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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the Quarterly Period Ended September 27, 2020

or

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

Commission File Number 001-39053

Graphic

BBQ HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

MMiMinsd

Minnesota

83-4222776

State or Other Jurisdiction of

Incorporation or Organization

I.R.S. Employer Identification No.

12701 Whitewater Drive, Suite 290

Minnetonka, MN

55343

Address of Principal Executive Offices

Zip Code

Registrant’s Telephone Number, Including Area Code (952) 294-1300

Securities registered pursuant to Section 12(b) of the Act:

DAVE

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

BBQ

The Nasdaq Global Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No 

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

Large Accelerated Filer 

Accelerated Filer 

Non-accelerated Filer 

Smaller Reporting Company 

Emerging Growth Company 

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

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

As of November 4, 2020, 9,284,105 shares of the registrant’s Common Stock were outstanding.

BBQ HOLDINGS, INC.

TABLE OF CONTENTS

    

Page

PART I

FINANCIAL INFORMATION

Item 1

Consolidated Financial Statements (unaudited)

Consolidated Balance Sheets as of September 27, 2020 and December 29, 2019

3

Consolidated Statements of Operations for the Three and Nine Months Ended September 27, 2020 and September 29, 2019

4

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 27, 2020

5

Consolidated Statements of Cash Flows for the Nine Months Ended September 27, 2020 and September 29, 2019

6

Notes to Consolidated Financial Statements

7

Item 2

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

20

Item 3

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4

Controls and Procedures

30

PART II

OTHER INFORMATION

Item 1

Legal Proceedings

30

Item 1A

Risk Factors

30

Item 6

EXHIBITS

31

SIGNATURES

32

CERTIFICATIONS

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BBQ HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 27, 2020 AND DECEMBER 29, 2019

(in thousands, except per share data)

(Unaudited)

ASSETS

Current assets:

 

September 27, 2020

    

December 29, 2019

Cash and cash equivalents

$

19,551

$

5,325

Restricted cash

 

959

 

761

Accounts receivable, net of allowance for doubtful accounts of $176,000 and $132,000, respectively

 

3,885

 

4,379

Inventories

 

2,490

 

1,346

Prepaid income taxes and income taxes receivable

285

264

Prepaid expenses and other current assets

 

638

 

1,356

Assets held for sale

 

3,911

 

2,842

Total current assets

 

31,719

 

16,273

Property, equipment and leasehold improvements, net

 

33,131

 

19,756

Other assets:

 

  

 

  

Operating lease right-of-use assets

64,833

25,962

Goodwill

651

640

Intangible assets, net

 

10,117

 

2,213

Deferred tax asset, net

 

4,264

 

6,646

Other assets

 

1,691

 

1,591

$

146,406

$

73,081

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

4,952

$

3,967

Current portion of lease liabilities

6,459

4,230

Current portion of long-term debt

2,749

616

Accrued compensation and benefits

 

2,225

 

2,694

Other current liabilities

 

8,467

 

4,975

Total current liabilities

 

24,852

 

16,482

 

  

 

  

Long-term liabilities:

 

  

 

  

Lease liabilities, less current portion

65,319

26,957

Long-term debt, less current portion

 

25,483

 

6,258

Other liabilities

 

1,386

 

1,610

Total liabilities

 

117,040

 

51,307

Shareholders’ equity:

 

  

 

  

Common stock, $.01 par value, 100,000 shares authorized, 9,284 and 9,272 shares issued and outstanding at September 27, 2020 and December 29, 2019, respectively

 

93

 

93

Additional paid-in capital

8,278

7,856

Retained earnings

 

22,206

 

14,423

Total shareholders’ equity

 

30,577

 

22,372

Non-controlling interest

(1,211)

(598)

Total equity

29,366

21,774

$

146,406

$

73,081

See accompanying notes to condensed consolidated financial statements.

