| Nature of Business and Summary of Significant Accounting Policies | 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Nature of Business On August 4, 2016, Diversified Restaurant Holdings,
Inc. (“DRH” or “the Parent”) announced that its Board of Directors unanimously approved a plan to pursue
a tax-free Spin-off of its Bagger Dave’s business (the “Spin-off”). Specifically, DRH contributed its 100.0%
owned entity, AMC Burgers, LLC and certain real estate entities into Bagger Dave’s Burger Tavern, Inc., a newly created Nevada
corporation (“Bagger Dave’s” or “Bagger”), which was then spun-off into a stand-alone, publicly-traded
company on the over-the-counter exchange. In connection with the Spin-off, DRH contributed to Bagger certain assets, liabilities,
and employees related to its Bagger Dave’s businesses. Intercompany balances due to/from DRH, which included amounts from
sales, were contributed to equity. Additionally, DRH contributed $2 million in cash to Bagger to provide working capital for its
operations and is a guarantor for certain of Bagger’s lease obligations. DRH has also agreed that, if deemed necessary within
twelve months after the Spin-off, it will contribute an additional $1 million cash, subject to the approval of it’s lenders. The spinoff was completed on December 25, 2016
via a one-for-one distribution of common shares in Bagger Dave’s to DRH shareholders of record on December 19, 2016. The consolidated balance sheet at December
25, 2016 represents the assets and liabilities that were spun off from DRH to Bagger Dave’s. In addition, deferred tax assets
were spun off, but a full valuation allowance was recorded prior to spin off. Prior to the Spin-off, Bagger Dave’s
was a co-obligor on a joint and several basis with DRH on DRH’s $155 million senior secured credit facility. DRH’s
debt under the facility remained with DRH and Bagger Dave’s was released as a borrower. Additionally, DRH retained substantially
all of the benefits (net operating loss and tax credit carryforwards) generated by Bagger Dave’s prior to the date of the
Spin-off. The Company headquarters are located at 807
W. Front St., Suite B, Traverse City, MI 49684. We can also be found on the Internet at www.baggerdaves.com. DRH originated the Bagger Dave’s concept
with the first restaurant opening in January 2008 in Berkley, Michigan. As of June 25, 2017, there were 18 Bagger Dave’s
restaurants in operation, fifteen in Michigan, one in Indiana and two in Ohio. Bagger Dave’s owns the right to the Bagger
Dave’s concept and has rights to franchise the concept in Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio and Wisconsin.
We do not intend to pursue franchise development at this time. Bagger Dave’s is a unique, full-service,
ultra-casual restaurant and bar concept. We have worked to create a concept that provides a warm, inviting and entertaining atmosphere
through a friendly and memorable guest experience. Bagger Dave’s specializes in locally-sourced,
never-frozen prime rib recipe burgers, all-natural lean turkey burgers, hand-cut fries, locally crafted beers on draft, hand-dipped
milk shakes, salads, black bean turkey chili and much more, delivered in a warm, hip atmosphere with friendly “full”
service. The concept differentiates itself from other full-service casual dining establishments by the absence of walk-in freezers
and microwaves, substantiating our fresh food offerings. The concept focuses on local flair of the city in which the restaurant
resides by showcasing historical photos. Running above the dining room and bar, the concept features an electric train; a feature
which was the genesis of Bagger Dave’s logo. We follow accounting standards set by the Financial
Accounting Standards Board (“FASB”). The FASB sets generally accepted accounting principles in the United States of
America (“GAAP”) that we follow to ensure we consistently report our financial condition, results of operations, and
cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“ASC”). Basis of Presentation These consolidated financial statements include
the accounts of Bagger Dave’s Burger Tavern, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances
have been eliminated. Prior to the Spin-off, the financial statements included AMC Burgers, Inc. and certain real estate entities
and were derived from the consolidated financial statements and accounting records of DRH, as if Bagger Dave’s operated on
a standalone basis. As a subsidiary of DRH, we did not maintain our own legal, tax, and certain other corporate support functions.
