Bojangles', Inc. - FORM 10-Q

Bojangles', Inc. - FORM 10-Q - May 2, 2017

Attached files

Attached files

Bojangles', Inc. Reports

file	filename
EX-32.2 - EX-32.2 - Bojangles', Inc.	d364517dex322.htm
EX-32.1 - EX-32.1 - Bojangles', Inc.	d364517dex321.htm
EX-31.2 - EX-31.2 - Bojangles', Inc.	d364517dex312.htm
EX-31.1 - EX-31.1 - Bojangles', Inc.	d364517dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 26, 2017

☐	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 ☒ 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 ☒ No ☐

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



Emerging growth company		☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

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

As of April 25, 2017, there were 36,596,368 shares of the registrant’s common stock, par value $0.01 per share outstanding.

BOJANGLES’, INC. AND SUBSIDIARIES

INDEX


		Page

	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of March 26, 2017 and December 25, 2016 (Unaudited)		1

	Condensed Consolidated Statements of Operations and Comprehensive Income for the thirteen weeks ended March 26, 2017 and March 27, 2016 (Unaudited)		2

	Condensed Consolidated Statement of Stockholders’ Equity for the thirteen weeks ended March 26, 2017 (Unaudited)		3

	Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended March 26, 2017 and March 27, 2016 (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		34

Item 4.	Controls and Procedures		36

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		37

Item 1A.	Risk Factors		37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37

Item 3.	Defaults Upon Senior Securities		37

Item 4.	Mine Safety Disclosures		37

Item 5.	Other Information		37

Item 6.	Exhibits		37

	Signature		38

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, technology initiatives 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 salmonella, E. coli or others;

•

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;

•

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 our Annual Report on Form 10-K for the fiscal year ended December 25, 2016 filed with the United States Securities and Exchange Commission (the “SEC”) on March 7, 2017 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.

iii

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

BOJANGLES’, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)


	March 26,		December 25,
	2017		2016
Assets

Current assets:
Cash and cash equivalents	$	21,413		13,898
Accounts and vendor receivables, net of allowance for doubtful accounts of $287 and $135		5,164		5,421
Accounts receivable, related parties, net of allowance for doubtful accounts of $23 and $22		435		386
Inventories, net		3,273		3,326
Other current assets		2,053		3,033


Total current assets		32,338		26,064

Property and equipment, net		54,710		52,275
Goodwill		161,140		161,140
Brand		290,500		290,500
Franchise rights, net		23,969		24,243
Favorable leases, net		900		981
Other noncurrent assets		4,118		4,569


Total assets	$	567,675		559,772


Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable	$	11,729		16,818
Accrued expenses		20,816		17,940
Current maturities of long-term debt		2,132		2,132
Current maturities of capital lease obligations		7,533		7,299
Other current liabilities		8,189		4,390


Total current liabilities		50,399		48,579

Long-term debt, less current maturities and deferred debt issuance costs, net		151,616		153,630
Deferred income taxes		111,179		111,312
Capital lease obligations, less current maturities		22,493		22,524
Other noncurrent liabilities		12,962		12,937


Total liabilities		348,649		348,982


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 March 26, 2017 and December 25, 2016		—		—
Common stock, $0.01 par value; 150,000 shares authorized and 36,596 and 36,547 shares issued and outstanding as of March 26, 2017 and December 25, 2016, respectively		366		365
Additional paid-in capital		125,337		124,802
Retained earnings		92,994		85,377
Accumulated other comprehensive income		329		246


Total stockholders’ equity		219,026		210,790


Total liabilities and stockholders’ equity	$	567,675		559,772

See accompanying notes to condensed consolidated financial statements.

BOJANGLES’, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(in thousands, except per share amounts)


	Thirteen Weeks Ended
	March 26, 2017			March 27, 2016
Revenues:
Company restaurant revenues	$	124,783			121,413
Franchise royalty revenues		6,513			6,172
Other franchise revenues		200			70

Total revenues		131,496			127,655

Company restaurant operating expenses:
Food and supplies costs		38,684			38,521
Restaurant labor costs		36,347			33,336
Operating costs		29,691			28,413
Depreciation and amortization		3,208			3,083

Total Company restaurant operating expenses		107,930			103,353

Operating income before other operating expenses		23,566			24,302

Other operating expenses:
General and administrative		8,953			9,511
Depreciation and amortization		725			717
Impairment		296			201
Loss (gain) on disposal of property and equipment		22			(199	)

Total other operating expenses		9,996			10,230

Operating income		13,570			14,072
Amortization of deferred debt issuance costs		(118	)		(146	)
Interest income		1			1
Interest expense		(1,667	)		(2,024	)

Income before income taxes		11,786			11,903
Income taxes		4,169			4,059

Net income		7,617			7,844

Other comprehensive income (loss), net of tax
Change in fair value on interest rate swaps, net of income tax (expense) benefit of $(50) and $255		83			(414	)

Comprehensive income	$	7,700			7,430

Net income per share:
Basic	$	0.21			0.22

Diluted	$	0.20			0.21

See accompanying notes to condensed consolidated financial statements.

