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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 26, 2016

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 001-37374

 

 

 

LOGO

Bojangles’, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   45-2988924

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9432 Southern Pine Boulevard  
Charlotte, North Carolina   28273
(Address of principal executive offices)   (Zip Code)

(704) 527-2675

(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, 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   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of August 1, 2016, there were 36,336,416 shares of the registrant’s common stock, par value $0.01 per share outstanding.

 

 

 


Table of Contents

BOJANGLES’, INC. AND SUBSIDIARIES

INDEX

 

         Page  
  PART I –FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
 

Condensed Consolidated Balance Sheets as of June 26, 2016 and December 27, 2015 (Unaudited)

     1   
 

Condensed Consolidated Statements of Operations and Comprehensive Income for the thirteen and twenty-six weeks ended June 26, 2016 and June 28, 2015 (Unaudited)

     2   
 

Condensed Consolidated Statement of Stockholders’ Equity for the twenty-six weeks ended June 26, 2016 (Unaudited)

     3   
 

Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended June 26, 2016 and June 28, 2015 (Unaudited)

     4   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     5   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      19   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      37   

Item 4.

  Controls and Procedures      38   
  PART II – OTHER INFORMATION   

Item 1.

  Legal Proceedings      40   

Item 1A.

  Risk Factors      40   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      41   

Item 3.

  Defaults Upon Senior Securities      41   

Item 4.

  Mine Safety Disclosures      41   

Item 5.

  Other Information      41   

Item 6.

  Exhibits      41   
  Signature      42   

 

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Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements made in this Quarterly Report that are not statements of historical or current facts, such as those under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may be preceded by, followed by or include the words “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “outlook,” “plan,” “potential,” “project,” “projection,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning.

Forward-looking statements are inherently subject to risks, uncertainties and assumptions; they are not guarantees of performance. You should not place undue reliance on these statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that the assumptions and expectations will prove to be correct.

You should understand that the following important factors could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

 

    our vulnerability to changes in consumer preferences and economic conditions;

 

    our ability to open restaurants in new and existing markets and expand our franchise system;

 

    our ability to generate comparable restaurant sales growth;

 

    our restaurants and our franchisees’ restaurants may close due to financial or other difficulties;

 

    new menu items, advertising campaigns, changes in discounting strategy and restaurant designs and remodels may not generate increased sales or profits;

 

    anticipated future restaurant openings may be delayed or cancelled;

 

    increases in the cost of chicken, pork, dairy, wheat, corn and other products;

 

    our ability to compete successfully with other quick-service and fast-casual restaurants, including new entrants to the breakfast market and those newly expanding their breakfast menus for all day availability;

 

    our reliance on our franchisees, who may be adversely impacted by economic conditions and who may incur financial hardships, be unable to obtain credit, need to close their restaurants or declare bankruptcy;

 

    our ability to support our franchise system;

 

    our limited degree of control over the actions of our franchisees;

 

    our potential responsibility for certain acts of our franchisees;

 

    our vulnerability to conditions in the Southeastern United States;

 

    negative publicity, whether or not valid;

 

    concerns about food safety and quality and about food-borne illnesses, including adverse public perception due to the occurrence of avian flu, swine flu or other food-borne illnesses, such as E. coli;

 

    our dependence upon frequent and timely deliveries of restaurant food and other supplies;

 

    our reliance upon a limited number of suppliers for substantially all of our restaurant food and other supplies;

 

    our reliance upon just one third-party distributor for substantially all of our restaurant food and other supplies;

 

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Table of Contents
    the adverse impact of economic conditions on our operating results and financial condition, on our ability to comply with the terms and covenants of our debt agreements and on our ability to pay or to refinance our existing debt or to obtain additional financing;

 

    our ability to protect our name and logo and other intellectual property;

 

    loss of the abilities, experience and knowledge of our existing directors and officers;

 

    matters relating to employment and labor laws;

 

    labor shortages or increases in labor costs;

 

    the impact of litigation, including wage and hour class action lawsuits;

 

    our ability and the ability of our franchisees to renew leases at the end of their terms;

 

    the impact of federal, state or local government regulations relating to the preparation and sale of food, zoning and building codes, employee wages and benefits, and environmental and other matters;

 

    the fact that we are considered a “controlled company” and exempt from certain corporate governance rules primarily relating to board independence, and we may use some or all of these exemptions;

 

    the fact that we are a holding company with no operations and will rely on our operating subsidiaries to provide us with funds;

 

    our expectations regarding the time during which we will be an emerging growth company under the JOBS Act; and

 

    changes in accounting standards.

In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Form 10-Q (including the exhibits hereto) might not occur. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, even if experience or future developments make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law.

See the section entitled “Risk Factors” in this Form 10-Q as well as our Annual Report on Form 10-K for the fiscal year ended December 27, 2015 filed with the United States Securities and Exchange Commission (the “SEC”) on March 11, 2016 for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. Those factors and the other risk factors described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, investors are cautioned not to place undue reliance on such forward-looking statements.

 

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

BOJANGLES’, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)

 

     June 26,     December 27,  
     2016     2015  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 17,424       14,263  

Accounts and vendor receivables, net of allowance for doubtful accounts of $191 and $329

     5,352       4,736  

Accounts receivable, related parties, net of allowance for doubtful accounts of $22 and $22

     433       403  

Inventories, net

     3,005       3,080  

Other current assets

     4,026       5,639  
  

 

 

   

 

 

 

Total current assets

     30,240       28,121  

Property and equipment, net

     48,929       48,137  

Goodwill

     161,140       161,140  

Brand

     290,500       290,500  

Franchise rights, net

     24,792       25,341  

Favorable leases, net

     1,169       1,394  

Other noncurrent assets

     3,441       3,673  
  

 

 

   

 

 

 

Total assets

   $ 560,211       558,306  
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 13,702       17,893  

Accrued expenses

     23,052       19,086  

Current maturities of long-term debt

     —          —     

Current maturities of capital lease obligations

     6,157       5,968  

Other current liabilities

     2,557       2,155  
  

 

 

   

 

 

 

Total current liabilities

     45,468       45,102  

Long-term debt, less current maturities and deferred debt issuance costs, net

     180,434       197,735  

Deferred income taxes

     112,103       115,028  

Capital lease obligations, less current maturities

     21,759       21,483  

Other noncurrent liabilities

     13,341       11,834  
  

 

 

   

 

 

 

Total liabilities

     373,105       391,182  
  

 

 

   

 

 

 

Commitments and contingencies (notes 2, 11 and 12)

     —          —     

Stockholders’ equity:

    

Preferred stock, $0.01 par value; 25,000 shares authorized and no shares issued and outstanding as of both June 26, 2016 and December 27, 2015

     —          —     

Common stock, $0.01 par value; 150,000 shares authorized and 36,336 and 36,009 shares issued and outstanding as of June 26, 2016 and December 27, 2015, respectively

     363       360  

Additional paid-in capital

     121,959       119,084  

Retained earnings

     65,536       47,661  

Accumulated other comprehensive (loss) income

     (752 )     19  
  

 

 

   

 

 

 

Total stockholders’ equity

     187,106       167,124  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 560,211       558,306  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

    

 

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Table of Contents

BOJANGLES’, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(in thousands, except per share amounts)

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
     June 26,
2016
    June 28,
2015
    June 26,
2016
    June 28,
2015
 

Revenues:

        

Company restaurant revenues

   $ 124,674       114,043       246,088       222,378  

Franchise royalty revenues

     6,621       6,368       12,793       12,305  

Other franchise revenues

     300       105       370       480  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     131,595       120,516       259,251       235,163  
  

 

 

   

 

 

   

 

 

   

 

 

 

Company restaurant operating expenses:

        

Food and supplies costs

     39,020       36,724       77,541       73,285  

Restaurant labor costs

     34,525       31,178       67,861       61,647  

Operating costs

     26,607       24,312       55,020       48,183  

Depreciation and amortization

     3,124       2,714       6,207       5,388  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Company restaurant operating expenses

     103,276       94,928       206,629       188,503  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before other operating expenses

     28,319       25,588       52,622       46,660  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other operating expenses:

        

General and administrative

     9,402       11,717       18,912       22,630  

Depreciation and amortization

     716       691       1,433       1,350  

Impairment

     187       —         389       15  

Loss (gain) on disposal of property and equipment

     10       14       (189 )     11  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other operating expenses

     10,315       12,422       20,545       24,006  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     18,004       13,166       32,077       22,654  

Amortization of deferred debt issuance costs

     (222 )     (231 )     (369 )     (415 )

Interest income

     2       5       3       5  

Interest expense

     (1,937 )     (2,171 )     (3,962 )     (4,392 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     15,847       10,769       27,749       17,852  

Income taxes

     5,816       4,435       9,874       8,080  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     10,031       6,334       17,875       9,772  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax

        

Change in fair value on interest rate swaps, net of income tax benefit (expense) of $219, $(9), $474 and $207

     (356 )     14       (771 )     (333 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 9,675       6,348       17,104       9,439  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 0.28       0.31       0.49       0.95  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.27       0.17       0.48       0.26  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

Twenty-Six Weeks Ended June 26, 2016

(Unaudited)

(in thousands)

 

                                 Accumulated        
                   Additional             other     Total  
     Common stock      paid-in      Retained      comprehensive     stockholders’  
     Shares      Amount      capital      earnings      income (loss)     equity  

Balance as of December 27, 2015

     36,009      $ 360        119,084        47,661        19       167,124  

Net income

     —           —           —           17,875        —          17,875  

Change in fair value on interest rate swaps,net of income tax benefit of $474

     —           —           —           —           (771 )     (771 )

Stock option exercises

     319        3        753        —           —          756  

Vesting of restricted stock units

     8        —           —           —           —          —     

Excess tax benefits from stock-based payment arrangements

     —           —           1,573        —           —          1,573  

Stock-based compensation

     —           —           549        —           —          549  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance as of June 26, 2016

     36,336      $ 363        121,959        65,536        (752 )     187,106  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

     Twenty-Six Weeks Ended  
     June 26,
2016
    June 28,
2015
 

Cash flows from operating activities:

    

Net income

   $ 17,875       9,772  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Deferred income tax benefit

     (775 )     (2,237 )

Depreciation and amortization

     7,640       6,738  

Amortization of deferred debt issuance costs

     369       415  

Impairment

     389       15  

(Gain) loss on disposal of property and equipment

     (189 )     11  

(Benefit) provision for doubtful accounts

     (138 )     55  

Provision for inventory spoilage

     3       16  

Benefit for closed stores

     (51 )     (50 )

Stock-based compensation

     549       1,402  

Excess tax benefit from stock-based compensation

     (1,573 )     (421 )

Changes in operating assets and liabilities

     1,188       2,930  
  

 

 

   

 

 

 

Net cash provided by operating activities

     25,287       18,646  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of franchisee’s assets

     —          (186 )

Purchases of property and equipment

     (3,950 )     (4,671 )

Proceeds from disposition of property and equipment

     49       28  
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,901 )     (4,829 )
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Principal payments on long-term debt

     (17,669 )     (12,551 )

Stock option exercises

     756       96  

Excess tax benefit from stock-based compensation

     1,573       421  

Principal payments on capital lease obligations

     (2,885 )     (2,221 )
  

 

 

   

 

 

 

Net cash used in financing activities

     (18,225 )     (14,255 )
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     3,161       (438 )

Cash and cash equivalents balance, beginning of fiscal period

     14,263       13,201  
  

 

 

   

 

 

 

Cash and cash equivalents balance, end of fiscal period

   $ 17,424       12,763  
  

 

 

   

 

 

 

Supplemental cash flow disclosures:

    

Non-cash conversion of preferred stock into common stock

   $ —          172,691  

Cash paid for interest

     3,957       4,374  

Cash paid for income taxes

     7,923       8,814  

Assets acquired under capital leases

     3,799       3,551  

Net change in assets under financing obligations

     808       1,493  

Reduction of capital lease obligations upon return of assets

     138       81  

Reduction of capital lease obligations upon early termination of lease

     288        —     

See accompanying notes to condensed consolidated financial statements.

