Document

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 26, 2018
OR
¨
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 
dfrglogoa01.jpg
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)
 
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 and posted on its corporate Web site, if any, 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 and post 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. 
Large accelerated filer
¨
 
  
Accelerated filer
 
x
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨

 
 
 
Emerging growth company
 
¨
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 24, 2018, the latest practicable date, 20,382,822 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.


Table of Contents

DEL FRISCO’S RESTAURANT GROUP, INC.
FORM 10-Q

INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i

Table of Contents

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 customer information;
the Barteca acquisition (as described herein), and
other factors described in "Item 1A. Risk Factors" set forth in our Annual Report on Form 10-K for the year ended December 26, 2017 (the "2017 Annual Report"), and in our Quarterly Report on Form 10-Q for the quarter ended March 27, 2018.
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.

1

Table of Contents

PART I
FINANCIAL INFORMATION
Item 1.    Financial Statements (Unaudited)

2

Table of Contents

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets—Unaudited
 
As of
(Amounts in thousands, except share data)
June 26, 2018
 
December 26, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
897

 
$
4,594

Inventory
18,238

 
18,029

Income taxes receivable
39

 
3,369

Lease incentives receivable
9,363

 
1,739

Prepaid expenses and other assets
6,789

 
9,272

Total current assets
35,326

 
37,003

Property and equipment:
 
 
 
Leasehold improvements
235,443

 
203,818

Furniture, fixtures, and equipment
73,966

 
76,369

Property and equipment, gross
309,409

 
280,187

Less accumulated depreciation
(108,159
)
 
(104,832
)
Property and equipment, net
201,250

 
175,355

Goodwill
62,157

 
62,241

Intangible assets, net
36,944

 
37,000

Deferred income taxes
2,043

 

Other assets
15,402

 
15,188

Total assets
$
353,122

 
$
326,787

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Cash overdraft
$
4,655

 
$

Accounts payable
16,022

 
13,941

Deferred revenue
13,116

 
17,646

Sales tax payable
1,978

 
3,314

Accrued payroll
7,342

 
7,415

Current portion of deferred rent obligations
5,998

 
4,440

Other current liabilities
4,815

 
5,076

Total current liabilities
53,926

 
51,832

Noncurrent liabilities:
 
 
 
Long-term debt
40,476

 
24,477

Obligation under capital lease
826

 

Deferred rent obligations
55,010

 
44,830

Deferred income taxes, net

 
3,238

Other liabilities
12,685

 
13,323

Total liabilities
162,923

 
137,700

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding at June 26, 2018 or December 26, 2017

 

Common stock, $0.001 par value, 190,000,000 shares authorized, 24,504,805 shares issued and 20,382,822 shares outstanding at June 26, 2018 and 24,420,490 shares issued and 20,309,341 shares outstanding at December 26, 2017
24

 
24

Treasury stock at cost: 4,121,983 and 4,111,149 shares at June 26, 2018 and December 26, 2017, respectively
(67,823
)
 
(67,823
)
Additional paid in capital
149,478

 
147,503

Retained earnings
108,520

 
109,383

Total stockholders' equity
190,199

 
189,087

Total liabilities and stockholders' equity
$
353,122

 
$
326,787

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) — Unaudited
໿

13 Weeks Ended(1)
 
12 Weeks Ended(1)
 
26 Weeks Ended(1)
 
24 Weeks Ended(1)
(Amounts in thousands, except per share data)
June 26, 2018
 
June 13, 2017
 
June 26, 2018
 
June 13, 2017
Revenues
$
90,040

 
$
82,301

 
$
179,343

 
$
166,191

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
25,956

 
23,433

 
52,110

 
47,214

Restaurant operating expenses (excluding depreciation and amortization shown separately below)
43,407

 
40,388

 
87,622

 
81,280

Marketing and advertising costs
1,997

 
1,618

 
4,016

 
2,918

Pre-opening costs
1,403

 
1,619

 
2,549

 
2,008

General and administrative costs
8,502

 
5,765

 
16,834

 
12,076

Donations
16

 

 
58

 

Consulting project costs
622

 
597

 
854

 
2,633

Acquisition and disposition costs
4,358

 

 
5,015

 

Reorganization severance

 
719

 
113

 
719

Lease termination and closing costs
1,023

 
540

 
1,389

 
538

Impairment charges

 

 
84

 

Depreciation and amortization
5,293

 
4,997

 
10,475

 
9,813

Total costs and expenses
92,577

 
79,676

 
181,119

 
159,199

Insurance settlements

 
308

 

 
348

Operating income (loss)
(2,537
)
 
2,933

 
(1,776
)
 
7,340

Other income (expense), net:
 
 
 
 
 
 
 
Interest, net of capitalized interest
(510
)
 
(9
)
 
(813
)
 
(19
)
Other  
(50
)
 
(10
)
 
(49
)
 
(11
)
Income (loss) before income taxes
(3,097
)
 
2,914

 
(2,638
)
 
7,310

Income tax expense (benefit)
(1,535
)
 
824

 
(1,476
)
 
1,910

Net income (loss)
$
(1,562
)
 
$
2,090

 
$
(1,162
)
 
$
5,400


 
 
 
 
 
 
 
Net income (loss) per average common share:
 
 
 
 
 
 
 
Basic
$
(0.08
)
 
$
0.10

 
$
(0.06
)
 
$
0.24

Diluted
$
(0.08
)
 
$
0.09

 
$
(0.06
)
 
$
0.24


 
 
 
 
 
 
 
Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
20,377

 
21,722

 
20,347

 
22,391

Diluted
20,377

 
22,061

 
20,347

 
22,720


 
 
 
 
 
 
 
Comprehensive income (loss)
$
(1,562
)
 
$
2,090

 
$
(1,162
)
 
$
5,400

(1)
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. Previously, the first three quarters of our fiscal year consisted of 12 weeks each and the fourth quarter consisted of 16 weeks or 17 weeks in a 53-week year. The second quarter ended June 26, 2018 contained 13 weeks, the quarter ended June 13, 2017 contained 12 weeks, the first two quarters ended June 26, 2018 contained 26 weeks and the first two quarters ended June 13, 2017 contained 24 weeks. See Note 1, Business and Basis of Presentation in the notes to our consolidated financial statements included in our quarterly report on Form 10-Q for the quarter ended June 26, 2018.
See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity—Unaudited

Common Stock
 
 
 
 
 
 
 