BOJANGLES’, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

Thirteen Weeks Ended March 26, 2017

(Unaudited)

(in thousands)


									Accumulated
					Additional				other		Total
	Common stock				paid-in		Retained		comprehensive		stockholders’
	Shares		Amount		capital		earnings		income		equity
Balance as of December 25, 2016		36,547	$	365		124,802		85,377		246		210,790

Net income		—		—		—		7,617		—		7,617
Change in fair value on interest rate swaps, net of income tax expense of $50		—		—		—		—		83		83
Stock option exercises		49		1		161		—		—		162
Stock-based compensation		—		—		374		—		—		374

Balance as of March 26, 2017		36,596	$	366		125,337		92,994		329		219,026

See accompanying notes to condensed consolidated financial statements.

BOJANGLES’, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	Thirteen Weeks Ended
	March 26, 2017			March 27, 2016
Cash flows from operating activities:
Net income	$	7,617			7,844
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax benefit		(183	)		(855	)
Depreciation and amortization		3,933			3,800
Amortization of deferred debt issuance costs		118			146
Impairment		296			201
Loss (gain) on disposal of property and equipment		22			(199	)
Provision for doubtful accounts		153			63
Benefit for inventory spoilage		(3	)		(1	)
Benefit for closed stores		—			(1	)
Stock-based compensation		374			276
Excess tax benefit from stock-based compensation		—			(449	)
Changes in operating assets and liabilities		1,909			1,500

Net cash provided by operating activities		14,236			12,325

Cash flows from investing activities:
Purchases of property and equipment		(3,015	)		(839	)
Proceeds from disposition of property and equipment		14			9

Net cash used in investing activities		(3,001	)		(830	)

Cash flows from financing activities:
Principal payments on long-term debt		(2,132	)		(3,669	)
Stock option exercises		162			271
Excess tax benefit from stock-based compensation		—			449
Principal payments on capital lease obligations		(1,750	)		(1,400	)

Net cash used in financing activities		(3,720	)		(4,349	)

Net increase in cash and cash equivalents		7,515			7,146
Cash and cash equivalents balance, beginning of fiscal period		13,898			14,263

Cash and cash equivalents balance, end of fiscal period	$	21,413			21,409

Supplemental cash flow disclosures:
Cash paid for interest	$	1,634			1,996
Cash paid for income taxes		410			2,076
Assets acquired under capital leases		2,029			1,043
Net change in assets under financing obligations		1,459			2,673
Reduction of capital lease obligations upon return of assets		69			93
Reduction of capital lease obligations upon early termination of lease		—			288

See accompanying notes to condensed consolidated financial statements.

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 March 26, 2017, there were 314 Company-operated restaurants, 61 related party franchised restaurants, and 353 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 weeks ended March 26, 2017:


	Thirteen Weeks Ended
	March 26, 2017
	Franchised		Company- Operated			System- Wide

Restaurants at the beginning of the period		407		309			716
Opened during the period		7		6			13
Closed during the period		—		(1	)		(1	)
Refranchised during the period		—		—			—

Restaurants at the end of the period		414		314			728

Restaurants closed during the period reflects permanent closures and excludes any temporary closures for items such as remodels, scrape and rebuilds, casualty events, severe weather conditions or any other short-term closure. A relocation results in a closure and an opening. During the thirteen weeks ended March 26, 2017, we closed one Company-operated restaurant, which was a relocation.

(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.

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 25, 2016. Certain prior period balances have been reclassified to conform to current period presentation.

BOJANGLES’, INC. AND SUBSIDIARIES

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

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 2017 will end on December 31, 2017 and will consist of 53 weeks. Fiscal year 2016 ended on December 25, 2016 and consisted of 52 weeks. The first three fiscal quarters of fiscal year 2017 are each comprised of thirteen weeks, and the fourth fiscal quarter of fiscal year 2017 is comprised of fourteen weeks. Fiscal quarters within fiscal year 2016 are each 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. The Company will not early adopt ASU 2014-09. ASU 2014-09 permits two transition approaches: retrospective or modified retrospective. The Company is still evaluating its transition approach and expects to reach a decision in the second fiscal quarter of fiscal year 2017. The Company has completed a preliminary review of ASU 2014-09 and does not expect the adoption of ASU 2014-09 to have a material impact on its company restaurant revenues or franchise royalty revenues. The Company expects the adoption of ASU 2014-09 will require the Company to recognize initial and renewal franchisee fees on a straight-line basis over the life of the franchise agreement, which will impact its other franchise revenues. In addition, the Company anticipates funds contributed by franchisees to the advertising funds managed by the Company, as well as the associated advertising fund expenditures, will be reported on a gross basis, and the advertising fund revenues and expenses may be reported in different periods.