 

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(1) Summary of Significant Operations and Accounting Policies

 

  (a) Operations

Bojangles’, Inc. (formerly known as BHI Holding Corp.) (together with its subsidiaries, “Bojangles’”, the “Company”, “we” or “our”) was formed on June 28, 2011 as a Delaware corporation. The Company’s principal business is the operations and development and franchising, as franchisor, of limited service restaurants. As of June 26, 2016, there were 295 Company-operated restaurants, 61 related party franchised restaurants, and 333 independent franchised restaurants operating under the Bojangles’® name. The restaurants are located principally in the Southeastern United States. The Company’s franchising activity is regulated by the laws of the various states in which it is registered to sell franchises, as well as rules promulgated by the Federal Trade Commission. The legislation and rules, among other things, establish minimum disclosure requirements to a prospective franchisee and require periodic registration by the Company with state administrative agencies.

The following is the number of Bojangles’ franchised, Company-operated and system-wide restaurants at the beginning and end of the thirteen and twenty-six weeks ended June 26, 2016:

 

     Thirteen Weeks Ended      Twenty-Six Weeks Ended  
     June 26, 2016      June 26, 2016  
     Franchised      Company-
Operated
     System-
Wide
     Franchised      Company-
Operated
     System-
Wide
 

Restaurants at the beginning of the period

     383         288         671         381         281         662   

Opened during the period

     11         7         18         13         14         27   

Closed during the period

     —           —           —           —           —           —     

Refranchised during the period

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Restaurants at the end of the period

     394         295         689         394         295         689   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (b) Basis of Presentation and Consolidation

The accompanying unaudited condensed 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 condensed or omitted pursuant to rules and regulations of the SEC.

On May 13, 2015, the Company completed its initial public offering of 8,912,500 shares of common stock at a price to the public of $19.00 per share (the “IPO”), including 1,162,500 shares sold to the underwriters pursuant to their option to purchase additional shares. All of the shares of the Company’s common stock offered as part of the IPO were sold by selling stockholders. Accordingly, the Company did not receive any proceeds from the sale of the shares. Prior to the consummation of the IPO (i) a 359.03843-for-1 stock split of the Company’s common stock was effected (subject to rounding to eliminate any fractional shares), (ii) the conversion ratio of the Company’s Series A

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

Preferred Stock was automatically adjusted as a result of the stock split in accordance with certain anti-dilution provisions in the Company’s certificate of incorporation and (iii) each share of the Company’s Series A Preferred Stock converted into 359.03843 shares of the Company’s common stock (subject to rounding to eliminate any fractional shares). All share and per-share data herein have been adjusted to reflect the stock split as though it had occurred prior to the earliest data presented.

These condensed consolidated financial statements should be read in conjunction with the Company’s results of operations, financial positions and cash flows in the Company’s financial statements as of and for the fiscal year ended December 27, 2015. Certain prior period balances have been reclassified to conform to current period presentation, including the reclassification of the December 27, 2015 balance of $2.5 million of debt issuance costs from Deferred debt issuance costs, net to Long-term debt, less current maturities and deferred debt issuance costs, net on the condensed consolidated balance sheets.

The results of operations and cash flows reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire fiscal year.

The Company consolidates entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All significant intercompany accounts and transactions are eliminated in consolidation.

 

  (c) Fiscal Year

The Company operates on a 52- or 53-week fiscal year ending on the last Sunday of December. Fiscal year 2016 will end on December 25, 2016 and will consist of 52 weeks. Fiscal year 2015 ended on December 27, 2015 and consisted of 52 weeks. Fiscal quarters within both fiscal years 2016 and 2015 are comprised of thirteen weeks.

 

  (d) Use of Accounting Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Accordingly, the actual amounts could differ from those estimates. Any adjustments applied to estimated amounts are recognized in the fiscal year in which such adjustments are determined.

 

  (e) New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This update was issued to replace the current revenue recognition guidance, creating a more comprehensive revenue model. This update was originally to be effective in fiscal periods beginning after December 15, 2016 and early application was not permitted. In July 2015, the FASB affirmed its proposal to defer the effective date by one year to annual reporting periods beginning after December 15, 2017. The FASB also affirmed its proposal to permit early adoption of the standard, but not before the original effective date of December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) (“ASU 2015-11”). The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. This pronouncement is effective for reporting periods beginning after December 15, 2016. The adoption of ASU 2015-11 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 is a comprehensive new standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. ASU 2016-02 will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU 2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous guidance relating to leases. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions. ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

 

(2) Long-Term Debt

Long-term debt consist of the following (in thousands):

 

     June 26,
2016
     December 27,
2015
 

Term Loan, due October 9, 2020

   $ 182,525         200,194   

Revolving line of credit, due October 9, 2020

     —           —     
  

 

 

    

 

 

 

Total long-term debt

     182,525         200,194   

Less: Current maturities of long term debt

     —           —     

Less: Deferred debt issuance costs, net

     (2,091      (2,459
  

 

 

    

 

 

 

Long-term debt, less current maturities and deferred debt issuance costs, net

   $ 180,434         197,735   
  

 

 

    

 

 

 
     June 26,
2016
     December 27,
2015
 

Deferred debt issuance costs

   $ 4,809         4,809   

Less accumulated amortization

     (2,718      (2,350
  

 

 

    

 

 

 

Deferred debt issuance costs, net

   $ 2,091         2,459   
  

 

 

    

 

 

 

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

  (a) Term Loan and Revolving Line of Credit

On October 9, 2012, the Company entered into a credit agreement (“Credit Agreement”) with several financial institutions, collateralized by all of the assets of the Company. The Credit Agreement contains both a term loan component and a revolving line of credit. The Credit Agreement was subsequently amended on May 15, 2013, April 11, 2014, July 23, 2015 and September 25, 2015.

As of June 26, 2016, there were outstanding balances under the term loan in one-month Eurodollar loans of $182.5 million, all of which were accruing interest at a rate of approximately 2.70%. As of December 27, 2015, there were outstanding balances under the term loan in one-month Eurodollar loans of $200.2 million, all of which were accruing interest at a rate of approximately 2.48%.

As of June 26, 2016 and December 27, 2015, there were no outstanding balances under the revolving line of credit.

Pursuant to the Credit Agreement, certain covenants restrict the Company from exceeding a maximum consolidated total lease adjusted leverage ratio, require the Company to maintain a minimum consolidated fixed charge coverage ratio, and place certain limitations on cash capital expenditures. The Company was not in violation of any covenants under the Credit Agreement as of June 26, 2016.

Debt issuance costs are capitalized and amortized using the effective interest method over the initial term of the related loan.

 

  (b) Interest Rate Swap Agreements

The Company enters into interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. The Company does not speculate using derivative instruments.

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.

The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions.

The Company enters into variable-rate LIBOR debt under the term loan portion of the Credit Agreement. The debt obligations expose the Company to variability in interest payments due to changes in interest rates. Management believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management entered into LIBOR-based interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. These swaps change the variable-rate cash flow exposure on part of the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives LIBOR-based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt for the notional amount of its debt hedged.

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

The activity in accumulated other comprehensive (loss) income is as follows (in thousands):

 

     Twenty-Six
Weeks Ended
     Fiscal Year
Ended
 
     June 26,
2016
     December 27,
2015
 

Opening balance, accumulated other comprehensive income

   $ 19        146  

Unrealized loss from effective interest rate swap, net of tax

     (771 )      (127 )
  

 

 

    

 

 

 

Ending balance, accumulated other comprehensive (loss) income

   $ (752 )      19  
  

 

 

    

 

 

 

 

(3) Fair Value Measurements

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

 

    Cash and cash equivalents, accounts and vendor receivables, other assets (nonderivatives), notes payable to financial institutions, trade accounts payable, and accrued expenses (nonderivatives): The carrying amounts, at face value or cost plus accrued interest, approximate fair value because of the short maturity of these instruments.

 

    Interest rate swaps: The fair value of interest rate swaps is determined using an income approach using the following significant inputs: the term of the swaps, the notional amount of the swaps, the rate on the fixed leg of the swaps and counterparty credit worthiness. There were three interest rate swaps outstanding as of June 26, 2016.

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

The following table presents financial assets and liabilities measured at fair value on a recurring basis, which include derivatives designated as cash flow hedging instruments, and other investments, which consists of money market accounts and mutual funds held in a rabbi trust established by the Company to fund a portion of the Company’s current and future obligations under its deferred compensation plan (in thousands):

 

            Quoted
Prices
               
            in active      Significant         
            markets for      other      Significant  
            identical      observable      unobservable  
     Carrying      instruments      inputs      inputs  
     value      (Level 1)      (Level 2)      (Level 3)  

Fair value measurement as of June 26, 2016:

           

Investments for nonqualified deferred compensation plan (included with other noncurrent assets on the consolidated balance sheets)

   $ 2,807        2,807        —          —    

Interest rate swap (included with other current liabilities and other non current liabilities on the consolidated balance sheets)

     (1,214      —          (1,214      —    

Fair value measurement as of December 27, 2015:

           

Investments for nonqualified deferred compensation plan (included with other noncurrent assets on the consolidated balance sheets)

   $ 2,628        2,628        —          —    

Interest rate swap (included with other noncurrent assets on the consolidated balance sheets)

     437        —          437        —    

Interest rate swap (included with other noncurrent liabilities on the consolidated balance sheets)

     (405      —          (405      —    

There were no transfers into or out of Level 1 and Level 2 fair value measurements during the twenty-six weeks ended June 26, 2016.

