September 2019a holding company reorganization was completed in which Famous Dave's of America, Inc.("FDA") became a wholly owned subsidiary of the new parent holding company named BBQ Holdings, Inc.(" BBQ Holdings"). As used in this Form 10-K, "Company", "we" and "our" refer to BBQ Holdingsand its wholly owned subsidiaries. BBQ Holdingswas incorporated on March 29, 2019under the laws of the State of Minnesota, while FDA was incorporated in Minnesotaon March 14, 1994. We develop, own and operate restaurants under the name "Famous Dave's", "Clark Crew BBQ", "Granite City Food & Brewery" and " Real Urban Barbecue." Additionally, we franchise restaurants under the name "Famous Dave's". As of January 3, 2021, there were 125 Famous Dave's restaurants operating in 31 states, Canada, and the United Arab Emirates, including 27 Company-owned restaurants and 98 franchise-operated restaurants. Included in the Famous Dave's company-owned restaurant total are four restaurants purchased in July 2019in Arizona(" Arizona Restaurants') and four restaurants purchased in March 2019in Colorado(" Colorado Restaurants"). The first Clark Crew BBQ restaurant opened in December 2019in Oklahoma City, Oklahoma. On March 9, 2020, we purchased 18 Granite City Food & Brewery restaurants ("Granite City Acquisition") in connection with a Chapter 11 bankruptcy filing. On March 16, 2020, we purchased one Real Urban Barbecuerestaurant located in Vernon Hills, Illinois. In October 2020, we signed a 25-unit development agreement with Bluestone Hospitality Group("Bluestone") whereby Bluestone will open Famous Dave's ghost kitchens and dual restaurant concepts with the Johnny Carino's
Italian brand. 27 Table of Contents
Impact of the COVID-19 virus on our business
March 2020, the World Health Organizationdeclared the outbreak of a novel coronavirus ("COVID-19") as a pandemic and the United Statesdeclared a National Public Health Emergency. As a result, public health measures were taken to minimize exposure to the virus. These measures, some of which are government-mandated, were implemented globally resulting in a dramatic decrease in economic activity. "Stay-at-home" orders with the exception of conducting certain essential functions, quarantines, travel restrictions and other governmental restrictions to reduce the spread of COVID-19 have had an adverse impact on our company's business. From mid-March through April, all of our Company-owned restaurants operated on a take-away, mobile pick-up and delivery basis only in order to protect its employees and customers from the spread of the COVID-19 pandemic and to comply with the government mandates. Beginning in May, we gradually began opening our restaurants for dine-in at 25% to 50% capacity pursuant to the regulations of the jurisdictions in which we operate. While all but one of our Company-owned restaurants began operating under limited-capacity in-store dining by mid-June 2020, in late October, some locations were required to reduce or eliminate in-store dining due to new COVID restrictions (Note 1 Nature of Business and Significant Accounting Policies). Due to the rapid development and fluidity of this situation, we cannot determine the ultimate impact that the COVID-19 pandemic will have on our consolidated financial condition, liquidity, and future results of operations.
Our fiscal year ends on the Sunday nearest to
December 31stof each year. Our fiscal year is generally 52 weeks; however, it periodically consists of 53 weeks. The fiscal year ended January 3, 2021(fiscal 2020) consisted of 53 weeks while the fiscal year ended December 29, 2019(fiscal 2019) consisted of 52 weeks.
The financial results presented and discussed herein reflect our results and the results of our wholly-owned and majority-owned consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform to the current year's presentation.