BOJANGLES’, INC. AND SUBSIDIARIES

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

recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company expects to adopt ASU 2016-02 on December 31, 2018, which is the first day of its fiscal year 2019. A modified retrospective transition is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company expects that ASU 2016-02 will have a material effect on its condensed consolidated financial statements. While the Company is continuing to assess the impact of adoption, it currently believes the most significant changes relate to (1) the recognition of new ROU assets and lease liabilities on the Company’s condensed consolidated balance sheet for real estate and equipment operating leases and (2) the derecognition of existing assets and liabilities for certain assets under construction in build-to-suit lease arrangements that the Company will lease when construction is complete.

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. The Company adopted ASU 2016-09 prospectively during the first fiscal quarter of 2017, and the adoption did not have a significant impact on the condensed consolidated financial statements. The Company expects the adoption of ASU 2016-09 to cause volatility in its effective tax rates and diluted net income per share due to the tax effects related to share-based payments being recorded to the condensed consolidated statement of operations and comprehensive income. The volatility in future periods will depend on the Company’s stock price on the date awards are exercised or vest and the number of awards that are exercised or vest in each period. In addition, the adoption of ASU 2016-09 resulted in an increase in the weighted average number of common shares outstanding used for computing diluted net income per share as tax effects related to share-based payments are no longer considered assumed proceeds when calculating dilutive potential common shares using the treasury-stock method.

The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, financial statement presentation, financial instruments and hedging. Some of the proposed changes are significant and could have a material impact on our reporting. The Company has not yet fully evaluated the potential impact of all of these proposals, but will make such an evaluation as the standards are finalized.

BOJANGLES’, INC. AND SUBSIDIARIES

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

(2)

Long-Term Debt

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


	March 26, 2017			December 25, 2016

Term Loan, due October 9, 2020	$	155,326			157,458
Revolving line of credit, due October 9, 2020		—			—

Total long-term debt		155,326			157,458
Less: Current maturities of long term debt		(2,132	)		(2,132	)
Less: Deferred debt issuance costs, net		(1,578	)		(1,696	)

Long-term debt, less current maturities and deferred debt issuance costs, net	$	151,616			153,630


	March 26, 2017			December 25, 2016
Deferred debt issuance costs	$	4,809			4,809
Less accumulated amortization		(3,231	)		(3,113	)

Deferred debt issuance costs, net	$	1,578			1,696

(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, September 25, 2015 and October 19, 2016.

As of March 26, 2017, there were outstanding balances under the term loan in one-month Eurodollar loans of $155.3 million, all of which were accruing interest at a rate of approximately 2.78%. As of December 25, 2016, there were outstanding balances under the term loan in one-month Eurodollar loans of $157.5 million, all of which were accruing interest at a rate of approximately 2.61%.

As of March 26, 2017 and December 25, 2016, 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 March 26, 2017.

Debt issuance costs are capitalized and amortized using the effective interest method over the 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.

BOJANGLES’, INC. AND SUBSIDIARIES

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

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.

In connection with the Credit Agreement, as of March 26, 2017, the Company has 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, the Company 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 the Company pays interest fixed at 1.3325% and receives the one-month LIBOR rate. Also on May 17, 2013, the Company 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 the Company pays interest fixed at 0.70125% and receives the one-month LIBOR rate. On October 26, 2015, the Company 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 the Company pays interest fixed at 1.115% and receives the one-month LIBOR rate.

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


	Thirteen Weeks Ended		Fiscal Year Ended
	March 26, 2017		December 25, 2016
Opening balance, accumulated other comprehensive income	$	246		19
Unrealized gain from effective interest rate swap, net of tax		83		227

Ending balance, accumulated other comprehensive income	$	329		246

BOJANGLES’, INC. AND SUBSIDIARIES

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

(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 March 26, 2017.