As more fully described in Note 6, the statements of operations for the three and six months ended June 26, 2016 include expense
allocations for certain functions provided by DRH. These expenses were allocated on the basis of direct usage when identifiable,
with the remainder allocated on the basis of revenue or headcount. The Company believes that the methods by which DRH allocated
its costs are a reasonable reflection of the utilization of services by, or benefits provided to the Company to be incurred by
Bagger Dave’s. The consolidated financial statements for the three and six months ended June 26, 2016 contained herein may
not be indicative of Bagger Dave’s financial position, operating results and cash flows in the future, or what they would
have been if it had been a stand-alone company during all periods presented. Fiscal Year The Company utilizes a 52- or 53-week accounting
period that ends on the last Sunday in December. Fiscal year 2016 ended on December 25, 2016 and fiscal year 2017 will end on December
31, 2017. Fiscal year 2016 was comprised of 52 weeks, while fiscal year 2017 will be comprised of 53 weeks. The fiscal quarters
ended June 25, 2017 and June 26, 2016 were each comprised of 13 weeks. The six month periods ended June 25, 2017 and June 26, 2016
were each comprised of 26 weeks. Management’s Plan Regarding Going
Concern Through a number of initiatives, many of which
are in place and have illustrated the expected outcomes in the short-term we will continue to focus on ensuring that Bagger’s
Dave’s operating cash flow is sufficient to support the business as a going concern. General and administration expense as
presented in the financial statements for the six months and fiscal quarter ended June 26, 2016 include allocations of DRH management
and support expenses that will not be incurred by Bagger Dave’s in future periods since these expenses were not part of the
Spin-Off. We have a detailed plan to increase the restaurant level profitability, significantly reduce general and administrative
expenses and minimize capital expenditures to ensure sustainable free cash flow. Some of the key components of this plan include: Increasing restaurant-level profitability
by:
● Driving increased average weekly volumes (“AWVs”) with a new menu design, improved net-promoter scores, enhanced kitchen processes (to ensure fast, consistent ticket times), new messaging and our first cable television advertising campaign. We believe our portfolio of Bagger Dave’s locations has significant opportunity to experience increased AWVs on relatively low base of about $21,600 based on fiscal year 2016.
● Reducing cost of sales and working closely with our vendors. We have found a number of opportunities to improve our cost of sales while maintaining product quality. We have also found savings opportunities through productivity and waste reduction.
● Reducing labor costs through a comprehensive labor strategy. We anticipate significant labor cost reduction for both hourly and salary restaurant-level employees. We expect to reduce hourly labor through enhanced recruiting and retention programs that should alleviate turnover; a significant cost that influences hourly labor. We are also exploring alternative strategies to better align management salaries with a location’s profitability.
● Reducing operating expenses. We have reduced or are in the process of reducing or eliminating expenses that are unnecessary for the operations of the business or are excessive to support our needs. In some cases, we are able to find alternative solutions at a lower cost.
● Closing unprofitable locations. The Company closed one in the six months ended June 25, 2017 and three locations as further described in Note 12 Subsequent Events. Decrease in general and administration expense by:
● Reducing salary expense. The 2016 Bagger Dave’s financial statements include allocations from DRH management team members that will not do work on behalf of or be charged to Bagger Dave’s post Spin-off. We closed eleven locations in 2015 as well as one as of June 26, 2017. As a result, there has been some rationalization of salary overhead due to these restaurant closures and some natural attrition. We believe that, although smaller, with proper allocation of responsibilities, the Bagger Dave’s management team can be highly effective to drive the business to greater profitability.
