Zoe's Kitchen, Inc. - FORM 10-Q

Attached files

file	filename
EX-10.1 - EXHIBIT 10.1 TRANSITION AGREEMENT - Zoe's Kitchen, Inc.	ex101transitionagreementja.htm
EX-31.1 - EXHIBIT 31.1 - Zoe's Kitchen, Inc.	ex311section302certificati.htm
EX-31.2 - EXHIBIT 31.2 - Zoe's Kitchen, Inc.	ex312section302certificati.htm
EX-32.1 - EXHIBIT 32.1 - Zoe's Kitchen, Inc.	ex321soxcertificatonq215.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended July 13, 2015

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

For the transition period from to

Commission File No. 001-36411

ZOE'S KITCHEN, INC.

(Exact name of registrant as specified in its charter)




Delaware		51-0653504
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

5760 State Highway 121, Suite 250 Plano, Texas		75024
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (214) 436-8765

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 and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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



Large accelerated filer o		Accelerated filer o
Non-accelerated filer þ	(Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

On August 27, 2015, there were 19,378,403 shares of common stock outstanding.

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Part I - Financial Information		Page
Item 1. Financial Statements		2
Unaudited Consolidated Balance Sheets		2
Unaudited Consolidated Statements of Operations		3
Unaudited Consolidated Statements of Cash Flows		4
Notes to Condensed Consolidated Financial Statements		5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosures about Market Risk		28
Item 4. Controls and Procedures		29
Part II - Other Information		30
Item 1. Legal Proceedings		30
Item 1A. Risk Factors		30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3. Defaults Upon Senior Securities		30
Item 4. Mine Safety Disclosures		30
Item 5. Other Information		30
Item 6. Exhibits		31
Signatures		32

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Part I - Financial Information

Item 1. Financial Statements

Zoe's Kitchen, Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets

(in thousands, except share and per share data)



	July 13, 2015			December 29, 2014
Assets
Current Assets:
Cash and cash equivalents	$	24,197		$	29,390
Trade accounts receivable, net of allowance for doubtful accounts of $15 at July 13, 2015 and $12 at December 29, 2014	1,131			678
Other accounts receivable	1,647			1,164
Inventory	1,521			1,295
Prepaid expenses and other	2,145			1,168
Total current assets	30,641			33,695
Property and equipment, net	123,860			103,945
Goodwill	29,528			29,528
Intangibles, net	10,318			11,206
Other long-term assets, net	478			287
Total long-term assets	164,184			144,966
Total assets	$	194,825		$	178,661
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	8,229		$	6,131
Accrued expenses and other	12,443			10,175
Total current liabilities	20,672			16,306
Long-term liabilities:
Deemed landlord financing	27,400			23,266
Deferred rent	17,737			13,701
Deferred income taxes	4,773			3,784
Other long-term liabilities, net	327			335
Total long-term liabilities	50,237			41,086
Total liabilities	70,909			57,392
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock: $0.01 par value, 135,000,000 shares authorized as of July 13, 2015 and December 29, 2014; 19,377,686 and 19,292,246 issued and outstanding as of July 13, 2015 and December 29, 2014, respectively.	$	194		$	193
Additional paid-in capital	144,548			142,714
Accumulated deficit	(20,826		)	(21,638		)
Total stockholders' equity	123,916			121,269
Total liabilities and stockholders' equity	$	194,825		$	178,661

The accompanying notes are an integral part of these consolidated financial statements.

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Zoe's Kitchen, Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share data)



	Twelve Weeks Ended						Twenty-eight Weeks Ended
	July 13, 2015			July 14, 2014			July 13, 2015			July 14, 2014
Revenue:
Restaurant sales	$	54,424		$	41,761		$	117,373		$	87,879
Royalty fees	50			127			109			275
Total revenue	54,474			41,888			117,482			88,154
Operating expenses:
Restaurant operating costs (excluding depreciation and amortization):
Cost of sales	17,313			14,243			36,987			29,163
Labor	15,006			11,367			32,825			24,467
Store operating expenses	10,514			7,314			22,301			16,062
General and administrative expenses	6,261			4,465			13,503			16,733
Depreciation	2,587			2,088			5,779			4,501
Amortization	375			314			887			782
Pre-opening costs	637			443			1,485			1,259
Loss from disposal of equipment	100			38			147			51
Total operating expenses	52,793			40,272			113,914			93,018
Income (loss) from operations	1,681			1,616			3,568			(4,864		)
Other income and expenses:
Interest expense, net	711			621			1,682			2,280
Loss on extinguishment of debt	—			—			—			978
Other income	(21		)	—			(31		)	—
Loss on interest cap	—			—			—			6
Total other income and expenses	690			621			1,651			3,264
Income (loss) before provision for income taxes	991			995			1,917			(8,128		)
Provision (benefit) for income taxes	871			(124		)	1,105			741
Net income (loss)	$	120		$	1,119		$	812		$	(8,869	)
Net income (loss) per share:
Basic	$	0.01		$	0.06		$	0.04		$	(0.56	)
Diluted	$	0.01		$	0.06		$	0.04		$	(0.56	)
Weighted average shares of common stock outstanding:
Basic	19,334,939			19,269,746			19,313,094			15,812,901
Diluted	19,557,645			19,477,765			19,535,948			15,812,901

The accompanying notes are an integral part of these consolidated financial statements.

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Zoe's Kitchen, Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(in thousands)



	Twenty-eight Weeks Ended
	July 13, 2015			July 14, 2014
Cash flows from operating activities:
Net income (loss)	$	812		$	(8,869	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	5,779			4,501
Amortization of intangible assets	887			782
Equity-based compensation	587			6,192
Deferred income taxes	1,046			741
Amortization of loan costs	10			77
Bad debt expense	6			5
Loss from disposal of equipment	147			51
Accretion of deemed landlord financing	122			129
Loss on extinguishment of debt	—			978
Changes in operating assets and liabilities:
Trade accounts receivable	(459		)	(258		)
Other accounts receivable	(483		)	(270		)
Inventory	(226		)	(246		)
Prepaid expenses and other	(1,082		)	(852		)
Accounts payable	1,255			2,124
Accrued expenses and other	1,232			2,157
Deferred rent	4,026			3,567
Net cash provided by operating activities	13,659			10,809
Cash flows from investing activities:
Purchase of property and equipment	(20,223		)	(18,007		)
Acquisition purchase price, net of cash acquired	—			(1,145		)
Proceeds from sale of property and equipment	58			79
Net cash used in investing activities	(20,165		)	(19,073		)
Cash flows from financing activities:
Proceeds from line of credit	—			7,900
Payments on long-term debt	—			(49,300		)
Proceeds from issuance of common stock, net of underwriter fees	—			93,581
Payments of costs associated with initial public offering	—			(2,538		)
Proceeds from deemed landlord financing	162			299
Proceeds from exercise of stock options	1,248			—
Payments of loan acquisition fees	(97		)	—
Net cash provided by financing activities	1,313			49,942
Net change in cash and cash equivalents	(5,193		)	41,678
Cash and cash equivalents:
Beginning of year	29,390			1,149
End of period	$	24,197		$	42,827
Supplemental disclosure of cash flow information:
Cash paid for interest related to long-term debt	$	10		$	812
Cash paid for interest related to deemed landlord financing	1,700			1,433
Non-cash deemed landlord financing	3,850			250
Change in accrued purchases of property and equipment	1,836			(1,459		)

The accompanying notes are an integral part of these consolidated financial statements.