Our investments for the nonqualified deferred compensation plan are comprised of investments held in a rabbi trust. These investments consist of money market funds and mutual funds and the fair value measurements are derived using quoted prices in active markets for the specific funds which are based on Level 1 inputs of the fair value hierarchy.

Our interest rate swaps are valued using a discounted cash flow analysis that incorporates observable market parameters, such as interest rate yield curves and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by us or the counterparty.

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

(4) Other Current Assets

Other current assets consist of the following (in thousands):

 

     June 26,
2016
     December 27,
2015
 

Income taxes refundable

   $ 1,735         2,887   

Prepaid expenses

     2,291         1,076   

Deferred income taxes

     —           1,676   
  

 

 

    

 

 

 

Other current assets

   $ 4,026         5,639   
  

 

 

    

 

 

 

 

(5) Property and Equipment, Net

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

 

     Useful lives      June 26,
2016
     December 27,
2015
 

Land

     —        $ 1,509        1,509  

Buildings

     Up to 40 years         1,330        1,330  

Furniture, fixtures and equipment

     Up to 5 years         17,614        16,798  

Computer hardware and software

     Up to 5 years         9,210        8,780  

Leasehold improvements

     Up to 20 years         23,873        22,987  

Capital leases, buildings

     Lesser of lease term or 40 years         8,286        8,553  

Capital leases, equipment

     Lesser of lease term or 5 years         23,942        22,956  

Capital leases, automobiles

     Lesser of lease term or 5 years         3,353        3,297  

Construction-in-progress

     —          6,825        3,408  
     

 

 

    

 

 

 

Total

        95,942        89,618  

Less:

        

Accumulated depreciation

        (30,422 )      (26,830 )

Accumulated amortization

        (16,591 )      (14,651 )
     

 

 

    

 

 

 

Property and equipment, net

      $ 48,929        48,137  
     

 

 

    

 

 

 

Depreciation and amortization expense related to property and equipment was $3.6 million and $3.1 million for the thirteen weeks ended June 26, 2016 and June 28, 2015, respectively, and $7.1 million and $6.2 million for the twenty-six weeks ended June 26, 2016 and June 28, 2015, respectively.

 

(6) Franchise Rights, Net

Franchise rights, net are as follows (in thousands):

 

     June 26,
2016
     December 27,
2015
 

Franchise rights, including reacquired franchise rights

   $ 29,623         29,623   

Less accumulated amortization

     (4,831 )      (4,282 )
  

 

 

    

 

 

 

Franchise rights, net

   $ 24,792         25,341   
  

 

 

    

 

 

 

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

Amortization expense related to franchise rights was $0.3 million during each of the thirteen weeks ended June 26, 2016 and June 28, 2015 and $0.5 million during each of the twenty-six weeks ended June 26, 2016 and June 28, 2015.

 

(7) Other Noncurrent Assets

Other noncurrent assets consist of the following (in thousands):

 

     June 26,
2016
     December 27,
2015
 

Investments for nonqualified deferred compensation plan

   $ 2,807        2,628  

Interest rate swap asset

     —          437  

Other noncurrent assets

     634        608  
  

 

 

    

 

 

 

Other noncurrent assets

   $ 3,441        3,673  
  

 

 

    

 

 

 

 

(8) Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

     June 26,
2016
     December 27,
2015
 

Payroll & related

   $ 11,285        12,316  

Sales and property taxes

     5,310        2,472  

Gift cards

     716        974  

Utilities

     1,199        1,092  

Occupancy

     622        481  

Interest

     721        715  

Other

     3,199        1,036  
  

 

 

    

 

 

 

Accrued expenses

   $ 23,052        19,086  
  

 

 

    

 

 

 

 

(9) Other Current Liabilities

Other current liabilities consist of the following (in thousands):

 

     June 26,
2016
     December 27,
2015
 

Financing obligations under build-to-suit transactions

   $ 2,402        1,594  

Closed store obligation

     104        184  

Interest rate swap liability

     51        —    

Other

     —          377  
  

 

 

    

 

 

 

Other current liabilities

   $ 2,557        2,155  
  

 

 

    

 

 

 

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

(10) Other Noncurrent Liabilities

Other noncurrent liabilities consist of the following (in thousands):

 

     June 26,
2016
     December 27,
2015
 

Deferred rents

   $ 6,660        5,875  

Unfavorable lease liability, net

     1,667        1,817  

Deferred compensation

     2,807        2,628  

Deferred revenue

     705        717  

Closed store obligation

     303        356  

Interest rate swap liability

     1,163        405  

Other noncurrent liabilities

     36        36  
  

 

 

    

 

 

 

Other noncurrent liabilities

   $ 13,341        11,834  
  

 

 

    

 

 

 

Deferred revenue includes initial franchise license fees that have been received, but for which the Company has not completed its obligations under these franchise agreements; therefore, revenue has not been recognized.

 

(11) Commitments and Contingencies

 

  (a) Litigation

The Company is subject to various claims and litigation that arise in the normal course of business. Management is of the opinion that, although the outcome of the litigation cannot be predicted with any certainty, the ultimate liability, if any, will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

  (b) Concentration of Credit Risk

Certain financial instruments potentially subject the company to a concentration of credit risk. These financial instruments consist primarily of cash and cash equivalents and accounts and vendor receivables. The Company places its cash and cash equivalents with high-credit, quality financial institutions. At times, the balances in the accounts exceed the amounts insured by the Federal Deposit Insurance Corporation.

Concentration of credit risk with respect to receivables is primarily limited to franchisees, which are primarily located in the Southeastern United States, and certain vendors. Royalty revenues from three franchisees, one of which is a related party, accounted for approximately 44% of the Company’s total franchise royalty revenues for each of the thirteen weeks ended June 26, 2016 and June 28, 2015 and approximately 44% of the Company’s total franchise royalty revenues for each of the twenty-six weeks ended June 26, 2016 and June 28, 2015. Royalty and franchise fee accounts receivable from three franchisees, one of which is a related party, accounted for approximately 43% and 44% of the Company’s gross royalty and franchise fee accounts receivable as of June 26, 2016 and December 27, 2015, respectively. The Company continually evaluates and monitors the credit history of its franchisees and believes it has an adequate allowance for bad debts.

 

  (c) Debt Guarantees

Prior to July 25, 2011, a franchisee of the Company assumed a portion of the Company’s then outstanding term debt, which the Company guarantees through 2018. The Company may be required to perform under this guarantee in the event of default or nonperformance by this franchisee. The Company has determined that default by the franchisee is unlikely due to its timely and consistent payments; therefore, the Company has not recorded a liability for this note on its condensed consolidated balance sheets. The carrying value of debt covered by this additional guarantee of the Company was $0.1 million as of both June 26, 2016 and December 27, 2015.

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

(12) Leases

The Company’s agreement with a financial institution providing up to $3.5 million for leasing of equipment scheduled to expire on March 1, 2016 was extended to September 30, 2016. The Company utilized the capacity under this agreement prior to its expiration. On June 27, 2016, the financial institution increased the capacity under this agreement by an additional $8.1 million and extended the expiration of the agreement to June 1, 2017. Under this leasing arrangement, each of the scheduled leases has a 60-month term, a fixed interest rate equal to the interest rate swap for a 2.61 year weighted average life as published by the Bloomberg Swap report on the lease commencement date for the specific equipment project plus 300 basis points, and a bargain purchase option at the end of the lease of $1. As a result of the bargain purchase option, the Company has classified the leases under this leasing arrangement as capital leases.

The Company’s agreement with another financial institution providing up to $1.4 million for leasing of equipment expired on April 30, 2016. Under this leasing arrangement, each of the scheduled leases had a 60-month term, a fixed interest rate equal to the 32-month interpolated interest rate swap on the lease commencement date for the specific equipment project plus 391 basis points, and a bargain purchase option at the end of the lease of $1. In April 2016, the Company entered into a new agreement with the financial institution providing up to $2.0 million for leasing of equipment, which is scheduled to expire April 30, 2017. Under this leasing arrangement, each of the scheduled leases has a 60-month term, a fixed interest rate equal to the 3-year interest rate swap on the lease commencement date for the specific equipment project plus 290 basis points, and a bargain purchase option at the end of the lease of $1. As a result of the bargain purchase option, the Company has classified the leases under these leasing arrangements as capital leases.

 

(13) Net Income per Share

Basic net income per share is calculated using the weighted-average number of shares of common stock outstanding during the thirteen and twenty-six weeks ended June 26, 2016 and June 28, 2015.

The computation of diluted net income per share assumes the conversion of the outstanding preferred stock into common stock. Diluted net income per share is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method.

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

The computations of basic and diluted net income per share for the thirteen and twenty-six weeks ended June 26, 2016 and June 28, 2015 are as follows (in thousands, except per share amounts):

 

     Thirteen Weeks Ended      Twenty-Six Weeks Ended  
     June 26,
2016
     June 28,
2015
     June 26,
2016
     June 28,
2015
 

Net income

   $ 10,031         6,334         17,875         9,772   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding-basic

     36,207         20,540         36,115         10,270   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares assumed from the conversion of Series A Preferred Stock

     —           15,388         —           25,646   

Weighted average dilutive effect of stock-based compensation

     1,385         1,563         1,402         1,536   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding-diluted

     37,592         37,491         37,517         37,452   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share-basic

   $ 0.28         0.31         0.49         0.95   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share-diluted

   $ 0.27         0.17         0.48         0.26   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(14) Income Taxes

The Company’s effective income tax rates were 36.7% and 41.2% for the thirteen weeks ended June 26, 2016 and June 28, 2015, respectively, and 35.6% and 45.3% for the twenty-six weeks ended June 26, 2016 and June 28, 2015, respectively. The effective income tax rate for the thirteen and twenty-six weeks ended June 26, 2016 and June 28, 2015 was impacted by the recognition of certain tax credits. The effective income tax rate for the thirteen and twenty-six weeks ended June 28, 2015 was also impacted by costs related to the IPO that were not deductible for income tax purposes.

 

(15) Stock Compensation Plan

Effective immediately prior to the IPO, the Company’s board of directors and stockholders approved the amendment and restatement of the 2011 Equity Incentive Plan. Under the Amended and Restated 2011 Equity Incentive Plan (the “Amended 2011 Plan”), the Company’s board of directors may grant awards representing up to 8.5 million shares of the Company’s common stock in the form of stock options, restricted stock awards, restricted stock units and performance awards to officers, directors, employees, and consultants of the Company and its subsidiaries. At June 26, 2016, there were 3.8 million shares remaining and available for future grants under the Amended 2011 Plan.