- 3 -

Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS

SEPTEMBER 27, 2020 AND SEPTEMBER 29, 2019

(in thousands, except per share data)

(Unaudited)

Three Months Ended

Nine Months Ended

September 27, 2020

September 29, 2019

September 27, 2020

    

September 29, 2019

Revenue:

  

 

  

  

 

  

Restaurant sales, net

$

32,559

$

20,451

$

78,251

$

48,267

Franchise royalty and fee revenue

 

2,153

 

2,909

 

6,628

 

9,560

Franchisee national advertising fund contributions

 

302

 

395

 

826

 

1,275

Licensing and other revenue

 

497

 

261

 

1,423

 

839

Total revenue

 

35,511

 

24,016

 

87,128

 

59,941

Costs and expenses:

 

  

 

  

 

  

 

  

Food and beverage costs

 

9,735

 

6,383

 

24,206

 

15,068

Labor and benefits costs

 

11,189

 

7,477

 

26,976

 

17,253

Operating expenses

 

10,521

 

6,470

 

26,251

 

15,430

Depreciation and amortization expenses

 

1,397

 

576

 

3,820

 

1,355

General and administrative expenses

 

3,138

 

2,653

 

9,973

 

7,547

National advertising fund expenses

302

395

826

1,275

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

 

(138)

 

214

 

4,814

 

718

Pre-opening expenses

 

(120)

 

94

 

(93)

 

94

Gain on disposal of property, net

 

(530)

 

(28)

 

(1,107)

 

(174)

Total costs and expenses

 

35,494

 

24,234

 

95,666

 

58,566

Income (loss) from operations

 

17

 

(218)

 

(8,538)

 

1,375

Other income (expense):

 

  

 

  

 

  

 

  

Interest expense

 

(326)

 

(33)

 

(866)

 

(392)

Interest income

 

94

 

27

 

380

 

114

Gain on bargain purchase

13,675

Total other (expense) income

 

(232)

 

(6)

 

13,189

 

(278)

(Loss) income before income taxes

 

(215)

 

(224)

 

4,651

 

1,097

Income tax benefit (expense)

 

273

 

174

 

2,519

 

(25)

Net income (loss)

 

58

 

(50)

 

7,170

 

1,072

Net loss attributable to non-controlling interest

270

67

613

67

Net income attributable to shareholders

$

328

$

17

$

7,783

$

1,139

Income per common share:

 

  

 

  

 

  

 

  

Basic net income per share attributable to shareholders

$

0.04

$

0.00

$

0.85

$

0.13

Diluted net income per share attributable to shareholders

$

0.04

$

0.00

$

0.85

$

0.12

Weighted average shares outstanding - basic

 

9,151

 

9,105

 

9,138

 

9,095

Weighted average shares outstanding - diluted

 

9,158

 

9,279

 

9,145

 

9,193

See accompanying notes to condensed consolidated financial statements.

- 4 -

Table of Contents

BBQ HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

SEPTEMBER 27, 2020

(in thousands)

(Unaudited)

Additional

Total

 

Common Stock

Paid-in

Retained

Shareholders'

Non-controlling

Total

    

Shares

    

Amount

    

Capital

Earnings

Equity

    

Interest

    

Equity

Balance - December 29, 2019

 

9,272

$

93

$

7,856

$

14,423

$

22,372

$

(598)

$

21,774

Issuance of restricted common stock

 

12

 

0

 

(0)

 

 

 

 

Stock-based compensation

 

 

 

422

 

 

422

 

 

422

Net income (loss)

 

 

 

 

7,783

 

7,783

 

(613)

 

7,170

Balance - September 27, 2020

 

9,284

$

93

$

8,278

$

22,206

$

30,577

$

(1,211)

$

29,366

See accompanying notes to condensed consolidated financial statements

- 5 -

Table of Contents

BBQ HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SEPTEMBER 27, 2020 AND SEPTEMBER 29, 2019

(in thousands)

(Unaudited)

Nine Months Ended

    

September 27, 2020

    

September 29, 2019

Cash flows from operating activities:

 

  

  

Net income

$

7,170

$

1,072

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

 

  

 

  

Depreciation and amortization

 

3,820

 

1,355

Stock-based compensation

 

422

 

354

Net gain on disposal

 

(1,080)

 

(174)

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

4,788

660

Gain on bargain purchase

(13,675)

Deferred income taxes

 

(2,569)

 

36

Other non-cash items

488

213

Changes in operating assets and liabilities:

 

 

Accounts receivable, net

 

494

 

(495)

Other assets

(867)

(580)

Accounts payable

 

985

 

1,371

Accrued and other liabilities

 

671

 

(356)

Cash flows provided by operating activities

 

647

 

3,456

Cash flows from investing activities:

 

  

 

  

Proceeds from the sale of assets

27

33

Purchases of property, equipment and leasehold improvements

 

(2,671)

 

(3,792)

Payments for acquired restaurants

(4,952)

(6,188)

Advances on notes receivable

 

 

(150)

Payments received on note receivable

24

20

Cash flows used for investing activities

 

(7,572)

 

(10,077)