 
(Amounts in thousands)
Shares
 
Par Value
 
Additional Paid
In Capital
 
Treasury Stock
 
Retained Earnings
 
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 loss

 

 

 

 
(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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Table of Contents

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows—Unaudited
໿

26 Weeks Ended(1)
 
24 Weeks Ended(1)
(Amounts in thousands)
June 26, 2018
 
June 13, 2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(1,162
)
 
$
5,400

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
10,475

 
9,813

Loss on disposal of restaurant property
55

 
13

Loan cost amortization

 
3

Equity based compensation
2,098

 
1,327

Impairment charges
84

 

Deferred income taxes
(5,281
)
 
(878
)
Amortization of deferred lease incentives
(841
)
 
(158
)
Changes in operating assets and liabilities:
 
 
 
Inventory
(209
)
 
175

Lease incentives receivable
1,156

 

Prepaid expenses and other assets
2,483

 
5,281

Insurance settlement

 
594

Accounts payable
(1,079
)
 
(2,947
)
Income taxes
3,330

 
2,630

Deferred rent obligations
3,799

 
(172
)
Deferred revenue
(4,231
)
 
(4,900
)
Other liabilities
(2,375
)
 
(1,106
)
Net cash provided by operating activities
8,302

 
15,075

Cash flows from investing activities:
 
 
 
Insurance settlement for property and equipment

 
535

Purchases of property and equipment
(32,330
)
 
(21,192
)
Other investing activities
(179
)
 
31

Net cash used in investing activities
(32,509
)
 
(20,626
)
Cash flows from financing activities:
 
 
 
Cash overdraft
4,655

 

Payments on revolving credit facility

 
(13,000
)
Proceeds from revolving credit facility
16,500

 
35,750

Principal payments of capital lease obligation
(21
)
 

Payments on loan against deferred compensation investments
(501
)
 

Purchases of treasury stock

 
(29,940
)
Cash tax payment for share-based awards
(175
)
 
(183
)
Proceeds from exercise of stock options
52

 
447

Net cash provided by (used in) financing activities
20,510

 
(6,926
)
Net change in cash and cash equivalents
(3,697
)
 
(12,477
)
Cash and cash equivalents at beginning of period
4,594

 
14,622

Cash and cash equivalents at end of period
$
897

 
$
2,145

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
471

 
$
70

Income taxes
$
945

 
$
406

Non cash investing and financing activities:
 
 
 
Capital expenditures included in accounts payable at end of period
$
7,087

 
$
1,610

Tenant improvement allowance receivables
$
8,780

 
$

Capital lease
$
887

 
$

Cumulative effect adjustment
$
299

 
$

(1)
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. Previously, the first three quarters of our fiscal year consisted of 12 weeks each and the fourth quarter consisted of 16 weeks or 17 weeks in a 53-week year. The second quarter ended June 26, 2018 contained 13 weeks, the quarter ended June 13, 2017 contained 12 weeks, the first two quarters ended June 26, 2018 contained 26 weeks and the first two quarters ended June 13, 2017 contained 24 weeks. See Note 1, Business and Basis of Presentation in the notes to our consolidated financial statements included in our quarterly report on Form 10-Q for the quarter ended June 26, 2018.
See accompanying notes to condensed consolidated financial statements.

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Table of Contents

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements—Unaudited
໿
1. Business and Basis of Presentation
As of June 26, 2018, Del Frisco’s Restaurant Group, Inc. ("we," "us," "our," or the “Company”) owned and operated 50 restaurants under the concept names of Del Frisco’s Double Eagle Steakhouse (“Double Eagle”), Sullivan’s Steakhouse (“Sullivan’s”), and Del Frisco’s Grille (“Grille”). Of the 50 restaurants we operated at the end of the period covered by this report, there were 13 Double Eagle restaurants, 23 Grille restaurants and 14 Sullivan’s restaurants in operation in 21 states and the District of Columbia.
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 ended and the 26 weeks ended June 26, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 25, 2018. 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 26, 2017 filed with the SEC on March 27, 2018 (the “2017 10-K”).
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. Previously, the first three quarters of our fiscal year consisted of 12 weeks each and the fourth quarter consisted of 16 weeks or 17 weeks in a 53-week year. The fiscal quarter ended June 26, 2018 contained 13 weeks and quarter ended June 13, 2017 contained 12 weeks and are referred to herein as the second quarter of 2018 and the second quarter of 2017, respectively. The first two quarters ended June 26, 2018 contained 26 weeks and the first two quarters ended June 13, 2017 contained 24 weeks and are referred to herein as the first two quarters of 2018 and the first two quarters of 2017, respectively. Fiscal 2018 will be a 52-week fiscal year as was fiscal 2017. 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.
As a result of the change in our calendar, our second quarter 2018, which began on March 28, 2018, had 91 days of activity, 7 more days than our second quarter 2017, which began on March 22, 2017 and had 84 days of activity. While our 2017 and 2018 full fiscal years will have the same number of days, our 2018 first quarter had 7 additional days, our 2018 third quarter will have 7 additional days, and our 2018 fourth quarter will have 21 fewer days than the corresponding periods in 2017. As a result, our first two quarters of 2018 had 14 more days than our first two quarters of 2017.

We have not restated and do not plan to restate previously filed 2017 quarterly financial statements prepared in accordance with GAAP because no information other than revenues, including certain recurring expense items, such as costs of sales, restaurant operating expenses, marketing and advertising cost, pre-opening costs, general and administrative costs and depreciation and amortization, and cash flow, necessary to restate operations are available on a daily or weekly basis. Because we rely on this information in the preparation of our financial statements, the unavailability thereof made restating our financial statements in accordance with GAAP impracticable. Accordingly, the corresponding first and second quarter 2017 historical operating results are not comparable to our first and second quarter 2018 results.
If we used our revised quarterly reporting period in the prior year, revenues would have been $89.6 million and $180.1 million during the 13 weeks period ended June 27, 2017 and the 26 weeks period ended June 27, 2017, respectively.
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.
Except for our accounting policies impacted by our adoption of Topic 606 discussed below, there have been no material changes to the significant accounting policies from what was previously reported in the 2017 10-K.

