UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended June 25, 2019



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

For the transition period from to

Commission File Number 001-35611

Del Frisco’s Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)



Delaware		20-8453116
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2900 Ranch Trail, Irving, TX		75063
(Address of principal executive offices)		(Zip code)

(469) 913-1845

(Registrant’s telephone number, including area code)

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	DFRG	The Nasdaq Global Select 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 x No ¨

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

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 x

As of July 31, 2019, the latest practicable date, 33,436,902 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.

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DEL FRISCO’S RESTAURANT GROUP, INC.

FORM 10-Q

INDEX



Cautionary Note Regarding Forward-Looking Statements	1

Part I – Financial Information	2

Item 1. Financial Statements (Unaudited)	2

Condensed Consolidated Balance Sheets as of June 25, 2019 and December 25, 2018	3

Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended June 25, 2019 and June 26, 2018 and for the Twenty-Six Weeks Ended June 25, 2019 and June 26, 2018	4

Condensed Consolidated Statements of Comprehensive Loss for the Thirteen Weeks Ended June 25, 2019 and June 26, 2018 and for the Twenty-Six Weeks Ended June 25, 2019 and June 26, 2018	5

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Thirteen Weeks Ended June 25, 2019 and June 26, 2018	6

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Twenty-Six Weeks Ended June 25, 2019 and June 26, 2018	7

Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended June 25, 2019 and June 26, 2018	8

Notes to Condensed Consolidated Financial Statements	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3. Quantitative and Qualitative Disclosures About Market Risk	38

Item 4. Controls and Procedures	38

Part II – Other Information	40

Item 1. Legal Proceedings	40

Item 1A. Risk Factors	40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3. Defaults Upon Senior Securities	42

Item 4. Mine Safety Disclosures	42

Item 5. Other Information	43

Item 6. Exhibits	44

Signatures	46

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this "Quarterly Report") and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements include all statements that are not historical facts. Forward looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” "should," "could" and variations of these words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Additional important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and include, but are not limited to, the following:


•	economic conditions (including customer spending patterns);


•	our ability to compete;


•	our ability to implement our growth strategy, including opening new restaurants, operating them profitably and accelerating development of our brands;


•	customer experiences or negative publicity surrounding our restaurants;


•	pricing and deliveries of food and other supplies;


•	changes in consumer tastes and spending patterns;


•	laws and regulations affecting labor and employee benefit costs, including increases in state and federally mandated minimum wages;


•	labor shortages;


•	general financial and credit market conditions;


•	fixed rental payments and the terms of our indebtedness;


•	cyber security and our ability to protect customer information;


•	the Barteca Acquisition;


•	valuation allowance;


•	merger with Harlan; and


•	other factors described in "Item 1A. Risk Factors" set forth in our Annual Report on Form 10-K for the year ended December 25, 2018 (the "2018 10-K"), and in our Quarterly Report on Form 10-Q for the quarter ended March 26, 2019.

All forward-looking statements in this Quarterly Report, or that are made on our behalf by our directors, officers or employees related to the information contained herein, apply only as of the date of this Quarterly Report or as of the date they were made. We undertake no obligation, except as required by applicable law, to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

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CONSOLIDATED DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets—Unaudited



	As of
(Amounts in thousands, except share data)	June 25, 2019			December 25, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	10,671		$	8,535
Inventory	23,055			22,461
Income taxes receivable	766			2,861
Lease incentives receivable	5,407			6,775
Prepaid expenses	3,623			8,284
Other current assets	5,091			9,043
Total current assets	48,613			57,959
Property and equipment:
Buildings and improvements	7,432			17,500
Leasehold improvements	283,027			251,417
Furniture, fixtures, and equipment	91,333			85,164
Construction in progress	17,043			24,906
Property and equipment, gross	398,835			378,987
Less accumulated depreciation	(102,525		)	(91,184		)
Property and equipment, net	296,310			287,803
Operating lease right-of-use assets, net	166,204			—
Goodwill	159,279			156,131
Intangible assets, net	205,710			206,573
Other assets	20,502			17,566
Total assets	$	896,618		$	726,032

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	38,368		$	43,527
Deferred revenue	13,605			16,624
Sales tax payable	2,736			3,215
Accrued payroll	9,167			11,258
Current portion of deferred rent obligations	—			4,193
Other current liabilities	10,292			6,026
Current portion of operating leases	27,030			—
Current portion of finance leases	1,028			1,714
Current portion of long-term debt	3,353			3,100
Total current liabilities	105,579			89,657
Noncurrent liabilities:
Long-term debt, net	350,755			320,736
Noncurrent operating leases	198,264			—
Finance leases	7,157			11,828
Deferred rent obligations	—			56,442
Deferred income taxes, net	23,427			23,900
Other liabilities	12,520			9,887
Total liabilities	697,702			512,450
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding at June 25, 2019 or December 25, 2018	—			—
Common stock, $0.001 par value, 190,000,000 shares authorized, 37,571,574 shares issued and 33,422,315 shares outstanding at June 25, 2019 and 37,444,400 shares issued and 33,321,795 shares outstanding at December 25, 2018	37			37
Treasury stock at cost: 4,149,259 and 4,122,605 shares at June 25, 2019 and December 25, 2018, respectively	(67,823		)	(67,823		)
Additional paid in capital	250,647			248,618
Retained earnings	17,384			33,379
Accumulated other comprehensive loss, net of tax	(1,329		)	(629		)
Total stockholders' equity	198,916			213,582
Total liabilities and stockholders' equity	$	896,618		$	726,032

See accompanying notes to condensed consolidated financial statements.

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DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations — Unaudited

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	13 Weeks Ended						26 Weeks Ended
(Amounts in thousands, except per share data)	June 25, 2019			June 26, 2018			June 25, 2019			June 26, 2018
Revenues	$	131,687		$	75,718		$	252,068		$	149,064
Costs and expenses:
Cost of sales	35,873			21,537			69,165			42,754
Restaurant operating expenses (excluding depreciation and amortization shown separately below)	65,261			36,337			127,399			72,558
Marketing and advertising costs	2,260			1,666			4,512			3,196
Pre-opening costs	1,301			1,403			4,050			2,549
General and administrative costs	17,117			7,988			33,489			15,778
Donations	163			16			195			58
Consulting project costs	3,450			621			7,954			854
Acquisition costs	—			4,338			—			4,946
Reorganization severance	480			—			777			113
Lease termination and closing costs	(1,754		)	589			1,154			591
Depreciation and amortization	8,144			4,237			15,795			8,372
Total costs and expenses	132,295			78,732			264,490			151,769
Operating loss	(608		)	(3,014		)	(12,422		)	(2,705		)
Other income (expense), net:
Interest, net of capitalized interest	(8,409		)	(510		)	(16,129		)	(814		)
Other	(32		)	(50		)	(19		)	(49		)
Loss before income taxes	(9,049		)	(3,574		)	(28,570		)	(3,568		)
Income tax benefit	(2,651		)	(2,182		)	(3,845		)	(2,181		)
Loss from continuing operations	(6,398		)	(1,392		)	(24,725		)	(1,387		)
(Loss) income from discontinued operations, net of tax	—			(170		)	—			225
Net loss	$	(6,398	)	$	(1,562	)	$	(24,725	)	$	(1,162	)
Net loss per average common share outstanding — basic and diluted
Loss from continuing operations	$	(0.19	)	$	(0.07	)	$	(0.74	)	$	(0.07	)
(Loss) income from discontinued operations	—			(0.01		)	—			0.01
Net loss	$	(0.19	)	$	(0.08	)	$	(0.74	)	$	(0.06	)
Weighted-average number of common shares outstanding:
Basic	33,417			20,377			33,387			20,347
Diluted	33,417			20,377			33,387			20,347

See accompanying notes to condensed consolidated financial statements.

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DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss — Unaudited



	13 Weeks Ended						26 Weeks Ended
(Amounts in thousands)	June 25, 2019			June 26, 2018			June 25, 2019			June 26, 2018
Net loss	$	(6,398	)	$	(1,562	)	$	(24,725	)	$	(1,162	)
Other comprehensive income(loss), net of tax:
Change in unrealized gain (loss) on cash flow hedge⁽¹⁾	1			—			(700		)	—
Other comprehensive income(loss), net of tax	1			—			(700		)	—
Comprehensive loss	$	(6,397	)	$	(1,562	)	$	(25,425	)	$	(1,162	)


(1)	Change in unrealized gain (loss) on cash flow hedges is presented net of tax, which was zero for the 13 weeks and 26 weeks ended June 25, 2019. There was no cash flow hedging activity for the 13 weeks and 26 weeks ended June 26, 2018.

See accompanying notes to condensed consolidated financial statements.

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DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity — Unaudited

For the 13 Weeks Ended June 25, 2019



	Common Stock
(In thousands, except share data)	Shares	Par Value		Additional Paid In Capital			Treasury Stock			Retained Earnings			Accumulated other Comprehensive Loss			Total
Balance at March 26, 2019	33,378,025	$	37	$	249,650		$	(67,823	)	$	23,782		$	(1,330	)	$	204,316
Net loss	—	—		—			—			(6,398		)	—			(6,398		)
Other comprehensiveincome, net of tax	—	—		—			—			—			1			1
Share-based compensation costs	—	—		1,010			—			—			—			1,010
Shares issued under stock compensation plan, net of shares withheld for tax effects	44,290	—		(13		)	—			—			—			(13		)
Balance at June 25, 2019	33,422,315	$	37	$	250,647		$	(67,823	)	$	17,384		$	(1,329	)	$	198,916

For the 13 Weeks Ended June 26, 2018



	Common Stock
(In thousands, except share data)	Shares	Par Value		Additional Paid In Capital			Treasury Stock			Retained Earnings			Accumulated other Comprehensive Loss		Total
Balance at March 27, 2018	20,342,589	$	24	$	148,481		$	(67,823	)	$	110,082		$	—	$	190,764
Net loss	—	—		—			—			(1,562		)	—		(1,562		)
Share-based compensation costs	—	—		1,071			—			—			—		1,071
Shares issued under stock compensation plan, net of shares withheld for tax effects	40,233	—		(74		)	—			—			—		(74		)
Balance at June 26, 2018	20,382,822	$	24	$	149,478		$	(67,823	)	$	108,520		$	—	$	190,199

See accompanying notes to condensed consolidated financial statements.