Stock Options

Stock options are granted at a price determined by the board of directors or a committee designated by the board at not less than the fair market value of a share on the date of grant. The term of each option shall be determined by the board of directors or a committee designated by the board at the time of grant and shall be no greater than ten years.

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

Stock option activity during the period indicated is as follows:

 

                   Weighted         
            Weighted      average      Aggregate  
            average      remaining      intrinsic  
     Number      exercise      contractual      value  
     of shares      price      term      (in thousands)  

Balance as of December 27, 2015

     4,347,024       $ 3.78         6.8       $ 51,198   

Granted

     151,000         18.05         

Exercised

     (318,149      2.38            4,727   

Repurchased

     —           —           

Forfeited

     —           —           

Expired

     —           —           
  

 

 

          

Balance as of June 26, 2016

     4,179,875       $ 4.40         6.5       $ 53,692   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable as of June 26, 2016

     2,262,856       $ 3.90         6.4       $ 30,137   
  

 

 

    

 

 

    

 

 

    

 

 

 

On June 8, 2016, the Company granted a total of 151,000 stock options to certain employees of the Company to purchase shares of its common stock at a price of $18.05 per share. The fair value of the stock options on the date of the grant was $5.48 per share. The stock options will vest in equal annual installments over four years, subject to continued service to the Company.

As of June 26, 2016, there was $2.6 million of total unrecognized compensation cost related to time based stock options, which is expected to be recognized over a weighted average period of approximately 2.8 years. As of June 26, 2016, there was approximately $2.2 million of total unrecognized compensation cost related to 1.2 million unvested performance based stock options. These performance based stock options will vest and become exercisable upon the achievement of certain performance metrics indicated in the stock option grant.

Restricted Stock Units

Restricted stock unit activity during the period indicated is as follows:

 

            Weighted  
            average  
            fair value  
     Number      at grant  
     of shares      date  

Nonvested as of December 27, 2015

     7,893       $ 19.00   

Granted

     92,120         18.05   

Forfeited

     —           —     

Vested

     (7,893      19.00   
  

 

 

    

Nonvested as of June 26, 2016

     92,120       $ 18.05   
  

 

 

    

 

 

 

On June 8, 2016, the Company granted a total of 75,500 restricted stock units to certain employees of the Company. The restricted stock units will vest in equal annual installments over four years, subject to continued service to the Company. Vested shares will be delivered within ten days of the vesting date of such restricted stock unit.

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

On June 8, 2016, the Company granted 2,770 restricted stock units to each of its six non-employee directors who are not affiliated with Advent International Corporation (“Advent”). The restricted stock units will vest on the date of the Company’s next annual meeting, subject to continued service to the Company. Vested shares will be delivered within ten days of the vesting date of such restricted stock unit.

On May 13, 2015, the Company granted 2,631 restricted stock units to each of its then three non-employee directors who were not affiliated with Advent. All of these restricted stock units vested on June 8, 2016.

As of June 26, 2016, there was $1.6 million of total unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average period of approximately 3.4 years.

 

(16) Related Party Transactions

Advent is related to the Company through members of the board of directors and ownership of the Company. The Company reimburses Advent for certain expenses. There were no amounts included in accounts payable due to Advent as of both June 26, 2016 and December 27, 2015.

Panthers Football, LLC (“The Panthers”) is owned by family members of certain indirect stockholders of the Company. The Company has marketing and sponsorship agreements with The Panthers.

Cajun Jack’s, LLC (“Cajun”) is owned by family members of certain indirect stockholders and a member of the board of directors of the Company. Cajun is a franchisee of the Company. Cajun remits payments to the Company for royalties, marketing, and franchise license fees.

New Generation Foods, LLC (“New Generation”) is owned by family members of certain indirect stockholders and a member of the board of directors of the Company. New Generation is a franchisee of the Company. New Generation remits payments to the Company for royalties, marketing, and franchise license fees. From January 29, 2014 through July 31, 2015, the Company matched New Generation’s advertising expenditures in an amount up to 1% of New Generation’s sales.

Tri-Arc Food Systems, Inc. (“Tri-Arc”) owns an interest in the Company. In addition, an owner of Tri-Arc is a member of the board of directors of the Company. Tri-Arc is a franchisee of the Company. Tri-Arc remits payments to the Company for royalties, marketing, and franchise license fees. In addition, the Company reimburses Tri-Arc for shared marketing costs.

JZF Properties, LLC (“JZF”) is owned by family members of certain indirect stockholders and a member of the board of directors of the Company. JZF leases a building and land to the Company for use as a restaurant operated by the Company.

MAR Real Estate, LLC (“MRE”) is owned by a certain indirect stockholder of the Company. MRE leases land and buildings to the Company for use as restaurants operated by the Company.

Palmetto Lowcountry Properties, LLC (“PLP”) is owned by a certain indirect stockholder of the Company. PLP leases land and buildings to the Company for use as restaurants operated by the Company.

Catco Bo Memorial, LLC (“CBM”) is owned by a certain indirect stockholder of the Company. CBM leases land, equipment and a building to the Company for use as a restaurant operated by the Company.

 

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BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

 

The following table presents expenses incurred and payments made in transactions with the Company’s related parties (in thousands):

 

          Thirteen Weeks Ended      Twenty-Six Weeks Ended  
          June 26,      June 28,      June 26,      June 28,  

Related Party

  

Description

   2016      2015      2016      2015  

Advent

   Out-of-pocket expense reimbursement    $ —           —           3         13   

The Panthers

   Marketing/sponsorship expense      —           —           100         50   

New Generation

   Advertising expense      —           33         —           64   

Tri-Arc

   Marketing expense      18         18         36         36   

JZF

   Rent payments      74         55         121         102   

MRE

   Rent payments      35         43         70         84   

PLP

   Rent payments      2         47         57         51   

CBM

   Rent payments      25         —           50         —     

The following tables present franchise royalty revenues and other franchise revenues from transactions with the Company’s related parties (in thousands):

 

     Franchise Royalty Revenues  
     Thirteen Weeks Ended      Twenty-Six Weeks Ended  
     June 26,      June 28,      June 26,      June 28,  

Related Party

   2016      2015      2016      2015  

Cajun

   $ 25         26         48         49   

New Generation

     140         133         276         256   

Tri-Arc

     1,279         1,261         2,501         2,457   
     Other Franchise Revenues  
     Thirteen Weeks Ended      Twenty-Six Weeks Ended  

Related Party

   June 26,
2016
     June 28,
2015
     June 26,
2016
     June 28,
2015
 

Cajun

   $ —           —           —           —     

New Generation

     —           —           —           35   

Tri-Arc

     —           —           13         13   

The following table presents accounts receivable from transactions with the Company’s related parties (in thousands):

 

     Gross Accounts Receivable  
     June 26,      December 27,  

Related Party

   2016      2015  

Cajun

   $ 9         9   

New Generation

     49         52   

Tri-Arc

     389         387   

 

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Table of Contents

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

The following discussion and analysis of the consolidated financial condition and results of operations for Bojangles’, Inc. (“Bojangles’” or the “Company”) should be read in conjunction with the financial statements of the Company and notes thereto included elsewhere in this Quarterly Report. In this Quarterly Report, unless the context otherwise requires, references to “we,” “us,” and “our” mean the Company, together with its subsidiaries, on a consolidated basis.

Operating results for any one fiscal quarter are not necessarily indicative of results to be expected for any other fiscal quarter or for the fiscal year, and our key performance indicators, as discussed below, may decrease for any future period. Unless otherwise stated, comparable restaurant sales and average unit volumes are presented on a system-wide basis, which means they include sales at both company-operated restaurants and franchised restaurants. Franchise sales represent sales at all franchised restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our franchise royalty revenues include royalties based on a percentage of franchise sales.

Overview

Bojangles’ is a highly differentiated and growing restaurant operator and franchisor dedicated to serving customers high-quality, craveable food made from our Southern recipes. We opened our first store in Charlotte, North Carolina in 1977 and, as of June 26, 2016, have expanded our system-wide restaurants to 689 across eleven states, the District of Columbia and Roatan Island, Honduras. Our system of restaurants, which includes both company-operated and franchised restaurants, generated approximately $306.1 million and $597.3 million of system-wide sales during the thirteen and twenty-six weeks ended June 26, 2016, respectively. We offer fast-casual quality food and preparation combined with quick-service speed, convenience and value.

Key Performance Indicators

To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company restaurant revenues, franchise royalty and other franchise revenues, system-wide average unit volumes (“AUVs”), comparable restaurant sales, restaurant openings and net income. In addition, we also evaluate Adjusted Net Income and Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA, and restaurant contribution and restaurant contribution margin, which are considered to be non-GAAP financial measures.

Company Restaurant Revenues

Company restaurant revenues consists of sales of food and beverages in company-operated restaurants. Company restaurant revenues in a period are influenced by several factors, including the number of operating weeks in such period, the number of open restaurants and comparable restaurant sales growth.

Seasonal factors cause our revenues to fluctuate from quarter to quarter. Our revenues per restaurant are typically lower in the first quarter. As a result, our quarterly and annual operating results and key performance indicators may fluctuate significantly.

Franchise Royalty and Other Franchise Revenues

Franchise royalty and other franchise revenues represents royalty income and initial and renewal franchise fees. While we expect the majority of our total revenue growth will be driven by company-operated restaurants, our franchised restaurants and growth in franchise royalty and other franchise revenues remain an important part of our financial success.

 

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System-wide Average Unit Volumes

We measure system-wide AUVs on a fiscal year basis and on a trailing twelve-month basis for each non-fiscal year-end period for system-wide restaurants. Annual AUVs are calculated using the following methodology: first, we determine the domestic free-standing restaurants with both a drive-thru and interior seating that have been open for a full twelve-month period (excluding express units); and second, we calculate the revenues for these restaurants and divide by the number of restaurants in that base to arrive at our AUV calculation. This methodology is similar for each trailing twelve-month period outside the fiscal year end.

 

     Trailing Twelve Months Ended  

(Dollar amounts in thousands)

   June 26,
2016
     June 28,
2015
 

Average Unit Volumes

  

Total system-wide

   $ 1,830         1,819   

Comparable Restaurant Sales

Comparable restaurant sales reflects the change in year-over-year sales for the comparable restaurant base. A restaurant enters our comparable restaurant base the first full day of the month after being open for fifteen months using a mid-month convention. While we do not record franchised restaurant sales as revenues, our royalty revenues are calculated based on a percentage of franchised restaurant sales.