Cash flows from financing activities:

 

  

 

  

Proceeds from long-term debt

 

22,058

 

Payments for debt issuance costs

 

(45)

 

(54)

Payments on long-term debt

 

(664)

 

(176)

Cash provided by (used for) financing activities

 

21,349

 

(230)

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

 

14,424

 

(6,851)

Cash, cash equivalents and restricted cash, beginning of period

 

6,086

 

12,440

Cash, cash equivalents and restricted cash, end of period

$

20,510

$

5,589

Supplemental Disclosures

Cash paid for interest, net

$

829

$

275

Cash paid for income taxes, net

Non-cash investing and financing activities:

(Decrease) in accrued property and equipment purchases

(39)

Gift card liability assumed pursuant to acquisitions

3,923

705

Accounts receivable settled through acquisitions

993

See accompanying notes to condensed consolidated financial statements.

- 6 -

Table of Contents

BBQ HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)          Basis of Presentation

Basis of Presentation

On September 17, 2019 a holding company reorganization was completed in which Famous Dave’s of America, Inc. (“FDA”) became a wholly owned subsidiary of the new parent holding company named BBQ Holdings, Inc. (“BBQ Holdings”).  As used in this Form 10-Q, “Company”, “we” and “our” refer to BBQ Holdings and its wholly owned subsidiaries.  BBQ Holdings was incorporated on March 29, 2019 under the laws of the State of Minnesota, while FDA was incorporated in Minnesota on March 14, 1994.  The Company develops, owns and operates restaurants under the name “Famous Dave’s”, “Clark Crew BBQ”, “Granite City Food & Brewery” and “Real Urban Barbecue.” Additionally, the Company franchises restaurants under the name “Famous Dave’s”.  As of September 27, 2020, there were 127 Famous Dave’s restaurants operating in 31 states, Canada, and the United Arab Emirates, including 29 Company-owned restaurants and 98 franchise-operated restaurants.  In October 2020, the Company signed a 25-unit development agreement with Bluestone Hospitality Group (“Bluestone”) whereby Bluestone will open Famous Dave’s ghost kitchens and dual restaurant concepts with the Johnny Carino’s Italian brand.  The first Clark Crew BBQ restaurant opened in December 2019 in Oklahoma City, Oklahoma.  On March 9, 2020, the Company purchased 18 Granite City Food & Brewery restaurants (“Granite City Acquisition”) in connection with a Chapter 11 bankruptcy filing.  On March 16, 2020, the Company purchased one Real Urban Barbecue restaurant located in Vernon Hills, Illinois.  

These accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) Rules and Regulations.  The information furnished in these condensed consolidated financial statements include normal recurring adjustments and reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited financial statements represent the condensed consolidated financial statements of the Company and its subsidiaries as of September 27, 2020 and December 29, 2019, and for the three and nine months ended September 27, 2020 and September 29, 2019. The results for the three and nine months ended September 27, 2020 are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.  These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in BBQ Holding, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 29, 2019 as filed with the SEC on March 27, 2020.

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic and the United States declared a National Public Health Emergency. As a result, public health measures were taken to minimize exposure to the virus. These measures, some of which are government-mandated, have been implemented globally resulting in a dramatic decrease in economic activity. “Stay-at-home” orders with the exception of conducting certain essential functions, quarantines, travel restrictions and other governmental restrictions to reduce the spread of COVID-19 have had an adverse impact on the Company’s business.  In some areas, these restrictions have discouraged or precluded even carry-out orders.  Further, the COVID-19 pandemic has precipitated significant job losses and a national economic downturn that typically impacts the demand for restaurant food service.  From mid-March through April, all of the Company's restaurants operated on a take-away, mobile pick-up and delivery basis only in order to protect its employees and customers from the spread of the COVID-19 pandemic and to comply with the government mandates.  Beginning in May, the Company gradually began opening its restaurants for dine-in at 25% to 50% capacity pursuant to the regulations of the jurisdictions in which the Company operates.  While all but one Company-owned restaurant began operating under limited-capacity in-store dining by mid-June 2020, in late October, some locations were required to reduce or eliminate in-store dining due to new COVID restrictions. Although the Company has experienced some recovery from the initial impact of COVID-19, the long-term impact of COVID-19 on the economy and on its business remains uncertain, the duration and scope of which cannot currently be predicted. The Company cannot predict what additional restrictions may be enacted, to what extent it can maintain off-premise sales volumes or if individuals will be comfortable returning to its dining rooms during or following social distancing protocols, and what long-lasting effects the COVID-19 pandemic may have on the restaurants industry as a whole. The extent of the reopening process, along with the potential impact of the COVID-19 pandemic on consumer spending behavior, which may be a function of continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including job losses, will determine the significance of the impact to the Company’s operating results and financial position.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report.  Management is continually evaluating the impact of this global crisis on its financial condition, liquidity, operations, suppliers, industry, and workforce and will take additional actions as necessary.  Management has delayed making certain rent payments on its leased properties and continues to negotiate with its landlords. The Company deferred the March through June royalties due from their franchisees and offered a discount