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Zoe's Kitchen, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

1. Nature of Operations and Basis of Presentation

Nature of Operations

Zoe’s Kitchen, Inc. (the "Company", "Zoës", "we" or "us"), primarily develops and operates fast-casual restaurants serving a distinct menu of freshly prepared Mediterranean-inspired dishes. As of July 13, 2015, we operated 148 Company-owned restaurants and three franchise restaurants in 16 states across the United States. We have determined that we have one operating and reportable segment. All of our revenues are derived in the United States. All of our assets are located in the United States.

On April 16, 2014, we completed an initial public offering (the "IPO") of 6,708,332 shares of common stock at a price to the public of $15.00 per share, which included 874,999 shares sold to the underwriters pursuant to their over-allotment option. All share and per share data have been retroactively restated in the accompanying financial statements to give effect to a 125,614.14:1 stock split, which became effective on April 14, 2014. After underwriter discounts and commissions and offering expenses, we received net proceeds from the offering of approximately $91.0 million. A portion of these proceeds were used to repay all of the outstanding borrowings under our 2011 Credit Facility (as defined herein, see Note 4).

On August 19, 2014, we completed a follow-on offering of 5,175,000 shares of common stock at a public offering price of $30.25 per share, which included 675,000 shares sold to the underwriters pursuant to their over-allotment option. All of the shares in the offering were offered by selling stockholders, except for 94,100 shares offered by us, the proceeds of which were used to repurchase the same number of shares from certain of our officers at the public offering price per share. We did not receive any net proceeds from the sale of shares of common stock by the selling stockholders. The repurchased shares were constructively retired as we do not intend to reissue the shares within a reasonable period of time.

On November 19, 2014, we completed a follow-on offering of 4,370,000 shares of common stock at a price of $32.00 per share, which included 570,000 shares sold to the underwriters pursuant to their over-allotment option. All of the shares in the offering were offered by the selling stockholders. We did not receive any proceeds from the offering.

Departure of Executive Officer

Effective June 18, 2015, Jason Morgan, our Chief Financial Officer ("CFO"), concluded his employment with the Company. The Company has commenced a search for his replacement.

Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and practices of the United States of America ("GAAP") for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included.

Certain information and footnote disclosures normally included in audited consolidated financial statements presented in accordance with GAAP have been omitted pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). Due to the seasonality of our business, results for any interim financial period are not necessarily indicative of the results that may be achieved for a full fiscal year. In addition, quarterly results of operations may be impacted by the timing and amount of sales and costs associated with the opening of new restaurants. These interim unaudited consolidated financial statements do not represent complete financial statements and should be read in conjunction with our annual financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2014 (the "2014 Form 10-K"). While the consolidated balance sheet data as of December 29, 2014 was derived from audited financial statements, it does not include all disclosures required by GAAP.

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Comprehensive Income (Loss)

Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) is the same as net income (loss) for all periods presented. Therefore, a separate statement of comprehensive income (loss) is not included in the accompanying consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Zoe’s Kitchen, Inc. and its wholly owned subsidiaries, Zoe’s Kitchen USA, LLC and Soho Franchising, LLC. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements presented herein reflect our financial position, results of operations, cash flows and changes in equity in conformity with GAAP.

Fiscal Year

We operate on a 52- or 53-week fiscal year that ends on the last Monday of the calendar year. Fiscal years ended December 28, 2015 and December 29, 2014 consist of 52 weeks. Our first fiscal quarter consists of 16 weeks, and each of our second, third and fourth fiscal quarters consists of 12 weeks, except for a 53-week year when the fourth quarter has 13 weeks.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions, such as valuation of long-lived, definite and indefinite-lived assets, estimated useful lives of assets, the reasonably assured lease terms of operating leases, the construction costs of leases where the Company is considered the owner during and after the construction period, allowance for doubtful accounts, the fair value and forfeiture rates related to equity-based compensation, insurance reserves, and deferred tax valuation allowances, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Recently Issued Accounting Standards

In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory",which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost or net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The update is effective for us prospectively for annual periods beginning after December 15, 2016, and interim periods therein, with early adoption permitted. The adoption of ASU 2015-11 is not expected to have a material impact on our consolidated financial position or results of operations.

In April 2015, the FASB issued ASU No. 2015-05, "Internal-Use Software (Subtopic 350-40)." This update was issued to provide guidance related to the accounting for fees in a cloud computing arrangement. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2015. The adoption of ASU 2015-05 is not expected to have a material impact on our consolidated financial position or results of operations.

In February 2015, the FASB issued ASU No. 2015-02, "Consolidation: Amendments to the Consolidation Analysis." This update improves targeted areas of the consolidation guidance and reduces the number of consolidation models. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2015, with early adoption permitted. The adoption of ASU 2015-02 is not expected to have a material impact on our consolidated financial position or results of operations.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern: Disclosures of Uncertainties about an Entity's Ability to Continue as a Going Concern." This update requires management of the Company to evaluate whether there is substantial doubt about the Company's ability to continue as a going concern. This update is effective for

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the annual period after December 15, 2016, and for annual and interim periods thereafter. The adoption of ASU 2014-15 is not expected to have a material impact on our consolidated financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This update was issued to replace the current revenue recognition guidance, creating a more comprehensive revenue model. This update is effective in fiscal periods beginning after December 15, 2017 and early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial position or results of operations.

2. Supplemental Information

Property and equipment, net consisted of the following (in thousands):



	July 13, 2015			December 29, 2014
Land	$	781		$	—
Buildings under deemed landlord financing	22,550			18,700
Leasehold improvements	86,373			73,096
Machinery and equipment	20,943			17,596
Furniture and fixtures	4,678			3,948
Automobiles	3,611			3,141
Computer equipment	5,665			4,825
Construction in progress	8,109			6,047
Property and equipment, gross	152,710			127,353
Less: Accumulated depreciation	(28,850		)	(23,408		)
Total Property and equipment, net	$	123,860		$	103,945

Accrued expenses and other consisted of the following (in thousands):



	July 13, 2015		December 29, 2014
Accrued payroll and payroll taxes	$	3,937	$	3,935
Accrued capital purchases	2,598		1,604
Sales tax payable	1,950		1,061
Gift certificate payable	481		896
Other accrued expenses	3,477		2,679
Total Accrued expenses and other	$	12,443	$	10,175

3. Fair Value Measurements

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to the short maturities of these instruments.

4. Bank Line of Credit and Term Loan

On April 16, 2014, we repaid in full our outstanding $37.5 million term loan and $2.9 million line of credit (the "2011 Credit Facility") with a portion of the proceeds from our IPO. Upon repayment, the 2011 Credit Facility and all related agreements were terminated. In addition, we wrote-off all unamortized loan costs, resulting in a loss on extinguishment of debt of $1.0 million.

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On February 6, 2015, we entered into a credit facility with Wells Fargo Bank, National Association (the "2015 Credit Facility"). The 2015 Credit Facility consists of a revolving loan commitment in the aggregate amount of $20.0 million, together with an incremental revolving credit commitment up to an aggregate amount of $30.0 million. The 2015 Credit Facility has a five year term and matures on February 6, 2020. As of July 13, 2015, we have no indebtedness under the 2015 Credit Facility.

Revolving credit loans under the 2015 Credit Facility bear interest, at the Company’s election, at either the base rate plus an applicable margin, or LIBOR plus an applicable margin. The base rate consists of the highest of the prime rate, the federal funds rate plus 0.5% and LIBOR plus 1.0%. The applicable margin and associated loan commitment fee consists of two pricing levels based on the Company’s consolidated total debt ratio. If this debt ratio is greater than or equal to 2.50 to 1, then the unused commitment fee is 0.15% per annum, and the applicable margin is LIBOR plus 1.5% or the base rate plus 0.5%. If this debt ratio is less than 2.50 to 1, then the unused commitment fee is 0.125% per annum and the applicable margin is LIBOR plus 1.0% or the base rate.