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
     June 26,
2016
    June 28,
2015
    June 26,
2016
    June 28,
2015
 

Comparable Restaurant Sales:

        

Company-operated

     0.9     3.3     1.8     5.1

Franchised

     (0.2 )%      5.1     0.6     6.7

Total system-wide

     0.2     4.4     1.1     6.0

Restaurant Openings

The number of restaurant openings reflects the number of restaurants opened during a particular reporting period. Before we open company-operated restaurants, we incur preopening costs. System-wide, some of our restaurants open with an initial start-up period of higher than normal sales volume, which subsequently decreases to stabilized levels. Newly opened company-operated restaurants typically experience normal inefficiencies such as higher food and supplies, labor and other direct operating costs and, as a result, restaurant contribution margins are typically lower during the start-up period of operations. In addition, newly opened restaurants typically have high occupancy costs compared to existing restaurants. When entering new markets, we may be exposed to longer start-up times and lower contribution margins than reflected in our average historical experience.

 

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The following is the number of Bojangles’ franchised, company-operated and system-wide restaurants at the beginning and end of the thirteen and twenty-six weeks ended June 26, 2016:

 

     Thirteen Weeks Ended      Twenty-Six Weeks Ended  
     June 26, 2016      June 26, 2016  
     Franchised      Company-
Operated
     System-
Wide
     Franchised      Company-
Operated
     System-
Wide
 

Restaurants at the beginning of the period

     383         288         671         381         281         662   

Opened during the period

     11         7         18         13         14         27   

Closed during the period

     —           —           —           —           —           —     

Refranchised during the period

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Restaurants at the end of the period

     394         295         689         394         295         689   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net Income, Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA

We consider net income to be a key performance indicator that shows the overall health of our entire business. We typically utilize net income in conjunction with the non-GAAP financial measures Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA when assessing the operational strength and the performance of our business.

Adjusted Net Income represents company net income before items that we do not consider representative of our ongoing operating performance, as well as an estimate of recurring incremental legal, accounting, insurance and other operating and compliance costs we expect to incur as a public company for those periods where they had not yet been incurred, both as identified in the reconciliation table below. Adjusted Diluted Net Income per Share represents company diluted net income per share before items that we do not consider representative of our ongoing operating performance, as well as an estimate of recurring incremental legal, accounting, insurance and other operating and compliance costs we expect to incur as a public company for those periods where they had not yet been incurred, both as identified in the reconciliation table below.

EBITDA represents company net income before interest expense (net of interest income), provision for income taxes and depreciation and amortization. Adjusted EBITDA represents company net income before interest expense (net of interest income), provision for income taxes, depreciation and amortization, items that we do not consider representative of our ongoing operating performance and certain non-cash items, as identified in the reconciliation table below.

Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA as presented in this Form 10-Q are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA. Our presentation of Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

 

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Table of Contents

Adjusted Net Income, Adjusted Diluted Net Income per share, EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) 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 Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.

We believe Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary significantly among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to evaluate our operating performance or compare our performance to that of our competitors.

 

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Table of Contents

The following tables set forth reconciliations of net income to Adjusted Net Income and diluted net income per share to Adjusted Diluted Net Income per Share:

 

     Thirteen Weeks Ended      Twenty-Six Weeks Ended  

(Dollar amounts in thousands)

   June 26,
2016
     June 28,
2015
     June 26,
2016
     June 28,
2015
 

Net income

   $ 10,031        6,334        17,875        9,772  
  

 

 

    

 

 

    

 

 

    

 

 

 

Certain professional and transaction costs (a)

     9        2,007        42        4,880  

Incremental public company costs (b)

     —           (194 )      —           (794 )

Vesting of performance-based stock options (c)

     —           707        —           707  

Payroll taxes associated with stock option exercises (d)

     51        17        71        17  

Distributor transition costs (e)

     16        —           81        —     

Tax impact of adjustments (f)

     (29 )      (283 )      (74 )      (172 )
  

 

 

    

 

 

    

 

 

    

 

 

 

Total adjustments

     47        2,254        120        4,638  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Income

   $ 10,078        8,588        17,995        14,410  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Thirteen Weeks Ended      Twenty-Six Weeks Ended  
     June 26,
2016
     June 28,
2015
     June 26,
2016
     June 28,
2015
 

Diluted net income per share

   $ 0.27         0.17         0.48         0.26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Certain professional and transaction costs (a)

     —           0.06         —           0.13   

Incremental public company costs (b)

     —           (0.01      —           (0.02

Vesting of performance-based stock options (c)

     —           0.02         —           0.02   

Payroll taxes associated with stock option exercises (d)

     —           —           —           —     

Distributor transition costs (e)

     —           —           —           —     

Tax impact of adjustments (f)

     —           (0.01      —           (0.01
  

 

 

    

 

 

    

 

 

    

 

 

 

Total adjustments

     —           0.06         —           0.12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Diluted Net Income per Share

   $ 0.27         0.23         0.48         0.38   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Includes costs associated with third-party consultants for one-time projects, public offering expenses and certain professional fees and transaction costs related to financing transactions. We could incur similar expenses in future periods if we commence additional public offerings, financing transactions or other one-time projects.
(b) Reflects an estimate of recurring incremental legal, accounting, insurance and other operating and compliance costs we expect to incur as a public company in addition to actual amounts incurred. By its nature, this adjustment involves risks and uncertainties, and the actual costs incurred could be different than this adjustment. No adjustments will be made beyond the second fiscal quarter 2016 since the one year anniversary of our initial public offering (“IPO”) occurred during the thirteen weeks ended June 26, 2016.
(c) Includes non-cash, stock-based compensation related to the vesting of certain performance-based stock option awards. We could incur similar expenses in future periods upon the achievement of the performance metrics indicated in the stock option grants.
(d) Represents payroll taxes associated with stock option exercises related to stock options that were outstanding prior to our IPO. We expect to incur similar expenses in future periods when our directors or employees exercise stock options that were outstanding prior to our IPO.
(e) Includes expenses incurred in connection with the transition to our new distributor.
(f) Represents the income tax (expense) benefit associated with the adjustments in (a) through (e) that are deductible for income tax purposes.

 

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Table of Contents

The following table sets forth reconciliations of net income to EBITDA and Adjusted EBITDA:

 

     Thirteen Weeks Ended      Twenty-Six Weeks Ended  

(Dollar amounts in thousands)

   June 26,
2016
     June 28,
2015
     June 26,
2016
     June 28,
2015
 

Net income

   $ 10,031        6,334        17,875        9,772  

Income taxes

     5,816        4,435        9,874        8,080  

Interest expense, net

     1,935        2,166        3,959        4,387  

Depreciation and amortization (a)

     4,062        3,636        8,009        7,153  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     21,844        16,571        39,717        29,392  

Non-cash rent (b)

     394        390        771        779  

Stock-based compensation (c)

     272        1,063        549        1,402  

Payroll taxes associated with stock option exercises (d)

     51        17        71        17  

Preopening expenses (e)

     379        438        596        739  

Sponsor and board member fees and expenses (f)

     —          38        —          166  

Certain professional, transaction and other costs (g)

     9        2,007        42        4,880  

Distributor transition costs (h)

     16        —          81        —    

Impairment and dispositions (i)

     237        25        248        54  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 23,202        20,549        42,075        37,429  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Includes amortization of deferred debt issuance costs.
(b) Includes deferred rent, which represents the extent to which our rent expense has been above or below our cash rent payments, amortization of favorable (unfavorable) leases and closed store reserves for rent net of cash payments. We expect to continue to incur similar expenses in future periods as we record rent expense in accordance with GAAP, as well as continue to amortize favorable (unfavorable) leases and record closed store reserves.
(c) Represents non-cash, stock-based compensation. We expect to incur similar expenses in future periods as we record stock-based compensation related to existing grants (and any potential future grants) in accordance with GAAP.
(d) Represents payroll taxes associated with stock option exercises related to stock options that were outstanding prior to our IPO. We expect to incur similar expenses in future periods when our directors or employees exercise stock options that were outstanding prior to our IPO.
(e) Includes expenses directly associated with the opening of company-operated restaurants and incurred prior to the opening of a company-operated restaurant. We expect to continue to incur similar expenses as we open company-operated restaurants.
(f) Includes reimbursement of expenses to our sponsor prior to our IPO and compensation and expense reimbursement to members of our board prior to our IPO.
(g) Includes costs associated with third-party consultants for one-time projects, public offering expenses and certain professional fees and transaction costs related to financing transactions. We could incur similar expenses in future periods if we commence additional public offerings, financing transactions or other one-time projects.
(h) Includes expenses incurred in connection with the transition to our new distributor.
(i) Includes loss (gain) on disposal of property and equipment, impairment and cash proceeds on disposals from disposition of property and equipment. We could continue to record impairment expense in future periods if performance of company-operated restaurants is not sufficient to recover the carrying amount of the related long-lived assets. We expect to incur future losses (gains) and to receive cash proceeds on disposal of property and equipment associated with retirement, replacement or write-off of fixed assets.

 

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Table of Contents

Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined as company restaurant revenues less food and supplies costs, restaurant labor costs, and operating costs. We expect restaurant contribution to increase based on company-operated restaurants we open and our comparable restaurant sales growth. Restaurant contribution margin is defined as restaurant contribution as a percentage of company restaurant revenues. Fluctuations in restaurant contribution and restaurant contribution margin can be attributed to company comparable restaurant sales growth, sales volumes of newly opened company restaurants, and changes in company food and supplies costs, restaurant labor costs and operating costs.

Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our company-operated restaurants and our calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP. We believe that restaurant contribution and restaurant contribution margin are important tools for investors as they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. We use restaurant contribution and restaurant contribution margin as key metrics to evaluate profitability and performance of our restaurants across periods and to evaluate our restaurant financial performance compared to our competitors.

The following table reconciles our restaurant contribution to the line item on the condensed consolidated statements of operations and comprehensive income entitled “Company restaurant revenues,” which we believe is the most directly comparable GAAP measure on our condensed consolidated statements of operations and comprehensive income.

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  

(Dollar amounts in thousands)

   June 26,
2016
    June 28,
2015
    June 26,
2016
    June 28,
2015
 

Company restaurant revenues

   $ 124,674       114,043       246,088       222,378  

Food and supplies costs

     (39,020 )     (36,724 )     (77,541 )     (73,285 )

Restaurant labor costs

     (34,525 )     (31,178 )     (67,861 )     (61,647 )

Operating costs

     (26,607 )     (24,312 )     (55,020 )     (48,183 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant contribution

   $ 24,522       21,829       45,666       39,263  
  

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant contribution margin

     19.7     19.1     18.6     17.7

Key Financial Definitions

Total Revenues

Our revenues are derived from two primary sources: company restaurant revenues and franchise revenues. Franchise revenues are comprised of franchise royalty revenues and, to a lesser extent, other franchise revenues, which include initial and renewal franchisee fees.