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

on deferred payments remitted prior to June 30, 2020.  On April 30, 2020, two of the Company’s wholly-owned operating subsidiaries received funding in connection with “Small Business Loans” under the federal Paycheck Protection Program provided in Section 7(a) of the Small Business Act of 1953, as amended by the Coronavirus Aid, Relief and Economic Security Act, as amended from time to time (the “Paycheck Protection Program”). Pursuant to the terms of the Business Loan Agreements and Promissory Notes the Company borrowed approximately $13.0 million in the aggregate.  Subsequently, two of the Company’s subsidiaries borrowed approximately $921,000 in the aggregate under the above referenced program in May 2020 (see Note 8).  The Company was very fortunate to be able to utilize the program for each of its subsidiaries.  As a nano-cap public restaurant organization, the Company’s access to capital differs greatly from its larger competitors.  The Company requires these funds to retain, recall, and pay its loyal employees.  The Covid-19 pandemic led to a government-required shut down of dining rooms, and with the Paycheck Protection Program funds, the Company has been able to continue serving customers.  While each state mandates the extent of government restrictions, those restrictions continue to suppress revenues at each of the Company’s stores, thus inhibiting the Company’s ability to build upon its cash position.  Should government restrictions increase, the Company’s cash position could be further diminished.  After a thorough review and consultation with advisors, pursuant to the guidance provided by Small Business Administration, the Company was able to certify with a high level of confidence that it met the requirements of the loans.  The Company continues to monitor the economic impact of the COVID-19 pandemic, as well as mitigating emergency assistance programs, such as the Coronavirus Aid, Relief, and Economic Security Act, on it, its customers, and its vendors. Remote work arrangements have been established for the Company’s employees to the extent possible in order to maintain financial reporting systems.

The duration of the disruption on global, national, and local economies cannot be reasonably estimated at this time. Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate impact that the COVID-19 pandemic will have on the Company’s consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate material adverse impact on the Company’s consolidated financial condition, liquidity, and future results of operations is uncertain.  

Reclassifications

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

Income Taxes

The Company maintains a federal deferred tax asset (“DTA”) in the amount of $4.3 million and $6.6 million as of September 27, 2020 and December 29, 2019, respectively. The primary cause of the change in the balance was due to the tax effect on the bargain purchase gain related to the Granite City Acquisition March 2020.  The Company evaluates the DTA on a quarterly basis to determine whether current facts and circumstances indicate that the DTA may not be fully realizable. As of September 27, 2020, the Company concluded that the DTA is fully realizable and that no further valuation allowance was necessary; however, the Company will continue to evaluate the DTA on a quarterly basis until the DTA has been fully utilized.

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

Three Months Ended

Nine Months Ended

September 27, 2020

September 29, 2019

    

September 27, 2020

    

September 29, 2019

Effective tax rate

127.0

%

77.7

%

(54.2)

%

2.3

%

The Company provides for income taxes based on its estimate of federal and state income tax liabilities. These estimates include, among other items, effective rates for state and local income taxes, allowable tax credits for items such as taxes paid on reported tip income, estimates related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items. The primary cause of the variance in the effective tax rate year over year is related to the bargain purchase gain recorded as part of the acquisition of the Granite City restaurants in the first quarter of 2020 (Note 2).  The Company’s estimates are based on the information available at the time that the Company prepares the income tax provision. The Company generally files its annual income tax returns several months after its fiscal year-end. Income tax returns are subject to audit by federal, state, and local governments, generally years after the tax returns are filed. These returns could be subject to material adjustments due to differing interpretations of the tax laws.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash and cash equivalents

On May 14, 2020, the Company invested $3.5 million in a certificate of deposit (CD) through Choice Bank. The interest rate on this CD is 3.0% with an annual percentage yield of 3.04%.  Interest is compounded every 30 days and the CD automatically renews monthly.  This balance is included with cash and cash equivalents on the Company’s balance sheet.