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DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity — Unaudited

For the 26 Weeks Ended June 25, 2019



	Common Stock
(In thousands, except share data)	Shares	Par Value		Additional Paid In Capital			Treasury Stock			Retained Earnings			Accumulated other Comprehensive Loss			Total
Balance at December 25, 2018	33,321,795	$	37	$	248,618		$	(67,823	)	$	33,379		$	(629	)	$	213,582
Cumulative effect adjustment (Notes 1)	—	—		—			—			8,730			—			8,730
Balance at December 26, 2018	33,321,795	37		248,618			(67,823		)	42,109			(629		)	222,312
Net loss	—	—					—			(24,725		)	—			(24,725		)
Other comprehensive loss, net of tax	—	—		—			—			—			(700		)	(700		)
Share-based compensation costs	—	—		2,221			—			—			—			2,221
Shares issued under stock compensation plan, net of shares withheld for tax effects	100,520	—		(192		)	—			—			—			(192		)
Balance at June 25, 2019	33,422,315	$	37	$	250,647		$	(67,823	)	$	17,384		$	(1,329	)	$	198,916

For the 26 Weeks Ended June 26, 2018



	Common Stock
(In thousands, except share data)	Shares	Par Value		Additional Paid In Capital			Treasury Stock			Retained Earnings			Accumulated other Comprehensive Loss		Total
Balance at December 26, 2017	20,309,341	$	24	$	147,503		$	(67,823	)	$	109,383		$	—	$	189,087
Cumulative effect adjustment (Note 1)	—	—		—			—			299			—		299
Balance at December 27, 2017	20,309,341	24		147,503			(67,823		)	109,682			—		189,386
Net income	—	—		—			—			(1,162		)	—		(1,162		)
Share-based compensation costs	—	—		2,098			—			—			—		2,098
Stock option exercises	4,000	—		52			—			—			—		52
Shares issued under stock compensation plan, net of shares withheld for tax effects	69,481	—		(175		)	—			—			—		(175		)
Balance at June 26, 2018	20,382,822	$	24	$	149,478		$	(67,823	)	$	108,520		$	—	$	190,199

See accompanying notes to condensed consolidated financial statements.

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DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows—Unaudited

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	26 Weeks Ended
(Amounts in thousands)	June 25, 2019			June 26, 2018
Cash flows from operating activities:
Net loss	$	(24,725	)	$	(1,162	)
Adjustments to reconcile net income loss to net cash provided by operating activities:
Depreciation and amortization	18,826			9,634
Loss on disposal of restaurant property	58			55
Amortization of debt issuance costs	1,084			—
Share based compensation	2,221			2,098
Impairment charges	—			84
Deferred income taxes	(3,621		)	(5,281		)
Changes in operating assets and liabilities:
Inventory	(594		)	(209		)
Lease incentives receivable	5,421			1,156
Prepaid expenses and other assets	6,001			2,483
Accounts payable	(2,195		)	(1,079		)
Income taxes	2,095			3,330
Deferred rent obligations	—			3,799
Deferred revenue	(3,019		)	(4,231		)
Other liabilities	(355		)	(2,375		)
Net cash provided by operating activities	1,197			8,302
Cash flows from investing activities:
Purchases of property and equipment	(27,897		)	(32,330		)
Other investing activities	242			(179		)
Net cash used in investing activities	(27,655		)	(32,509		)
Cash flows from financing activities:
Cash overdraft	—			4,655
Payments on borrowings	(42,614		)	—
Proceeds from borrowings	74,300			16,500
Payment of debt issuance costs	(2,032		)	—
Principal payments of finance leases	(625		)	(21		)
Payments on loan against deferred compensation investments	(243		)	(501		)
Cash tax payment for share-based awards	(192		)	(175		)
Proceeds from exercise of stock options	—			52
Net cash provided by financing activities	28,594			20,510
Net change in cash and cash equivalents	2,136			(3,697		)
Cash and cash equivalents at beginning of period	8,535			4,594
Cash and cash equivalents at end of period	$	10,671		$	897
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest	$	14,849		$	471
Income taxes	$	(2,067	)	$	945
Non cash investing and financing activities:
Capital expenditures included in accounts payable at end of period	$	3,036		$	7,087
Tenant improvement allowance receivables	$	4,053		$	8,780
Capital lease	$	—		$	887

See accompanying notes to condensed consolidated financial statements.

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DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited

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1. Business and Basis of Presentation

As of June 25, 2019, Del Frisco’s Restaurant Group, Inc. ("we," "us," "our," “Del Frisco’s” or the “Company”) owned and operated 78 restaurants under the concept names of Del Frisco’s Double Eagle Steakhouse (“Double Eagle”), Barcelona Wine Bar (“Barcelona”), bartaco, and Del Frisco’s Grille (“Grille”). Of the 78 restaurants we operated at the end of the period covered by this report, there were 16 Double Eagle restaurants, 17 Barcelona restaurants, 21 bartaco restaurants, and 24 Grille restaurants in operation in 17 states and the District of Columbia.

Recent Developments

On June 27, 2018 (“Acquisition Date”), we completed the acquisition of all outstanding interests in Barteca Holdings, LLC ("Barteca Acquisition"), a Delaware limited liability company, and its subsidiaries (“Barteca”) for total cash consideration of $331.2 million, which represents a purchase price of $325 million plus customary adjustments including payments for cash remaining in the business.

In connection with the completion of the Barteca Acquisition, we entered into a new credit agreement that provides for (i) senior secured term loans in an aggregate principal amount of $390.0 million (“Term Loan B”) and (ii) senior secured revolving credit commitments in an aggregate principal amount of $50.0 million (“Revolving Loan,” and, collectively with the term loans, the “2018 Credit Facility”). See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements for information regarding our credit facility.

On August 1, 2018, we entered into an underwriting agreement with certain underwriters with respect to (i) the sale by the Company of 11,250,000 shares of the Company’s common stock, par value $0.001 per share, to the underwriters and (ii) the grant by the Company to the underwriters of an option (the “Option”) to purchase up to 1,687,500 additional shares of the Company’s common stock (together, the “Shares”). The sale of the Shares, including the exercise in full of the Option, closed on August 6, 2018. The total proceeds of $97.8 million from the public offering of common stock were used to repay a portion of Term Loan B. See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements.

On August 27, 2018 we amended (the “First Amendment”) Term Loan B (“Amended Term Loan B”). The First Amendment amends the 2018 Credit Facility, to, among other things, provide the Company with additional term loans (“Additional Term Loans”) in an aggregate principal amount of $18.0 million. The First Amendment also amended the 2018 Credit Facility to increase the interest rate applicable to the Additional Term Loans and the existing term loans outstanding under the 2018 Credit Facility to, at our option, a rate per annum equal to either a LIBOR or a base rate, plus an applicable margin, which is equal to 6.00% for LIBOR rate loans and 5.00% for base rate loans. See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements for information regarding our amended credit facility.

On September 21, 2018, we sold all of the outstanding equity interests in our Sullivan’s Steakhouse business (“Sullivan’s") to Sullivan’s Holding LLC, a Delaware limited liability company and affiliate of Romano’s Macaroni Grill, for the total gross proceeds of approximately $32 million, subject to customary adjustments for inventory and cash. See Note 3, Dispositions in the notes to our condensed consolidated financial statements for information regarding discontinued operations.

On February 26, 2019, we entered into a joinder agreement with JPMorgan Chase Bank, N.A., as the incremental term lender and JPMorgan Chase Bank, N.A. as the administrative agent (the “Joinder Agreement”). The Joinder Agreement modifies the 2018 Credit Facility and provides the Company with incremental term loan commitments in a principal amount equal to $25.0 million. The Company drew the full amount of the incremental term loans on the date of the Joinder Agreement and received net proceeds of approximately $23.1 million. The Company used the net proceeds of the incremental term loans to repay a portion of the outstanding amounts under the 2018 Credit Facility. Since the repayment does not reduce the commitments under the 2018 Credit Facility, the transaction expanded the Company’s sources of liquidity without increasing leverage at this time. See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements.

On June 17, 2019, we entered into an amendment (the “Second Amendment”) to the 2018 Credit Facility to increase the percentage of Projected EBITDAR Margin that may be included when determining Consolidated EBITDAR for purposes of calculating the Financial Covenant (as defined in the 2018 Credit Facility). See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements.

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affiliates of L Catterton will acquire all outstanding shares of the Company’s common stock for a total value of approximately $650 million. Company stockholders will receive $8.00 in cash per share. The Agreement and Plan of Merger, dated as of June 23, 2019, by and among the Company, Harlan Parent, Inc. and Harlan Merger Sub, Inc. was filed as an exhibit to our Current Report on Form 8-K filed with the SEC on June 24, 2019.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. Operating results for the 13 weeks and 26 weeks ended June 25, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 25, 2018 filed with the SEC on March 11, 2019 (the “2018 10-K”).