● Reducing marketing expense. Effective 2017, Bagger Dave’s marketing budget will be 3.0% or less of sales. In prior years, the marketing spend was between 4.0%-10.0% in any given period. We believe that, with a more efficient use of marketing funds, and higher focus on local store marketing initiatives, we can achieve a better return on our marketing investment though increased sales. Managing of capital expenditures: We have no plans to make capital investments
related to remodels, refreshes or new restaurant development and, as such, our only expected capital expenditures will be those
that are maintenance-related and necessary to keep our restaurants operating. With the young average age of our stores, the recent
capital expenditures to upgrade some of our older facilities and our focus on achieving positive free cash flow, we have no plans
for any significant level of capital expenditures. We believe that general and administrative
expenses and capital expenditures will range between $1.9 million and $2.3 million in 2017. Coupled with the aforementioned plan
to increase profitability, reduce general and administrative expenses and reduce capital expenditures, we believe that our current
cash resources are sufficient to meet our needs. However, during fiscal 2017, an additional $1.0 million of funding may be considered
upon approval by DRH and its lenders. This additional funding would only be considered if deemed necessary by DRH and in the event
Bagger Dave’s is unable to obtain alternate financing. Cash and Cash Equivalents Cash and cash equivalents consist of cash on
hand and demand deposits in banks. The Company considers all highly-liquid investments purchased with original maturities of three
months or less to be cash and cash equivalents. The Company, at times throughout the year, may, in the ordinary course of business,
maintain cash balances in excess of federally-insured limits. Management does not believe the Company is exposed to any unusual
risks on such deposits. Accounts Receivable Accounts receivable primarily consist of amounts
owing from DRH and from credit card charges. There was no allowance for doubtful accounts necessary at June 25, 2017 and December
25, 2016. Gift Cards The Company records Bagger Dave’s gift
card sales as a gift card liability when sold. When redeemed, the gift card liability account is offset by recording the transaction
as revenue. Michigan law states that gift cards cannot expire and any post-sale fees cannot be assessed until 5 years after the
date of gift card purchase by the consumer. There is no breakage attributable to Bagger Dave’s restaurants for the Company
to record as of June 25, 2017 and June 26, 2016. The Company’s gift card liability was
$228,064 and $282,717 as of June 25, 2017 and December 25, 2016, respectively, and is included in other accrued liabilities on
the Consolidated Balance Sheets. Inventory Inventory consists mainly of food and beverage
products and is accounted for at the lower of cost or market using the first in, first out method of inventory valuation. Cash
flows related to inventory sales are classified in net cash used by operating activities in the Consolidated Statements of Cash
Flows. Prepaid Assets and Other Long-Term Assets Prepaid assets consist principally of prepaid
rent, insurance and contracts and are recognized ratably as operating expense over the period of future benefit. Other long-term
assets consist primarily of security deposits for operating leases and utilities. Property and Equipment Property and equipment are recorded at cost.
Buildings, which includes buildings on leased land, are depreciated using the straight-line method over the shorter of the term
of the lease or its estimated useful life, which ranges from 10-39 years. Equipment and furniture and fixtures are depreciated
using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold
improvements, which include the cost of improvements funded by landlord incentives or allowances, are amortized using the straight-line
method over the lesser of the term of the lease, with consideration of renewal options if renewals are reasonably assured because
failure to renew would result in an economic penalty, or the estimated useful lives of the assets, which is typically five - 15
years. Maintenance and repairs are expensed as incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation
are eliminated from the respective accounts and the related gains or losses are credited or charged to earnings. The Company capitalizes items associated with
construction but not yet placed into service, known as construction in progress (“CIP”). Items capitalized include
fees associated with the design, build out, furnishing of the restaurants, leasehold improvements, construction period interest
(when applicable), equipment, and furniture and fixtures. Restaurant CIP is not amortized or depreciated until the related assets
are placed into service. Items are placed into service according to their asset category when the restaurant is open for service. Intangible Assets Amortizable intangible assets consist of trademarks
and are stated at cost, less accumulated amortization. The trademarks are amortized on a straight-line basis over the estimated
useful life of 15 years. Liquor licenses, also a component of intangible
assets, are deemed to have an indefinite life and, accordingly, are not amortized. Management reviews liquor license assets on
an annual basis (at year-end) to determine whether carrying values have been impaired. We identify potential impairments for liquor
licenses by comparing the fair value with its carrying amount. If the fair value exceeds the carrying amount, the liquor licenses
are not impaired. If the carrying amount exceeds the fair value, an impairment loss is recorded for the difference. If the fair
value of the asset is less than the carrying amount, an impairment is recorded. No impairments were recognized in the fiscal quarters
ended June 25, 2017 or June 26, 2016. Impairment or Disposal of Long-Lived
Assets We review long-lived assets quarterly to determine
if triggering events have occurred which would require a test to determine if the carrying amount of these assets may not be recoverable
based on estimated future cash flows. Assets are reviewed at the lowest level for which cash flows can be identified, which is
at the individual restaurant level. In the absence of extraordinary circumstances, restaurants are included in the impairment analysis
after they have been open for two years. We evaluate the recoverability of a restaurant’s long-lived assets, including buildings,
intangibles, leasehold improvements, furniture, fixtures, and equipment over the remaining life of the primary asset in the asset
group, after considering the potential impact of planned operational improvements, marketing programs, and anticipated changes
in the trade area. In determining future cash flows, significant estimates are made by management with respect to future operating
results for each restaurant over the remaining life of the primary asset in the asset group. If assets are determined to be impaired,
the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value based on
our estimate of discounted future cash flows. The determination of asset fair value is also subject to significant judgment. Refer
to Note 2 for additional information. We account for exit or disposal activities,
including restaurant closures, in accordance with ASC Topic 420, Exit or Disposal Cost Obligations Deferred Rent Certain operating leases provide for minimum
annual payments that increase over the life of the lease. Typically, our operating leases contain renewal options under which we
may extend the initial lease terms for periods of five to 10 years. The aggregate minimum annual payments are expensed on a straight-line
basis commencing when we gain control and extending over the term of the related lease, including option renewals as deemed reasonably
assured. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the lease is accrued
as deferred rent liability and reduced in later years when the actual cash payment requirements exceed the straight-line expense.