Application of accounting methods and critical estimates
The following discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities and expenses, and related disclosures. On an on-going basis, management evaluates its estimates and judgments. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by customers and other outside sources and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. Our management believes the following critical accounting policies reflect its more significant judgments and estimates used in the preparation of our consolidated financial statements. Our company's significant accounting policies are described in Note 1 Nature of Business and Significant Accounting Policies to the consolidated financial statements included herein. We have discussed the development and selection of the following critical accounting policies with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures relating to such policies in this Management's Discussion and Analysis of Financial Condition and Results of
Operations. 28 Table of Contents
Recognition of franchise-related income
We recognize franchise fee revenue on a straight-line basis over the life of the related franchise agreements and any exercised renewal periods. Cash payments are due upon the opening of a new restaurant or upon the execution of a renewal of the related franchise agreement. Our performance obligation with respect to franchise fee revenues consists of a license to utilize our brand for a specified period of time, which is satisfied equally over the life of each franchise agreement. Area development fees are deferred until a new restaurant is opened pursuant to the area development agreement, at which time revenue is recognized on a straight-line basis over the life of the franchise agreement. Cash payments for area development agreements are typically due when an area development agreement has been executed. Gift card breakage revenue is recognized proportionately as gift cards are redeemed utilizing an estimated breakage rate based on our historical experience. Gift card breakage revenue is reported within the licensing and other revenue line item of the consolidated statements of operations. The Company reports contributions from franchisees to our company's system-wide
Public Relations and Marketing Development Fund(the "NAF") on a gross basis within the franchisee national advertising fund contributions line item on the consolidated statements of operations.
Costs and expenses
Restaurant costs and expenses include, among other items, food and beverage costs; labor and benefits costs; operating expenses, which include occupancy costs, repair and maintenance costs, supplies and advertising and promotion. Certain of these costs and expenses are variable and will increase or decrease with sales volume. The primary fixed costs are restaurant management salaries and occupancy costs. Our experience is that when a new restaurant opens, it incurs higher than normal levels of labor and food costs until operations stabilize, usually during the first three to six months of operations. As restaurant management and staff gain experience following a restaurant's opening, labor scheduling, food cost management and operating expense control typically improve to levels similar to those at our more established restaurants.
General and administrative expenses
General and administrative expenses include all corporate and administrative functions, other than marketing and digital services. Salaries and benefits, legal fees, accounting fees, professional consulting fees, travel, rent and general insurance are major items in this category. Additionally, we record expense for managers-in-training ("MITs") in this category. 29
Impairment of assets, estimated lease termination and other closing costs
We evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired, the loss is measured by the amount by which the carrying amount of the restaurant site exceeds its fair value. Fair value is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms, discount rate and other factors. If these assumptions change in the future, we may be required to take additional impairment charges for the related assets. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates. Restaurant sites that are operating, but have been previously impaired, are reported at the lower of their carrying amount or fair value less estimated costs to sell.
We lease the property for our corporate headquarters, most of our Company-owned stores, and certain office and restaurant equipment. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of use ("ROU") assets, current portion of operating lease liabilities, and operating lease liabilities in its consolidated balance sheets. ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term, including any renewal options where the renewal is reasonably assured at the commencement date. Because most of our leases do not provide an implicit rate of return, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Operating lease ROU assets also exclude lease incentives received. Where we are the lessee, at initial adoption, we have elected to account for non-lease components associated with its leases (e.g., common area maintenance costs) and lease components separately for substantially all of its asset classes. Subsequent to adoption we will combine lease and non-lease components. We account for construction allowances by recording a receivable when its collectability is considered probable, and relieve the receivable once the cash is obtained from the landlord. We depreciate the leasehold improvements over the lesser of their useful lives or the full term of the lease, including renewal options and build-out periods. We record rent expense during the build-out period and classify this expense in pre-opening expenses in our consolidated statements of operations. Liquor licenses
We own transferable liquor licenses in jurisdictions with a limited number of authorized liquor licenses. These licenses are capitalized as indefinite-lived intangible assets and are included in intangible assets, net in our consolidated balance sheets. We review annually these liquor licenses for impairment. Additionally, the costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are expensed as incurred. Annual liquor license renewal fees are recognized in expense over
the renewal term. Accounts receivable, net We provide an allowance for uncollectible accounts on accounts receivable based on historical losses and existing economic conditions, when relevant. We provide for a general bad debt reserve for franchise receivables due to increases in days sales outstanding for which no payment plan or other payment arrangement exists. This general reserve is based on the aging of receivables meeting specified criteria and is adjusted each quarter based on past due receivable balances. Additionally, we have periodically established a specific reserve on certain receivables as necessary on a case-by-case basis. Any changes to the reserve are recorded in general and administrative expenses. In fiscal 2020, we recorded approximately
$403,000in bad debt related to the discount we offered franchisees on deferred payments remitted prior to June 30, 2020as described in Note 1 Nature of Business and Significant Accounting Policies to the financial statements. Exclusive of that one-time adjustment, accounts receivable balances written off have not exceeded allowances provided. We believe all accounts receivable in excess of the allowance are fully collectible. If accounts receivable in excess of provided allowances are determined uncollectible, they are charged to expense in the period that 30
determination is made. In assessing recoverability of these receivables, we make judgments regarding the financial condition of the franchisees based primarily on past and current payment trends, as well as other variables, including annual financial information, which franchisees are required to submit to us.