The results of Sullivan's operations have been presented as discontinued operations for the 13 weeks and and 26 weeks ended June 26, 2018. See Note 3, Dispositions in the notes to our condensed consolidated financial statements for information regarding discontinued operations.

We operate on a 52- or 53-week fiscal year ending the last Tuesday in December. Beginning in fiscal 2018, we changed to a fiscal quarter calendar where each quarter contains 13 weeks, other than in a 53-week year where the last quarter of the year will contain 14 weeks. Fiscal 2019 will be a 53-week fiscal year, fiscal 2018 was a 52-week fiscal year. We believe that a reporting basis comprised of four equal 13-week quarters is a more typical reporting format comparable to most companies in the restaurant industry and is easier to understand for our investors.

Accounting Estimates

The preparation of the unaudited condensed 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 unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual amounts may differ from those estimates.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). which requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will primarily depend on its classification as a finance (formerly capital) or operating lease. However, unlike previous GAAP, which required only capital leases to be recognized on the balance sheet, ASU 2016-02 requires all leases with an initial term greater than one year to be recognized on the balance sheet as a right-of-use ("ROU") asset and a lease liability.

We adopted ASU 2016-02 in the first quarter of 2019 by utilizing the modified retrospective transition method through a cumulative-effect adjustment in the beginning of the first quarter of 2019. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that existed prior to the adoption of the new standard. We made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. We have elected the practical expedient the Company will not separate a qualifying contract into its lease and non-lease components. The Company recognizes those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases with original terms over 12 months where the Company is the lessee. As a result of the adoption of the new lease standard we recognized ROU assets of $161.6 million, and lease liabilities of $218.0 million, and recorded a cumulative effect adjustment to increase retained earnings of $8.7 million, due to build-to-suit leases and prior deferred gains on sales leaseback transactions.

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40) ("ASU 2018-15") - Customer's Accounting for Implementation Costs incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-15 reduces the complexity of accounting for costs of implementing a cloud computing service arrangement

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and aligns the following requirements to capitalize implementation costs: (i) those incurred in a hosting arrangement that is a service contract, and (ii) those incurred to develop or obtain internal-use software, including hosting arrangements that include an internal software license. This amended guidance is first effective for our fiscal year beginning after December 15, 2019 with early adoption permitted. The guidance may be adopted either using the prospective or retrospective approach. We are currently evaluating the impact of this new guidance on our financial position and results of operations.

2. Acquisitions

On the Acquisition Date, we completed the acquisition of all outstanding interests in Barteca for total cash consideration of $331.2 million, which represents a purchase price of $325 million plus customary adjustments including payments for cash remaining in the business. Barteca owns and operates two restaurant concepts: Barcelona and bartaco. Barcelona and bartaco restaurant concepts are innovative, with a unique vibe, food, drinks and design. Barcelona serves as a neighborhood Spanish tapas bar with an ever-changing selection of tapas, using both local and seasonal ingredients as well as specialties from Spain and the Mediterranean. Barcelona has a superior Spanish wine program and an award winning selection of wines, with 17 locations in 9 states and the District of Columbia. bartaco combines fresh, upscale street food with a coastal vibe in a relaxed environment and is inspired by a healthy, outdoor lifestyle. bartaco has 21 locations across 13 states, as of June 25, 2019.

The following table summarizes the preliminary fair value of identified assets acquired and liabilities assumed at the Acquisition Date:



	As of
(Amounts in thousands)	June 27, 2018
Purchase price	$	331,199

Allocation of purchase price
Cash and cash equivalents	6,006
Accounts receivable	3,311
Inventory	2,068
Prepaid expenses and other assets	3,740
Leasehold improvements	34,919
Buildings and improvements	17,967
Furniture, fixtures, and equipment	13,207
Construction in progress	4,340
Other assets	1,421
Intangible assets	185,080
(Unfavorable) leases	(785		)
Accounts payable and other liabilities	(14,111		)
Financing lease obligations	(13,340		)
Deferred taxes	(28,147		)
Total fair value of net assets acquired:	215,676
Goodwill	$	115,523

Intangible assets acquired primarily include liquor licenses and bartaco and Barcelona trade names. The fair value of the acquired liquor licenses and trade names are $1.1 million and $183.0 million, respectively. Other intangible assets were valued at approximately $0.2 million. Liquor licenses acquired will be amortized over an estimated useful life of each individual license, which is currently estimated to be one year. Trade names represent intangible assets with indefinite life.

As a result of the acquisition, we have recognized approximately $115.5 million of goodwill, of which $104.7 million is deductible for income tax purposes. Goodwill, of which $43.2 million and $72.3 million is attributable to the Barcelona and bartaco reportable segments, respectively, represents the excess of the purchase price over the aggregate fair value of net assets acquired and is related to the benefits expected as a result of the acquisition, including sales, development and growth opportunities. We believe that Barteca's innovative concepts are highly complementary and will provide Del Frisco’s portfolio with significant growth and development opportunities, enabling us to capture market share in the experiential dining segment, while mitigating the effects of seasonality and the risk of economic downturns to our restaurant portfolio.

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The purchase accounting is complete, and our estimates and assumptions were subject to change during the measurement period (up to one year from the acquisition date).

Amounts previously estimated have changed during the measurement period. The changes in estimates included an increase of $4.5 million of buildings and improvements, an increase of $2.0 million of financing lease obligations and a decrease of $0.9 million in accounts payable. We recorded the measurement-period adjustments in the fourth quarter of 2018. Depreciation and interest expenses increased by $0.2 million and $0.1 million, respectively as a result of these measurement-period adjustments. Additionally, deferred tax liabilities increased by $3.1 million with a corresponding change to goodwill in the second quarter of 2019.

Pro Forma Results of Operations (unaudited)

The following pro forma results of operations for the 13 weeks ended June 26, 2018 and 26 weeks ended June 26, 2018, have been prepared as though the business acquisition had occurred on January 1, 2017 consistent with the pro forma results of operations prepared for the third quarter and annual filings of fiscal 2018. This pro forma financial information is not indicative of the results of operations that the Company would have attained had the acquisition occurred at the beginning of the period presented, nor is the pro forma financial information indicative of the results of operations that may occur in the future:



	13 Weeks Ended			26 Weeks Ended
(Amounts in thousands)	June 26, 2018			June 26, 2018
Revenues	$	112,655		$	217,281
Net loss	(5,556		)	(8,165		)
Net loss per average common share
Basic	$	(0.27	)	$	(0.40	)
Diluted	$	(0.27	)	$	(0.40	)

The above pro forma information includes Barteca's actual revenues and net loss of $36.9 million and $6.7 million for the 13 weeks ended June 26, 2018 and $68.2 million and $5.7 million for the 26 weeks ended June 26, 2018, respectively. The combined companies incurred $7.0 million and $13.9 million of interest expense based on financing related to the transaction for the 13 weeks ended June 26, 2018 and 26 weeks ended June 26, 2018, respectively and was reflected in pro forma net loss. Pro forma revenues exclude Sullivan’s results of operation as these amounts are reflected as discontinued operations in the Consolidated Statements of Operations. See Note 3, Dispositions in the notes to our condensed consolidated financial statements for information regarding discontinued operations.

3. Dispositions

On September 21, 2018, we sold all of the outstanding equity interests in our Sullivan’s Steakhouse business to Sullivan’s Holding LLC, a Delaware limited liability company and affiliate of Romano’s Macaroni Grill for total gross proceeds of approximately $32 million, subject to customary adjustments for inventory and cash.

The results of Sullivan’s operations have been reflected as discontinued operations for the 13 weeks ended June 26, 2018 and 26 weeks ended June 26, 2018. Sullivan’s Steakhouse had been previously disclosed as a separate reportable segment. Disposition costs related to the sale of Sullivan’s were approximately $2.0 million.



	13 Weeks Ended		26 Weeks Ended
(Amounts in thousands)	June 26, 2018		June 26, 2018
Revenues	$	14,322	$	30,279
Costs and expenses:
Cost of sales	4,419		9,356
Restaurant operating expenses	7,070		15,064
Marketing and advertising costs	331		820
General and administrative costs	514		1,055
Disposition costs	20		69
Lease termination and closing costs	434		798
Impairment charges	—		84
Depreciation and amortization	1,057		2,103

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Total costs and expenses	13,845			29,349
Income from discontinued operation before income taxes	477			930
Income tax expense	647			705
(Loss) income from discontinued operations	$	(170	)	$	225

Cash flows from Sullivan’s discontinued operations are included in the accompanying Condensed Consolidated Statements of Cash Flows. The significant cash flow items from the Sullivan’s divestiture for the 26 weeks ended June 26, 2018 were as follows:



	26 Weeks Ended
(Amounts in thousands)	June 26, 2018
Depreciation and amortization	$	2,103
Capital expenditures	462

4. Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) data is computed based on the weighted average number of shares of common stock outstanding during the periods. Diluted EPS data is computed based on the weighted average number of shares of common stock outstanding, including all potentially issuable shares of common stock. We incurred a net loss for the 13 weeks and 26 weeks ended June 25, 2019, and therefore, diluted shares outstanding equaled basic shares outstanding. We incurred a net loss for the 13 weeks and 26 weeks ended June 26, 2018, and therefore, diluted shares outstanding equaled basic shares outstanding.