The 2015 Credit Facility includes specific financial covenants such as a leverage ratio and an interest coverage ratio. We are also subject to other customary covenants, including limitations on additional borrowings, dividend payments and acquisitions.

5. Equity-based Compensation

In connection with the IPO, we adopted the 2014 Omnibus Incentive Plan (the “2014 Incentive Plan”), which provides for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards available to directors, officers and other employees of us and our subsidiaries, as well as others performing consulting or advisory services to us. The number of shares of common stock available for issuance under the 2014 Incentive Plan may not exceed 1,905,799.

The following table summarizes our stock option plan:



	Stock Options		Weighted Average Exercise Price
Stock Options outstanding as of December 29, 2014	521,470		$	16.64
Granted	304,750		35.27
Forfeited	(71,383	)	26.82
Exercised	(83,218	)	15.00
Stock Options outstanding as of July 13, 2015	671,619		$	24.21

For the twenty-eight weeks ended July 13, 2015, there were 33,480 options forfeited in relation to the departure of our CFO. There were 250,000 stock options granted in the prior year that vested immediately upon completion of the IPO and the remainder of the options will vest in four equal annual installments following the date of the grant. The weighted average fair market value of stock options granted in the twenty-eight weeks ended July 13, 2015 was $13.59 per share, as estimated at the date of grant using the Black-Scholes model using the following weighted average assumptions:



		Twenty-eight Weeks Ended
		July 13, 2015
Dividend yield		0%
Expected volatility ⁽¹⁾		36.4%
Risk-free rate of return		1.7%
Expected life (in years) ⁽²⁾		6.3

(1) Expected volatility was based on competitors within the industry.

(2) Expected life was calculated using the simplified method, which is an average of the contractual term of the option and its ordinary vesting period, as we do not have sufficient historical data for determining the expected term of our stock option awards.

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There were 6,666 restricted stock units outstanding as of December 29, 2014 and 7,235 and 2,222 restricted stock units were granted and vested, respectively, during the twenty-eight weeks ended July 13, 2015. All of our outstanding restricted stock units vest in three equal annual installments following the date of the grant.

We recognized equity-based compensation as a component of general and administrative expenses of $0.3 million and $0.1 million during the twelve weeks ended July 13, 2015 and July 14, 2014, respectively, and $0.6 million and $6.2 million during the twenty-eight weeks ended July 13, 2015 and July 14, 2014, respectively. Of the total equity-based compensation recognized in the twenty-eight weeks ended July 14, 2014, $4.9 million is related to accelerated vesting of outstanding equity awards at the IPO and $1.2 million is related to stock options granted at the date of the IPO. As of July 13, 2015, total unrecognized compensation expense related to non-vested stock awards, including an estimate for pre-vesting forfeitures, was $4.2 million, which is expected to be recognized over a weighted-average period of 3.4 years.

6. Earnings Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average shares outstanding during the period, without consideration of common stock equivalents. Diluted net income (loss) per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method.

The following table presents the computation of basic and diluted net loss per share for the period indicated:



	Twelve Weeks Ended				Twenty-eight Weeks Ended
	July 13, 2015		July 14, 2014		July 13, 2015		July 14, 2014
Net income (loss) (in thousands):	$	120	$	1,119	$	812	$	(8,869	)
Shares:
Basic weighted average shares outstanding	19,334,939		19,269,746		19,313,094		15,812,901
Diluted weighted average shares outstanding	19,557,645		19,477,765		19,535,948		15,812,901
Earnings (loss) per share:
Basic EPS	$	0.01	$	0.06	$	0.04	$	(0.56	)
Diluted EPS	$	0.01	$	0.06	$	0.04	$	(0.56	)

During the twelve weeks ended July 13, 2015, there were 339,143 stock options excluded from the diluted earnings per share calculation because their inclusion would have been anti-dilutive. During the twelve weeks ended July 14, 2014 there were no stock options excluded from the diluted earnings per share calculation.

During the twenty-eight weeks ended July 13, 2015, there were 258,906 stock options and 295 restricted stock units excluded from the diluted earnings per share calculation because their inclusion would have been anti-dilutive. During the twenty-eight weeks ended July 14, 2014, there were 98,661 stock options and 1,664 restricted stock units excluded from the diluted earnings per share calculation because their inclusion would have been anti-dilutive.

7. Income Taxes

Provision for income taxes was $0.9 million for the twelve weeks ended July 13, 2015 and benefit for income taxes was $0.1 million for the twelve weeks ended July 14, 2014. Provision for income taxes was $1.1 million and $0.7 million for the twenty-eight weeks ended July 13, 2015 and July 14, 2014, respectively. The effective tax rate was 57.9% and (9.1)% for the twenty-eight weeks ended July 13, 2015 and July 14, 2014, respectively. Our quarterly provision for income taxes is measured using an estimated effective tax rate for the period. The comparison of our effective tax rate between periods is significantly impacted by the level of pre-tax income earned and projected for the year, which for the twenty-eight weeks ended July 14, 2014 was impacted by additional expenses incurred as a result of our IPO completed in April 2014.

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8. Related Party Transactions

Corporate Development and Administrative Services Agreement

Prior to the IPO, we terminated the Corporate Development and Administrative Services Agreement dated October 31, 2007 (the "Corporate Services Agreement") with Brentwood Private Equity IV, LLC ("Brentwood"), our former controlling shareholder. Under the terms of the agreement, Brentwood provided assistance in our corporate development activities and our business growth efforts. As consideration for Brentwood's services, we provided reimbursement for business expenses related to performance of this agreement and an annual consulting fee based on Adjusted EBITDA as defined in the agreement. We had no expenses related to this agreement during the twenty-eight weeks ended July 13, 2015 and $0.1 million during the twenty-eight weeks ended July 14, 2014.

9. Commitments and Contingencies

Franchise Agreement

Our franchise agreement requires franchisees to remit continuing royalty fees at a specified percentage of the franchisee’s gross sales revenue, provides that we as franchisor, or our authorized representative, will: (a) provide franchisee with written schedules of all foods, food products, beverages, and other items for sale, and the furniture, fixtures, supplies and equipment necessary and required for the operation of the restaurant; (b) provide franchisee with a list of approved suppliers for the products and services necessary and required for the restaurant; (c) upon the reasonable written request of franchisee, render reasonable advisory services by telephone or in writing pertaining to the operation of the restaurant; (d) provide franchisee with a sample of the standard Zoës Kitchen menu, and any modifications to the menu; (e) loan franchisee a copy of the System’s operating manual and any supplements to the manual that may be published by us; and, (f) provide franchisee the opportunity to participate in group purchasing programs that we may use, develop, sponsor or provide on terms and conditions determined solely by us. In addition, as a condition to the commencement of business by the franchisee, the franchisee must attend and successfully complete our training program.

Litigation

On October 31, 2014, Forsyth Consulting, Inc. ("Forsyth"), a former music vendor for the Company, filed a complaint against the Company in the Circuit Court of Jefferson County, Alabama alleging breach of contract with respect to its prior music service contract. We have removed the action to federal court and, on December 19, 2014, we filed a counterclaim in the United States District Court for the Northern District of Alabama, alleging breach of contract and tortious interference with business relations claims against Forsyth. The Company believes that Forsyth's claims are without merit and intends to vigorously pursue this action.