Restricted cash and marketing fund

The Company has a Marketing Development Fund, to which most Company-owned Famous Dave’s restaurants, in addition to the majority of franchise-operated, contribute a percentage of net sales, for use in public relations and marketing development efforts. The funds held in this account are used in part to reimburse the Company for its marketing and digital services activities on behalf of the Famous Dave’s brand.  The Company also receives funds from its suppliers to be used exclusively for point-of-sale equipment purchases for its own stores as well as its franchisees.  As the assets held by these funds are considered to be restricted, the Company reflects the cash related to these funds within restricted cash and reflect the liability within accrued expenses on its condensed consolidated balance sheets. The Company had approximately $1.0 million and $761,000 in these funds as of September 27, 2020 and December 29, 2019, respectively.

Assets Held for Sale

As of September 27, 2020, the Company had assets held for sale of approximately $3.9 million related to two owned properties for which it has entered into agreements to sell.  The contract purchase price for the two properties is $6.1 million in the aggregate. One such property was sold subsequent to September 27, 2020, the purchase price of which was $3.6 million (Note 17).

Impairment of Assets

Management reviews property and equipment, including leasehold improvements for impairment when events or circumstances indicate these assets might be impaired pursuant to the FASB accounting guidance on impairment or disposal of long-lived assets.  The Company’s management considers such factors as the Company’s history of losses and the disruptions in the overall economy in preparing an analysis of its property, including leasehold improvements, to determine if events or circumstances have caused these assets to be impaired.  Management bases this assessment upon the carrying value versus the fair market value of the asset and whether or not that difference is recoverable.  Such assessment is performed on a restaurant-by-restaurant basis and includes other relevant facts and circumstances including the physical condition of the asset.  If management determines the carrying value of the restaurant assets exceeds the projected future undiscounted cash flows, an impairment charge would be recorded to reduce the carrying value of the restaurant assets to their fair value.

In the first half of fiscal 2020, the financial performance of the Company’s restaurants in Grand Junction, Colorado, Colorado Springs, Colorado, Madison, Wisconsin and Westbury, New York, including a history of negative cash flow as well as decreases in comparable restaurant sales, caused the Company to record impairment losses.  The recorded impairment losses of the carrying value of each restaurant’s assets consisted of the following:

Location

FF&E

ROU Asset

Total

(dollars in thousands)

Westbury, NY

$

948

$

-

$

948

Colorado Springs, CO

462

97

559

Grand Junction, CO

1,032

1,187

2,219

Madison, WI

164

820

984

$

2,606

$

2,104

$

4,710

Concentrations of Credit Risk

As of September 27, 2020, the Company had a receivable from one franchisee in the amount of $416,000.  However, the Company has secured a mortgage on this franchisee’s property in Kansas City, Kansas.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 and restricted stock units, when dilutive.

Three Months Ended

Nine Months Ended

(in thousands, except per share data)

September 27, 2020

    

September 29, 2019

   

September 27, 2020

    

September 29, 2019

Net income per share – basic:

  

 

  

  

 

  

Net income attributable to shareholders

$

328

$

17

$

7,783

$

1,139

Weighted average shares outstanding - basic

 

9,151

 

9,105

 

9,138

 

9,095

Basic net income per share attributable to shareholders

$

0.04

$

0.00

$

0.85

$

0.13

Net income per share – diluted:

 

  

 

  

 

  

 

  

Net income attributable to shareholders

$

328

$

17

$

7,783

$

1,139

Weighted average shares outstanding - diluted

 

9,158

 

9,279

 

9,145

 

9,193

Diluted net income per share attributable to shareholders

$

0.04

$

0.00

$

0.85

$

0.12

There were approximately 137,500 stock options outstanding as of September 27, 2020 that were not included in the computation of diluted EPS because they were anti-dilutive.

(2)        Restaurant Acquisitions

On March 16, 2020, the Company completed the acquisition of the assets and operations of a Real Urban Barbeque restaurant in Vernon Hills, Illinois from Real Urban Barbeque VH LLC.  The contract purchase price of the restaurant was approximately $45,000, exclusive of closing costs plus the assumption of the lease, gift card and certain other liabilities. The assets acquired and the liabilities assumed were considered to be immaterial and were provisionally recorded at estimated fair values based on information available, including an ROU asset and offsetting liability of approximately $714,000.  