The following table details our basic and diluted earnings per common share calculation:໿



	13 Weeks Ended						26 Weeks Ended
(Amounts in thousands, except per share data)	June 25, 2019			June 26, 2018			June 25, 2019			June 26, 2018
Net loss	$	(6,398	)	$	(1,562	)	$	(24,725	)	$	(1,162	)
Shares:
Weighted-average common shares outstanding—basic	33,417			20,377			33,387			20,347
Effect of dilutive shares	—			—			—			—
Weighted-average common shares outstanding—diluted	33,417			20,377			33,387			20,347

Loss per share—basic	$	(0.19	)	$	(0.08	)	$	(0.74	)	$	(0.06	)
Loss per share—diluted	$	(0.19	)	$	(0.08	)	$	(0.74	)	$	(0.06	)

5. Stock-Based Employee Compensation

2012 Long-Term Equity Incentive Plan

On July 16, 2012, we adopted the Del Frisco’s Restaurant Group, Inc. 2012 Long-Term Equity Incentive Plan (the “2012 Plan”), which allows us to grant stock options, restricted stock, restricted stock units, deferred stock units and other equity-based awards to directors, officers, key employees and other key individuals performing services for us. The 2012 Plan provided for granting of options to purchase shares of common stock at an exercise price not less than the fair value of the stock on the date of grant. Equity-based awards vest or become exercisable at various periods ranging from one to four years from the date of grant. The 2012 Plan has 2,232,800 shares of common stock authorized for issuance under the plan. At June 25, 2019 no shares of common stock were available for future grants under the 2012 Plan.

2019 Long-Term Equity Incentive Plan

On May 30, 2019, we adopted the Del Frisco’s Restaurant Group, Inc. 2019 Long-Term Equity Incentive Plan (the “2019 Plan"), which allows us to grant stock options, stock appreciation rights ("SAR"), restricted stock, restricted stock units and other equity-based awards to directors, officers, key employees and other key individuals performing services for us. The 2019 Plan provides for granting of SAR or options to purchase shares of common stock at an exercise price not less than the fair value of the stock on the date of grant. Equity-based awards vest or become exercisable at various periods ranging from one to four years from the date of grant. The 2019 Plan has 1,950,000 shares of common stock authorized for issuance under the plan. There were 467,300

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shares of common stock issuable upon exercise of outstanding options and 1,603,701 restricted shares, restricted stock units and performance stock units outstanding at June 25, 2019, with 2,098,208 shares of common stock available for future grants.

The following table details our total share-based compensation cost, as well as where the costs were expensed:



	13 Weeks Ended				26 Weeks Ended
(Amounts in thousands)	June 25, 2019		June 26, 2018		June 25, 2019		June 26, 2018
Restaurant operating expenses	$	6	$	29	$	14	$	64
General and administrative costs	1,004		1,042		2,207		2,034
Total stock compensation cost	$	1,010	$	1,071	$	2,221	$	2,098

Restricted Stock, Restricted Stock Units, and Performance Stock Units

The following table summarizes restricted stock, restricted stock unit, and performance stock unit activity:



	26 Weeks Ended June 25, 2019
	Shares (000's)		Weighted average grant date fair value		Aggregate intrinsic value ($000's)
Outstanding at beginning of period	1,313		$	10.24
Granted	467		5.97
Vested	(127	)	15.81
Forfeited	(49	)	8.94
Outstanding at end of period	1,604		$	8.60	$	12,701

As of June 25, 2019, there was $8.6 million of total unrecognized compensation cost related to non-vested restricted stock, restricted stock units, and performance stock units. This cost is expected to be recognized over a period of approximately 1.9 years.

Stock Options

The following table summarizes stock option activity:



	26 Weeks Ended June 25, 2019
	Shares (000's)	Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value ($000's)
Outstanding at beginning of period	467	$	18.54
Exercised	—	—
Forfeited	—	—
Outstanding at end of period	467	$	18.54	3.8 years	$	—
Options exercisable at end of period	467	$	18.54	3.8 years	$	—

As of June 25, 2019, all stock options were vested, accordingly all compensation costs related to vested stock options were recognized.

6. Derivative Financial Instruments

As of June 25, 2019, we have entered into one derivative instrument designated as a cash flow hedge for risk management purposes. The derivative instrument is used to mitigate our exposure to interest rate fluctuations.

Interest Rate Cap

During fiscal 2018, we entered into an interest rate cap with a notional value of $200.0 million and 3.00% per annum strike rate to hedge the variability of the monthly 1-month LIBOR interest payments on a portion of our Term Loan B. The hedged monthly interest payments began on July 31, 2018 and end on the expiration of the interest rate cap on June 30, 2022. Any variability in the 1-month LIBOR interest payment on the Term Loan Facility beyond 3.00% per annum is offset by the net proceeds received upon exercising the interest rate cap. The interest rate cap was designated as a cash flow hedge at inception.

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The hedge effectiveness for the designated interest rate cap is based on the changes in the interest rate cap’s intrinsic value. Accordingly, we will exclude all the change in the time value of the interest rate cap from the assessment. The excluded component will be amortized over the life of the derivative instrument and recognized in Interest, net of capitalized interest in the Consolidated Statements of Operations. The amount of gains (losses) that are reported in accumulated other comprehensive income (loss) at the reporting date that are expected to be reclassified into earnings within the next 12 months is $0.5 million.

Credit Risk

We are exposed to credit risk of the counterparty with which we entered into the derivative. This is the risk of the counterparty’s non-performance pursuant to the derivative contract. The risk will continue to exist as long as the derivative is in an asset position, creating a liability for the counterparty. However, the risk is deemed to be minimal as the counterparty has investment grade credit ratings. We will monitor the counterparty’s credit ratings and our market position with the counterparty on an ongoing basis. The interest rate cap does not contain any credit-risk related contingent features.

Quantitative Disclosures on Derivative Instruments

The following tables present the required quantitative disclosures for our derivative instrument, including its estimated fair values (all estimated using Level 2 inputs) and their financial statement presentation for the fiscal quarters ended June 25, 2019 and June 26, 2018, respectively.

Derivative instruments recorded at fair value in our unaudited condensed consolidated balance sheets as of June 25, 2019 and December 25, 2018, respectively, consisted of the following:



	Derivative Assets
(Amounts in thousands)	June 25, 2019			December 25, 2018
Derivatives designated as hedging instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate cap	Other current assets	$	132	Other current assets	$	1,075
Total derivatives designated as hedging instruments		$	132		$	1,075

The effect of cash flow hedges on accumulated other comprehensive income (loss) for the 13 weeks ended June 25, 2019 and the 13 weeks ended June 26, 2018, was as follows (Amounts in thousands):



Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) on Derivative*					Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income				Classification of Gain or (Loss) Recognized in income related to Amount Excluded from Effectiveness Testing	Amount of Gain or (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)
	13 Weeks Ended						13 Weeks Ended					13 Weeks Ended
	June 25, 2019			June 26, 2018			June 25, 2019		June 26, 2018			June 25, 2019		June 26, 2018
Interest rate cap	$	(120	)	$	—	Interest, net of capitalized interest	$	—	$	—	Interest, net of capitalized interest	$	121	$	—

*The portion of gain/loss recognized in Accumulated Other Comprehensive Income related to the component excluded from the assessment of effectiveness was a loss of $0.1 million.

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The effect of cash flow hedges on accumulated other comprehensive income (loss) for the 26 weeks ended June 25, 2019 and the 26 weeks ended June 26, 2018, was as follows (Amounts in thousands):



Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) on Derivative*					Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income				Classification of Gain or (Loss) Recognized in income related to Amount Excluded from Effectiveness Testing	Amount of Gain or (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing)
	26 Weeks Ended						26 Weeks Ended					26 Weeks Ended
	June 25, 2019			June 26, 2018			June 25, 2019		June 26, 2018			June 25, 2019		June 26, 2018
Interest rate cap	$	(943	)	$	—	Interest, net of capitalized interest	$	—	$	—	Interest, net of capitalized interest	$	243	$	—

*The portion of gain/loss recognized in Accumulated Other Comprehensive Income related to the component excluded from the assessment of effectiveness was a loss of $0.9 million.

The effect of cash flow hedges on Consolidated Statements of Operations for the 13 weeks ended June 25, 2019 and the 13 weeks ended June 26, 2018, was as follows:



	Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
	13 Weeks Ended
(Amounts in thousands)	June 25, 2019		June 26, 2018
Gain or (loss) on cash flow hedging relationships
Interest Rate Cap:
Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income	$	—	$	—
Amount excluded from effectiveness testing using an amortization approach⁽¹⁾	121		—
Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income as a result that a forecasted transaction is no longer probable of occurring	—		—


(1)	The portion of the amount of loss reclassified from accumulated other comprehensive income (loss) to income includes $0.1 million related to the amortization of the excluded component.

The effect of cash flow hedges on Consolidated Statements of Operations for the 26 weeks ended June 25, 2019 and the 26 weeks ended June 26, 2018, was as follows:



	Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
	26 Weeks Ended
(Amounts in thousands)	June 25, 2019		June 26, 2018
Gain or (loss) on cash flow hedging relationships
Interest Rate Cap:
Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income	$	—	$	—
Amount excluded from effectiveness testing using an amortization approach⁽¹⁾	243		—
Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income as a result that a forecasted transaction is no longer probable of occurring	—		—


(1)	The portion of the amount of loss reclassified from accumulated other comprehensive income (loss) to income includes $0.2 million related to the amortization of the excluded component.