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Table of Contents

Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, and issued subsequent amendments to the initial guidance to provide additional clarification on specific topics (“Topic 606”). Topic 606 provides a comprehensive revenue recognition model requiring companies to recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The Company adopted Topic 606 as of December 27, 2017 by applying the cumulative effect transition method. Based on our evaluation of our revenue streams, the Company has determined that there was not a material impact as of the date of adoption between the new revenue standard and how we previously recognized revenue, and therefore the adoption did not have a material effect on our consolidated financial statements. The primary item affected by the adoption of Topic 606 was the deferred revenue from our loyalty program. While we do not anticipate changes to this revenue stream to be material, as stated above, we do expect to recognize income from this revenue stream earlier than it was previously recognized under the prior guidance, by bifurcating the performance obligations associated with our loyalty program. As a result of adopting Topic 606, the cumulative effect to our retained earnings was approximately $0.3 million, net of tax effect. For other revenue streams, there was no material change in the timing of revenue recognition as our accounting policies under the prior guidance was materially consistent with Topic 606.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) ("ASU 2016-15") – Classification of Certain Cash Receipts and Cash Payments. This ASU is intended to clarify the presentation of cash receipts and payments in specific situations. The amendments in this update were effective for financial statements issued for annual periods that begun after December 15, 2017, including interim periods within those annual periods, and early application was permitted. An entity should apply ASU 2016-15 using a retrospective transition method to each period presented. We adopted ASU 2016-15 beginning in fiscal 2018. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) ("ASU 2016-18") – Restricted Cash, which outlines that a statement of cash flows explains the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 was effective for public business entities for annual periods, including interim periods within those annual periods, that begun after December 15, 2017, and early application was permitted. An entity should apply ASU 2016-18 using a retrospective transition method to each period presented. We adopted ASU 2016-18 beginning in fiscal 2018. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) ("ASU 2017-09") – Scope of Modification Accounting, which provides clarity and reduces complexity when an entity has changes to the terms or conditions of a share-based payment award, and when an entity should apply modification accounting. The amendments in this update are effective for financial statements issued for annual periods that begun after December 15, 2017, including interim periods within those annual periods, and early adoption was permitted for interim or annual periods. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. We adopted ASU 2017-09 beginning in fiscal 2018. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. The main amendments in ASU 2016-02 require recognition on the balance sheet of lease assets and lease liabilities by lessees for those leases classified as operating leases. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. We anticipate implementing the standard by taking advantage of the practical expedient option, which permits companies to not apply ASU 2016-02 in the comparative periods in our consolidated financial statements in the fiscal year of adoption. At the time of adoption, the discounted minimum remaining rental payments of operating leases will be the starting point for determining the right-of-use asset and lease liability. We had operating leases with remaining rental payments of approximately $461.6 million at the end of second quarter in 2018. We expect that adoption of ASU 2016-02 will have a material impact on our consolidated balance sheets due to recognition of the right-of-use asset and lease liability related to our current operating leases. In preparation for the adoption of the new guidance, we are in the process of implementing controls and key system changes to enable the preparation of financial information. The process of evaluating the full impact of the new guidance on our consolidated financial statements and disclosures is ongoing, however we anticipate the evaluation of the impact will be completed in fiscal 2018.

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2. 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 ended June 26, 2018, and therefore, diluted shares outstanding equaled basic shares outstanding. The computation of diluted earnings per share excluded 540,000 antidilutive stock options, restricted stock units and performance stock units for the 12 weeks ended June 13, 2017. We incurred a net loss for the 26 weeks ended June 26, 2018, and therefore, diluted shares outstanding equaled basic shares outstanding. The computation of diluted earnings per share excluded 640,000 antidilutive stock options, restricted stock units and performance stock units for the 24 weeks ended June 13, 2017.
The following table details our basic and diluted earnings per common share calculation:໿

13 Weeks Ended
 
12 Weeks Ended
 
26 Weeks Ended
 
24 Weeks Ended
(Amounts in thousands, except per share data)
June 26, 2018
 
June 13, 2017
 
June 26, 2018
 
June 13, 2017
Net income (loss)
$
(1,562
)
 
$
2,090

 
$
(1,162
)
 
$
5,400

Shares:
 
 
 
 
 
 
 
Weighted-average common shares outstanding—basic
20,377

 
21,722

 
20,347

 
22,391

Effect of dilutive shares

 
339

 

 
329

Weighted-average common shares outstanding—diluted
20,377

 
22,061

 
20,347

 
22,720


 
 
 
 
 
 
 
Earnings (loss) per share—basic
$
(0.08
)
 
$
0.10

 
$
(0.06
)
 
$
0.24

Earnings (loss) per share—diluted
$
(0.08
)
 
$
0.09

 
$
(0.06
)
 
$
0.24


3. 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 provides 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. There were 555,800 shares of common stock issuable upon exercise of outstanding options and 737,804 restricted shares, restricted stock units and performance stock units outstanding at June 26, 2018 with 637,369 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
 
12 Weeks Ended
 
26 Weeks Ended
 
24 Weeks Ended
(Amounts in thousands)
June 26, 2018
 
June 13, 2017
 
June 26, 2018
 
June 13, 2017
Restaurant operating expenses
$
29

 
$
61

 
$
64

 
$
134

General and administrative costs
1,042

 
731

 
2,034

 
1,193

Total stock compensation cost
$
1,071

 
$
792

 
$
2,098

 
$
1,327


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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 26, 2018
 
Shares (000's)
 
Weighted average grant date fair value
 
Aggregate intrinsic value ($000's)
Outstanding at beginning of period
498

 
$
13.90

 
 
Granted
340

 
15.17

 
 
Vested
(80
)
 
17.63

 
 
Forfeited
(20
)
 
16.25

 
 
Outstanding at end of period
738

 
$
14.02

 
$
9,628

As of June 26, 2018, there was $6.9 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 2.0 years
Stock Options
The following table summarizes stock option activity:

26 Weeks Ended June 26, 2018
 
Shares (000's)
 
Weighted average exercise price
 
Weighted average remaining contractual term
 
Aggregate intrinsic value ($000's)
Outstanding at beginning of period
589

 
$
18.53

 
 
 
 
Exercised
(4
)
 
13.00

 
 
 
 
Forfeited
(29
)
 
19.75

 
 
 
 
Outstanding at end of period
556

 
$
18.50

 
4.8 years
 
$
9

Options exercisable at end of period
550

 
$
18.48

 
4.8 years
 
$
9

A summary of changes in and the status of non-vested stock options is presented below:

26 Weeks Ended

June 26, 2018
 
Shares (000's)
 
Weighted average grant-date fair value
Non-vested stock options at beginning of period
7

 
$
8.93

Vested

 

Forfeited
(1
)
 