Beginning in fiscal 2019, we were required to adopt ASU 2018-17- Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. See Note 1 Nature of Business and Significant Accounting Policies to the accompanying financial statements for more information. We recognize compensation expense for share-based awards granted to team members based on their fair values at the time of grant over the requisite service period. Additionally, our board members receive share-based awards for their board service. Our pre-tax compensation expense for stock options and other incentive awards is included in general and administrative expenses in our consolidated statements of operations.
We provide for income taxes based on our estimate of federal and state income tax liabilities. These estimates include, among other items, effective rates for state and local income taxes, allowable tax credits for items such as taxes paid on reported tip income, estimates related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items. Our estimates are based on the information available to us at the time that we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state, and local governments, generally years after the tax returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. Accounting for uncertain tax positions requires significant judgment including estimating the amount, timing, and likelihood of ultimate settlement. Although we believe that our estimates are reasonable, actual results could differ from these estimates. Additionally, uncertain positions may be re-measured as warranted by changes in facts or law.
Operating results – Fiscal 2020 compared to 2019
The following table presents items in our consolidated statements of operations as a percentage of net restaurant sales or total revenue, as indicated, for
the periods presented: Year Ended January 3, 2021 December 29, 2019 Food and beverage costs(1) 30.9 % 31.4 % Labor and benefits costs(1) 34.0 % 35.8 % Operating expenses(1) 33.8 % 32.9 % Restaurant level operating margin(1)(3) 1.3 % (0.1) % Depreciation and amortization expenses(2) 4.2 % 2.7 % General and administrative expenses(2) 11.9 % 13.2 % (Loss) income from operations(2) (9.2) %
(1) As a percentage of restaurant sales, net
(2) As a percentage of total sales
(3) The current operating margin at restaurant level is equal to restaurant sales, net,
less food and beverage costs, labor and benefit costs, and operating expenses. 31 Table of Contents Total Revenue
Our components and changes in our revenues included the following for the years ended
Year Ended (dollars in thousands) January 3, 2021 December 29, 2019 $ Change % Change Revenue: Restaurant sales, net $ 109,544 $ 68,564
$ 40,98059.8 %
Franchise royalty and fee revenue 8,919 12,126 (3,207) (26.4) % Franchisee national advertising fund contributions 1,124 1,616 (492) (30.4) % Licensing and other revenue 1,850 1,249 601 48.1 % Total revenue $ 121,437 $ 83,555
$ 37,88245.3 %
The increase in year-over-year restaurant sales for the year ended
January 3, 2021as compared to the year ended December 29, 2019was primarily a result of the net increase of 14 full service Company-owned restaurants during fiscal 2020, as a result of the acquisition of the Arizona Restaurants, Colorado Restaurantsand the Granite City Acquisition. Same store net sales for Company-owned restaurants for fiscal year 2020, decreased 8.5% compared to fiscal year 2019. It is our policy to include in our same store net sales base, restaurants that have been open for 12 months under our company's ownership. On a weighted basis, for the year ended January 3, 2021, dine-in sales decreased by 46.3% while to-go sales increased by 72.6% driven by third-party delivery sales and curb-side pickup due to the unavailability of dine-in options as a result of the COVID-19 pandemic. Catering same store sales decreased 54.6% for fiscal year 2020 compared to fiscal year 2019 as a result of group activities being eliminated or reduced in capacity as a result of the COVID-19 pandemic. We have been making significant investments in programs aimed at increasing to-go and catering sales at all our BBQ Holdingsrestaurants. We have rolled out delivery programs with various third-party services, which we believe, along with online ordering, will continue to augment our to-go and catering sales in the future. We believe our focus on to-go enables us to capture a greater portion of the "take-out" market by allowing consumers to "trade within our brands," when dining in is not always an option. We believe that these innovations will provide additional avenues for our franchisees to grow their respective businesses. The decrease in year-over-year franchise-related revenue was primarily due to the elimination of the dine-in option for our guests in much of fiscal year 2020 due to state regulations caused by the pandemic. Licensing and other revenue, which is primarily derived from retail sales of Famous Dave's branded sauces, rubs, Real Urban Barbeque consumer packaged goods, and the sale of raw brewing products produced at the Granite City brewing facility increased approximately $601,000in fiscal 2020 over fiscal year 2019.