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7. Long-Term Indebtedness

Credit Facilities

On June 27, 2018, in connection with the completion of the Barteca Acquisition, we entered into a new credit agreement that provides for (i) a seven year senior secured term loan Term Loan B in aggregate principal amount of $390.0 million bearing interest per annum equal to either a LIBOR or ABR rate, plus an applicable margin, which is equal to 4.75% per annum for LIBOR loans and 3.75% for ABR loans, with the option to maintain or convert base rate loans to LIBOR loans and (ii) five year senior secured revolving credit commitments ("Revolving Loan") in an aggregate principal amount of $50.0 million with the ability to increase the facility by up to an additional $25.0 million with unpaid amounts bearing interest at 3.50% per annum for LIBOR loans and 2.50% per annum for ABR loans. Similar to the term loan, base rate loans may be maintained or converted to LIBOR loans. Rates may be subject to adjustment by reference to the consolidated total leverage ratio, (collectively with the term loans, the "2018 Credit Facility"). Part of the proceeds from the term loans were used to retire the 2012 Credit Facility.

On August 6, 2018, we received $97.8 million of proceeds from a public offering of common stock that were used to repay a portion of the $390.0 million of the Term Loan B pursuant to an existing prepayment option.

On August 27, 2018 we amended ("The First Amendment") Term Loan B ("Amended Term Loan B"). The First Amendment amends the 2018 Credit Facility, to, among other things, completely re-syndicate the Amended Term Loan B and provide the Company with additional term loans ("Additional Term Loans") in an aggregate principal amount of $18.0 million. The First Amendment also amended the 2018 Credit Facility to increase the interest rate applicable to the Additional Term Loans and the existing term loans outstanding under the 2018 Credit Facility to, at our option, a rate per annum equal to either a LIBOR or ABR rate, plus an applicable margin, which is equal to 6.00% for LIBOR loans and 5.00% for ABR loans.

As of June 25, 2019, $32.0 million under the Revolving Loan was outstanding (excluding amounts reserved for letters of credit in the amount of $1.6 million). As of December 25, 2018, $23.7 million under the Revolving Loan, was outstanding (excluding amounts reserved for letters of credit in the amount of $1.6 million). The unpaid Revolving Loan amounts bear interest at 3.50% per annum for LIBOR loans and 2.50% per annum for ABR loans. As of June 25, 2019, the Revolving Loan unused commitment fee was 0.50%. The principal amount of the Revolving Loan is due and payable on June 27, 2023.

As of June 25, 2019, $332.8 million was outstanding under the Amended Term Loan B. Interest on the Amended Term Loan B accrues at a rate per annum equal to either a LIBOR or ABR rate, plus an applicable margin, which is equal to 6.00% for LIBOR loans and 5.00% for ABR loans. The Interest Rate Cap Agreement, which has a notional value of $200.0 million and 3.00% per annum strike rate to hedge the variability of the monthly 1-month LIBOR interest payments on a portion of our Term Loan B, mitigates the risk of an increase in the LIBOR rate in effect on the Amended Term Loan B. See Note 6, Derivative Financial Instruments for further discussion. As of June 25, 2019, the applicable interest rate on the Amended Term Loan B was 8.50%. The Amended Term Loan B is payable in equal quarterly installments of $0.8 million. The outstanding principal of the Amended Term Loan B is due and payable on June 27, 2025.

Amounts outstanding under the 2018 Credit Facility are guaranteed by Del Frisco's and certain of the subsidiaries of Del Frisco’s (collectively, the "Loan Parties"). The 2018 Credit Facility is secured by a first priority security interest in substantially all of the assets of the Loan Parties. The 2018 Credit Facility agreement contains certain representations, warranties and affirmative covenants and financial covenants, including a maximum ratio of total indebtedness to EBITDAR, as defined in the credit agreement governing the credit facility. The total indebtedness to EBITDAR calculation is applicable only when we are over 25% drawn on the Revolver at the end of the reporting period. In addition, the 2018 Credit Facility agreement contains covenants restricting certain corporate actions, including asset dispositions, acquisitions, the payment of dividends, the incurrence of indebtedness and providing financing or other transactions with affiliates.

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Loan Against the Investments in Deferred Compensation Plan

On July 12, 2017, we executed an agreement to borrow against the investments in our deferred compensation plan to pay out funds due to plan participants instead of using operating cash flows. The loan does not have an expiration date or defined payment terms, and accrues interest at a rate of 1%, net of the 4% that is earned by the investments being loaned against. As of June 25, 2019 and December 25, 2018 there was $3.6 million and $3.8 million of outstanding borrowings on this loan, respectively.

Long-Term Indebtedness Summary

As of June 25, 2019 and December 25, 2018, long-term debt consisted of the following:



	As of
(Amounts in thousands)	June 25, 2019			December 25, 2018
Amended Term Loan B	$	332,803		$	309,417
Revolving Loan	32,000			23,700
Loan Against the Investments in Deferred Compensation Plan	3,577			3,820
Net discount	(13,065		)	(12,107		)
Deferred financing costs	(1,207		)	(994		)
Long-term debt	354,108			323,836
Less current portion	(3,353		)	(3,100		)
Total long-term debt, net	$	350,755		$	320,736

8. Leases

We adopted ASU 2016-02 in the first quarter of 2019 by utilizing the modified retrospective transition method through a cumulative-effect adjustment in the beginning of the first quarter of 2019. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that existed prior to the adoption of the new standard. We made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. We have elected the practical expedient the Company will not separate a qualifying contract into its lease and non-lease components. The Company recognizes those lease payments in the Consolidated Statements of Operation on a straight-line basis over the lease term. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases with original terms over 12 months where the Company is the lessee.

Upon adoption of Topic 842 during the first quarter of 2019 we recognized ROU of $161.6 million, and lease liabilities of $218.0 million, and recorded a cumulative effect adjustment to increase retained earnings of $8.7 million, due to build-to-suit leases and prior deferred gains on sales leaseback transactions.

We currently lease all of our restaurants. We lease certain facilities under noncancelable operating leases and have several obligations under finance leases, with terms expiring between 2019 and 2039. The operating and finance leases have renewal options ranging from 5 to 20 years, which are exercisable at our option. In addition, certain leases contain escalation clauses based on a fixed percentage increase and provisions for contingent rentals based on a percentage of gross revenues, as defined. The majority of our leases provide for minimum annual rents with some containing percentage-of-sales rent provisions, against which the minimum rent may be applied. The majority of our leases also provide for rent escalation clauses, contingent rental expense, and/or tenant improvement allowances. Minimum rental payments under operating leases are recognized on a straight-line basis over the expected term of the lease, which includes optional renewal periods that are reasonably certain to be exercised and where failure to exercise such renewal options would result in an economic penalty to us.

For the Company's operating and finance leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. Key estimates and judgments include how the Company determines (i) the discount rate it uses to discount the unpaid lease payments to present value, (ii) lease term and (iii) lease payments. Topic 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate ("IBR"). Generally, the Company cannot determine the interest rate implicit in the lease and therefore uses the IBR as a discount rate for its leases. The IBR reflects the rate of interest the Company would pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. To estimate our specific incremental borrowing rates over various tenors (ranging from 3-year through 30-years), a comparable market yield curve consistent with our credit quality was calibrated to our outstanding debt instruments. The lease term for all of the Company's leases includes the

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noncancellable period of the lease plus any additional periods covered by an option to extend the lease that is reasonably certain to be executed by the Company. Lease payments included in the measurement of the lease liability comprise fixed payments owed over the lease term, fixed non-lease component payments, variable lease payments that depend on an index or rate, and the renewal option if it is reasonably certain the Company will exercise the option. As part of the lease agreements the Company is also responsible for payments regarding non-lease components (common area maintenance, operating expenses, etc.) and most of these payments are variable costs; however, some leases have fixed operating or common area maintenance expenses so these leases with fixed non-lease component payments were included as part of the lease liabilities.

The ROU asset is initially measured at cost, which comprises the initial amount of lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For the Company's operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, and adjusted for any prepaid or accrued lease payments, less the unamortized balance of lease incentives received.

Operating leases are included in operating lease ROU assets, current portion of operating leases, and operating lease liabilities on our Consolidated Statements of Operation. Finance leases are included in buildings and improvements and furniture, fixtures, and equipment, current portion of finance leases, and finance lease on our Consolidated Statements of Operation.

Lease Position

The table below presents the lease-related assets and liabilities recorded on the balance sheet:



		As of
(Amounts in thousands)	Classification	June 25, 2019
Assets
Operating leases⁽¹⁾	Operating lease right-of-use assets	$	166,204
Finance leases⁽²⁾	Buildings and improvements; Furniture, fixtures, and equipment	8,259
Total leased assets		$	174,463
Liabilities
Current
Operating	Current portion of operating leases	$	27,030
Finance	Current portion of finance leases	1,028
Noncurrent
Operating	Noncurrent operating leases	198,264
Finance	Finance leases	7,157
Total lease liabilities		$	233,479


(1)	Operating lease right-of-use assets, presented net of accumulated amortization of $3.0 million as of June 25, 2019.


(2)	Finance lease assets accumulated amortization was $0.4 million as of June 25, 2019.

Lease Costs

The table below presents certain information related to the lease costs for finance and operating leases:



(Amounts in thousands)	Classification	13 Weeks Ended June 25, 2019		26 Weeks Ended June 25, 2019
Operating lease cost⁽¹⁾	Restaurant operating expenses	$	8,955	$	17,704
Finance lease cost
Amortization of leased assets	Depreciation and amortization	194		388
Interest on lease liabilities	Interest expense	230		435
Net lease cost		$	9,379	$	18,527


(1)	Includes short-term lease and variable lease costs of $0.2 million and $0.9 million for the13 weeks ended June 25, 2019, respectively and $0.5 million and $1.8 million for the 26 weeks ended June 25, 2019, respectively.