We are currently involved in various claims and legal actions that arise in the ordinary course of our business, including claims resulting from employment related matters. None of these claims, most of which are covered by insurance, has had a material effect on us. As of the date of this report, other than as set forth above, we are not party to any material pending legal proceedings and are not aware of any claims that could have a material adverse effect on our business, financial condition, results of operations or cash flows. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims could materially and adversely affect our business, financial condition, results of operations or cash flows.

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Other Commitments

In connection with the IPO, the Company entered into employment agreements with two of its executives, superseding their existing employment agreements as discussed in our definitive proxy statement filed with the SEC on April 27, 2015. The employment agreements have an initial term of three years, with subsequent one year extensions unless terminated by the Company or the executive. Under both employment agreements, if the executive’s employment is terminated without "cause" or by the executive with "good reason", the executive is entitled to the following severance payments: a) 12 months of continued base salary; b) 12 months of continued health plan coverage, provided the executive continues to pay the relevant employee portion on an after-tax basis that was being paid prior to termination and provided that such coverage will cease if the executive obtains coverage through a new employer; c) a prorated annual bonus amount based on certain performance metrics and; (d) prorated vesting of any incentive equity shares that would have otherwise vested in the 12-month period following termination. The severance payments are conditioned upon the executive entering into a general release in favor of the Company and our affiliates.

Effective June 18, 2015, Jason Morgan, our CFO, concluded his employment with the Company. The Company agreed to pay Mr. Morgan $0.5 million pursuant to the terms of his employment agreement as described above and a transition agreement.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our 2014 Form 10-K.

In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions set forth under the sections entitled "Risk Factors" and "Forward-Looking Statements" as filed in our 2014 Form 10-K.

Overview

Zoës Kitchen is a fast growing, fast casual restaurant concept serving a distinct menu of fresh, wholesome, Mediterranean-inspired dishes delivered with Southern hospitality. Founded in 1995 by Zoë and Marcus Cassimus in Birmingham, Alabama, Zoës Kitchen is a natural extension of Zoë Cassimus' lifetime passion for cooking Mediterranean meals for family and friends. Since opening our first restaurant, we have never wavered from our commitment to make our food fresh daily and to serve our customers in a warm and welcoming environment. We believe our brand delivers on our customers' desire for freshly-prepared food, convenient, unique and high-quality experiences and their commitment to family, friends and enjoying every moment.

Growth Strategies and Outlook

We plan to execute the following strategies to continue to enhance our brand awareness and grow our revenue and achieve profitability:


•	grow our restaurant base;


•	increase our comparable restaurant sales; and


•	improve our margins and leverage infrastructure.

We have expanded our restaurant base from 21 restaurants in seven states in 2008 to 151 restaurants in 16 states as of July 13, 2015, including three franchise restaurants. We opened 19 Company-owned restaurants during the twenty-eight weeks ended July 13, 2015. We plan to open 31 to 33 restaurants in 2015, including the restaurants opened in the twenty-eight weeks ended July 13, 2015. We expect to double our restaurant base in the next four years. To increase comparable restaurant sales, we plan to heighten brand awareness to drive new customer traffic, increase existing customer frequency and grow our catering business. We believe we are well positioned for future growth with a developed infrastructure capable of supporting a restaurant base that is greater than our existing footprint. Additionally, we believe we have an opportunity to optimize costs and achieve profitability as we benefit from economies of scale.

Key Events

Franchise acquisitions. Since the beginning of 2009, we have acquired 11 franchise locations. In November 2011, we acquired three franchise restaurants in Houston, Texas; in August 2012, we acquired three franchise restaurants in South Carolina, with two restaurants located in Columbia and one restaurant in Greenville; in January 2014, we acquired two franchise restaurants, with one located in Mobile, Alabama and one located in Destin, Florida; and in November 2014, we acquired from our Louisiana franchisee three franchise restaurants, two restaurants under development, and area development rights in Louisiana.

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Initial Public Offering. On April 16, 2014, we completed our IPO of 6,708,332 shares of common stock at a price to the public of $15.00 per share, which included 874,999 shares of common stock sold to the underwriters pursuant to their over-allotment option. After underwriters discounts and commissions and offering expenses, we received net proceeds from the offering of approximately $91.0 million. A portion of these proceeds were used to repay the outstanding indebtness under our 2011 Credit Facility, which at the time of the IPO had an outstanding balance of approximately $48.3 million. We have used the remainder of the proceeds to support our growth, primarily through opening new restaurants and for working capital and general corporate expenses.

As a result of our IPO and the repayment of our outstanding debt, we have benefited from savings on interest expense and management fees that we incurred as a private company. We also expect to incur incremental costs as a public company including legal, accounting, insurance, information technology and other compliance costs. We will continue to use our operating cash flows to fund capital expenditures to support restaurant growth as well as to invest in our existing restaurants, infrastructure and information technology. See "Liquidity and Capital Resources."

Further, in connection with our IPO, we incurred $6.1 million of equity-based compensation expenses, which includes $4.9 million related to accelerated vesting of outstanding equity awards at the IPO and $1.2 million related to stock options granted at the date of the IPO. The financial impact of the IPO affects the comparability of our post-IPO financial performance to our pre-IPO financial performance.

Follow-on Offerings. On August 19, 2014, we completed our follow-on offering of 5,175,000 shares of the Company's common stock at a price of $30.25 per share, which included 675,000 shares sold to the underwriters pursuant to their over-allotment option. All of these shares were offered by the selling stockholders, except for 94,100 shares offered by the Company, the proceeds of which were used by the Company to repurchase the same number of shares from certain of its officers. We did not receive any net proceeds from the offering.

On November 19, 2014, we completed another follow-on offering of 4,370,000 shares of the Company's common stock at a price of $32.00 per share, which included 570,000 shares sold to the underwriters pursuant to their over-allotment option. All of these shares were offered by the selling stockholders. We did not receive any proceeds from the offering.

Departure of Executive Officer. Effective June 18, 2015, Jason Morgan, our Chief Financial Officer, concluded his employment with the Company. The Company has commenced a search for his replacement.

Key Measures We Use to Evaluate Our Performance

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are restaurant sales, comparable restaurant sales growth, AUVs, restaurant contribution, number of new restaurant openings and Adjusted EBITDA.

Restaurant Sales

Restaurant sales represents sales of food and beverages in Company-owned restaurants. Several factors affect our restaurant sales in any given period including the number of restaurants in operation and per restaurant sales.

Comparable Restaurant Sales Growth

Comparable restaurant sales refers to year-over-year sales comparisons for the comparable Company-owned restaurant base. We define the comparable restaurant base to include those restaurants open for 18 periods or longer. As of July 13, 2015 and July 14, 2014, there were 105 and 70 restaurants, respectively, in our comparable Company-owned restaurant base. This measure highlights performance of existing restaurants, as the impact of new Company-owned restaurant openings is excluded.

Comparable restaurant sales growth is generated by an increase in customer traffic or changes in per customer spend. Per customer spend can be influenced by changes in menu prices and/or the mix and number of items sold per check.

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Measuring our comparable restaurant sales allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:


•	consumer recognition of our brand and our ability to respond to changing consumer preferences;


•	overall economic trends, particularly those related to consumer spending;


•	our ability to operate restaurants effectively and efficiently to meet consumer expectations;


•	pricing;


•	customer traffic;


•	per customer spend and average check amount;


•	marketing and promotional efforts;


•	local competition;


•	trade area dynamics;


•	introduction of new menu items; and


•	opening of new restaurants in the vicinity of existing locations.

Consistent with common industry practice, we present comparable restaurant sales on a fiscal calendar basis that aligns current year sales weeks with comparable periods in the prior year, regardless of whether they belong to the same calendar period or not. Since opening new Company-owned restaurants will be a significant component of our revenue growth, comparable restaurant sales is only one measure of how we evaluate our performance.

