NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Combination

The accompanying combined financial statements include the operations of Cornerstar BBQ, Inc., Larkridge BBQ, Inc., Quebec Square BBQ, Inc. and Razorback BBQ, Inc. (collectively the “Company”), subsidiaries of Legendary BBQ, Inc. (“Legendary”).

These combined financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All inter-company transactions and balances have been eliminated.

The Company is a franchisee of Famous Dave’s of America, Inc. (“FDA”) and is in the business of operating Famous Dave’s restaurants in Colorado.

Use of estimates

The preparation of combined financial statements in conformity with GAAP requires the Company 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 combined financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ materially from those estimates.

Fiscal year

The Company’s fiscal year ends on the last Sunday in December and is generally 52 weeks; however, it periodically consists of 53 weeks. The fiscal year ended December 24, 2017 (fiscal 2017) consisted of 52 weeks.

Income taxes

The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Accordingly, these combined financial statements do not include a provision for income taxes because the earnings and losses are included in the stockholder’s income tax return.

Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company and has concluded that as of December 24, 2017, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the combined financial statements. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. Management believes the Company is no longer subject to income tax examinations for years prior to 2014.

Sales taxes

The Company’s accounting policy is to exclude the tax collected and remitted from sales and expenses.

Cash and cash equivalents

Cash equivalents include all investments with original maturities of three months or less or which are readily convertible into known amounts of cash and are not legally restricted. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000, while the remaining balances are uninsured. There have been no losses of uninsured amounts and the Company does not anticipate such losses.

Accounts receivable and revenue recognition

The Company’s trade accounts receivable are generally related to catering sales. Trade accounts receivable are reported at the amount management expects to collect from outstanding balances. No allowance for doubtful accounts receivable was considered necessary at December 24, 2017.

Sales are recognized daily from each restaurant’s point of sale system. Sales of gift cards are deferred until utilized by the customer as a form of payment.

Inventories

Inventories consist of food, liquor and retail goods that are recorded at the lower of cost (first-in, first-out) or net realizable value.

Prepaid expenses and other current assets

Prepaid expenses and other current assets generally consist of prepaid insurance and deposits. Prepaid insurance is recognized ratably in operating expense over the period of future benefit.

Property and equipment, net

Property and equipment are stated at cost, net of accumulated depreciation. The Company recognizes depreciation expense utilizing the straight-line method once an asset has been placed into service. The following table outlines the useful lives of our major classes of property and equipment:

The Company evaluates restaurant sites and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. There was no indication of impairment for the year ended December 24, 2017.

Intangible Assets

Amortizable intangible assets consist of franchise fees and area development fees. These assets are stated at cost, net of accumulated amortization, and are amortized over 20 years.

Deferred Rent

Certain operating leases provide for minimum annual payments that increase over the life of the lease. Typically, the Company’s operating leases contain renewal options under which we may extend the initial lease terms for periods of 5 to 10 years. The aggregate minimum annual payments are expensed on a straight-line basis commencing at the start of the lease 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 a 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.”

Advertising

Advertising costs are charged to expense as incurred. Advertising costs were approximately $731,000 for the year ended December 24, 2017 and are included in operating expenses in the combined statements of income.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014‑09 Revenue from Contracts with 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.

The requirements for these standards relating to Topic 606 will be effective for annual periods beginning after December 15, 2018. The Company will adopt these standards upon their effective date. The Company has substantially completed its evaluation of the standard, and its assessment concludes that the new revenue recognition standard will not materially impact the recognition of restaurant sales, the Company’s primary source of revenue, or any other revenue stream.

In February 2016, the FASB issued ASU 2016‑02, Leases. ASU 2016‑02 requires that lease arrangements longer than 12 months result in a lessee recognizing a lease asset and liability. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. The updated guidance is effective for annual periods beginning after December 15, 2019, and early adoption is permitted. The Company has analyzed the impact of the new standard and concluded that the adoption of ASU 2016‑02 will materially impact its combined financial statements by significantly increasing its non-current assets and non-current liabilities on its combined balance sheets in order to record the right of use assets and related lease liabilities for existing operating leases. With respect to implementation, the Company is currently reviewing the accounting standard and is not yet able to estimate the impact on its combined financial statements.

Depreciation expense for the year ended December 24, 2017 was approximately $331,000.

Amortization expense for the year ended December 24, 2017 was approximately $10,000.

Future amortization expense, as of December 24, 2017 is projected to be as follows:

The Company’s operating lease terms generally include renewal options, and require the Company to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Total rent expense for the year ended December 24, 2017 was approximately $941,000.

Scheduled future minimum lease payments for each of the five years and thereafter for non-cancelable operating leases for existing restaurants with initial or remaining lease terms in excess of one year at December 24, 2017 are summarized as follows:

Company is required to pay FDA royalties (5% of net sales) on all of its restaurants and advertising fund contributions of net sales (1%) on two of its restaurants. Additionally, the Company is required to spend 1.5% of net sales on local advertising. The Company incurred approximately $796,000 of royalties to FDA during the year ended December 24, 2017, which is included in general and administrative expenses.

The Company is a guarantor of a business loan agreement by Legendary; Great Northern Cattle Co.; and Basic Food Group, Inc. In the event of default, the Company could be liable to repay $4.6 million. As of December 24, 2017, the Company does not believe that it will be required to perform against this guarantee. See Note 6 – Related Party Transactions. As of December 24, 2017, Legendary had a payable in the amount of $248,000 related to payroll taxes for employees of the Company, which the Company may be required to repay in the event of default by Legendary.

The Company is subject to ordinary and routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the ordinary course of its business. The ultimate outcome of any litigation is uncertain. The Company has insured and continues to insure against most of these types of claims. A judgment on any claim not covered by or in excess of insurance coverage could materially adversely affect the Company’s financial condition or results of operations.

NOTE 6 – RELATED PARTY TRANSACTIONS

The Company has a management agreement with Basic Food Group, Inc. (“BFG”), a subsidiary of Legendary. BFG provides restaurant and corporate management services to the Company. Avenue Bar and Grill, Inc. dba Avenue Grill (“Avenue”) and Great Northern Tavern DTC, Inc. (“GNT”) own and operate restaurant concepts other than Famous Dave’s restaurants. William Ferguson is the sole owner of Legendary and Avenue and the majority owner of GNT. Great Northern Cattle Co. (“GNCC”) was formed to hold real property and owns the restaurant facility occupied by Avenue.

During the year ended December 24, 2017, the Company incurred approximately $843,000 of management expenses to BFG, which are included in general and administrative expenses. The Company receives capital contributions from Legendary to fund its operations and also makes capital distributions to Legendary for the purposes of funding the operations of the aforementioned related parties.

NOTE 7 – SUBSEQUENT EVENTS

On January 29, 2019, Famous Dave’s Ribs. Inc. (“Ribs”), a wholly owned subsidiary of FDA 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 the Company’s restaurants (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. The transaction, excluding Mesa Mall BBQ, Inc., closed on March 4, 2019.

Management has evaluated subsequent events through May 14, 2019, the date at which the combined financial statements were available to be issued.