Food and Supplies Costs

Food and supplies costs include the direct costs associated with food, beverage and packaging of our menu items at company-operated restaurants. The components of food and supplies are variable in nature, change with sales volume, are affected by menu mix and are subject to fluctuations in commodity costs.

 

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Table of Contents

Restaurant Labor Costs

Restaurant labor costs, including preopening labor, consist of company-operated restaurant-level management and hourly labor costs, including salaries, wages, payroll taxes, workers’ compensation expense, benefits and bonuses paid to our company-operated restaurant-level team members. Like other cost items, we expect restaurant labor costs at our company-operated restaurants to grow due to inflation and as our company restaurant revenues grows. Factors that influence labor costs include minimum wage and employer payroll tax legislation, exempt versus non-exempt classification, a tightening labor market, employee turnover levels, health care costs and the performance of our restaurants. In addition, the Patient Protection and Affordable Care Act (“PPACA”) has increased health care costs for our restaurants, and we expect the PPACA will continue to result in increased health care costs for our restaurants in the future. We expect that the newly enacted Department of Labor (“DOL”) regulations related to overtime and exempt versus non-exempt classification that are scheduled to become effective December 1, 2016, along with various labor initiatives we intend to implement, including table service and potentially employing more full-time versus part-time team members, will increase our restaurant labor costs.

Operating Costs

Restaurant operating costs include all other company-operated restaurant-level operating expenses, such as repairs and maintenance, utilities, credit and debit card processing, occupancy expenses and other restaurant operating costs. In addition, our advertising costs are included in operating costs and are comprised of our company-operated restaurants’ portion of spending on all advertising which includes, but is not limited to, television, radio, social media, billboards, point-of-sale materials, sponsorships, and creation of media, such as commercials and marketing campaigns.

Company Restaurant Depreciation and Amortization

Company restaurant depreciation and amortization primarily consists of the depreciation of property and equipment and amortization of intangible assets at the restaurant level. We expect that growth in company-operated restaurant count, as well investments in technology and other initiatives, will increase company restaurant depreciation and amortization.

General and Administrative Expenses

General and administrative expenses include expenses associated with corporate and administrative functions that support our operations, including compensation and benefits, travel expense, stock-based compensation expense, legal and professional fees, training, and other corporate costs. We expect we will incur incremental general and administrative expenses as a result of our IPO and as a public company.

Other Depreciation and Amortization

Other depreciation and amortization primarily consists of the depreciation of property and equipment and amortization of intangible assets not directly located at company-operated restaurants. We expect that growth in system-wide restaurant count, as well investments in technology and other initiatives, will increase other depreciation and amortization.

Impairment

Long-lived assets such as property, equipment and intangible assets are reviewed on a unit-by-unit basis for impairment. When circumstances indicate a carrying value of the assets may not be recoverable, an appropriate impairment is recorded. Impairments could increase if performance of company-operated restaurants is not sufficient to recover the carrying amount of the related long-lived assets.

Loss (Gain) on Disposal of Property and Equipment

Loss (gain) on disposal of property and equipment includes the net loss (gain) on disposal of assets related to retirements and replacements or write-off of leasehold improvements, equipment and other fixed assets. These losses (gains) are related to normal disposals in the ordinary course of business and gains from insurance proceeds, if any.

 

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Amortization of Deferred Debt Issuance Costs

Deferred debt issuance costs are amortized over the term of the related debt on the effective interest method.

Interest Expense

Interest expense primarily consists of interest on our debt outstanding under our credit facility and capital lease obligations.

Income Taxes

Income taxes represent federal, state, and local current and deferred income tax expense.

 

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Results of Operations

Thirteen Weeks Ended June 26, 2016 Compared with the Thirteen Weeks Ended June 28, 2015

Our operating results for the thirteen weeks ended June 26, 2016 and June 28, 2015 are compared below:

 

     Thirteen Weeks Ended  
     June 26,
2016
     June 28,
2015
     Increase/
(Decrease)
     Percentage
Change
 
     (Dollar amounts in thousands)  

Statement of Operations Data:

     

Revenues:

     

Company restaurant revenues

   $ 124,674       $ 114,043       $ 10,631         9.3

Franchise royalty revenues

     6,621         6,368         253         4.0

Other franchise revenues

     300         105         195         185.7
  

 

 

    

 

 

    

 

 

    

Total revenues

     131,595         120,516         11,079         9.2
  

 

 

    

 

 

    

 

 

    

Company restaurant operating expenses:

     

Food and supplies costs

     39,020         36,724         2,296         6.3

Restaurant labor costs

     34,525         31,178         3,347         10.7

Operating costs

     26,607         24,312         2,295         9.4

Depreciation and amortization

     3,124         2,714         410         15.1
  

 

 

    

 

 

    

 

 

    

Total company restaurant operating expenses

     103,276         94,928         8,348         8.8
  

 

 

    

 

 

    

 

 

    

Operating income before other operating expenses

     28,319         25,588         2,731         10.7
  

 

 

    

 

 

    

 

 

    

Other operating expenses:

     

General and administrative

     9,402         11,717         (2,315      (19.8 )% 

Depreciation and amortization

     716         691         25         3.6

Impairment

     187         —           187         n/m   

Loss on disposal of property and equipment

     10         14         (4      (28.6 )% 
  

 

 

    

 

 

    

 

 

    

Total other operating expenses

     10,315         12,422         (2,107      (17.0 )% 
  

 

 

    

 

 

    

 

 

    

Operating income

     18,004         13,166         4,838         36.7

Amortization of deferred debt issuance costs

     (222      (231      9         (3.9 )% 

Interest income

     2         5         (3 )      (60.0 )% 

Interest expense

     (1,937      (2,171      234         (10.8 )% 
  

 

 

    

 

 

    

 

 

    

Income before income taxes

     15,847         10,769         5,078         47.2

Income taxes

     5,816         4,435         1,381         31.1
  

 

 

    

 

 

    

 

 

    

Net income

   $ 10,031       $ 6,334       $ 3,697         58.4
  

 

 

    

 

 

    

 

 

    

n/m = not meaningful

Company Restaurant Revenues

Company restaurant revenues increased $10.6 million, or 9.3%, during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. The growth in company restaurant revenues was primarily due to an increase in comparable company restaurant sales of $1.0 million, or 0.9%, composed of increases in price and transactions at our comparable restaurants, and an increase in the non-comparable restaurant base (net additions of 28 company-operated restaurants as of June 26, 2016 compared to June 28, 2015) accounting for $9.6 million.

Franchise Royalty Revenues

Franchise royalty revenues increased $0.3 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. The increase was primarily due to a net additional 15 franchised restaurants at June 26, 2016 compared to June 28, 2015, partially offset by a reduction in franchised comparable restaurant sales of 0.2%.

 

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Other Franchise Revenues

Other franchise revenues increased $0.2 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. The increase was primarily due to the timing of the opening of franchised restaurants.

Food and Supplies Costs

Food and supplies costs increased $2.3 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. This increase was primarily driven by an increase in company restaurant revenues. Food and supplies costs as a percentage of company restaurant revenues during the thirteen weeks ended June 26, 2016 was 31.3% versus 32.2% during the thirteen weeks ended June 28, 2015. This percentage decrease was primarily due to our menu price increases and lower commodity costs.

Restaurant Labor Costs

Company-operated restaurant labor increased $3.3 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015, primarily due to higher company restaurant revenues as a result of an increase in the number of company-operated restaurants. As a percentage of company restaurant revenues, restaurant labor costs increased to 27.7% from 27.3%. This increase was primarily driven by an increase in direct labor, partially offset by lower medical claims, incentive compensation and payroll taxes.

We expect our restaurant labor costs will continue to increase due to the tightening labor market, as well as certain labor initiatives across company-operated restaurants, including the expansion of our table service and potentially increasing the number of full-time versus part-time team members. In addition, we expect that our restaurant labor costs will increase as a result of the newly enacted DOL regulations related to overtime and exempt versus non-exempt classification that are scheduled to become effective December 1, 2016.

Operating Costs

Operating costs increased $2.3 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015, primarily due to higher company restaurant revenues, partially offset by the timing of certain marketing expenses. As a percentage of company restaurant revenues, operating costs were 21.3% for both of the thirteen weeks ended June 26, 2016 and June 28, 2015. Operating costs as a percentage of company restaurant revenues remained constant as the increase in operating costs attributable to higher occupancy and utilities costs was offset by lower marketing costs.

Restaurant Depreciation and Amortization

Restaurant depreciation and amortization increased $0.4 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015, due primarily to the increased number of company-operated restaurants and our new point-of-sale system. As a percentage of company restaurant revenues, depreciation and amortization was 2.5% and 2.4% during the thirteen weeks ended June 26, 2016 and June 28, 2015, respectively.

General and Administrative Expenses

General and administrative expenses decreased $2.3 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. The decrease was due primarily to $1.8 million in legal, accounting and other expenses incurred during the thirteen weeks ended June 28, 2015 directly related to public offering expenses, $0.8 million of lower stock-based compensation expense primarily as a result of the vesting of certain performance awards during the thirteen weeks ended June 28, 2015 and $0.4 million of lower meetings and convention expenses primarily due to our bi-annual franchise convention and unit director leadership conference occurring during the thirteen weeks ended June 28, 2015, partially offset by headcount added to support an increased number of restaurants in our system and additional costs as a result of operating as a public company. As a percentage of total revenues, general and administrative expenses were 7.1% and 9.7% during the thirteen weeks ended June 26, 2016 and June 28, 2015, respectively.

 

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We expect our recurring general and administrative expenses will continue to increase as we grow our business and incur additional expenses related to being a newer public company.

Interest Expense

Interest expense decreased $0.2 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. The decrease was due primarily to principal payments of $33.2 million on our long-term debt and a reduction in our applicable rate, partially offset by an increase in the LIBOR rate and interest expense associated with interest rate swaps.

Income Taxes

Income taxes increased $1.4 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. Our effective income tax rates were 36.7% and 41.2% during the thirteen weeks ended June 26, 2016 and June 28, 2015, respectively. The decrease in our effective income tax rate was primarily due to expenses incurred during the thirteen weeks ended June 28, 2015 related to the IPO for which we did not receive a tax deduction, partially offset by additional tax credits recorded in the thirteen weeks ended June 28, 2015 versus the thirteen weeks ended June 26, 2016.