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):


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

Fair value measurement as of
March 26, 2017:
Investments for nonqualified deferred compensation plan (included with other noncurrent assets on the consolidated balance sheets)	$	2,729			2,729		—			—
Interest rate swap (included with other current assets and other other noncurrent assets on the consolidated balance sheets)		595			—		595			—
Interest rate swap (included with other current liabilities on the consolidated balance sheets)		(67	)		—		(67	)		—

Fair value measurement as of
December 25, 2016:
Investments for nonqualified deferred compensation plan (included with other noncurrent assets on the consolidated balance sheets)	$	3,112			3,112		—			—
Interest rate swap (included with other current assets and other other noncurrent assets on the consolidated balance sheets)		561			—		561			—
Interest rate swap (included with other current liabilities on the consolidated balance sheets)		(166	)		—		(166	)		—

BOJANGLES’, INC. AND SUBSIDIARIES

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

There were no transfers into or out of Level 1 and Level 2 fair value measurements during the thirteen weeks ended March 26, 2017.

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.

(4)

Other Current Assets

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


	March 26, 2017		December 25, 2016
Prepaid expenses	$	2,040		1,517
Interest rate swap asset		13		11
Income taxes refundable		—		1,505

Other current assets	$	2,053		3,033

(5)

Property and Equipment, Net

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


	Useful lives		March 26, 2017			December 25, 2016

Land		—	$	1,509			1,509
Buildings		Up to 40 years		1,330			1,330
Furniture, fixtures and equipment		Up to 5 years		18,559			18,342
Computer hardware and software		Up to 5 years		9,828			9,673
Leasehold improvements		Up to 20 years		28,473			25,171
Capital leases, buildings		Lesser of lease term or 40 years		8,286			8,286
Capital leases, equipment		Lesser of lease term or 5 years		29,627			28,707
Capital leases, automobiles		Lesser of lease term or 5 years		3,485			3,478
Construction-in-progress		—		8,784			8,086


Total				109,881			104,582

Less:
Accumulated depreciation				(35,230	)		(33,462	)
Accumulated amortization				(19,941	)		(18,845	)


Property and equipment, net			$	54,710			52,275

Depreciation and amortization expense related to property and equipment was $3.7 million and $3.5 million for the thirteen weeks ended March 26, 2017 and March 27, 2016, respectively.

BOJANGLES’, INC. AND SUBSIDIARIES

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

(6)

Franchise Rights, Net

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


	March 26, 2017			December 25, 2016
Franchise rights, including reacquired franchise rights	$	29,623			29,623
Less accumulated amortization		(5,654	)		(5,380	)

Franchise rights, net	$	23,969			24,243

Amortization expense related to franchise rights was $0.3 million during each of the thirteen weeks ended March 26, 2017 and March 27, 2016.

(7)

Other Noncurrent Assets

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


	March 26, 2017		December 25, 2016
Investments for nonqualified deferred compensation plan	$	2,729		3,112
Interest rate swap asset		582		550
Other noncurrent assets		807		907

Other noncurrent assets	$	4,118		4,569

(8)

Accrued Expenses

Accrued expenses consist of the following (in thousands):


	March 26, 2017		December 25, 2016
Payroll & related	$	9,607		9,791
Sales and property taxes		4,163		2,620
Gift cards		903		1,135
Utilities		1,288		1,232
Occupancy		473		445
Interest		648		616
Bank fees		711		711
Other		3,023		1,390

Accrued expenses	$	20,816		17,940

BOJANGLES’, INC. AND SUBSIDIARIES

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

(9)

Other Current Liabilities

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


	March 26, 2017		December 25, 2016
Financing obligations under build-to-suit transactions	$	5,573		4,114
Income taxes payable		2,437		—
Closed store obligation		112		110
Interest rate swap liability		67		166

Other current liabilities	$	8,189		4,390

(10)

Other Noncurrent Liabilities

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


	March 26, 2017		December 25, 2016
Deferred rents	$	7,847		7,434
Unfavorable lease liability, net		1,457		1,527
Deferred compensation		2,729		3,112
Deferred revenue		660		565
Closed store obligation		217		246
Other noncurrent liabilities		52		53

Other noncurrent liabilities	$	12,962		12,937

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

BOJANGLES’, INC. AND SUBSIDIARIES

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

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 March 26, 2017 and March 27, 2016. Royalty and franchise fee accounts receivable from three franchisees, one of which is a related party, accounted for approximately 42% and 40% of the Company’s gross royalty and franchise fee accounts receivable as of March 26, 2017 and December 25, 2016, 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 March 26, 2017 and December 25, 2016.

(12)

Leases

The Company’s agreement with a financial institution providing up to $3.5 million for leasing of equipment that was originally scheduled to expire on March 1, 2016 was initially extended to September 30, 2016. As the Company had utilized all capacity under this agreement, on June 27, 2016, the financial institution increased the capacity under this agreement by an additional $8.1 million and further 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.