On February 11, 2020, the Company entered into an Asset Purchase Agreement with Granite City Food & Brewery Ltd. (“Granite City”) to acquire certain assets associated with Granite City restaurants in connection with the Chapter 11 filing of Granite City.  The Granite City Acquisition was approved by the Bankruptcy Court at a hearing on February 21, 2020.  The purchase price for the assets purchased was $3,650,000 plus certain assumed liabilities including gift card liability and cure costs.  On March 9, 2020, the Company closed the Granite City Acquisition with cash on hand and borrowing under its existing loan agreement with Choice Bank.  

The Granite City Acquisition was accounted for using the purchase method of accounting in accordance with ASC 805 “Business Combinations” and, accordingly, the condensed consolidated statements of operations include the results of these operations from the date of acquisition. The assets acquired and the liabilities assumed were provisionally recorded at estimated fair values based on information available as of the end of the second quarter of fiscal 2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the provisional allocation of assets acquired and liabilities assumed for the Granite City Acquisition:

(in thousands)

Assets acquired:

Cash and cash equivalents

$

128

Inventory

980

Property, plant, equipment and leasehold improvements, net

17,818

Lease right-of-use asset, net of unfavorable lease value

50,968

Identifiable intangible assets, net

8,329

Total identifiable assets acquired

78,223

Liabilities assumed:

Gift card liability

(3,923)

Lease liability

(50,968)

Deferred tax liability

(4,752)

Net assets acquired

18,580

Gain on bargain purchase

13,675

Total cash consideration

$

4,905

Unaudited pro forma results of operations for the three and nine months ended September 27, 2020 and September 29, 2019, as if the Company had acquired the Granite City operations at the beginning of each period presented is as follows. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future.

Three Months Ended

Nine Months Ended

September 27, 2020

September 29, 2019

September 27, 2020

September 29, 2019

(in thousands)

Pro forma revenues

$

35,511

$

40,446

$

99,532

$

112,580

Pro forma net income attributable to shareholders

$

328

$

(107)

$

7,678

$

2,664

Basic pro forma net income per share attributable to shareholders

$

0.04

$

(0.01)

$

0.84

$

0.29

Diluted pro forma net income per share attributable to shareholders

$

0.04

$

(0.01)

$

0.84

$

0.29

(3)          Prepaid Expenses and Other Current Assets

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

(in thousands)

    

September 27, 2020

    

December 29, 2019

Prepaid expenses and deferred costs

 

$

364

 

$

405

Prepaid insurance

274

951

Prepaid expenses and other current assets

 

$

638

 

$

1,356

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4)

Property, Equipment and Leasehold Improvements, net

The increase in property, equipment and leasehold improvements was primarily due to the Granite City Acquisition described in Note 2, offset in part by the impairment write down of assets as described in Note 1.  Property, equipment and leasehold improvements, net, consisted of the following:

(in thousands)

September 27, 2020

December 29, 2019

Land, buildings, and improvements

$

32,753

$

28,185

Furniture, fixtures, equipment and software

 

28,862

 

17,880

Décor

 

533

 

584

Construction in progress

 

332

 

483

Accumulated depreciation and amortization

 

(29,349)

 

(27,376)

Property, equipment and leasehold improvements, net

$

33,131

$

19,756

(5)          Intangible Assets, net

The Company has intangible assets that consist of liquor licenses, database, trademarks and patents, and reacquired franchise rights, net. The liquor licenses and trademarks/logos are indefinite-lived assets and are not subject to amortization.  Reacquired franchise rights are amortized to depreciation and amortization expense on a straight-line basis over the remaining life of the reacquired franchise agreement.  The database is amortized over three years.  

The increase in intangible assets was due to the Granite City Acquisition described in Note 2.  Intangible assets consisted of the following:

(in thousands)

September 27, 2020

    

December 29, 2019

Reacquired franchise rights, net

1,372

1,788

Goodwill

651

640

Liquor licenses

868

425

Trademark/Logos/Patents

7,688

-

Database

184

-

Other

5

-

Intangible assets, net

$

10,768

$

2,853

(6)         Other Current Liabilities

Other current liabilities consisted of the following at:

(in thousands)

    

September 27, 2020

December 29, 2019

Gift cards payable

$

5,722

$

2,360

Sales tax payable

 

1,195

 

584

Other accrued expense

1,028

1,476

Accrued interest

 

58

 

30

Accrued utilities

313

374

Deferred franchise fees

 

151

 

151

Other current liabilities

$

8,467

$

4,975

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7)

Other Liabilities

Other liabilities consisted of the following at:

(in thousands)

    

September 27, 2020

December 29, 2019

Deferred rent

$

285

$

Deferred franchise fees

799

1,165

Miscellaneous other liabilities

 

71

 

216

Asset retirement obligations

 

 

3

Accrual for uncertain tax position

6

6

Long-term deferred compensation

 

225

 

220

Other liabilities

$

1,386

$

1,610

(8)          Long-Term Debt

On June 20, 2019, the Company entered into a Loan Agreement among the Company and Choice Financial Group. The Loan Agreement provides for a term loan in the principal amount of up to $24.0 million and is evidenced by a promissory note. The note has a maturity date of June 20, 2025. The first year of the note provided for payments of interest only, with the remaining five years requiring payments of interest and principal based on a 60 month amortization period. Interest shall be payable in an amount equal to the Wall Street Journal Prime Rate, but in no circumstances shall the rate of interest be less than 5.00%. The note may be prepaid, partially or in full, at any time and for no prepayment penalty.  The Company is subject to various financial and non-financial covenants on this debt, including a debt-service coverage ratio. As of September 27, 2020, the Company was compliant with all of its covenants.  Pursuant to the sale of the Company’s Coon Rapids, Minnesota Famous Dave’s location on September 30, 2020, the Company paid down approximately $3.5 million in principal on this loan (Note 17).

On April 30, 2020, FDA and Granite City, Inc. (“GC”), wholly-owned operating subsidiaries of the Company received funding of approximately $7.2 million and $5.8 million, respectively, in connection with “Small Business Loans” under the Paycheck Protection Program. Subsequently, BBQ Ventures, Inc. (“Real Urban Barbeque”) and Mercury BBQ C (“Clark Crew BBQ”) received funding of approximately $121,000 and $800,000, respectively, under the above referenced program on May 6, 2020 and May 8, 2020, respectively.  These amounts were borrowed pursuant to the terms of the Promissory Notes by FDA, GC, Real Urban Barbeque and Clark Crew BBQ (“PPP Loans”), in favor of Choice Financial Group, a bank operating out of the state of North Dakota.  The Company was very fortunate to be able to utilize the program for each of its subsidiaries.  As a nano-cap public restaurant organization, the Company’s access to capital differs greatly from its larger competitors.  The Company requires these funds to retain, recall, and pay its loyal employees.  The Covid-19 pandemic led to a government-required shut down of dining rooms, and with the Paycheck Protection Program funds, the Company has been able to continue serving its customers.  While each state mandates the extent of government restrictions, those restrictions continue to suppress revenues at each of the Company’s stores, thus inhibiting the Company’s ability to build upon its cash position.  Should government restrictions increase, the Company’s cash position could be further diminished.  After a thorough review and consultation with advisors, pursuant to the guidance provided by Small Business Administration, the Company was able to certify with a high level of confidence that it met the requirements of the loans.  

The PPP Loans bear interest at 1% per annum and mature in 24 months from the date of disbursement of funds under the PPP Loans respectively.  Under certain circumstances, all or a portion of the PPP Loans may be forgiven, however, there can be no assurance that any portion of the PPP Loans will be forgiven and that FDA, GC, Real Urban Barbeque or Clark Crew BBQ would not be required to repay the PPP Loans in full.  If the PPP Loans are forgiven in full, no interest and principal payments will be required.  Interest and principal payments under the PPP Loans will be deferred until such time the amount of forgiveness is determined.

The PPP Loans contain certain covenants which, among other things, restrict the borrower’s use of the proceeds of the PPP Loans to the payment of payroll costs, interest on mortgage obligations, rent obligations and utility expenses, require compliance with all other loans or other agreements with any creditor of the borrower, to the extent that a default under any loan or other agreement

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

would materially affect the borrower’s ability to repay the PPP Loans and limit the ability of the borrower to make certain changes to its ownership structure.

Debt outstanding under the above referenced promissory notes consisted of the following as of the periods presented:

    

(in thousands)

    

September 27, 2020

December 29, 2019

Term Loan

$

14,362

  

$

6,924

PPP Loans

13,957

Less: deferred financing costs

 

(87)

  

 

(50)

Less: current portion of long-term debt

 

(2,749)

  

 

(616)

Long-term debt, less current portion

$

25,483

  

$

6,258

(9)        Leases

The Company leases the property for its corporate headquarters, most of its Company-owned stores, and certain office and restaurant equipment. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of use (“ROU”) assets, current portion of operating lease liabilities, and operating lease liabilities in its consolidated balance sheets.