9.99

Non-vested stock options at end of period
6

 
$
8.64

As of June 26, 2018, there was a nominal amount of unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a period of approximately 0.1 years.
4. Long-Term Debt
On October 15, 2012, we entered into a credit facility that, as of the last amendment on October 20, 2017, provides for an unsecured credit facility with a maximum credit commitment of $50.0 million. The credit facility expires on October 15, 2019. Borrowings under the credit facility bear interest, at our option, based on (i) LIBOR plus 1.50% or (ii) the prime rate as defined in the credit facility. We are required to pay a commitment fee equal to 0.25% per annum on the available but unused credit facility. The credit facility is guaranteed by certain of our subsidiaries. The credit facility contains various financial covenants, including a maximum ratio of total indebtedness to EBITDA and minimum fixed charge coverage, both as defined in the credit agreement governing the credit facility. The credit facility also 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.
As of June 26, 2018, there was $38.0 million of outstanding borrowings on the credit facility, and we had approximately $10.7 million of borrowings available, with $1.3 million in outstanding letters of credit commitments. As of December 26, 2017, there

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were $21.5 million outstanding borrowings on the credit facility and $1.5 million in outstanding letters of credit. We were in compliance with all of the financial debt covenants as of June 26, 2018 and December 26, 2017. See footnote 9 for subsequent events.
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 3% that is earned by the investments being loaned against. As of June 26, 2018, there was $2.5 million of outstanding borrowings on this loan.
5. Income Taxes
The effective income tax rate for the 13 weeks ended June 26, 2018 was 49.6%, compared to 28.3% for the 12 weeks ended June 13, 2017. The effective income tax rate for the 26 weeks ended June 26, 2018 was 56.0%, compared to 26.1% for the 24 weeks ended June 13, 2017. The factors that cause the effective tax rates to vary from the federal statutory rate of 21% and 35% include the impact of FICA tip and other credits, partially offset by state income taxes and certain non-deductible expenses.
The Tax Cuts and Jobs Act (the "TCJA") was enacted in December 2017. The TCJA reduced the U.S. federal corporate tax rate from 35% to 21%, among other provisions. US GAAP requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. The provisional impact of the TCJA for the year ended December 26, 2017 was $4.6 million. The TCJA may be subject to technical amendments, as well as interpretations and implementing of regulations by the Department of Treasury and Internal Revenue Service, any of which could increase or decrease one or more impacts of the legislation. As such, we may record additional provisional amounts or adjustments to provisional amounts during the measurement period ending no later than December 2018. As of June 26, 2018, we have not changed the provisional estimates recognized in 2017.
6. 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.
The following table presents our financial assets and liabilities measured at fair value on a recurring basis at June 26, 2018 and December 26, 2017, respectively:

Fair Value Measurements
(amounts in thousands)
Level
 
June 26, 2018
 
December 26, 2017
Deferred compensation plan investments (included in Other assets)
2
 
$
14,671

 
$
14,643

Deferred compensation plan liabilities (included in Other liabilities)
2
 
$
(10,568
)
 
$
(11,326
)
There were no transfers among levels within the fair-value hierarchy during the first two quarters of fiscal 2018 and fiscal 2017. The carrying value of our cash and cash equivalents, receivables and accounts payable approximate fair value due to their short-term nature. The fair value of the credit facility approximates its carrying value since it is a variable rate credit facility (Level 2).

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We also believe the carrying amount of the long-term debt borrowed against our deferred compensation plan approximates the fair value because, while subject to a fixed rate, the interest rate approximates current market rates of debt with similar terms and comparable credit risk.
7. Segment Reporting
We operate the Double Eagle, Sullivan’s, 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, as Double Eagle restaurants typically have higher revenues, driven by their larger physical presence and higher average check, the Double Eagle, Sullivan’s, 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 26, 2018
(Amounts in thousands)
Double Eagle
 
Grille
 
Sullivan's
 
Corporate
 
Consolidated
Revenues
$
43,471

 
$
32,247

 
$
14,322

 
$

 
$
90,040

Restaurant-level EBITDA
11,130

 
5,048

 
2,502

 

 
18,680

Capital expenditures
18,420

 
6,171

 
261

 
106

 
24,958

Property and equipment, gross
134,631

 
122,909

 
46,545

 
5,324

 
309,409


12 Weeks Ended June 13, 2017
(Amounts in thousands)
Double Eagle
 
Grille
 
Sullivan's
 
Corporate
 
Consolidated
Revenues
$
40,194

 
$
26,487

 
$
15,620

 
$

 
$
82,301

Restaurant-level EBITDA
10,909

 
3,851

 
2,102

 

 
16,862

Capital expenditures
2,588

 
5,065

 
2,457

 
33

 
10,143

Property and equipment, gross
122,925

 
124,784

 
52,179

 
2,566

 
302,454


26 Weeks Ended June 26, 2018
(Amounts in thousands)
Double Eagle
 
Grille
 
Sullivan's
 
Corporate
 
Consolidated
Revenues
$
87,425

 
$
61,639

 
$
30,279

 
$

 
$
179,343

Restaurant-level EBITDA
22,176

 
8,380

 
5,039

 

 
35,595

Capital expenditures
28,206

 
8,154

 
462

 
(249
)
 
36,573

Property and equipment, gross
134,631

 
122,909

 
46,545

 
5,324

 
309,409


24 Weeks Ended June 13, 2017
(Amounts in thousands)
Double Eagle
 
Grille
 
Sullivan's
 
Corporate
 
Consolidated
Revenues
$
79,955

 
$
52,834

 
$
33,402

 
$

 
$
166,191

Restaurant-level EBITDA
21,607

 
7,613

 
5,559

 

 
34,779

Capital expenditures
7,063

 
8,352

 
6,373

 
140

 
21,928

Property and equipment, gross
122,925

 
124,784

 
52,179

 
2,566

 
302,454

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

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for, or superior to, operating income, which is calculated in accordance with GAAP, and the reconciliations to operating income set forth below should be carefully evaluated.
We define restaurant-level EBITDA as operating income before pre-opening costs, general and administrative costs, donations, consulting project costs, acquisition and disposition costs, reorganization severance costs, lease termination and closing costs, depreciation and amortization, and impairment charges. 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 and disposition costs and reorganization severance costs are excluded because they are not related to the health of ongoing operations. Lease termination and closing costs, depreciation and amortization, impairment charges, and insurance settlements 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
 
12 Weeks Ended
 
26 Weeks Ended
 
24 Weeks Ended
(Amounts in thousands)
June 26, 2018
 
June 13, 2017
 
June 26, 2018
 
June 13, 2017
Operating income (loss)
$
(2,537
)
 