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Lease Maturities

The following table presents aggregate lease maturities as of June 25, 2019:



	As of
	June 25, 2019
(Amounts in thousands)	Operating Leases			Finance Leases			Total
2019	$	13,633		$	519		$	14,152
2020	34,055			1,280			35,335
2021	34,259			1,312			35,571
2022	34,844			1,329			36,173
2023	34,727			1,353			36,080
Thereafter	379,809			9,698			389,507
Total minimum lease payments	531,327			15,491			546,818
Less: amount of lease payments representing interest	(306,033		)	(7,306		)	(313,339		)
Present value of future minimum lease payments	225,294			8,185			233,479
Less: current obligations under leases	(27,030		)	(1,028		)	(28,058		)
Long-term lease obligations	$	198,264		$	7,157		$	205,421

Future minimum payments due under financing lease and capital lease obligations for existing restaurants and commitments for restaurants whose development had not yet commenced as of December 25, 2018, under Accounting Standard Codification Topic 840, the predecessor to Topic 842, are as follows:



	As of
(Amounts in thousands)	December 25, 2018
2019	$	1,714
2020	1,812
2021	1,858
2022	1,887
2023	1,814
Thereafter	6,428
Total minimum lease payments	$	15,513
Less imputed interest	(1,971		)
Present value of future lease commitments	13,542
Less current maturities	(1,714		)
Obligations under capital and financing leases, net of current maturities	$	11,828

Future minimum lease payments under noncancelable operating leases include renewal option periods for certain leases when such option periods are included for purposes of calculating straight-line rents. At December 25, 2018, future minimum rentals for each of the next five years and thereafter, and in total, are as follows: ໿



	As of
(Amounts in thousands)	December 25, 2018
2019	$	32,357
2020	35,070
2021	35,398
2022	36,029
2023	34,871
Thereafter	365,864
Total minimum lease payments	$	539,589

At June 25, 2019, the Company has entered into noncancellable operating leases for 6 additional restaurant locations. These leases will commence subsequent to June 25, 2019 and, therefore, are not recognized as of June 25, 2019. The fixed payments due on

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an undiscounted basis over the lease term is $72.0 million. The Company will assess the lease classification at the lease commencement date.

Other Information

The following table presents the weighted average remaining lease term and discount rate:



		As of
		June 25, 2019
Weighted-average remaining lease term
Operating leases		14.8 years
Finance leases		12.2 years
Weighted-average discount rate
Operating leases		11.8%
Finance leases		11.3%

The following table presents other information related to our operating and finance leases:



(Amounts in thousands)	26 Weeks Ended June 25, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	2,367
Operating cash flows from finance leases	—
Financing cash flows from finance leases	625
Leased assets obtained in exchange for lease obligations⁽¹⁾
Operating leases	15,010
Finance leases	—


(1)	Amounts disclosed for leased assets obtained in exchange for lease obligations include amounts added to the carrying amount of leased assets resulting from lease modifications and reassessments.

9. Accumulated Other Comprehensive Loss

Changes in the composition of Accumulated Other Comprehensive Loss (“AOCI”) during the second quarter ended June 25, 2019 were as follows:



(Amounts in thousands)	Net Unrealized Gains (Losses) Related to Derivatives			Accumulated Other Comprehensive Loss
Balance at December 25, 2018	$	(629	)	$	(629	)
Net change in fair value of derivatives, net of tax	(943		)	(943		)
Amounts reclassified to earnings of cash flow hedges, net of tax	243			243
Balance at June 25, 2019	$	(1,329	)	$	(1,329	)

10. Income Taxes

The effective income tax rate for the 13 weeks ended June 25, 2019 was 29.3%, compared to 61.1% for the 13 weeks ended June 26, 2018. The effective income tax rate for the 26 weeks ended June 25, 2019 was 13.5%, compared to 61.1% for the 26 weeks ended June 26, 2018. For the 26 weeks ended June 25, 2019, the factors that cause the effective tax rates to vary from the federal statutory rate of 21% were primarily the change to the valuation allowance, the effect of certain permanent differences and the impact of the FICA tip deduction addback. For the 26 weeks ended June 26, 2018, the factors causing the effective tax rates to vary from the federal statutory rate of 21% include the impact of the FICA tip and other credits, partially offset by state income taxes and certain non-deductible expenses.

The Company assesses the available positive and negative evidence at each balance sheet date to determine whether sufficient future taxable income will be generated to permit the use of existing deferred tax assets. The purpose of this analysis is to assess whether it is more likely than not that some or all of our deferred tax assets will not be realized. Significant judgment is required in estimating valuation allowances for deferred tax assets and in making this determination, we consider all available positive and

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negative evidence and make certain assumptions. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in the applicable carryback or carryforward periods. To the extent we generate sufficient taxable income in the future to fully utilize the tax benefits of the net deferred tax assets on which a valuation allowance was recorded; our effective tax rate may decrease as the valuation allowance is reversed. During fiscal 2018, the Company entered a three year cumulative loss position and established a valuation allowance against deferred tax assets for which it is more likely than not that the deferred tax assets will not be realized.

11. Fair Value Measurement

Under GAAP, we are required to measure certain assets and liabilities at fair value, or to disclose the fair value of certain assets and liabilities recorded at cost. Pursuant to these fair value measurement and disclosure requirements, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value is calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities includes consideration of non-performance risk, including our own credit risk. Each fair value measurement is reported in one of the following three levels:


•	Level 1—valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.


•	Level 2—valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


•	Level 3—valuation inputs are unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

Fair Value of Debt and Other Financial Instruments

Debt is recorded at carrying value. The fair value of long-term debt is based on market prices that generally are observable for similar liabilities at commonly quoted intervals and is considered a Level 2 fair value measurement. The estimated fair value of debt (including current portion) is $355.8 million and $303.7 million and the carrying amount is $354.1 million and $323.8 million as of June 25, 2019 and December 25, 2018, respectively.

At June 25, 2019, the carrying values of other financial instruments such as cash and cash equivalents, receivables and accounts payable approximate fair value due to their short-term nature.

Recurring Fair Value Measurements

The following table presents our financial assets and liabilities measured at fair value on a recurring basis at June 25, 2019 and December 25, 2018, respectively:



	Fair Value Measurements
(Amounts in thousands)	Level	June 25, 2019						December 25, 2018
Financial assets (liabilities):		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Deferred compensation plan investments (included in Other assets)	2	$	15,035		$	15,035		$	13,556		$	13,556
Deferred compensation plan liabilities (included in Other liabilities)	2	(9,520		)	(9,520		)	(8,059		)	(8,059		)
Interest rate cap agreement assets (included in Other current assets)	2	132			132			1,075			1,075

There were no transfers among levels within the fair-value hierarchy during the first two quarters of fiscal 2019 and fiscal 2018.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:


•	The measurement of the fair value of derivative assets and liabilities is based on market prices that generally are observable for similar assets and liabilities at commonly quoted intervals and is considered a Level 2 fair value measurement. Derivative assets and liabilities that have maturity dates equal to or less than twelve months from the

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balance sheet date are included in prepaid and other current assets and other accrued liabilities, respectively. Derivative assets and liabilities that have maturity dates greater than twelve months from the balance sheet date are included in deposits and other assets and other long-term liabilities, respectively. See Note 2 Summary of Significant Accounting Policies of our 2018 10-K for additional information on our derivative instruments and related Company policies.

12. Segment Reporting

We operate the Double Eagle, Barcelona, bartaco, and Grille brands as operating segments. The restaurant concepts operate solely in the U.S. within the full-service dining industry, providing similar products to similar customers. Sales from external customers are derived principally from food and beverage sales, and we do not rely on any major customers as a source of sales. The restaurant concepts also possess similar economic characteristics, resulting in similar long-term expected financial performance characteristics. However, Double Eagle restaurants typically have higher revenues, driven by their larger physical presence and higher average check. The Double Eagle, Barcelona, bartaco, and Grille operating segments have varying operating income and restaurant-level EBITDA margins due to the leveraging of higher revenues on certain fixed operating costs such as management labor, rent, utilities, and building maintenance.

The following tables present information about reportable segments:



	13 Weeks Ended June 25, 2019
(Amounts in thousands)	Double Eagle		Barcelona		bartaco		Grille		Corporate		Consolidated
Revenues	$	49,423	$	21,096	$	28,227	$	32,941	$	—	$	131,687
Restaurant-level EBITDA	11,505		5,208		6,901		4,679		—		28,293
Capital expenditures	4,420		2,583		4,942		1,408		91		13,444
Property and equipment, gross	160,746		41,459		59,646		132,785		4,199		398,835



	13 Weeks Ended June 26, 2018
(Amounts in thousands)	Double Eagle		Barcelona		bartaco		Grille		Corporate		Consolidated
Revenues	$	43,471	$	—	$	—	$	32,247	$	—	$	75,718
Restaurant-level EBITDA	11,130		—		—		5,048		—		16,178
Capital expenditures	18,420		—		—		6,171		106		24,697
Property and equipment, gross	134,631		—		—		122,909		5,324		262,864



	26 Weeks Ended June 25, 2019
(Amounts in thousands)	Double Eagle		Barcelona		bartaco		Grille		Corporate		Consolidated
Revenues	$	99,398	$	38,287	$	49,109	$	65,274	$	—	$	252,068
Restaurant-level EBITDA	21,930		8,675		11,317		9,070		—		50,992
Capital expenditures	7,512		4,409		9,781		2,411		528		24,641
Property and equipment, gross	160,746		41,459		59,646		132,785		4,199		398,835



	26 Weeks Ended June 26, 2018
(Amounts in thousands)	Double Eagle		Barcelona		bartaco		Grille		Corporate			Consolidated
Revenues	$	87,425	$	—	$	—	$	61,639	$	—		$	149,064
Restaurant-level EBITDA	22,176		—		—		8,380		—			30,556
Capital expenditures	28,206		—		—		8,154		(249		)	36,111
Property and equipment, gross	134,631		—		—		122,909		5,324			262,864

In addition to using consolidated results in evaluating our performance and allocating our resources, our chief operating decision maker uses restaurant-level EBITDA, which is not a measure defined by GAAP at both the segment and consolidated level. At the consolidated level, this non-GAAP operating measure is useful to both management and investors because it represents one means of gauging the overall profitability of our recurring and controllable core restaurant operations. This measure is not, however, indicative of our overall results, nor does restaurant-level profit accrue directly to the benefit of stockholders, primarily due to the exclusion of corporate-level expenses. Restaurant-level EBITDA on a consolidated basis should not be considered a substitute for, or superior to, operating income loss, which is calculated in accordance with GAAP, and the reconciliations to operating income set forth below should be carefully evaluated.