Average Unit Volumes (AUVs)

AUVs consist of the average sales of all Company-owned restaurants that have been open for a trailing 52-week period or longer. AUVs allow management to assess changes in consumer traffic and per-customer spending patterns at our restaurants.

Restaurant Contribution

Restaurant contribution is defined as restaurant sales less restaurant operating costs, which are cost of sales, labor and store operating expenses. We expect restaurant contribution to increase in proportion to the number of new Company-owned restaurants we open and our comparable restaurant sales growth. Fluctuations in restaurant contribution margin can also be attributed to those factors discussed below for the components of restaurant operating costs.

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Number of New Restaurant Openings

The number of Company-owned restaurant openings reflects the number of restaurants opened during a particular reporting period. Before we open new Company-owned restaurants, we incur pre-opening costs. Some of our restaurants open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. Typically, our new restaurants have stabilized sales after approximately 12 to 24 weeks of operation, at which time the restaurant's sales typically begin to grow on a consistent basis. In new markets, the length of time before average sales for new restaurants stabilize is less predictable and can be longer as a result of our limited knowledge of these markets and consumers' limited awareness of our brand. New restaurants may not be profitable, and their sales performance may not follow historical patterns. The number and timing of restaurant openings has had, and is expected to continue to have, an impact on our results of operations. The following table shows the growth in our Company-owned and franchise restaurant base:



	Twelve Weeks Ended		Twenty-eight Weeks Ended
	July 13, 2015	July 14, 2014	July 13, 2015	July 14, 2014
Company-owned Restaurant Base
Beginning of period	141	109	129	94
Openings	7	7	19	20
Franchisee acquisitions	—	—	—	2
Restaurants at end of period	148	116	148	116
Franchise Restaurant Base
Beginning of period	3	6	3	8
Franchisee acquisitions	—	—	—	(2	)
Restaurants at end of period	3	6	3	6
Total restaurants	151	122	151	122

Key Financial Definitions

Restaurant sales. Restaurant sales represent sales of food and beverages in Company-owned restaurants, net of promotional allowances and employee meals. Restaurant sales in a given period are directly impacted by the number of operating weeks in the period, the number of restaurants we operate and comparable restaurant sales growth.

Royalty fees. Royalty fees represent royalty income from franchisees.

Cost of sales. Cost of sales consists primarily of food, beverage and packaging costs. The components of cost of sales are variable in nature, change with sales volume and are influenced by menu mix and subject to increases or decreases based on fluctuations in commodity costs.

Labor. Labor includes all restaurant-level management and hourly labor costs, including salaries, wages, benefits and bonuses, payroll taxes and other indirect labor costs.

Store operating expenses. Store operating expenses include all other restaurant-level operating expenses, such as supplies, utilities, repairs and maintenance, travel costs, credit card fees, recruiting, delivery service, restaurant-level marketing costs, security and occupancy expenses.

General and administrative expenses. General and administrative expenses include expenses associated with corporate and regional functions that support the development and operations of restaurants, including compensation and benefits, travel expenses, stock compensation costs, legal and professional fees, advertising costs, information systems, corporate office rent and other related corporate costs.

Depreciation. Depreciation consists of depreciation of fixed assets, including equipment and capitalized leasehold improvements.

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Amortization. Amortization consists of amortization of certain intangible assets including franchise agreements, trademarks, reacquired rights and favorable leases.

Pre-opening costs. Pre-opening costs consist of expenses incurred prior to opening a new restaurant and are made up primarily of manager salaries, relocation costs, supplies, recruiting expenses, employee payroll and training costs. Pre-opening costs also include occupancy costs recorded during the period between date of possession and the restaurant's opening date.

Loss from disposal of equipment. Loss from disposal of equipment is composed of the loss on disposal of assets related to retirements and replacements of leasehold improvements or equipment. These losses are related to normal disposals in the ordinary course of business, along with disposals related to selected restaurant remodeling activities.

Loss on extinguishment of debt. Loss on extinguishment of debt consists of the write-off of unamortized loan costs and other fees, following the repayment of our 2011 Credit Facility.

Interest expense, net. Interest expense includes cash and imputed non-cash charges related to our deemed landlord financing, non-cash charges related to our residual value obligations, amortization of debt issue costs as well as cash payments and accrued charges related to our 2011 Credit Facility.

Provision for income taxes. Provision for income taxes represents federal, state and local current and deferred income tax expense.

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Consolidated Results of Operations

The following table summarizes key components of our results of operations for the periods indicated as a percentage of our total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant sales.



	Twelve Weeks Ended				Twenty-eight Weeks Ended
	July 13, 2015		July 14, 2014		July 13, 2015		July 14, 2014
Revenue:
Restaurant sales	99.9	%	99.7	%	99.9	%	99.7	%
Royalty fees	0.1	%	0.3	%	0.1	%	0.3	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Operating expenses:
Restaurant operating costs (1):
Cost of sales	31.8	%	34.1	%	31.5	%	33.2	%
Labor	27.6	%	27.2	%	28.0	%	27.8	%
Store operating expenses	19.3	%	17.5	%	19.0	%	18.3	%
General and administrative expenses	11.5	%	10.7	%	11.5	%	19.0	%
Depreciation	4.7	%	5.0	%	4.9	%	5.1	%
Amortization	0.7	%	0.7	%	0.8	%	0.9	%
Pre-opening costs	1.2	%	1.1	%	1.3	%	1.4	%
Loss from disposal of equipment	0.2	%	0.1	%	0.1	%	0.1	%
Total operating expenses	96.9	%	96.1	%	97.0	%	105.5	%
Income (loss) from operations	3.1	%	3.9	%	3.0	%	(5.5	)%
Other income and expenses:
Interest expense, net	1.3	%	1.5	%	1.4	%	2.6	%
Loss on extinguishment of debt	—		—		—		1.1	%
Other income	(0.0	)%	—		(0.0	)%	—
Loss on interest cap	—		—		—		0.0	%
Total other income and expenses	1.3	%	1.5	%	1.4	%	3.7	%
Income (loss) before provision for income taxes	1.8	%	2.4	%	1.6	%	(9.2	)%
Provision (benefit) for income taxes	1.6	%	(0.3	)%	0.9	%	0.8	%
Net income (loss)	0.2	%	2.7	%	0.7	%	(10.1	)%

(1) As a percentage of restaurant sales.

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Twelve Weeks Ended July 13, 2015 compared to Twelve Weeks Ended July 14, 2014

The following table presents selected consolidated comparative results of operations from our unaudited consolidated financial statements for the twelve weeks ended July 13, 2015 compared to the twelve weeks ended July 14, 2014.



	Twelve Weeks Ended

	July 13, 2015			July 14, 2014			Increase / (Decrease)
	July 13, 2015			July 14, 2014			Dollars			Percentage

	(Dollars in thousands)
Consolidated Statement of Operations Data:
Revenue
Restaurant sales	$	54,424		$	41,761		$	12,663		30.3	%
Royalty fees	50			127			(77		)	(60.6	)%
Total revenue	54,474			41,888			12,586			30.0	%
Operating expenses:
Restaurant operating costs (excluding depreciation and amortization):
Cost of sales	17,313			14,243			3,070			21.6	%
Labor	15,006			11,367			3,639			32.0	%
Store operating expenses	10,514			7,314			3,200			43.8	%
General and administrative expenses	6,261			4,465			1,796			40.2	%
Depreciation	2,587			2,088			499			23.9	%
Amortization	375			314			61			19.4	%
Pre-opening costs	637			443			194			43.8	%
Loss (gain) from disposal of equipment	100			38			62			163.2	%
Total operating expenses	52,793			40,272			12,521			31.1	%
Income from operations	1,681			1,616			65			4.0	%
Other expenses
Interest expense, net	711			621			90			14.5	%
Other Income	(21		)	—			(21		)	*
Total other expenses	690			621			69			11.1	%
Income before provision for income taxes	991			995			(4		)	(0.4	)%
Provision (benefit) for income taxes	871			(124		)	995			*
Net income	$	120		$	1,119		$	(999	)	(89.3	)%

*Not meaningful.