The following table shows the average weekly net sales held and operated by a franchise for the periods presented:
Year Ended January 3, 2021 December 29, 2019 Average Weekly
Net Sales(AWS): Franchise-Operated(1) $ 42,612 $ 51,432 Company-Owned 44,093 47,642
(1) AWS for franchised restaurants is not recognized as company-owned
revenues and are not included in our consolidated financial statements. We
estimate that the disclosure of average weekly net sales and weeks of operation
franchised restaurants provide useful information to investors
because the historical performance and trends of
directly to the trends in franchise royalty income we receive from these
franchisees and impact the perceived success and value of the barbecue
Brand Holdings. It also provides a
32 Table of Contents
comparison against which management and investors can analyze the extent to which
which company-owned restaurants are realizing their income potential.
Food and Beverage Costs
Our food and beverage costs included the following for completed exercises
Year Ended (dollars in thousands) January 3, 2021 December 29, 2019 $ Change % Change Food and beverage costs $ 33,867 $ 21,541
$ 12,32657.2 % Food and beverage costs for the fiscal years ended January 3, 2021and December 29, 2019represented approximately 30.9% and 31.4% of net restaurant sales, respectively. This year-over-year decrease, as a percentage of net restaurant sales, was a result of the reduction of menu items offered as the restaurants reacted to the increase in to-go business and limited in-store dining due to COVID-19 restrictions. Labor and Benefits Costs
Our labor and benefit costs consisted of the following for the completed years
(dollars in thousands)
$ 12,66351.5 % Labor and benefits costs for the fiscal years ended January 3, 2021and December 29, 2019were approximately 34.0% and 35.8% of net restaurant sales, respectively. The year-over-year decrease during the year ended January 3, 2021, as a percentage of net restaurant sales, was driven by in part by a concerted effort by management to increase efficiency at the restaurants and in part by the decrease in labor needed as dining room closures were mandated as a result of COVID-19. The Company furloughted approximately 77% of its workforce as
a means to control labor costs. Operating Expenses
Our operating expenses consist of the following items for the years ended
Year Ended (dollars in thousands) January 3, 2021 December 29, 2019 $ Change % Change Operating expenses $ 36,984 $ 22,555
$ 14,42964.0 %
Operating expenses for the fiscal years ended
January 3, 2021and December 29, 2019were approximately 33.8% and 32.9% of net restaurant sales, respectively. This year over year increase in expense as a percentage of net restaurant sales was due primarily to the reduced revenue resulting from the effects of COVID-19.
Depreciation and amortization
Depreciation and amortization expense for the fiscal years ended
January 3, 2021and December 29, 2019was approximately $5.1 millionand $2.2 million, respectively, representing approximately 4.2% and 2.7% of total revenues, respectively. Depreciation and amortization expense increased during the year ended January 3, 2021primarily as a result of the addition of Company-owned restaurants. 33 Table of Contents
General and administrative expenses
Our general and administrative expenses consisted of the following for the fiscal years presented: Year Ended (dollars in thousands) January 3, 2021 December 29, 2019 $ Change % Change General and administrative expenses $ 14,395 $ 10,992
$ 3,40331.0 %
General and administrative expenses for the years completed
Impairment of assets, estimated lease termination and other closing costs
Here is a summary of asset impairment, estimated lease termination and other closing costs we incurred for the periods presented:
Year Ended (dollars in thousands) January 3, 2021 December 29, 2019 Asset impairments, net $ 5,532 $ 282 Lease termination charges and related costs 169 926 Restaurant closure expenses (18) 88
Impairment of assets, estimated lease termination fees $ 5,683
and other closing costs
During fiscal year 2020, we closed five Company-owned stores compared to four Company-owned stores in fiscal year 2019. In addition to the five locations we closed in fiscal year 2020, we impaired the assets of four under-performing locations. These charges represented the write-offs of the impaired assets, as well as the net assets of closed restaurants, lease termination charges incurred with the early termination of leases, and ongoing costs incurred related to closed restaurants.