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We define restaurant-level EBITDA as operating income before pre-opening costs, general and administrative costs, donations, consulting project costs, acquisition costs, reorganization severance costs, lease termination and closing costs and depreciation and amortization. Pre-opening costs are excluded because they vary in timing and magnitude and are not related to the health of ongoing operations. General and administrative costs are only included in our consolidated financial results as they are generally not specifically identifiable to individual operating segments as these costs relate to supporting all of our restaurant operations and the extension of our concepts into new markets. Donations, consulting project costs, acquisition costs and reorganization severance costs are excluded because they are not related to the health of ongoing operations. Lease termination and closing costs and depreciation and amortization are excluded because they are not ongoing controllable cash expenses, and they are not related to the health of ongoing operations. Property and equipment is the only balance sheet measure used by our chief operating decision maker in allocating resources.

The following table reconciles operating income (loss) to restaurant-level EBITDA:



	13 Weeks Ended						26 Weeks Ended
(Amounts in thousands)	June 25, 2019			June 26, 2018			June 25, 2019			June 26, 2018
Operating income (loss)	$	(608	)	$	(3,014	)	$	(12,422	)	$	(2,705	)
Pre-opening costs	1,301			1,403			4,050			2,549
General and administrative costs	17,117			7,988			33,489			15,778
Donations	163			16			195			58
Consulting project costs	3,450			621			7,954			854
Acquisition costs	—			4,338			—			4,946
Reorganization severance	480			—			777			113
Lease termination and closing costs	(1,754		)	589			1,154			591
Depreciation and amortization	8,144			4,237			15,795			8,372
Restaurant-level EBITDA	$	28,293		$	16,178		$	50,992		$	30,556

13. Commitments and Contingencies

We are subject to various claims, possible legal actions, and other matters arising out of the normal course of business. While it is not possible to predict the outcome of these issues, management is of the opinion that adequate provision for potential losses has been made in the accompanying condensed consolidated financial statements and that the ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Litigation Related to the Merger

On July 25, 2019, a complaint was filed, captioned Sabatini v. Del Frisco’s Restaurant Group, Inc. et al., Case No. 1:19-cv-01385-LPS (the “Sabatini Complaint”). The Sabatini Complaint generally alleges that the Company and the members of its Board of Directors violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by omitting material information from the Proxy Statement rendering it false and misleading and seeks, among other things, an injunction against the Merger, or in the event the Merger is consummated, rescission and rescissory damages, additional disclosure of facts in the Proxy Statement relating to the Merger, a declaration from the court that the defendants violated federal securities laws, and costs (including attorneys’ and experts’ fees).

On July 29, 2019, a complaint was filed, captioned Stein v. Del Frisco’s Restaurant Group, Inc. et al., Case No. 1:19-cv-01412-LPS (the “Stein Complaint”). The Stein Complaint generally alleges that the Company and the members of its Board of Directors violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by omitting material information from the Proxy Statement rendering it false and misleading and seeks, among other things, an injunction against the Merger, or in the event the Merger is consummated, rescission and rescissory damages, additional disclosure of facts in the Proxy Statement relating to the Merger, a declaration from the court directing the defendants to account to plaintiff for all damages suffered as a result of their wrongdoing, and costs and disbursements (including attorneys’ and experts’ fees and expenses).

On August 2, 2019, a complaint was filed, captioned Kyle T. Karmazyn v. Del Frisco’s Restaurant Group, Inc., et al., Case No. 1:19-cv-07193 (LAP) (the “Karmazyn Complaint”). The Karmazyn Complaint alleges generally that the Company and the members of its Board of Directors violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by omitting material information from the Proxy Statement and seeks, among other things, an injunction against the Merger unless and until the Company makes additional disclosure of facts in the Proxy Statement relating to the Merger, the court to direct the defendants to account to plaintiff for all alleged damages sustained as a result of their alleged wrongdoing, and costs and disbursements (including attorneys’ and experts’ fees and expenses).

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Credit Commitments

At June 25, 2019 and December 25, 2018, we had outstanding letters of credit of $1.6 million, which were drawn on our 2018 Credit Facility (see Note 7, Long-Term Indebtedness). The letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents information that we believe is relevant to an assessment and understanding of our consolidated financial position and results of operations. This information should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial data included elsewhere in this Quarterly Report. The following information should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 201810-K. Unless the context otherwise indicates, all references to “we,” “our,” “us,” “Del Frisco’s” or the “Company” refer to Del Frisco’s Restaurant Group, Inc. and its subsidiaries.

Overview

Del Frisco’s develops, owns and operates four contemporary and complementary restaurants: Del Frisco’s Double Eagle Steakhouse (“Double Eagle”), Barcelona Wine Bar (“Barcelona”), bartaco, and Del Frisco’s Grille (“Grille”). As of the end of the period covered by this report, we operated 78 restaurants in 17 states and the District of Columbia. Of the 78 restaurants we operated at the end of the period covered by this report, there were 16 Double Eagle restaurants, 17 Barcelona restaurants, 21 bartaco restaurants, and 24 Grille restaurants.

Our Growth Strategies and Outlook. Our growth model is comprised of the following three primary drivers:

•

Disciplined Growth. Our long term target is to grow annual revenues through a combination of annual restaurant growth and comparable restaurant sales growth. We believe that there are significant opportunities to grow our concepts in both existing and new markets, where we believe we can generate attractive unit-level economics, which we view as the most significant driver of future growth. Our real estate process includes partnering with a third party master broker to source potential sites against a set of clear criteria for each brand, working with a third-party spatial analytics company, who have developed a model to determine the most attractive locations for each of our brands and a predictive sales model for specific sites, and a Real Estate Committee, consisting of members of the Board of Directors (the “Board”) and senior management, which visits, assesses and approves each site. While we do not believe it is possible to guarantee every site will meet its expected returns, we expect these processes to increase the probability of a site meeting its financial return on investment hurdles. We believe our concepts’ complementary market positioning and ability to coexist in the same markets, coupled with our flexible unit models and robust site assessment and approval processes, will allow us to expand each of our concepts into a greater number of locations. We will also continue to pursue opportunities to increase the sales at our existing restaurants through menu innovation, relevant and impactful marketing initiatives and loyalty programs, growing private dining and continued focus on enhancing the guest experience.

•

Operating and G&A Leverage. Our long term target is to grow Adjusted EBITDA. We will continue to protect our strong restaurant level margins through operational efficiencies and economies of scale, including purchasing synergies across our concepts. As we open new restaurants our organizational structure will enable us to keep our brand teams focused on individual brand priorities while leveraging our support functions across a larger business, resulting in G&A reducing as a percentage of revenue over time. The Barteca Acquisition greatly enhances our ability to leverage the benefits of scale.


•	Financing Strategies. Our long term target is to reduce our leverage through a combination of disciplined capital expenditures to support our restaurant count growth target and remodel needs, free cash flow generation from revenue growth and operating and G&A leverage, and other financing strategies to reduce our debt.

Our long term target is to grow the Double Eagle, Barcelona and bartaco brands by opening new restaurants. We expect to open no Grilles in 2019 or 2020 as we evaluate the performance of 2018 openings which incorporate lessons learned from our 2017 consulting project. In the first quarter of fiscal 2019, we closed the Chicago, Illinois Double Eagle. It generally takes 9 to 12 months after the signing of a lease or the closing of a purchase to complete construction and open a new restaurant. Additional time is sometimes required to obtain certain government approvals, permits and licenses, such as liquor licenses.

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Performance Indicators. We use the following key metrics in evaluating the performance of our restaurants:

•

Comparable Restaurant Sales Growth. We consider a restaurant to be comparable during the first full fiscal quarter following the eighteenth month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable sales reflect changes in customer count trends as well as changes in average check. Our comparable restaurant base consisted of 59 and 30 restaurants at June 25, 2019 and June 26, 2018, respectively.


•	Average Check. Average check is calculated by dividing total restaurant sales by customer counts for a given time period. Average check is influenced by menu prices and menu mix. Management uses this indicator to analyze trends in customers’ preferences, the effectiveness of menu changes and price increases and per customer expenditures.


•	Average Unit Volume. Average unit volume, or AUV, consists of the average sales of our restaurants over a certain period of time. This measure is calculated by dividing total restaurant sales within a period by the number of restaurants operating during the relevant period. This indicator assists management in measuring changes in customer traffic, pricing and development of our concepts.


•	Customer Counts. Customer counts for Double Eagle and Grille are measured by the number of entrées ordered at our restaurants over a given time period. Barcelona and bartaco customer counts are measured by the number of customers counted in the dining room or on the patio over a given time period.