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Restaurant sales for twelve weeks ended July 14, 2014	$	41,761
Incremental restaurant sales increase due to:
Comparable restaurant sales	2,042
Restaurants not in comparable restaurant base	10,621
Restaurant sales for the twelve weeks ended July 13, 2015	$	54,424

Restaurant sales increased by $12.7 million, or 30.3%, for the twelve weeks ended July 13, 2015 compared to the twelve weeks ended July 14, 2014. Restaurants not in the comparable restaurant base and other sales accounted for $10.6 million of this increase. The balance of the growth was due to an increase in comparable restaurant sales of $2.0 million, or 5.6%, in the twelve weeks ended July 13, 2015, comprised primarily of a 1.3% increase in customer traffic, a 0.8% increase in price and 3.5% increase in product mix at our comparable restaurants.

Franchise and royalty fees. Royalty fees decreased by $0.1 million, or 60.6%, for the twelve weeks ended July 13, 2015 compared to the twelve weeks ended July 14, 2014. The decrease was primarily attributable to the acquisition of the Louisiana franchise restaurants in November 2014, which resulted in lower royalty fees in the twelve weeks ended July 13, 2015 as the stores are now Company-owned. We recognized no franchise fees for the twelve weeks ended July 13, 2015 or July 14, 2014.

Cost of sales. Cost of sales increased $3.1 million for the twelve weeks ended July 13, 2015 compared to the twelve weeks ended July 14, 2014, due primarily to the increase in restaurant sales. As a percentage of restaurant sales, cost of sales decreased from 34.1% in the twelve weeks ended July 14, 2014 to 31.8% in the twelve weeks ended July 13, 2015. This decrease was primarily driven by lower raw material costs in poultry, dairy and dry goods.

Labor. Labor increased by $3.6 million for the twelve weeks ended July 13, 2015 compared to the twelve weeks ended July 14, 2014, due primarily to opening 29 new Company-owned restaurants and acquiring three franchise restaurants since July 14, 2014. As a percentage of restaurant sales, labor increased from 27.2% in the twelve weeks ended July 14, 2014 to 27.6% in the twelve weeks ended July 13, 2015. This increase was primarily driven by an increase in training stores to support our current growth and wage inflation.

Store operating expenses. Store operating expenses increased by $3.2 million for the twelve weeks ended July 13, 2015 compared to the twelve weeks ended July 14, 2014, due primarily to opening 29 new Company-owned restaurants and acquiring three franchise restaurants since July 14, 2014. As a percentage of restaurant sales, store operating expense increased from 17.5% in the twelve weeks ended July 14, 2014 to 19.3% in the twelve weeks ended July 13, 2015. This increase was primarily attributable to the timing of our general manager conference, which in 2014 occurred in the sixteen weeks ended April 21, 2014 and in 2015 occurred in the twelve weeks ended July 13, 2015. In addition, the increase was attributable to higher repair and maintenance costs, occupancy from lower sales leverage on new stores and utilities.

General and administrative expenses. General and administrative expenses increased by $1.8 million for the twelve weeks ended July 13, 2015 compared to the twelve weeks ended July 14, 2014. As a percentage of revenue, general and administrative expenses increased from 10.7% in the twelve weeks ended July 14, 2014 to 11.5% in twelve weeks ended July 13, 2015. This increase was driven primarily by costs associated with our former CFO's departure and increased non-cash equity-based compensation due to a higher fair value associated with our current year equity awards offset by timing of various marketing initiatives.

Depreciation. Depreciation increased by $0.5 million for the twelve weeks ended July 13, 2015 compared to the twelve weeks ended July 14, 2014, due primarily to opening 29 new Company-owned restaurants and acquiring three franchise restaurants since July 14, 2014. As a percentage of revenue, depreciation decreased from 5.0% in the twelve weeks ended July 14, 2014 to 4.7% in the twelve weeks ended July 13, 2015.

Amortization. Amortization increased by $0.1 million for the twelve weeks ended July 13, 2015 compared to the twelve weeks ended July 14, 2014.

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Pre-opening costs. Pre-opening costs increased by $0.2 million for the twelve weeks ended July 13, 2015 compared to the twelve weeks ended July 14, 2014. As a percent of revenue, pre-opening costs increased from 1.1% in the twelve weeks ended July 14, 2014 to 1.2% in the twelve weeks ended July 13, 2015.

Interest expense. Interest expense increased by $0.1 million for the twelve weeks ended July 13, 2015 compared to the twelve weeks ended July 14, 2014.

Provision for income taxes. Provision for income taxes was $0.9 million for the twelve weeks ended July 13, 2015 compared to a benefit of $0.1 million for the twelve weeks ended July 14, 2014. Tax expense typically remains relatively constant as it primarily reflects the accrual of income tax expense related to a valuation allowance in connection with the tax amortization of the Company’s goodwill that was not available to offset existing deferred tax assets. Due to the uncertain timing of the reversal of this temporary difference, it cannot be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore the tax liability cannot offset deferred tax assets. The comparison of our effective tax rate between periods is significantly impacted by the level of pre-tax income earned and projected for the year, which in 2014 was impacted by additional expenses incurred as a result of our IPO completed in April 2014.

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Twenty-eight Weeks Ended July 13, 2015 compared to Twenty-eight Weeks Ended July 14, 2014

The following table presents selected consolidated comparative results of operations from our unaudited consolidated financial statements for the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014:



	Twenty-eight Weeks Ended

	July 13, 2015			July 14, 2014			Increase / (Decrease)
	July 13, 2015			July 14, 2014			Dollars			Percentage

	(Dollars in thousands)
Consolidated Statement of Operations Data:
Revenue:
Restaurant sales	$	117,373		$	87,879		$	29,494		33.6	%
Royalty fees	109			275			(166		)	(60.4	)%
Total revenue	117,482			88,154			29,328			33.3	%
Operating expenses:
Restaurant operating costs (excluding depreciation and amortization):
Cost of sales	36,987			29,163			7,824			26.8	%
Labor	32,825			24,467			8,358			34.2	%
Store operating expenses	22,301			16,062			6,239			38.8	%
General and administrative expenses	13,503			16,733			(3,230		)	(19.3	)%
Depreciation	5,779			4,501			1,278			28.4	%
Amortization	887			782			105			13.4	%
Pre-opening costs	1,485			1,259			226			18.0	%
Loss from disposal of equipment	147			51			96			188.2	%
Total operating expenses	113,914			93,018			20,896			22.5	%
Income (loss) from operations	3,568			(4,864		)	8,432			*
Other income and expenses:
Interest expense, net	1,682			2,280			(598		)	(26.2	)%
Loss on extinguishment of debt	—			978			(978		)	*
Other income	(31		)	—			(31		)	*
Loss on interest cap	—			6			(6		)	*
Total other income and expenses	1,651			3,264			(1,613		)	(49.4	)%
Income (loss) before provision for income taxes	1,917			(8,128		)	10,045			*
Provision (benefit) for income taxes	1,105			741			364			49.1	%
Net income (loss)	$	812		$	(8,869	)	$	9,681		*

*Not meaningful.