$
2,933

 
$
(1,776
)
 
$
7,340

Pre-opening costs
1,403

 
1,619

 
2,549

 
2,008

General and administrative costs
8,502

 
5,765

 
16,834

 
12,076

Donations
16

 

 
58

 

Consulting project costs
622

 
597

 
854

 
2,633

Acquisition and disposition costs
4,358

 

 
5,015

 

Reorganization severance

 
719

 
113

 
719

Lease termination and closing costs
1,023

 
540

 
1,389

 
538

Depreciation and amortization
5,293

 
4,997

 
10,475

 
9,813

Impairment charges

 

 
84

 

Insurance settlements

 
(308
)
 

 
(348
)
Restaurant-level EBITDA
$
18,680

 
$
16,862

 
$
35,595

 
$
34,779

8. 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.
At June 26, 2018 and December 26, 2017, we had outstanding letters of credit of $1.3 million and $1.5 million, respectively, which were drawn on our credit facility, see Note 4. The letters of credit typically act as guarantee of payment to certain third parties in accordance with specified terms and conditions.
9. Subsequent Event
On June 27, 2018, we completed the acquisition (the “Barteca Acquisition”) of Barteca Holdings, LLC, a Delaware limited liability company, and its subsidiaries (“Barteca”), for a purchase price of $325 million subject to customary adjustments for debt, cash, and working capital.
Barteca, now referred to as Del Frisco’s Emerging Brands within our organizational structure, owns and operates two restaurant chains: Barcelona Wine Bar (“Barcelona”) and bartaco. Barteca currently operates 33 restaurants in 12 states and the District of Columbia. Barteca’s two 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. We believe that Barcelona is the largest Spanish restaurant group in the U.S. with 15 locations in 7 states and the District of Columbia.

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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 and (ii) senior secured revolving credit commitments in an aggregate principal amount of $50.0 million, collectively with the term loans, the Credit Facilities.
The interest rates per annum applicable to loans under the Credit Facilities are, at the Company’s option, equal to either a LIBOR rate or a base rate, plus an applicable margin. Initially, the applicable margin for the Term Loans is 4.75% for LIBOR loans and 3.75% for base rate loans. The arrangers under our Credit Facility intend to syndicate the Term Loans under such facility, and in connection with such syndication rights, the applicable margin for the Term Loans is subject to change. The applicable margin for loans made under the Revolving Credit Commitments will range from 2.50% to 3.50% per annum for LIBOR loans and 1.50% to 2.50% per annum for base rate loans, in each case, depending on the Company’s consolidated total net leverage ratio. The Company will pay a commitment fee on the unused portion of the Revolving Credit Commitments at a rate that ranges from 0.35% to 0.50% per annum, depending on the Company’s consolidated total net leverage ratio. The Revolving Credit Commitments mature on June 27, 2023, and the Term Loans mature on June 27, 2025. The Company is required to repay 1% of the principal amount of the Term Loans annually.


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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 2017 Annual Report. Unless the context otherwise indicates, all references to “we,” “our,” “us,” or the “Company” refer to Del Frisco’s Restaurant Group, Inc. and its subsidiaries.
Overview
Del Frisco’s Restaurant Group, Inc. develops, owns and operates three contemporary, high-end, complementary restaurants: Del Frisco’s Double Eagle Steakhouse, or Double Eagle, Del Frisco’s Grille, or the Grille and Sullivan’s Steakhouse, or Sullivan’s. As of the end of the period covered by this report, we operated 50 restaurants in 21 states and the District of Columbia. Of these 50, there were 13 Double Eagle restaurants, 23 Grille restaurants and 14 Sullivan’s 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 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 Eagles, 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 learnings from our 2017 consulting project. In the first two quarters of 2018, we closed Austin, Texas and Chicago, Illinois Sullivan's and Little Rock, Arkansas and Stamford, Connecticut Grille restaurants. 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.
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 43 and 43 restaurants at June 26, 2018 and June 13, 2017, respectively.

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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 are measured by the number of entrées ordered at our restaurants over a given time period.
Adjusted EBITDA and Adjusted EBITDA Margin. 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 and disposition costs, consulting project costs, reorganization severance, impairment charges and insurance settlements. Adjusted EBITDA Margin is the ratio of Adjusted EBITDA to revenues. These non-GAAP operating measures are useful to both management and investors, where by monitoring and controlling our Adjusted EBITDA and Adjusted EBITDA Margins, we can gauge the overall profitability of our Company.
Restaurant-Level EBITDA and Restaurant-Level EBITDA Margin. Restaurant-level EBITDA represents Adjusted EBITDA before general and administrative costs. 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 7, 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 the June 27, 2018, we completed the acquisition (the “Barteca Acquisition”) of Barteca Holdings, LLC, a Delaware limited liability company, and its subsidiaries (“Barteca”), for a purchase price of $325 million subject to customary adjustments for debt, cash, and working capital.
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 and (ii) senior secured revolving credit commitments in an aggregate principal amount of $50.0 million, collectively with the term loans, the credit facilities.
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. Previously, the first three quarters of our fiscal year consisted of 12 weeks each and the fourth quarter consisted of 16 weeks or 17 weeks in a 53-week year. The fiscal quarter ended June 26, 2018 contained 13 weeks and quarter ended June 13, 2017 contained 12 weeks and are referred to herein as the second quarter of 2018 and the second quarter of 2017, respectively. The first two quarters ended June 26, 2018 contained 26 weeks and the first two quarters ended June 13, 2017 contained 24 weeks and are referred to herein as the first two quarters of 2018 and the first two quarters of 2017, respectively. As a result of the change in our calendar, our first two quarters of 2018 had 182 days of activity, 14 more days than our first two quarters of 2017, which had 168 days of activity. We have not restated and do not plan to restate historical results. See Note 1, Business and Basis of Presentation in the notes to our consolidated financial statements.
We estimate the additional operating days in the second quarter of 2018 resulted in $6.5 million of additional consolidated revenues, or $3.2 million, $2.3 million and $1.0 million of Double Eagle, Grille and Sullivan’s revenues, and in the first two quarters of 2018 resulted in $13.3 million of additional consolidated revenues, or $6.4 million, $4.8 million and $2.1 million of Double Eagle, Grille and Sullivan’s revenues, respectively. We discuss the estimated impacts of the additional operating days in more detail below to the extent significant.