Total other income (expenses)
Total other expense for the fiscal years ended
January 3, 2021and December 29, 2019included interest expense of $805,000and $494,000, respectively. These expenses were partially offset by interest income of approximately $154,000and $215,000during the fiscal years ended January 3, 2021and December 29, 2019, respectively. The increase in interest expense was primarily related to the increase in outstanding debt related to borrowings for the Granite City Acquisition and the PPP Loans obtained as a result of the effects of COVID-19 on our business (Note 8 Long-term Debt). In fiscal year 2020, we recorded a gain on bargain purchase in conjunction with the Granite City acquisition in the amount of $13.2 million(Note 2 Restaurant Acquisition).
Income tax benefit for the year ended
January 3, 2021and December 29, 2019was $2.8 millionand $659,000, respectively. This represents an effective tax rate of (132.7)% and 52.2%, respectively. The decrease in our effective tax rate primarily relates to the bargain purchase gain recognized on the Granite City Acquisition (Note 2 Restaurant Acquisition). 34
Basic and diluted net earnings (loss) per common share
Our basic and diluted net income per common share for the year ended
January 3, 2021was $0.54per share. Basic and diluted net loss per common share for the year ended December 29, 2019was $0.07per share. For the year ended January 3, 2021, we had basic and diluted weighted-average shares outstanding of approximately 9,155,000 and 9,168,000, respectively. For the year ended December 29, 2019, we had basic and diluted weighted-average shares outstanding of approximately 9,099,000.
Financial situation, liquidity and capital resources
Our balance of cash and cash equivalents was approximately
$19.6 millionand $6.1 millionat January 3, 2021and December 29, 2019, respectively. During fiscal year 2020, we drew approximately $8.1 millionon our loan agreement with Choice Financial Groupand received approximately $14.0 millionin PPP Loans (Note 8 Long-Term Debt). We used cash to purchase one Real Urban Barbeque restaurant in Illinoisand 18 Granite City restaurants in 11 states (Note 2 Restaurant Acquisition). We expect to utilize cash on hand to reinvest in our brand and the evolution of our company. Our current ratio, which measures our immediate short-term liquidity, was 1.1 at January 3, 2021compared with 1.0 as of December 29, 2019. The current ratio is computed by dividing total current assets by total current liabilities. Net cash provided by operating activities for the year ended January 3, 2021was $2.1 million, which reflects net income of approximately $4.3 millionreduced primarily by the $13.2 millionnon-cash bargain purchase gain on the Granite City Acquisition and increased by non-cash charges of approximately $12.3 millionprimarily due to depreciation and amortization, stock-based compensation, asset impairment/lease termination charges and bad debt expense. Changes in operating assets for the fiscal year ended January 3, 2021primarily included cash outflows from a net increase in prepaids and other assets of $1.3 million, offset in part by cash inflows from the increase of accounts payable and other liabilities of $4.7 million. Net cash provided by operating activities for the year ended December 29, 2019was approximately $2.6 million, which reflects net loss from continuing operations of approximately $1.2 million, increased by non-cash charges of approximately $3.7 millionprimarily due to depreciation and amortization, stock-based compensation and asset impairment/lease termination charges. Changes in operating assets and liabilities for the year ended December 29, 2019primarily included net cash outflows related to accounts receivable and other current assets of $2.0 millionoffset in part by cash inflows of $2.1related to accounts payable and other liabilities. Net cash used by investing activities for the year ended January 3, 2021was $6.0 millionrelated to payments for acquired restaurants of $5.4 millionand the purchase of property, equipment and leasehold improvements of $3.5 million, net of proceeds from the sale of our Coon Rapids, Minnesotalocation. Net cash used by investing activities for the year ended December 29, 2019was $13.0 millionprimarily related to the acquisition of the Colorado Restaurantsand Arizona Restaurants. Net cash provided by financing activities in fiscal year 2020 was $17.4 millionwhich was related to the proceeds from our loan with Choice Bankand the proceeds from our PPP Loans, offset in part by payments on our long-term debt. Proceeds from our loan with Choice Bankwere used to fund acquisitions while the funds from the PPP Loans were used to fund operations.