Restaurant sales. The following table summarizes the growth in restaurant sales from the twenty-eight weeks ended July 14, 2014 to the twenty-eight weeks ended July 13, 2015:



(in thousands)	Net Sales
Restaurant sales for the twenty-eight weeks ended July 14, 2014	$	87,879
Incremental restaurant sales increase due to:
Comparable restaurant sales	5,052
Restaurants not in comparable restaurant base	24,442
Restaurant sales for the twenty-eight weeks ended July 13, 2015	$	117,373

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Restaurant sales increased by $29.5 million, or 33.6%, in the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014. Restaurants not in the comparable restaurant base and other sales accounted for $24.4 million of this increase. The balance of the growth was due to an increase in comparable restaurant sales of $5.1 million, or 6.7%, in the twenty-eight weeks ended July 13, 2015 comprised primarily of a 2.5% increase in customer traffic, 1.0% increase in price and 3.1% increase in product mix at our comparable restaurants.

Royalty fees. Royalty fees decreased by $0.2 million, or 60.4%, in the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014. The decrease was primarily attributable to the acquisition of the Louisiana franchise restaurants in November 2014, which resulted in lower royalty fees in the twenty-eight weeks ended July 13, 2015.

Cost of sales. Cost of sales increased $7.8 million in the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014, due primarily to the increase in restaurant sales. As a percentage of restaurant sales, cost of sales decreased from 33.2% in the twenty-eight weeks ended July 14, 2014 to 31.5% in the twenty-eight weeks ended July 13, 2015. This decrease was primarily driven by lower costs in poultry, dairy, produce and dry goods, offset by higher costs in beef and seafood.

Labor. Labor increased by $8.4 million in the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014, due primarily to opening 29 new Company-owned restaurants and acquiring three franchise restaurants since July 14, 2014. As a percentage of restaurant sales, labor increased from 27.8% in the twenty-eight weeks ended July 14, 2014 to 28.0% in the twenty-eight weeks ended July 13, 2015. The increase was primarily driven by an increase in training stores to support our current growth and wage inflation.

Store operating expenses. Store operating expenses increased by $6.2 million in the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014, due primarily to opening 29 new Company-owned restaurants and acquiring three franchise restaurants since July 14, 2014. As a percentage of restaurant sales, store operating expense increased from 18.3% in the twenty-eight weeks ended July 14, 2014 to 19.0% in the twenty-eight weeks ended July 13, 2015. This increase was primarily attributable to higher repair and maintenance costs, occupancy from lower sales leverage on new stores and utilities.

General and administrative expenses. General and administrative expenses decreased by $3.2 million in the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014. As a percentage of revenue, general and administrative expenses decreased from 19.0% in the twenty-eight weeks ended July 14, 2014 to 11.5% in the twenty-eight weeks ended July 13, 2015. The decrease was primarily driven by a $5.7 million decrease in equity-based compensation expense due to the accelerated vesting of stock and stock options, $0.4 million of non-capitalized IPO-related expenses as of the date of the IPO in 2014 and the timing of various marketing initiatives in 2015. These decreases are offset by increased corporate payroll and related expenses associated with supporting an increased number of restaurants, incremental public company costs and costs associated with our former CFO's departure.

Depreciation. Depreciation increased by $1.3 million in the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014, due primarily to opening 29 new Company-owned restaurants and acquiring three franchise restaurants since July 14, 2014. As a percentage of revenue, depreciation decreased from 5.1% in the twenty-eight weeks ended July 14, 2014 to 4.9% in the twenty-eight weeks ended July 13, 2015.

Amortization. Amortization increased by $0.1 million in the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014.

Pre-opening costs. Pre-opening costs increased by $0.2 million in the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014. As a percent of revenue, pre-opening costs decreased from 1.4% in the twenty-eight weeks ended July 14, 2014 to 1.3% in the twenty-eight weeks ended July 13, 2015.

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Interest expense. Interest expense decreased by $0.6 million in the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014, due primarily to lower interest and amortization of deferred financing costs costs of $0.8 million after repaying all outstanding borrowings under our 2011 Credit Facility on April 16, 2014, offset by interest from deemed landlord financing increasing $0.2 million.

Loss on extinguishment of debt. Loss on extinguishment of debt was $1.0 million for the twenty-eight weeks ended July 14, 2014 due to the repayment of the entire amount of outstanding borrowings under our 2011 Credit Facility.

Provision for income taxes. Provision for income taxes increased by $0.4 million in the twenty-eight weeks ended July 13, 2015 compared to the twenty-eight weeks ended July 14, 2014. Our tax expense typically remains relatively constant as it primarily reflects the accrual of income tax expense related to a valuation allowance in connection with the tax amortization of the Company’s goodwill that was not available to offset existing deferred tax assets. Due to the uncertain timing of the reversal of this temporary difference, it cannot be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore the tax liability cannot offset deferred tax assets. The comparison of our effective tax rate between periods is significantly impacted by the level of pre-tax income earned and projected for the year, which in 2014 was primarily impacted by additional expenses incurred as a result of our IPO in April 2014.

Adjusted EBITDA

EBITDA is defined as net income (loss) before interest, income taxes and depreciation and amortization.

Adjusted EBITDA is defined as EBITDA plus equity-based compensation expense, management and consulting fees, asset disposals, loss on interest cap, loss on extinguishment of debt, non-capitalized offering-related expenses, executive transition costs and pre-opening costs. Adjusted EBITDA is intended as a supplemental measure of our performance that is not required by, or presented in accordance with GAAP. We believe that EBITDA and Adjusted EBITDA provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. Our management uses EBITDA and Adjusted EBITDA (i) as a factor in evaluating management's performance when determining incentive compensation and (ii) to evaluate the effectiveness of our business strategies.

We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company's financial measures with other fast casual restaurants, which may present similar non-GAAP financial measures to investors. In addition, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate Adjusted EBITDA in the same fashion.

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Our management does not consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company's financial statements. Some of these limitations are:


•	Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;


•	Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;


•	Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;


•	although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;


•	equity-based compensation expense is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing performance for a particular period;


•	Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and


•	other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

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The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA:



	Twelve Weeks Ended					Twenty-eight Weeks Ended
	July 13, 2015		July 14, 2014			July 13, 2015		July 14, 2014

	(Dollars in thousands)
Adjusted EBITDA:
Net income (loss), as reported	$	120	$	1,119		$	812	$	(8,869	)
Depreciation and amortization	2,962		2,402			6,666		5,283
Interest expense, net	711		621			1,682		2,280
Provision (benefit) for income taxes	871		(124		)	1,105		741
EBITDA	4,664		4,018			10,265		(565		)
Asset disposals and loss on interest cap (1)	100		38			147		57
Management and consulting fees (2)	—		—			—		113
Equity-based compensation expense (3)	—		—			—		6,111
Loss on extinguishment of debt (4)	—		—			—		978
Pre-opening costs (5)	637		443			1,485		1,259
Offering related expenses (6)	—		142			—		526
Executive transition costs (7)	549		—			549		—
Adjusted EBITDA	$	5,950	$	4,641		$	12,446	$	8,479

(1) Represents costs related to loss on disposal of equipment and loss on interest cap.
(2) Represents fees payable to Brentwood Private Equity IV, LLC ("Brentwood"), our former controlling stockholder, pursuant to the Corporate Development and Administrative Services Agreement dated October 31, 2007 ("Corporate Services Agreement"), and fees payable to Greg Dollarhyde pursuant to a consulting agreement entered into on March 22, 2011. Both agreements were terminated prior to the completion of the IPO.
(3) Represents non-cash equity-based compensation expense associated with the accelerated vesting of stock and stock options at our IPO in April 2014. Amounts previously disclosed for the twelve and twenty-eight weeks ended July 14, 2014 included an additional $72,000 and $79,000, respectively, related to post- IPO non-cash equity-based compensation.
(4) Represents the remaining deferred financing costs, loan administrative fee, and interest rate contract that were written off with the repayment of our 2011 Credit Facility.
(5) Represents expenses directly associated with the opening of new restaurants that are incurred prior to opening, including pre-opening rent.
(6) Represents fees and expenses that were incurred, but not capitalized, in relation to our IPO completed on April 16, 2014.
(7) Represents costs associated with our former CFO's departure pursuant to his employment and transition agreement.