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Due to the difference in the reporting period between the second quarter of 2018 and the first quarter of 2017, and between the first two quarters of 2018 and the first two quarters of 2017 discussed above, our results of operations for the second quarter of 2018 and the first two quarters of 2018 as presented in accordance with GAAP and set forth below are not comparable to the second quarter of 2017 and the first two quarters of 2017.
Key Financial Definitions
Detailed discussion regarding key financial definitions as they relate to our results of operations can be found in the 2017 10-K.

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Results of Operations
The following table shows our operating results (in thousands), as well as our operating results as a percentage of revenues. With the change in our fiscal quarters, as described above, the second quarter of 2018 represents 13 weeks of activity and the second quarter of 2017 represents only 12 weeks of activity. Further, the first two quarters of 2018 represent 26 weeks of activity and the first two quarters of 2017 represent only 24 weeks of activity.

13 Weeks Ended
 
12 Weeks Ended
 
26 Weeks Ended
 
24 Weeks Ended

June 26, 2018
 
June 13, 2017
 
June 26, 2018
 
June 13, 2017
Revenues
$
90,040

 
100.0
 %
 
$
82,301

 
100.0
 %
 
$
179,343

 
100.0
 %
 
$
166,191

 
100.0
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
25,956

 
28.8

 
23,433

 
28.5

 
52,110

 
29.1

 
47,214

 
28.4

Restaurant operating expenses (excluding depreciation and amortization shown separately below)
43,407

 
48.2

 
40,388

 
49.1

 
87,622

 
48.9

 
81,280

 
48.9

Marketing and advertising costs
1,997

 
2.2

 
1,618

 
2.0

 
4,016

 
2.2

 
2,918

 
1.8

Pre-opening costs
1,403

 
1.6

 
1,619

 
2.0

 
2,549

 
1.4

 
2,008

 
1.2

General and administrative costs
8,502

 
9.4

 
5,765

 
7.0

 
16,834

 
9.4

 
12,076

 
7.3

Donations
16

 

 

 

 
58

 

 

 

Consulting project costs
622

 
0.7

 
597

 
0.7

 
854

 
0.5

 
2,633

 
1.6

Acquisition and disposition costs
4,358

 
4.8

 

 

 
5,015

 
2.8

 

 

Reorganization severance

 

 
719

 
0.9

 
113

 
0.1

 
719

 
0.4

Lease termination and closing costs
1,023

 
1.1

 
540

 
0.7

 
1,389

 
0.8

 
538

 
0.3

Impairment charges

 

 

 

 
84

 

 

 

Depreciation and amortization
5,293

 
5.9

 
4,997

 
6.1

 
10,475

 
5.8

 
9,813

 
5.9

Total costs and expenses
92,577

 
102.8

 
79,676

 
96.8

 
181,119

 
101.0

 
159,199

 
95.8

Insurance settlements

 

 
308

 
0.4

 

 

 
348

 
0.2

Operating income (loss)
(2,537
)
 
(2.8
)
 
2,933

 
3.6

 
(1,776
)
 
(1.0
)
 
7,340

 
4.4

Other income (expense), net:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest, net of capitalized interest
(510
)
 
(0.6
)
 
(9
)
 

 
(813
)
 
(0.5
)
 
(19
)
 

Other  
(50
)
 
(0.1
)
 
(10
)
 

 
(49
)
 

 
(11
)
 

Income (loss) before income taxes
(3,097
)
 
(3.4
)
 
2,914

 
3.5

 
(2,638
)
 
(1.5
)
 
7,310

 
4.4

Income tax expense (benefit)
(1,535
)
 
(1.7
)
 
824

 
1.0

 
(1,476
)
 
(0.8
)
 
1,910

 
1.1

Net income (loss)
$
(1,562
)
 
(1.7
)%
 
$
2,090

 
2.5
 %
 
$
(1,162
)
 
(0.6
)%
 
$
5,400

 
3.2
 %

18

Table of Contents

13 Weeks Ended June 26, 2018 Compared to the 12 Weeks Ended June 13, 2017
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 2018 (13 weeks) and 2017 (12 weeks). The tables below include Restaurant-level EBITDA, a non-GAAP measure. See Note 7, 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 26, 2018

Double Eagle
 
Grille
 
Sullivan's
 
Consolidated
Revenues
$
43,471

 
100.0
%
 
$
32,247

 
100.0
%
 
$
14,322

 
100.0
%
 
$
90,040

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
12,780

 
29.4

 
8,757

 
27.2

 
4,419

 
30.9

 
25,956

 
28.8

Restaurant operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor
9,986

 
23.0

 
10,199

 
31.6

 
4,144

 
28.9

 
24,329

 
27.0

Operating expenses
5,011

 
11.5

 
4,395

 
13.6

 
2,218

 
15.5

 
11,624

 
12.9

Occupancy
3,545

 
8.2

 
3,201

 
9.9

 
708

 
4.9

 
7,454

 
8.3

Restaurant operating expenses
18,542

 
42.7

 
17,795

 
55.2

 
7,070

 
49.4

 
43,407

 
48.2

Marketing and advertising costs
1,019

 
2.3

 
647

 
2.0

 
331

 
2.3

 
1,997

 
2.2

Restaurant-level EBITDA
$
11,130

 
25.6
%
 
$
5,048

 
15.7
%
 
$
2,502

 
17.5
%
 
$
18,680

 
20.7
%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant operating weeks
169

 
 
 
316

 
 
 
197

 
 
 
682

 
 
Average weekly volume
$
257

 
 
 
$
102

 
 
 
$
73

 
 
 
$
132

 
 

12 Weeks Ended June 13, 2017

Double Eagle
 
Grille
 
Sullivan's
 
Consolidated
Revenues
$
40,194

 
100.0
%
 
$
26,487

 
100.0
%
 
$
15,620

 
100.0
%
 
$
82,301

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
11,912

 
29.6

 
6,750

 
25.5

 
4,771

 
30.5

 
23,433

 
28.5

Restaurant operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor
9,611

 
23.9

 
8,889

 
33.6

 
4,676

 
29.9

 
23,176

 
28.2

Operating expenses
4,234

 
10.5

 
3,534

 
13.3

 
2,274

 
14.6

 
10,042

 
12.2

Occupancy
2,808

 
7.0

 
3,002

 
11.3

 
1,360

 
8.7

 
7,170

 
8.7

Restaurant operating expenses
16,653

 
41.4

 
15,425

 
58.2

 
8,310

 
53.2

 
40,388

 
49.1

Marketing and advertising costs
720

 
1.8

 
461

 
1.7

 
437

 
2.8

 
1,618

 
2.0

Restaurant-level EBITDA
$
10,909

 
27.1
%
 
$
3,851

 
14.5
%
 
$
2,102

 
13.5
%
 
$
16,862

 
20.5
%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant operating weeks
150

