FAMOUS DAVES OF AMERICA INC

In fiscal 2018, we continued our focus on increasing sales and traffic through various initiatives. These initiatives included a new social listening tool to streamline increase feedback across social media channels, tests of brand refreshes, a new menu relaunch and increased focus on digial and online ordering channels such as our new mobile app and loyalty program.  Third party delivery was a key driver of our sales growth and we continued to expand on these capabilities while also driving adoption in our franchise community. After evaluating the success of third-party delivery, we implemented third party partners for our catering line of business.

Culinary innovation was key to our efforts in 2018 with an emphasis on frequency driving offerings.  The test menu launched for our initial brand refresh location included over 20 new menu items along with a new design aimed at elevating our offerings.  Based on the success of the initial test, the menu was rolled out in two additional locations.  The success of the expanded menu test provided the basis for a system-wide menu overhaul.  For the system-wide launch management identified four new menu item changes to be rolled out to all locations and 12 new optional menu items to offer.  Franchisee reception was overwhelmingly positive since the October 2018 launch and resulted in franchise locations adding an average of ten new menu items.

Goodwill represents the excess of cost over the fair value of identified net assets of businesses acquired. Goodwill is subject to an annual impairment analysis. We may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If it is more likely than not the fair value of the reporting unit is less than its carrying amount, we identify potential impairments of goodwill by comparing the fair value of the reporting unit to its carrying amount, which includes goodwill and other intangible assets. The fair value of the reporting unit is calculated using a market approach. If the fair value of the reporting unit exceeds the carrying amount, the assets are not impaired. If the carrying amount exceeds the fair value, this is an indication that impairment may exist. We calculate the amount of the impairment by comparing the fair value of the assets and liabilities to the fair value of the reporting unit. The fair value of the reporting unit in excess of the value of the assets and liabilities is the implied fair value of the goodwill. If this amount is less than the carrying amount of goodwill, impairment is recognized for the difference. No goodwill impairment charges were recognized during the year ended December 30, 2018.

Beginning in fiscal 2019, we are required to adopt ASC 842 – Leases.  The new standard requires lessees to recognize a lease liability and a right-of-use asset for all leases which is equal to the present value of the remaining lease payments, discounted using the rate implicit in the lease (or the lessee’s incremental borrowing rate to the extent the rate implicit in the lease cannot be readily determined).  If applicable, a lessee should also include the exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option, payments for penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease and any amounts that the lessee is probable to owe pursuant to residual value guarantees.    We have evaluated this standard and have determined it will have a material impact on our consolidated balance sheets.  We have not chosen to early adopt this standard, and as such, information contained within this Annual Report on Form 10-K is disclosed pursuant to ASC 840 –Leases.

We will adopt the new lease standard as of the effective date by applying the current period adjustment approach, utilizing the package of practical expedients available and the practical expedient to not reassess land easements. We are finalizing our analysis of the impact of Topic 842 to our accounting policies, processes, disclosures, and internal control over financial reporting and have implemented necessary upgrades to our existing lease system.  We expect to record total operating lease liabilities of approximately $13.6 million and corresponding lease right of use assets of approximately $11.4 million based on the operating lease liabilities adjusted for deferred rent and liabilities associated with lease termination costs.    

On January 29, 2019, Famous Dave’s Ribs. Inc. (“Ribs”), our wholly owned subsidiary, entered into an asset purchase agreement (the “APA”), by and between Legendary BBQ, Inc., Cornerstar BBQ, Inc., Razorback BBQ, Inc., Larkridge BBQ, Inc., Mesa Mall BBQ, Inc., and Quebec Square BBQ, Inc. to purchase the assets and operations of five Famous Dave’s restaurants located in Colorado (the “Purchased Restaurants”). Pursuant to the APA, the contract purchase price for the Purchased Restaurants is approximately $4,100,000, exclusive of closing costs, plus an amount equal to the book value of the restaurant inventory, plus the assumption the gift card liability associated with the Purchased Restaurants. We completed the acquisition of four of the five restaurants on March 4, 2019 (the “First Four”). As of the date that these financial statements were available to be issued, the initial accounting for the First Four was incomplete and as such, it was impractical to include in these consolidated financial statements the pro forma impact of the acquisition.