•

Restaurant-Level EBITDA and Restaurant-Level EBITDA Margin. Restaurant-level EBITDA represents Adjusted EBITDA before general and administrative costs. Adjusted EBITDA represents operating income (loss) before depreciation and amortization, plus the sum of certain non-operating expenses, including pre-opening costs, donations, lease termination costs, acquisition costs, consulting project costs, reorganization severance, impairment charges and insurance settlements. Restaurant-level EBITDA margin is the ratio of Restaurant-level EBITDA to revenues. These non-GAAP operating measures are useful to both management and investors because they represent one means of gauging the overall profitability of our recurring and controllable core restaurant operations for each segment, and all segments at a consolidated level. These measures are not, however, indicative of our overall results, nor does restaurant-level profit accrue directly to the benefit of stockholders, primarily due to the exclusion of corporate-level expenses. See Note 12, Segment Reporting, in the notes to our consolidated financial statements for a reconciliation of restaurant-level EBITDA to operating income at a consolidated level.

Our business is subject to seasonal fluctuations. Historically, the percentage of our annual revenues earned during the first and fourth fiscal quarters has been higher due, in part, to increased gift card redemptions and increased private dining during the year-end holiday season, respectively. As many of our operating expenses have a fixed component, our operating income and operating income margin have historically varied significantly from quarter to quarter. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year.

Recent Events

On August 27, 2018 we amended (“First Amendment”) Term Loan B (“Amended Term Loan B”). The First Amendment amends the 2018 Credit Facility, to, among other things, provide the Company with additional term loans (“Additional Term Loans”) in an aggregate principal amount of $18.0 million. The First Amendment also amended the 2018 Credit Facility to increase the interest rate applicable to the Additional Term Loans and the existing term loans outstanding under the 2018 Credit Facility to, at our

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option, a rate per annum equal to either a LIBOR or a base rate, plus an applicable margin, which is equal to 6.00% for LIBOR rate loans and 5.00% for base rate loans. See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements for information regarding our amended credit facility.

On September 21, 2018, we sold all of the outstanding equity interests in our Sullivan’s Steakhouse business (“Sullivan’s) to Sullivan’s Holding LLC, a Delaware limited liability company and affiliate of Romano’s Macaroni Grill, for the total gross proceeds of approximately $32 million, subject to customary adjustments for inventory and cash.

On February 26, 2019, we entered into the Joinder Agreement with JPMorgan Chase Bank, N.A., as the incremental term lender and JPMorgan Chase Bank, N.A. as the administrative agent. The Joinder Agreement provided the Company with incremental term loan commitments in a principal amount equal to $25.0 million. The Company drew the full amount of the incremental term loans on the date of the Joinder Agreement and received net proceeds of approximately $23.1 million. The Company used the net proceeds of the incremental term loans to repay a portion of the outstanding amounts under its revolving credit facility. Since the repayment does not reduce the commitments under the revolving credit facility, the transaction expanded the Company’s sources of liquidity without increasing leverage at this time. See Note 7, Long-Term Debt in the notes to our condensed consolidated financial statements for information regarding our amended credit facility.

On June 23, 2019, we entered into a definitive agreement to be acquired by affiliates of L Catterton, a consumer-focused private equity firm with over $15 billion of equity capital across six fund strategies in 17 offices globally. Under the terms of the agreement, affiliates of L Catterton will acquire all outstanding shares of the Company’s common stock for a total value of approximately $650 million. Company stockholders will receive $8.00 in cash per share. The Agreement and Plan of Merger, dated as of June 23, 2019, by and among the Company, Harlan Parent, Inc. and Harlan Merger Sub, Inc. was filed as an exhibit to our Current Report on Form 8-K filed with the SEC on June 24, 2019.

Change in Reporting Periods

We operate on a 52- or 53-week fiscal year ending on the last Tuesday of each December and, beginning in fiscal 2018, we changed to a fiscal quarter calendar where each quarter contains 13 weeks, other than in a 53-week year where the last quarter of the year will contain 14 weeks.

Key Financial Definitions

Detailed discussion regarding key financial definitions as they relate to our results of operations can be found in the 2018 10-K.

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Results of Operations

The following table shows our operating results, as well as our operating results as a percentage of revenues for the periods indicated:



	13 Weeks Ended										26 Weeks Ended
(Amounts in thousands)	June 25, 2019					June 26, 2018					June 25, 2019					June 26, 2018
Revenues	$	131,687		100.0	%	$	75,718		100.0	%	$	252,068		100.0	%	$	149,064		100.0	%
Costs and expenses:
Cost of sales	35,873			27.2		21,537			28.4		69,165			27.4		42,754			28.7
Restaurant operating expenses (excluding depreciation and amortization shown separately below)	65,261			49.6		36,337			48.0		127,399			50.5		72,558			48.7
Marketing and advertising costs	2,260			1.7		1,666			2.2		4,512			1.8		3,196			2.1
Pre-opening costs	1,301			1.0		1,403			1.9		4,050			1.6		2,549			1.7
General and administrative costs	17,117			13.0		7,988			10.5		33,489			13.3		15,778			10.6
Donations	163			0.1		16			—		195			0.1		58			—
Consulting project costs	3,450			2.6		621			0.8		7,954			3.2		854			0.6
Acquisition costs	—			—		4,338.0			5.7		—			—		4,946			3.3
Reorganization severance	480			0.4		—			—		777			0.3		113			0.1
Lease termination and closing costs	(1,754		)	(1.3	)	589			0.8		1,154			0.5		591			0.4
Depreciation and amortization	8,144			6.2		4,237			5.6		15,795			6.3		8,372			5.6
Total costs and expenses	132,295			100.5		78,732			104.0		264,490			104.9		151,769			101.8
Operating loss	(608		)	(0.5	)	(3,014		)	(4.0	)	(12,422		)	(4.9	)	(2,705		)	(1.8	)
Other income (expense), net:
Interest, net of capitalized interest	(8,409		)	(6.4	)	(510		)	(0.7	)	(16,129		)	(6.4	)	(814		)	(0.5	)
Other	(32		)	—		(50		)	(0.1	)	(19		)	—		(49		)	—
Loss before income taxes	(9,049		)	(6.9	)	(3,574		)	(4.7	)	(28,570		)	(11.3	)	(3,568		)	(2.4	)
Income tax benefit	(2,651		)	(2.0	)	(2,182		)	(2.9	)	(3,845		)	(1.5	)	(2,181		)	(1.5	)
Loss from continuing operations	(6,398		)	(4.9	)	(1,392		)	(1.8	)	(24,725		)	(9.8	)	(1,387		)	(0.9	)
(Loss) income from discontinued operations, net of tax⁽¹⁾	—			—		(170		)	(0.2	)	—			—		225			0.2
Net loss	$	(6,398	)	(4.9	)%	$	(1,562	)	(2.1	)%	$	(24,725	)	(9.8	)%	$	(1,162	)	(0.8	)%


(1)	Discontinued operations represent the sale of Sullivan's. See Note 3, Dispositions in the in the notes to our condensed consolidated financial statements for information regarding discontinued operations.

Table of Contents

13 Weeks Ended June 25, 2019 Compared to the 13 Weeks Ended June 26, 2018

The following tables show our operating results (in thousands) by segment and on a consolidated basis, as well as our operating results as a percentage of revenues, for the second quarter of 2019 (13 weeks) and 2018 (13 weeks). The tables below include Restaurant-level EBITDA, a non-GAAP measure. See Note 12, Segment Reporting in the notes to our condensed consolidated financial statements for additional information on this metric, including a reconciliation to operating income, the most directly comparable GAAP measure.



	13 Weeks Ended June 25, 2019
	Double Eagle				Barcelona				bartaco				Grille				Consolidated
Revenues	$	49,423	100.0	%	$	21,096	100.0	%	$	28,227	100.0	%	$	32,941	100.0	%	$	131,687	100.0	%
Costs and expenses:
Cost of sales	14,412		29.2		5,612		26.6		6,742		23.9		9,107		27.6		35,873		27.2
Restaurant operating expenses:
Labor	12,056		24.4		6,378		30.2		9,257		32.8		10,337		31.4		38,028		28.9
Operating expenses	5,866		11.9		2,632		12.5		3,648		12.9		4,751		14.4		16,897		12.8
Occupancy	4,292		8.7		1,040		4.9		1,571		5.6		3,433		10.4		10,336		7.8
Restaurant operating expenses	22,214		44.9		10,050		47.6		14,476		51.3		18,521		56.2		65,261		49.6
Marketing and advertising costs	1,292		2.6		226		1.1		108		0.4		634		1.9		2,260		1.7
Restaurant-level EBITDA	$	11,505	23.3	%	$	5,208	24.7	%	$	6,901	24.4	%	$	4,679	14.2	%	$	28,293	21.5	%

Restaurant operating weeks	208				221				270				312				1,011
Average weekly volume	$	238			$	95			$	105			$	106			$	130



	13 Weeks Ended June 26, 2018
	Double Eagle				Barcelona				bartaco				Grille				Consolidated
Revenues	$	43,471	100.0	%	$	—	—	%	$	—	—	%	$	32,247	100.0	%	$	75,718	100.0	%
Costs and expenses:
Cost of sales	12,780		29.4		—		—		—		—		8,757		27.2		21,537		28.4
Restaurant operating expenses:
Labor	9,986		23.0		—		—		—		—		10,199		31.6		20,185		26.7
Operating expenses	5,011		11.5		—		—		—		—		4,395		13.6		9,406		12.4
Occupancy	3,545		8.2		—		—		—		—		3,201		9.9		6,746		8.9
Restaurant operating expenses	18,542		42.7		—		—		—		—		17,795

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Del Frisco's Restaurant Group, Inc. 10-Q