 
 
 
276

 
 
 
202

 
 
 
628

 
 
Average weekly volume
$
268

 
 
 
$
96

 
 
 
$
77

 
 
 
$
131

 
 
Revenues. Consolidated revenues increased $7.7 million, or 9.4%, to $90.0 million in the second quarter of 2018 from $82.3 million in the second quarter of 2017. This increase was primarily due to 54 net additional operating weeks in the second quarter of 2018, primarily due to the change to our fiscal quarter calendar adding one additional reporting week in the second quarter of 2018 compared to the second quarter in 2017, coupled with two new restaurant openings over the past four quarters, Grille restaurants in Westwood, Massachusetts and at Brookfield Place in New York. The additional second quarter of 2018 revenue attributable to the change in reporting calendar was approximately $6.5 million, of which $0.3 million was attributable to the two new openings. This increase was partially offset by decreased revenue at our comparable restaurants, and the closure of the Austin, Texas and Chicago, Illinois Sullivan's restaurants and Little Rock, Arkansas and Stamford, Connecticut Grille restaurants. Comparable restaurant sales decreased 1.4% for the second quarter of 2018, comprised of a 7.5% decrease in customer counts, partially offset by a 6.1% increase in average check, primarily driven by mix resulting from menu initiatives.
Double Eagle revenues increased $3.3 million, or 8.2%, to $43.5 million in the second quarter of 2018 from $40.2 million in the second quarter of 2017. This increase was primarily due to 19 additional operating weeks in the second quarter of 2018, primarily

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due to the change to our fiscal quarter calendar, as described above, coupled with the opening of the Plano, Texas Double Eagle restaurant during the second quarter of 2017. The additional second quarter of 2018 revenue attributable to the change in reporting calendar was approximately $3.2 million. This increase was partially offset by a decrease in comparable restaurant sales. Comparable restaurant sales decreased by 1.2%, comprised of a 6.3% decrease in customer counts and a 5.1% increase in average check, primarily driven by mix resulting from menu initiatives.
Grille revenues increased $5.8 million, or 21.7%, to $32.2 million in the second quarter of 2018 from $26.5 million in the second quarter of 2017. This increase was primarily due to 40 additional operating weeks in the second quarter of 2018 as the result of the change to our fiscal quarter calendar, as described above, coupled with the opening of the Grille restaurants in Westwood, Massachusetts during the first quarter of 2018 and at Brookfield Place in New York during the third quarter of 2017, partially offset by the closure of Little Rock, Arkansas and Stamford, Connecticut Grille restaurants during second quarter of 2018. The additional second quarter of 2018 revenue attributable to the change in reporting calendar was approximately $2.3 million. Comparable restaurant sales increased by 0.7%, comprised of a 7.0% decrease in customer counts, partially offset by a 7.7% increase in average check, primarily driven by mix resulting from menu initiatives. 
Sullivan’s revenues decreased $1.3 million, or 8.3%, to $14.3 million in the second quarter of 2018 from $15.6 million in the second quarter of 2017. The decrease in revenues was primarily due to the net loss of 5 operating weeks from the closure of the Austin Texas Sullivan's restaurant during the first quarter in 2018 and the Chicago, Illinois Sullivan's restaurant during the second quarter of 2018 and a decrease in comparable restaurant sales as a result of the removal of lunch from 7 restaurants in the second quarter of 2017, partially offset by the additional operating weeks as a result of the change to our fiscal quarter calendar, as described above. The additional second quarter of 2018 revenue attributable to the change in reporting calendar was approximately $1.0 million. Comparable restaurant sales decreased by 6.0%, comprised of a 11.1% decrease in customer counts, partially offset by a 5.1% increase in average check, primarily driven by mix resulting from menu initiatives.
Cost of Sales. Consolidated cost of sales increased $2.5 million, or 10.8%, to $26.0 million in the second quarter of 2018 from $23.4 million in the second quarter of 2017. This increase was primarily due to net additional 54 operating weeks in the second quarter of 2018, as discussed above. As a percentage of consolidated revenues, consolidated cost of sales increased to 28.8% during the second quarter of 2018 from 28.5% in the second quarter of 2017.
As a percentage of revenues, Double Eagle cost of sales decreased to 29.4% during the second quarter of 2018 from 29.6% in the second quarter of 2017. This decrease in cost of sales, as a percentage of revenues, was primarily due to decreased beef costs.
As a percentage of revenues, Grille cost of sales increased to 27.2% during the second quarter of 2018 from 25.5% in the second quarter of 2017.  This increase in cost of sales, as a percentage of revenues, was primarily due to menumix shift following the new menu launch in the fourth quarter of 2017.
As a percentage of revenues, Sullivan’s cost of sales increased to 30.9% during the second quarter of 2018 from 30.5% in the second quarter of 2017. This increase in cost of sales, as a percentage of revenues, was primarily due to menumix shift following the new menu launch in the fourth quarter of 2017.
Restaurant Operating Expenses. Consolidated restaurant operating expenses increased $3.0 million, or 7.5%, to $43.4 million in the second quarter of 2018 from $40.4 million in the second quarter of 2017.  This increase was primarily due to net additional 54 operating weeks in the second quarter of 2018, as discussed above. As a percentage of consolidated revenues, consolidated restaurant operating expenses decreased to 48.2% in second quarter of 2018 from 49.1% in the second quarter of 2017.
As a percentage of revenues, Double Eagle restaurant operating expenses increased to 42.7% during the second quarter of 2018 from 41.4% during the second quarter of 2017. This increase in restaurant operating expenses, as a percentage of revenues, was primarily due to higher occupancy and other restaurant operating costs, partially offset by lower labor costs.
As a percentage of revenues, Grille restaurant operating expenses decreased to 55.2% during the second quarter of 2018 from 58.2% in the second quarter of 2017. This decrease in restaurant operating expenses, as a percentage of revenues, was primarily due to lower occupancy and labor and benefits costs, partially offset by higher other restaurant operating costs.
As a percentage of revenues, Sullivan’s restaurant operating expenses decreased to 49.4% during the second quarter of 2018 from 53.2% in the second quarter of 2017. This decrease in restaurant operating expenses, as a percentage of revenues, was primarily due to lower occupancy and labor and benefits costs, partially offset by higher other restaurant operating costs.
Marketing and Advertising Costs. Consolidated marketing and advertising costs increased $0.4 million to $2.0 million in the second quarter of 2018 compared to $1.6 million in the second quarter of 2017. As a percentage of consolidated revenues, consolidated marketing and advertising costs increased to 2.2% in the second quarter of 2018 from 2.0% in the second quarter of 2017.