The Company also accounts, in its straight-line computation, for the effect of any “rental holidays”, “free rent
periods”, and “landlord incentives or allowances”. Deferred Gains Deferred gains on the sale leaseback transaction
described in Note 3, are recognized as a reduction of rent expense over the life of the related operating lease agreements. Revenue Recognition Revenues from food and beverage sales are recognized
and generally collected at the point of sale. All sales taxes are presented on a net basis and are excluded from revenue. Advertising Advertising expenses of $0.188 million and
$0.163 million are included in general and administrative expenses in the Consolidated Statements of Operations for the fiscal
quarters ended June 25, 2017 and June 26, 2016, respectively. Advertising expenses of $0.316 million and $0.321 million are included
in general and administrative expenses in the Consolidated Statements of Operations for the six months ended June 25, 2017 and
June 26, 2016, respectively. Pre-opening Costs Pre-opening costs are those costs associated
with opening new restaurants and will vary based on the number of new locations opening and under construction. The Company also
reclassifies labor costs that exceed the historical average for the first three months of restaurant operations that are attributable
to training. These costs are expensed as incurred. Pre-opening costs of $0 and $0.20 million and $0 and $0.35 million are included
in the Consolidated Statements of Operations for the three and six months ended June 25, 2017 and June 26, 2016, respectively.
Excess labor cost incurred after restaurant opening and included in pre-opening cost were approximately $0 and $0.15 million and
$0 and $0.15 million for the three and six months ended June 25, 2017 and June 26, 2016, respectively. Income Taxes Prior to the Spin-off, the Company filed a
consolidated tax return with DRH. Deferred income tax assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted
tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense (income)
is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Income tax expense for the three and six months ended June 26, 2016 was determined as if the Company were filing a separate tax
return. The Company applies the provisions of FASB
ASC 740, Income Taxes Use of Estimates The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of income and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows: Classification of Certain Cash Receipts and Payments.” ASU 2016-15 provides guidance on eight
specific cash flow issues with the objective of reducing diversity in practice. The guidance is effective for interim and annual
periods beginning after December 15, 2017. Early adoption is permitted for any entity in any interim or annual period. We are currently
evaluating the impact of the guidance, but do not believe it will materially impact our consolidated financial statements. In February 2016, FASB issued ASU 2016-02,
Leases In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements - Going Concern In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) 2014-09 "Revenue with Contracts from Customers (Topic 606)." ASU
2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The guidance introduces a five-step
model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers
at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In March 2016, the FASB issued ASU 2016-04, "Liabilities - Extinguishments of Liabilities: Recognition of Breakage for Certain
Prepaid Stored-Value Products." ASU 2016-04 provides specific guidance for the de-recognition of prepaid stored-value product
liabilities. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers: Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)." ASU 2016-08 provides specific guidance to determine whether an entity is providing a
specified good or service itself or is arranging for the good or service to be provided by another party. In April 2016, the FASB
issued ASU 2016-10, "Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing." ASU 2016-10
provides clarification on the subjects of identifying performance obligations and licensing implementation guidance. These standards are effective for annual periods
beginning after December 15, 2017, and interim periods therein. We are currently evaluating the impact of our pending adoption
of ASU 2014-09, although based on the nature of our business we do not expect the standard will have a significant impact on our
consolidated financial statements. We reviewed all other significant newly-issued
accounting pronouncements and concluded that they either are not applicable to our operations or that no material effect is expected
on our consolidated financial statements as a result of future adoption. |