During the second and third quarters of 2020, the Company negotiated rent concession with several of its landlords due to the economic disruption to its business during the COVID-19 pandemic.  The company accounted for these lease concessions related to the effects of the COVID-19 pandemic in accordance with the lease modification accounting guidance in Topic 842, Leases. Pursuant to such guidance, the Company remeasured the modified leases using the revised terms as of the modification dates.  Adjustments were made to reflect the remeasured liability with the offset to the ROU asset.

Lease expense for lease payments is recognized on a straight-line basis over the lease term and is included in operating expenses and general and administrative expenses on the statement of operations. The components of lease expense for the period presented is as follows:

Nine Months Ended

Nine Months Ended

(in thousands)

September 27, 2020

September 29, 2019

Operating lease cost

$

6,657

$

2,879

Short-term lease cost

266

68

Variable lease cost

581

31

Sublease income

(118)

(207)

Total lease cost

$

7,386

$

2,771

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental cash flow information related to leases for the period presented is as follows:

Nine Months Ended

Nine Months Ended

(in thousands)

September 27, 2020

September 29, 2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$

5,715

$

3,125

Right-of-use assets obtained in exchange for new operating lease liabilities

51,682

18,887

Weighted-average remaining lease term of operating leases (in years)

10

9.24

Weighted-average discount rate of operating leases

5.24

%

5.49

%

(10)        Revenue Recognition

Deferred revenue liabilities consist primarily of franchise fees which are recognized straight-line over the life of the agreements, and area development fees which are deferred until a new restaurant is opened pursuant to the agreement.  The following table illustrates estimated revenues expected to be recognized in the future related to unsatisfied performance obligations as of September 27, 2020:

(in thousands)

    

    

Fiscal Year

 

  

2020

$

54

2021

 

103

2022

 

103

2023

 

101

2024

 

95

Thereafter

 

494

Total

$

950

The following table reflects the change in contract liabilities between September 27, 2020 and December 29, 2019:

(in thousands)

Balance, December 29, 2019

$

1,318

Revenue recognized

(368)

Balance, September 27, 2020

$

950

(

(11)       Stock-based Compensation

Effective May 5, 2015, the Company adopted the 2015 Equity Plan (the “2015 Plan”), pursuant to which it 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. At the Company’s annual meeting of shareholders held in June 2020, its shareholders approved the amendment to the 2015 Plan to increase the number of common stock reserved for issuance from 1,000,000 to 1,500,000. The Company also maintains an Amended and Restated 2005 Stock Incentive Plan (the “2005 Plan”). The 2005 Plan prohibits the granting of options pursuant to the 2005 plan after May 12, 2015, the tenth anniversary of the date the 2005 Plan was approved by the Company’s shareholders. Nonetheless, the 2005 Plan will remain in effect until all outstanding incentives granted thereunder have either been satisfied or terminated. As of September 27, 2020, there were 91,321 shares available for grant pursuant to the 2015 Plan.

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

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

Stock price – Published trading market values of the Company’s common stock as of the date of grant.
Exercise price – The stated exercise price of the stock option.
Expected life – The simplified method as outlined in ASC 718.
Expected dividend – The rate of dividends that the Company expects to pay over the term of the stock option.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Volatility – Actual volatility over the most recent historical period equivalent to the expected life of the option.
Risk-free interest rate – The daily United States Treasury yield curve rate.

The Company recognized stock-based compensation expense in its consolidated statements of operations for the three and nine months ended September 27, 2020 and September 29, 2019, respectively, as follows:

Three Months Ended

Nine Months Ended

(in thousands)

September 27, 2020

September 29, 2019

    

September 27, 2020

    

September 29, 2019

Stock options

$

110

$

72

$

235

$

213

Restricted stock

 

64

 

59

 

187

 

141

$

174

$

131

$

422

$

354

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

    

    

Weighted

Average

Remaining

Number of 

Weighted Average 

Contractual

(number of options in thousands)

    

Options

    

Exercise Price

    

Life in Years

Options outstanding at December 29, 2019

 

452

$

6.71

Granted

 

277

 

3.85

Forfeited or expired

(53)

5.54

Options outstanding at September 27, 2020

 

676

$

5.63

6.1

Nine Months Ended

    

September 27, 2020

September 29, 2019

Weighted-average fair value of options granted during the period

$

1.79

$

1.75

Expected life (in years)

 

5.1

 

3.9

Expected dividend

$