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Table of Contents

As a percentage of revenues, Double Eagle marketing and advertising costs increased to 2.3% during the second quarter of 2018 from 1.8% in the second quarter of 2017. Marketing and advertising costs, as a percentage of revenues increased primarily due to higher digital media and local advertising costs, partially offset by lower printing costs.
As a percentage of revenues, Grille marketing and advertising costs increased to 2.0% during the second quarter of 2018 compared to 1.7% in the second quarter of 2017. Marketing and advertising costs, as a percentage of revenues increased primarily due to higher digital media and local advertising costs, partially offset by lower printing costs. 
As a percentage of revenues, Sullivan’s marketing and advertising costs decreased to 2.3% during the second quarter of 2018 from 2.8% in the second quarter of 2017. Marketing and advertising costs, as a percentage of revenues decreased primarily due to lower printing costs, partially offset by higher digital media and local advertising costs.
Pre-opening Costs. Pre-opening costs decreased $0.2 million to $1.4 million in the second quarter of 2018 from $1.6 million in the second quarter of 2017 due primarily to the timing of new restaurants under construction versus the prior year comparable period. Pre-opening costs include non-cash straight line rent, which is incurred during construction and can precede a restaurant opening by four to six months.
General and Administrative Costs. General and administrative costs increased to $8.5 million in the second quarter of 2018 from $5.8 million in the second quarter of 2017. As a percentage of revenues, general and administrative costs increased to 9.4% in the second quarter of 2018 compared to 7.0% during the second quarter of 2017. This increase was primarily related to the additional operating week in the second quarter of 2018 due to our calendar adjustment previously mentioned, and additional compensation costs, including stock based compensation, related to growth in the number of restaurant support center and regional management-level personnel to support recent and anticipated growth. General and administrative costs are expected to continue to increase as a result of costs related to our anticipated growth, including further investments in our infrastructure. As we are able to leverage these investments made in our people and systems, we expect these expenses to decrease as a percentage of total revenues over time.
Consulting Project Costs. Consulting project costs were $0.6 million in the second quarter of 2018. These costs are primarily related to the Enterprise resource planning system (ERP), and we expect these costs to continue during fiscal 2018. Consulting project costs were $0.6 million in the second quarter of 2017 and were primarily related to consumer insight research supporting the Grille restaurants.
Acquisition and Disposition Costs. Acquisition and disposition costs were $4.4 million in the second quarter of 2018. These costs are primarily related to the Barteca Acquisition. We expect these costs to continue during fiscal 2018. No such costs were incurred in the second quarter of 2017.
Reorganization Severance.  We did not incur reorganization severance costs in the second quarter of 2018. Reorganization severance costs were $0.7 million in the second quarter of 2017.
Lease Termination and Closing Costs. During the second quarter of 2018, we incurred approximately $1.0 million in charges related to the closure of Chicago, Illinois Sullivan's restaurant and Little Rock, Arkansas and Stamford, Connecticut Grille restaurants. During the second quarter of 2017, we incurred approximately $0.5 million in charges related to the closure of the Seattle, Washington and Houston, Texas Sullivan's restaurants.
Depreciation and Amortization. Depreciation and amortization increased $0.3 million, or 6.7%, to $5.3 million in the second quarter of 2018 from $5.0 million in the second quarter of 2017. The increase in depreciation and amortization expense was primarily the result of the change to our fiscal quarter calendar, as previously described, coupled with the new assets related to one restaurant opened in fiscal 2018 and two restaurants opened in fiscal 2017, as well as for existing restaurants that were remodeled during fiscal 2017.
Income Tax Expense. The effective income tax rate for the second quarter of 2018 was 49.6% compared to 28.3% for the second quarter of 2017. The factors that cause the effective tax rates to vary from the federal statutory rate of 21% and 35% include the impact of FICA tip and other credits, partially offset by state income taxes and certain non-deductible expenses.

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Table of Contents

26 Weeks Ended June 26, 2018 Compared to the 24 Weeks Ended June 13, 2017
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 first two quarters of 2018 (26 weeks) and 2017 (24 weeks). The tables below include Restaurant-level EBITDA, a non-GAAP measure. See Note 7, 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.

26 Weeks Ended June 26, 2018

Double Eagle
 
Grille
 
Sullivan's
 
Consolidated
Revenues
$
87,425

 
100.0
%
 
$
61,639

 
100.0
%
 
$
30,279

 
100.0
%
 
$
179,343

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
25,948

 
29.7

 
16,806

 
27.3

 
9,356

 
30.9

 
52,110

 
29.1

Restaurant operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor
20,353

 
23.3

 
20,012

 
32.5

 
8,637

 
28.5

 
49,002

 
27.3

Operating expenses
9,881

 
11.3

 
8,566

 
13.9

 
4,607

 
15.2

 
23,054

 
12.9

Occupancy
7,153

 
8.2

 
6,593

 
10.7

 
1,820

 
6.0

 
15,566

 
8.7

Restaurant operating expenses
37,387

 
42.8

 
35,171

 
57.1

 
15,064

 
49.8

 
87,622

 
48.9

Marketing and advertising costs
1,914

 
2.2

 
1,282

 
2.1

 
820

 
2.7

 
4,016

 
2.2

Restaurant-level EBITDA
$
22,176

 
25.4
%
 
$
8,380

 
13.6
%
 
$
5,039

 
16.6
%
 
$
35,595

 
19.8
%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant operating weeks
338

 
 
 
638

 
 
 
391

 
 
 
1,367

 
 
Average weekly volume
$
259

 
 
 
$
97

 
 
 
$
77

 
 
 
$
131

 
 

24 Weeks Ended June 13, 2017

Double Eagle
 
Grille
 
Sullivan's
 
Consolidated
Revenues
$
79,955

 
100.0
%
 
$
52,834

 
100.0
%
 
$
33,402

 
100.0
%
 
$
166,191

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
23,682

 
29.6

 
13,507

 
25.6

 
10,025

 
30.0

 
47,214

 
28.4

Restaurant operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Labor
19,299

 
24.1

 
17,896

 
33.9

 
10,080

 
30.2