 

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Twenty-Six Weeks Ended June 26, 2016 Compared with the Twenty-Six Weeks Ended June 28, 2015

Our operating results for the twenty-six weeks ended June 26, 2016 and June 28, 2015 are compared below:

 

     Twenty-Six Weeks Ended  
     June 26,
2016
     June 28,
2015
     Increase/
(Decrease)
     Percentage
Change
 
     (Dollar amounts in thousands)  

Statement of Operations Data:

     

Revenues:

     

Company restaurant revenues

   $ 246,088       $ 222,378       $ 23,710         10.7

Franchise royalty revenues

     12,793         12,305         488         4.0

Other franchise revenues

     370         480         (110      (22.9 )% 
  

 

 

    

 

 

    

 

 

    

Total revenues

     259,251         235,163         24,088         10.2
  

 

 

    

 

 

    

 

 

    

Company restaurant operating expenses:

     

Food and supplies costs

     77,541         73,285         4,256         5.8

Restaurant labor costs

     67,861         61,647         6,214         10.1

Operating costs

     55,020         48,183         6,837         14.2

Depreciation and amortization

     6,207         5,388         819         15.2
  

 

 

    

 

 

    

 

 

    

Total company restaurant operating expenses

     206,629         188,503         18,126         9.6
  

 

 

    

 

 

    

 

 

    

Operating income before other operating expenses

     52,622         46,660         5,962         12.8
  

 

 

    

 

 

    

 

 

    

Other operating expenses:

     

General and administrative

     18,912         22,630         (3,718      (16.4 )% 

Depreciation and amortization

     1,433         1,350         83         6.1

Impairment

     389         15         374         n/m   

(Gain) loss on disposal of property and equipment

     (189      11         (200      n/m   
  

 

 

    

 

 

    

 

 

    

Total other operating expenses

     20,545         24,006         (3,461      (14.4 )% 
  

 

 

    

 

 

    

 

 

    

Operating income

     32,077         22,654         9,423         41.6

Amortization of deferred debt issuance costs

     (369      (415      46         (11.1 )% 

Interest income

     3         5         (2      (40.0 )% 

Interest expense

     (3,962      (4,392      430         (9.8 )% 
  

 

 

    

 

 

    

 

 

    

Income before income taxes

     27,749         17,852         9,897         55.4

Income taxes

     9,874         8,080         1,794         22.2
  

 

 

    

 

 

    

 

 

    

Net income

   $ 17,875       $ 9,772       $ 8,103         82.9
  

 

 

    

 

 

    

 

 

    

n/m = not meaningful

Company Restaurant Revenues

Company restaurant revenues increased $23.7 million, or 10.7%, during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015. The growth in company restaurant revenues was primarily due to an increase in comparable company restaurant sales of $3.8 million, or 1.8%, composed of increases in price and transactions at our comparable restaurants, and an increase in the non-comparable restaurant base (net additions of 28 company-operated restaurants as of June 26, 2016 compared to June 28, 2015) accounting for $19.9 million.

Franchise Royalty Revenues

Franchise royalty revenues increased $0.5 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015. The increase was primarily due to a net additional fifteen franchised restaurants at June 26, 2016 compared to June 28, 2015 and franchised comparable restaurant sales growth of 0.6%.

 

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Other Franchise Revenues

Other franchise revenues decreased $0.1 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015. The decrease was primarily due to the timing of the opening of franchised restaurants.

Food and Supplies Costs

Food and supplies costs increased $4.3 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015. This increase was primarily driven by an increase in company restaurant revenues. Food and supplies costs as a percentage of company restaurant revenues during the twenty-six weeks ended June 26, 2016 was 31.5% versus 33.0% during the twenty-six weeks ended June 28, 2015. This percentage decrease was primarily due to our menu price increases and lower commodity costs.

Restaurant Labor Costs

Company-operated restaurant labor increased $6.2 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015, primarily due to higher company restaurant revenues as a result of an increase in the number of company-operated restaurants. As a percentage of company restaurant revenues, restaurant labor costs decreased to 27.6% from 27.7%. This decrease was primarily driven by lower medical claims, incentive compensation and payroll taxes, partially offset by an increase in direct labor costs.

We expect our restaurant labor costs will continue to increase due to the tightening labor market, as well as certain labor initiatives across company-operated restaurants, including the expansion of our table service and potentially increasing the number of full-time versus part-time team members. In addition, we expect our restaurant labor costs will increase as a result of the newly enacted DOL regulations related to overtime and exempt versus non-exempt classification that are scheduled to become effective December 1, 2016.

Operating Costs

Operating costs increased $6.8 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015, primarily due to higher company restaurant revenues. As a percentage of company restaurant revenues, operating costs increased to 22.4% for the twenty-six weeks ended June 26, 2016 from 21.7% in the twenty-six weeks ended June 28, 2015. This increase was primarily attributable to higher occupancy costs.

Restaurant Depreciation and Amortization

Restaurant depreciation and amortization increased $0.8 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015, due primarily to the increased number of company-operated restaurants and our new point-of-sale system. As a percentage of company restaurant revenues, depreciation and amortization was 2.5% and 2.4% during the twenty-six weeks ended June 26, 2016 and June 28, 2015, respectively.

General and Administrative Expenses

General and administrative expenses decreased $3.7 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015. The decrease was due primarily to $4.5 million in legal, accounting and other expenses incurred during the twenty-six weeks ended June 28, 2015 directly related to public offering expenses, $0.9 million of lower stock-based compensation expense primarily as a result of the vesting of certain performance awards during the twenty-six weeks ended June 28, 2015 and $0.5 million of lower meetings and convention expenses primarily due to our bi-annual franchise convention and unit director leadership conference occurring during the twenty-six weeks ended June 28, 2015, partially offset by headcount added to support an increased number of restaurants in our system, additional costs as a result of operating as a public company, and $0.1 million of expenses incurred in connection with the transition to a new distributor. As a percentage of total revenues, general and administrative expenses were 7.3% and 9.6% during the twenty-six weeks ended June 26, 2016 and June 28, 2015, respectively.

 

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We expect our recurring general and administrative expenses will continue to increase as we grow our business and incur additional expenses related to being a newer public company.

Interest Expense

Interest expense decreased $0.4 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015. The decrease was due primarily to principal payments of $33.2 million on our long-term debt and a reduction in our applicable rate, partially offset by an increase in the LIBOR rate and interest expense associated with interest rate swaps.

Income Taxes

Income taxes increased $1.8 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015. Our effective income tax rates were 35.6% and 45.3% during the twenty-six weeks ended June 26, 2016 and June 28, 2015, respectively. The decrease in our effective income tax rate was primarily due to expenses incurred during the twenty-six weeks ended June 28, 2015 related to the IPO for which we did not receive a tax deduction and additional tax credits recorded in the twenty-six weeks ended June 26, 2016 versus the twenty-six weeks ended June 28, 2015.

Contractual Obligations

During the twenty-six weeks ended June 26, 2016, there were no material changes to the contractual obligations as disclosed in the Annual Report on Form 10-K for the fiscal year ended December 27, 2015, other than those made in the ordinary course of business.

Off-Balance Sheet Arrangements

We have guaranteed through 2018 debt from a previous credit facility which was assumed by a franchisee. We may be required to perform this guarantee in the event of default or nonperformance by this franchisee. We have determined that default by the franchisee is unlikely due to its timely and consistent payments and have therefore not recorded a liability for the debt assumed by this franchisee on our condensed consolidated balance sheets. The carrying value of debt covered by this additional guarantee by us was approximately $0.1 million at both June 26, 2016 and December 27, 2015.

Emerging Growth Company

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as modified by the Jumpstart our Business Startups Act of 2012, or the JOBS Act (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of stockholder approval of any golden parachute payments not previously approved.

In addition, 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 of 1933 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 exemption, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

 

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We will remain an “emerging growth company” until the earliest of (a) December 27, 2020, (b) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (c) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (d) the date on which we have issued more than $1 billion in non-convertible debt securities in the preceding three-year period.

Critical Accounting Policies and Use of 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.

Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that the critical accounting policies and estimates discussed below involve the most difficult management judgments due to the sensitivity of the methods and assumptions used. Our significant accounting policies are described in Note 1 to our consolidated financial statements contained elsewhere in this Form 10-Q.

There have been no material changes to our critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 27, 2015.

New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This update was issued to replace the current revenue recognition guidance, creating a more comprehensive revenue model. This update was originally to be effective in fiscal periods beginning after December 15, 2016 and early application was not permitted. In July 2015, the FASB affirmed its proposal to defer the effective date by one year to annual reporting periods beginning after December 15, 2017. The FASB also affirmed its proposal to permit early adoption of the standard, but not before the original effective date of December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) (“ASU 2015-11”). The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. This pronouncement is effective for reporting periods beginning after December 15, 2016. The adoption of ASU 2015-11 is not expected to have a significant impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 is a comprehensive new standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. ASU 2016-02 will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU 2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous guidance relating to leases. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

 

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In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions. ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

Liquidity and Capital Resources

Our primary requirements for liquidity and capital are new company-operated restaurants, existing restaurant capital investments (remodels and maintenance), information technology investments, principal and interest payments on our term debt and capital lease obligations, operating lease obligations and working capital and general corporate needs. Our customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Therefore, we are able to sell many of our inventory items before we have to pay our suppliers for such items. Our restaurants do not require significant inventories or receivables. We have accounts receivable from our franchisees, which are primarily related to royalty revenues, as well as from certain vendors.

Our growth plan is dependent upon many factors, including economic conditions, real estate markets, restaurant locations and the nature of our lease agreements. Our capital expenditure outlays are also dependent on costs for maintenance in our existing restaurants as well as information technology and other general corporate expenditures. We primarily utilize build-to-suit developments and equipment financing leases for our new company-operated restaurants, requiring minimal upfront cash investment. While we currently primarily utilize a build-to-suit development strategy combined with equipment financing leases, our new restaurant strategy may change over time.

We currently expect that our capital expenditures for 2016 will range between $12.5 million and $13.5 million excluding approximately $1.7 million to $1.8 million of restaurant preopening costs for restaurants that are not capitalized. These capital estimates are based on restaurant capital expenditures for the opening of 28 to 29 company-operated restaurants as well as investments to remodel and improve our existing restaurants, investments in technology and expenditures for general corporate purposes.

We believe that cash and cash equivalents and expected cash flow from operations are adequate to fund debt service requirements, capital lease obligations, operating lease obligations, capital expenditures and working capital needs for at least the next twelve 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 revenues and cash flow from operations, our ability to manage costs and working capital successfully and the continued availability of build-to-suit and equipment financing leases for our new company-operated restaurants. We have used excess cash flows to make payments on our outstanding long-term debt in advance of the required due date, and we may continue to do so in future periods.

 

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The following table presents summary cash flow information for the periods indicated (in thousands):

 

     Twenty-Six Weeks Ended  
     June 26,
2016
     June 28,
2015
 

Net cash provided by (used in)

     

Operating activities

   $ 25,287       $ 18,646   

Investing activities

     (3,901      (4,829

Financing activities

     (18,225      (14,255
  

 

 

    

 

 

 

Net increase (decrease) in cash

   $ 3,161       $ (438
  

 

 

    

 

 

 

Operating Activities

Net cash provided by operating activities increased from $18.6 million during the twenty-six weeks ended June 28, 2015 to $25.3 million during the twenty-six weeks ended June 26, 2016. The increase was primarily attributable to an increase in cash generated from our operations due to the net increase in company-operated restaurants, an increase in franchise royalty revenues and an increase in comparable restaurant sales, as well as the costs associated with our IPO incurred during the twenty-six weeks ended June 28, 2015.

