit Agreement filed as Exhibit 10.1 to our Current Report on Form 8-K filed on June 10, 2016.

We were in compliance with all covenants of the Credit Agreement for the quarter ended July 3, 2016 except the Adjusted Leverage Ratio. Under the Credit Agreement, the Adjusted Leverage Ratio must not exceed 5.50:1.00 for the quarter ended July 3, 2016 and the Adjusted Leverage Ratio as recalculated was 5.74:1.00. On August 16, 2016, we received a waiver of this covenant default from the Lender and have paid $500,000 in outstanding principle under the Facility.

Contractual Obligations

For the details of our contractual obligations, see Notes 7 and 8 to the audited consolidated financial statements and the disclosure set forth in Part II, Item 7 (Management Discussion and Analysis of Financial Condition and Results of Operations) in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016.

Under the combined Facility and Term Loan we are subject to various financial covenants which include maximum target capital expenditures, cash flow ratios and adjusted leverage ratios.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 3, 2016. The accounting policies used in preparing our interim 2016 consolidated financial statements are the same as those described in our Fiscal 2015 Annual Report on Form 10-K.

Forward-Looking Information

Famous Dave’s makes written and oral statements from time to time, including statements contained in this Form 10-Q regarding its business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends and other matters that are forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. Statements containing the words or phrases “will likely result”, “anticipates”, “are expected to”, “will continue”, “is anticipated”, “estimates”, “projects”, “believes”, “expects”, “intends”, “target”, “goal”,

 

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“plans”, “objective”, “should” or similar expressions identify forward-looking statements which may appear in documents, reports, filings with the SEC, news releases, written or oral presentations made by our officers or other representatives to analysts, shareholders, investors, news organizations, and others, and discussions with our management and other Company representatives. For such statements, including those contained in this report, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties that are difficult to predict, including but not limited to those identified herein under Part II, Item 1A. “Risk Factors” and under Part I, Item 1A. “Risk Factors of our Annual Report on Form 10-K for the fiscal year ended January 3, 2016. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statements made by us or on our behalf speak only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. We do not undertake any obligation to update or keep current either (i) any forward-looking statements to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by us or on our behalf.

Additional Information on Famous Dave’s

We are currently subject to the informational requirements of the Exchange Act of 1934, as amended. As a result, we are required to file periodic reports and other information with the SEC, such as annual, quarterly and current reports, proxy and information statements. You are advised to read this Form 10-Q in conjunction with the other reports, proxy statements and other documents we file from time to time with the SEC. If you would like more information regarding Famous Dave’s, you may read and copy the reports, proxy and information statements and other documents we file with the SEC, at prescribed rates, at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. You may obtain information regarding the operation of the SEC’s public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public free of charge at the SEC’s website. The address of this website is http://www.sec.gov. Our most current SEC filings, such as our annual, quarterly and current reports, proxy statements and press releases are available to the public free of charge on our website.

The address of our website is www.famousdaves.com. Our website is not intended to be, and is not, a part of this Quarterly Report on Form 10-Q. We will provide electronic or paper copies of our SEC filings (excluding exhibits) to any Famous Dave’s shareholder free of charge upon receipt of a written request for any such filing. All requests for our SEC filings should be sent to the attention of Investor Relations at Famous Dave’s of America, Inc., 12701 Whitewater Drive, Suite 200, Minnetonka, MN 55343.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our Company’s financial instruments include cash and cash equivalents and long-term debt. Our Company includes as unrestricted cash and cash equivalents investments with original maturities of three months or less when purchased and which are readily convertible into known amounts of cash. Our Company’s unrestricted cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. We have no derivative financial instruments. Our total outstanding long-term debt as of July 3, 2016 was approximately $14.2 million, including our line of credit, and financing lease obligations. The terms of our credit facility with Wells Fargo Bank, National Association, as administrative agent and lender are discussed above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Liquidity and Capital Resources.”

 

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Some of the food products purchased by us are affected by commodity pricing and are, therefore, subject to price volatility caused by weather, production problems, delivery difficulties and other factors that are outside our control. To control this risk in part, we have fixed-priced purchase commitments for food from vendors. In addition, we believe that substantially all of our food is available from several sources, which helps to control food commodity risks. We have secondary source suppliers for certain items and in 2016 we have continued to make this a key area of focus in order to protect the supply chain and to ensure a more fair and competitive pricing environment. We believe we have the ability to increase menu prices, or vary the menu options offered, if needed, in response to a food product price increase.

 

Item 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There has been no change in our internal control over financial reporting during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

From time to time, we are involved in various legal actions arising in the ordinary course of business. In the opinion of our management, the ultimate dispositions of these matters will not have a material adverse effect on our consolidated financial position and results of operations. Currently, there are no significant legal matters pending except as described below.

Famous Dave’s of America, Inc.’s (“Famous Dave’s”) 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 is currently the subject of a pending interlocutory appeal which Famous Dave’s intends to oppose vigorously.

 

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On July 28, 2015, these 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.

 

Item 1A. RISK FACTORS

The most significant risk factors applicable to the Company are described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended January 3, 2016, as updated by this Part II, Item 1A “Risk Factors” and our subsequent filings with the Securities and Exchange Commission. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

 

Item 5. OTHER INFORMATION

During the Company’s earnings call on August 15, 2016, Mr. Dexter Newman, the Company’s Chief Financial Officer, reported that the Company was in compliance with all debt covenants under the Credit Agreement with its Lender. Subsequent to the call, the Company recalculated and determined it was not in compliance with its Adjusted Leverage Ratio covenant. The Lender granted a waiver of this violation prior to filing this Quarterly Report on Form 10-Q. Please see note 6 to the Consolidated Financial Statements and Financial Condition, Liquidity, and Capital Resources section to Management’s Discussion and Analysis.

 

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Item 6. EXHIBITS

 

  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document
101.SCH    XBRL Schema Document
101.CAL    XBRL Calculation Linkbase Document
101.LAB    XBRL Label Linkbase Document
101.PRE    XBRL Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    FAMOUS DAVE’S OF AMERICA, INC.
    (“Registrant”)
Dated: August 17, 2016     By:  

/s/ Adam J. Wright

     

Adam J. Wright

     

Chief Executive Officer

     

Director (Principal Executive Officer)

Dated: August 17, 2016      

/s/ Dexter Newman

     

Dexter Newman

     

Chief Financial Officer and Secretary

     

(Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit Number

    

Description

  31.1       Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2       Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1       Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  101.INS       XBRL Instance Document
  101.SCH       XBRL Schema Document
  101.CAL       XBRL Calculation Linkbase Document
  101.LAB       XBRL Label Linkbase Document
  101.PRE       XBRL Presentation Linkbase Document
  101.DEF       XBRL Taxonomy Extension Definition Linkbase Document

 

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