The net cash provided by financing activities during the 2019 financial year was
mainly from the proceeds of a loan agreement with
We are subject to various financial and non-financial covenants on our long-term debt, including a debt-service coverage ratio. As of
January 3, 2021, we were in compliance with all of our covenants. 35
March 2020, the World Health Organizationdeclared coronavirus COVID-19 a global pandemic. COVID-19 pandemic has caused a disruption to our business. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report, and due to the rapid development and fluidity of the situation, we are not able to determine the ultimate impact it will have on our financial condition. We have taken measures to mitigate our downturn in sales, including reducing labor and renegotiating rents on our restaurant properties. Additionally, the proceeds from our PPP Loans have been used to fund operations. Although we have filed for forgivness of these loans, we have not yet heard from the Small Business Administration. There can be no assurance that any portion of the PPP Loans will be forgiven and we would not be required to repay the PPP Loans in full. Interest and principal payments under the PPP Loans will continue to be deferred until such time the amount of forgiveness is determined.
The following is a summary of our contractual obligations as of
January 3, 2021. Our PPP Loans are scheduled to be repaid in fiscal year 2022, however, we have applied for forgiveness of such loans but have not yet heard from the Small Business Administration(Note 8 Long-Term Debt): (in thousands) Total 2021 2022 2023 2024 2025 Thereafter Term Loan $ 10,403 $ 2,111 $ 2,220 $ 2,335 $ 2,457 $ 1,280$ - PPP Loans 13,957 - 13,957 - - - - Operating Lease Obligations 91,261 9,674 9,978 9,617 8,608 8,254 45,130 Total $ 115,621 $ 11,785 $ 26,155 $ 11,952 $ 11,065 $ 9,534 $ 45,130
Off-balance sheet arrangements
Our company does not have any off-balance sheet arrangements (as that term is defined in point 303 of the SK Regulation) which are reasonably likely to have a current or future effect on our financial position or changes in the financial position, operating results or liquidity.
January 3, 2021, we had cumulative state net operating loss carry-forwards for tax reporting purposes of approximately $26.8 millionand federal net operating loss carry-forwards for tax reporting purposes of $10.9 millionwhich, if not used, will begin to expire in fiscal 2021 and 2038, respectively.
Recent accounting advice not yet adopted
December 2019, the Financial Accounting Standards Board("FASB") issued Update 2019-12, Income Taxes ("Topic 740") as part of its Simplification Initiative. This guidance provides amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for annual and interim reporting periods beginning after December 15, 2020, and early adoption is permitted. We plan to adopt during the first quarter of 2021, and we expect an immaterial impact to the consolidated financial statements. We reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a significant impact on our consolidated financial statements.
The primary inflationary factors affecting our operations include food, beverage and labor costs. In addition, our leases require us to pay taxes, maintenance, repairs and utilities and these costs are subject to inflationary increases. 36 Table of Contents In some cases, some of our lease commitments are tied to consumer price index ("CPI") increases. We are also subject to interest rate changes based on market conditions. While we have taken steps to enter into agreements for some of the commodities used in our restaurant operations, there can be no assurance that future supplies and costs for such commodities will not fluctuate due to weather or other market conditions outside of our control. Many of our restaurant employees are paid hourly rates subject to the federal, state or local minimum wage requirements. Numerous state and local governments have their own minimum wage and other regulatory requirements for employees that are generally greater than the federal minimum wage and are subject to annual increases based on changes in their local consumer price indices. Additionally, certain operating and other costs, including health benefits in compliance with the Patient Protection and Affordable Care Act, taxes, insurance, COVID-19 pandemic related benefits, and other outside services continue to increase with the general level of inflation and may also be subject to other cost and supply fluctuations outside of our control. While we have been able to partially offset inflation and other changes in the costs of key operating resources by adjusting menu prices, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. At times, competitive conditions and macroeconomic conditions that impact consumer discretionary spending may limit our menu pricing flexibility. There can be no assurance that we will continue to generate increases in comparable restaurant sales in amounts sufficient to offset inflationary or other cost pressures.
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