Investing Activities

Net cash used in investing activities decreased from $4.8 million during the twenty-six weeks ended June 28, 2015 to $3.9 million during the twenty-six weeks ended June 26, 2016. The decrease was primarily attributable to a reduction in purchases of property and equipment and the purchase of a franchisee’s assets during the twenty-six weeks ended June 28, 2015.

Financing Activities

Net cash used in financing activities increased from $14.3 million during the twenty-six weeks ended June 28, 2015 to $18.2 million during the twenty-six weeks ended June 26, 2016. This increase was primarily due to $5.1 million and $0.7 million of higher principal payments on long-term debt and capital lease obligations, respectively, partially offset by a $0.7 million increase in proceeds received from the exercises of stock options and a $1.2 million increase in the associated excess tax benefit.

Debt and Other Obligations

Credit Agreement

On October 9, 2012, we entered into a credit agreement (“Credit Agreement”) with several financial institutions. The Credit Agreement is secured by substantially all of our assets and originally provided for borrowings under a term loan of $175.0 million and a revolving credit facility of $25.0 million, with a maturity date of October 9, 2017. In May 2013, we amended the Credit Agreement to provide for an additional $50.0 million term loan, the proceeds of which were used to fund a distribution to the holders of our Series A preferred stock. In April 2014, we further amended the Credit Agreement to provide for an additional $50.0 million term loan, the proceeds of which were also used to fund a distribution to the holders of our Series A preferred stock, and to extend the maturity date to October 9, 2018. On July 23, 2015, we amended the Credit Agreement in order to permit the merger of BHI Intermediate Holding Corp., our former wholly owned subsidiary, into us. On September 25, 2015, we further amended the Credit Agreement to, among other things, extend the maturity date on the Credit Agreement to October 9, 2020 and lower the applicable interest rate. We had $182.5 million of outstanding term loans and no outstanding borrowings under our revolving credit facility as of June 26, 2016.

 

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Borrowings under the Credit Agreement are allowed under base rate and Eurodollar rate loans. Base rate loans bear interest at the higher of (1) the Bank of America prime rate, (2) the Federal Funds Rate plus 0.50%, or (3) the LIBOR rate for one-month loans plus 1.00% and an applicable rate. Eurodollar rate loans may be entered or converted into one-, two-, three-, or six-month periods and are charged interest at the LIBOR rate on the effective date for the period selected, plus an applicable rate. As of June 26, 2016, all of our outstanding term loan debt was in one-month Eurodollar loans with an interest rate of approximately 2.70%.

Debt Covenants

Our Credit Agreement contains various covenants that, among other things, do not allow us to exceed a maximum consolidated total lease adjusted leverage ratio, require us to maintain a minimum consolidated fixed charge coverage ratio, and place certain limitations on cash capital expenditures. We were in compliance with all of the covenants under our Credit Agreement as of June 26, 2016.

Hedging Arrangements

In connection with our Credit Agreement, as of June 26, 2016, we have three variable-to-fixed interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. On May 17, 2013, we entered into an interest rate swap contract with a notional amount of $50.0 million, an effective date of November 30, 2015 and a termination date of September 29, 2017, under which we pay interest fixed at 1.3325% and receive the one-month LIBOR rate. Also on May 17, 2013, we entered into a separate interest rate swap contract with an effective date of May 31, 2013, a termination date of May 31, 2017 and a notional amount of $25.0 million, under which we pay interest fixed at 0.70125% and receive the one-month LIBOR rate. On October 26, 2015, we entered into another interest rate swap contract with an effective date of October 30, 2015, a termination date of October 31, 2019 and a notional amount of $50.0 million, under which we pay interest fixed at 1.115% and receive the one-month LIBOR rate.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Inflation Risk

The primary inflationary factors affecting our operations are food and supplies, labor costs, energy costs and materials used in the construction of new company-operated restaurants. Increases in the minimum wage directly affect our labor costs and the PPACA has increased our health insurance costs beginning in fiscal 2015. In addition to the factors we can control that could increase labor costs, such as our labor initiatives, we expect that a tightening labor market, as well as the newly enacted DOL regulations related to overtime and exempt versus non-exempt classification that are scheduled to become effective December 1, 2016 will also increase our restaurant labor costs. Our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflationary increases in the costs of labor and material which results in higher rent expense on new restaurants.

Interest Rate Risk

Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. We are exposed to market risk from changes in interest rates on our debt, which bears interest at variable rates. As of June 26, 2016, we had outstanding borrowings of $182.5 million under our Credit Agreement. As of June 26, 2016, $125.0 million of our outstanding borrowings under the Credit Agreement were covered by interest rate swaps that effectively fix the interest rate on those borrowings for certain periods of time. A 1.00% increase in the effective interest rate applied to our borrowings currently subject to variable interest rates would result in a pre-tax interest expense increase of $0.6 million on an annualized basis.

Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. Debt under our Credit Agreement has floating interest rates. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates for our floating rate debt. Our floating rate debt requires payments based on a

 

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variable interest rate index such as LIBOR. Therefore, increases in interest rates may reduce our net income by increasing the cost of our debt. However, we seek to mitigate our floating interest rate risk on the long-term debt under our Credit Agreement by entering into fixed pay interest rate derivatives on a portion of the long-term debt under our Credit Agreement, as discussed above under “Debt and Other Obligations – Hedging Arrangements”.

Commodity Market 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 contain risk management techniques designed to minimize price volatility. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our condensed consolidated balance sheets. Typically, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing or promotional mix, or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase food and supplies costs as a percentage of company restaurant revenues and customers may react negatively to increases in our menu prices which could adversely impact customer traffic and revenues.

Credit Risk

Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows.

Certain financial instruments potentially subject us to a concentration of credit risk. These financial instruments consist primarily of cash and cash equivalents and accounts and vendor receivables. We place our cash and cash equivalents with high-credit, quality financial institutions. At times, the balances in the accounts exceed the amounts insured by the Federal Deposit Insurance Corporation.

Concentration of credit risk with respect to receivables is primarily limited to franchisees, which are primarily located in the Southeastern United States, and vendors. Royalty revenues from three franchisees, one of which is a related party, accounted for approximately 44% of our total franchise royalty revenues for each of the thirteen weeks ended June 26, 2016 and June 28, 2015, and approximately 44% of our total franchise royalty revenues for each of the twenty-six weeks ended June 26, 2016 and June 28, 2015. Royalty and franchise fee accounts receivable from three franchisees, one of which is a related party, accounted for approximately 43% and 44% of our gross royalty and franchise fee accounts receivable as of June 26, 2016 and December 27, 2015, respectively. We continually evaluate and monitor the credit history of our franchisees and believe we have an adequate allowance for bad debts.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 12a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

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As of the end of the period covered by this Quarterly Report, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of June 26, 2016.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the thirteen weeks ended June 26, 2016 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

We are subject to various claims and litigation that arise in the normal course of business. Management is of the opinion that, although the outcome of the litigation cannot be predicted with any certainty, the ultimate liability, if any, will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors

Except with respect to the amended and restated risk factor below, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2015.

If we or our franchisees face labor shortages or increased labor costs, our results of operations and our growth could be adversely affected.

Labor is a primary component in the cost of operating our company-operated and franchised restaurants. If we or our franchisees face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, unionization of restaurant workers, or increases in the federally-mandated or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), our and our franchisees’ operating expenses could increase and our growth could be adversely affected.

We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal or state minimum wage and increases in the minimum wage will increase our labor costs and the labor costs of our franchisees. The federal minimum wage has been $7.25 per hour since July 24, 2009. Federally-mandated, state-mandated or locally-mandated minimum wages may be raised in the future. Since January 1, 2014, lawmakers in twelve states and the District of Columbia passed legislation to increase the state minimum wage. We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected. Also, reduced margins of franchisees could make it more difficult to sell franchises. If menu prices are increased by us and our franchisees to cover increased labor costs, the higher prices could adversely affect transactions which could lower sales and thereby reduce our margins and the royalties that we receive from franchisees.

In addition, our success depends in part upon our and our franchisees’ ability to attract, motivate and retain a sufficient number of well-qualified restaurant operators, management personnel and other employees. Qualified individuals needed to fill these positions can be in short supply in some geographic areas, and in fiscal 2015 some of our stores experienced increased competition for qualified employees. In addition, limited service restaurants have traditionally experienced relatively high employee turnover rates. Our turnover increased in fiscal 2015 at company-operated restaurants and has continued to increase during the twenty-six weeks ended June 26, 2016. Although we have not yet experienced any significant problems in recruiting employees, our and our franchisees’ ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could increase our and our franchisees’ labor costs and have a material adverse effect on our business, financial condition, results of operations or cash flows. If we or our franchisees are unable to recruit and retain sufficiently qualified individuals, our business and our growth could be adversely affected. Competition for these employees could require us or our franchisees to pay higher wages, which could also result in higher labor costs.

Finally, labor initiatives we or our franchisees implement across company-operated and franchised restaurants influence our labor costs. Certain initiatives, such as the expansion of our table service at company-operated restaurants, will increase our labor costs and overall operating expenses, which could adversely affect our growth. Changing the mix of full-time and part-time team members is another labor initiative that will influence our labor costs. Increasing our full-time team members at company-operated restaurants and/or franchised restaurants relative to part-time team members will result in higher labor costs for us and/or our franchisees, which could adversely affect our growth.

 

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits filed as part of this Quarterly Report are listed in the exhibit index immediately preceding such exhibits, which exhibit index is incorporated herein by reference.

 

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SIGNATURE

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

Date: August 8, 2016

 

Bojangles’, Inc.
By:  

/s/ M. John Jordan

  M. John Jordan
  Senior Vice President of Finance, Chief Financial Officer and Treasurer
  (Principal Financial Officer and Authorized Signatory)

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

  10.1 #    Bojangles’, Inc. Compensation Policy For Non-Employee Directors (Amended and Restated Effective June 8, 2016). *
  31.1    Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
  31.2    Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
  32.1    Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡
  32.2    Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡
101    Sections of the Bojangles’, Inc. Quarterly Report on Form 10-Q for the quarterly period ended June 26, 2016, formatted in XBRL (eXtensible Business Reporting Language), submitted in the following files:
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.

 

# Indicates a management contract or compensatory plan or arrangement
* Filed herewith
Furnished herewith

 

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