Liquidity and Capital Resources

Potential Impacts of Market Conditions on Capital Resources

We have continued to experience positive trends in consumer traffic and increases in comparable restaurant sales, operating cash flows and restaurant contribution margin. However, the restaurant industry continues to be challenged, and uncertainty exists as to the sustainability of these favorable trends. We have continued to implement various cost savings initiatives, including savings in our food costs through waste reduction and efficiency initiatives in our supply chain and labor costs. We have developed new menu items to appeal to consumers and used marketing campaigns to promote these items.

We believe that cash and cash equivalents and expected cash flow from operations are adequate to fund operating lease obligations, capital expenditures and working capital obligations for at least the next 12 months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow from operations and our ability to manage costs and working capital successfully.

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Summary of Cash Flows

Following the IPO, our primary sources of liquidity and cash flows are operating cash flows and the net proceeds from the IPO not used for repayment of our 2011 Credit Facility. We are using these sources to fund capital expenditures for new Company-owned restaurant openings, reinvest in our existing restaurants, repurchase restaurants from our franchisees, invest in infrastructure and information technology and maintain working capital. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have at least 20 days to pay our vendors.



	Twenty-eight Weeks Ended
	July 13, 2015			July 14, 2014

	(Dollars in thousands)
Consolidated Statement of Cash Flows Data:
Net cash provided by operating activities	$	13,659		$	10,809
Net cash used in investing activities	(20,165		)	(19,073		)
Net cash provided by financing activities	1,313			49,942

Cash Flows Provided by Operating Activities

Net cash provided by operating activities increased to $13.7 million for the twenty-eight weeks ended July 13, 2015 from $10.8 million for the twenty-eight weeks ended July 14, 2014. Net cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, and the net change in operating assets and liabilities.

Net cash provided by operating activities for the twenty-eight weeks ended July 13, 2015 consisted primarily of net income adjusted for non-cash expenses and an increase in accounts payable, accrued expenses and other and deferred rent. The increase in accounts payable and accrued expenses and other was primarily related to seasonality and the timing of several corporate invoices. The increase in deferred rent was primarily related to new store openings.

Net cash provided by operating activities for the twenty-eight weeks ended July 14, 2014 consisted primarily of net income adjusted for non-cash expenses, including charges related to accelerated vesting of stock and stock options in connection with our IPO, and an increase in accounts payable, accrued expenses and other, and deferred rent. The increase in accounts payable and accrued expenses and other was primarily related to an increase due to seasonality. The increase in deferred rent was primarily related to new store openings.

Cash Flows Used in Investing Activities

Net cash used in investing activities increased to $20.2 million for the twenty-eight weeks ended July 13, 2015 from $19.1 million for the twenty-eight weeks ended July 14, 2014. The increase was primarily due to the timing of new store openings offset by the acquisition of two franchise stores in the twenty-eight weeks ended July 14, 2014 for $1.1 million.

Cash Flows Provided by Financing Activities

Cash flows provided by financing activities decreased to $1.3 million for the twenty-eight weeks ended July 13, 2015 from $49.9 million for the twenty-eight weeks ended July 14, 2014, primarily due to $91.0 million in net proceeds from the sale of common stock in our IPO offset by a change of $41.4 million in net payments on our 2011 Credit Facility which was repaid in full following the IPO in 2014.

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Credit Facility

On April 16, 2014, we repaid all outstanding borrowings under the 2011 Credit Facility with a portion of the proceeds from our IPO and subsequently terminated our 2011 Credit Agreement.

On February 6, 2015, we entered into the 2015 Credit Facility with Wells Fargo Bank, National Association. The 2015 Credit Facility consists of a revolving loan commitment in the aggregate amount of $20.0 million, together with an incremental revolving credit commitment up to an aggregate amount of $30.0 million. The 2015 Credit Facility has a five year term and matures on February 6, 2020. As of July 13, 2015, we have no indebtedness under the 2015 Credit Facility.

Off-Balance Sheet Arrangements

As of July 13, 2015, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Our critical accounting policies are those that materially affect our financial statements and involve difficult, subjective or complex judgments by management. Although these estimates are based on management's best knowledge of current events and actions that may impact us in the future, actual results may be materially different from the estimates.

We believe our critical accounting policies are affected by significant judgments and estimates used in the preparation of our consolidated financial statements and that the judgments and estimates are reasonable. Our critical accounting polices and estimates are described in our annual consolidated financial statements and the related notes in our 2014 Form 10-K.

JOBS Act

On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other non-emerging growth companies.

As an emerging growth company, we have relied on certain exemptions and reduced reporting requirements provided by the JOBS Act. As of the end of our second fiscal quarter in the current year (or July 13, 2015), the market value of our common stock held by non-affiliates exceeded $700 million. Accordingly, we qualify as a large accelerated filer beginning with our Annual Report on Form 10-K for the fiscal year ending December 28, 2015 and will be subject to the reporting and filing requirements applicable to such filers. These requirements include, among other things, (i) providing an auditor's attestation report on our systems of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) providing compensation disclosure required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and (iii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (auditor discussion and analysis). To comply with these requirements, we expect to incur additional general and administrative costs related to incremental audit requirements as well as resource needs. While we expect to comply with these requirements in a timely manner, any failure to do so could have a material adverse effect on our business and results of operations.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are exposed to interest rate risk through fluctuations of interest rates on our investments and debt, as applicable. Changes in interest rates affect the interest income we earn, and therefore impact our cash flows and results of operations.

Commodity Price Risk

We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements we use contain risk management techniques designed to minimize price volatility. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase restaurant operating costs as a percentage of restaurant sales.

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Item 4. Controls and Procedures

Our management establishes and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Such information is accumulated and communicated to our management, including our President and Chief Executive Officer ("CEO") and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

We have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act) as of the end of the period covered by this report, with the participation of our CEO and Principal Financial Officer, as well as other key members of our management. Based on this evaluation, our CEO and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered in this report.

The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II - Other Information

Item 1. Legal Proceedings

Refer to Note 9, Commitments and Contingencies, of the Notes to the Unaudited Consolidated Financial Statements.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 29, 2014.

Item 2. Unregistered Sales of Equity and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit Index



Exhibit Number			Description of Exhibit
10.1			Transition Agreement dated August 12, 2015 by and between Zoe's Kitchen, Inc. and Jason Morgan
31.1			Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*			Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			XBRL Taxonomy Extension Label Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

* This certification is deemed not filed for purposes of section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934. the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 27, 2015

ZOE'S KITCHEN, INC.



By:	/s/ Kevin Miles
	Name: Kevin Miles
	Title: President and Chief Executive Officer



By:	/s/ James Besch
	Name: James Besch
	Title: Principal Financial Officer

Zoe's Kitchen, Inc. - FORM 10-Q - August 27, 2015

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Zoe's Kitchen, Inc. Reports