On August 15, 2016, the Company entered into an agreement with another financial institution providing up to $3.0 million for leasing of equipment, which is scheduled to expire on June 30, 2017. Under this leasing arrangement, each of the scheduled leases has a 60-month term, a fixed interest rate equal to the average of two- and three-year interest rate swap rates 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.

On October 11, 2016, the Company entered into an agreement with another financial institution providing up to $2.1 million for leasing of equipment, which is scheduled to expire on September 30, 2017. Under this leasing arrangement, each of the scheduled leases has a 60-month term, a fixed interest rate equal to the three-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 this leasing arrangement 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 weeks ended March 26, 2017 and March 27, 2016.

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, and assumes the conversion of the outstanding preferred stock into common stock.

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 weeks ended March 26, 2017 and March 27, 2016 are as follows (in thousands, except per share amounts):


	Thirteen Weeks Ended
	March 26, 2017		March 27, 2016
Net income	$	7,617		7,844


Weighted average number of common shares outstanding-basic		36,568		36,023

Weighted average dilutive effect of stock-based compensation		2,069		1,412

Weighted average number of common shares outstanding-diluted		38,637		37,435


Net income per share-basic	$	0.21		0.22

Net income per share-diluted	$	0.20		0.21

(14)

Income Taxes

The Company’s effective income tax rates were 35.4% and 34.1% for the thirteen weeks ended March 26, 2017 and March 27, 2016, respectively. The effective income tax rate for both of the thirteen weeks ended March 26, 2017 and March 27, 2016 was impacted by the recognition of certain tax credits. In addition, the effective income tax rate for the thirteen weeks ended March 26, 2017 was impacted by the recognition of $0.2 million of excess tax benefits associated with the exercise of stock options.

(15)

Stock Compensation Plan

Effective immediately prior to the Company’s initial public offering in May 2015, 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 March 26, 2017, there were 4.0 million additional shares available for grant 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.

BOJANGLES’, INC. AND SUBSIDIARIES

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

Stock option activity during the period indicated is as follows:


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

Balance as of December 25, 2016		3,767,273		$	4.59		6.0	$	55,023

Granted		—
Exercised		(48,934	)		3.31				751
Repurchased		—
Forfeited		(4,244	)		10.56
Expired		—


Balance as of March 26, 2017		3,714,095		$	4.60		5.8	$	56,065


Exercisable as of March 26, 2017		2,358,218		$	4.24		5.7	$	36,465

As of March 26, 2017, there was $1.7 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 2.1 years. As of March 26, 2017, there was approximately $2.5 million of total unrecognized compensation cost related to 0.9 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:


	Number of shares			Weighted average fair value at grant date

Nonvested as of December 25, 2016		81,850		$	18.05

Granted		—
Forfeited		(1,000	)		18.05
Vested		—


Nonvested as of March 26, 2017		80,850		$	18.05

As of March 26, 2017, there was $1.0 million of total unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average period of approximately 3.1 years.

(16)

Related Party Transactions

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

BOJANGLES’, INC. AND SUBSIDIARIES

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

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.

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.

MRMJ Holdings, LLC (“MRMJ”) is owned by a certain indirect stockholder of the Company. MRMJ leases land and a building to the Company for use as a restaurant operated by the Company.

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


		Thirteen Weeks Ended
Related Party	Description	March 26, 2017		March 27, 2016
The Panthers	Marketing/sponsorship expense		—		100
Tri-Arc	Marketing expense		18		18
JZF	Rent payments		48		47
MRE	Rent payments		75		35
PLP	Rent payments		—		55
CBM	Rent payments		25		25
MRMJ	Rent payments		15		—

BOJANGLES’, INC. AND SUBSIDIARIES

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

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
Related Party	March 26, 2017		March 27, 2016
Cajun	$	23		23
New Generation		142		136
Tri-Arc		1,246		1,222

	Other Franchise Revenues
	Thirteen Weeks Ended
Related Party	March 26, 2017		March 27, 2016
Cajun	$	—		—
New Generation		—		—
Tri-Arc		—		13

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


	Gross Accounts Receivable
Related Party	March 26, 2017		December 25, 2016
Cajun	$	8		8
New Generation		53		51
Tri-Arc		400		382

(17)

Subsequent Event

In connection with a former executive’s departure from the Company subsequent to March 26, 2017, the Company expects to incur severance and related legal fees of approximately $0.6 million during the thirteen weeks ended June 25, 2017.

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 March 26, 2017, have expanded our system-wide restaurants to 728 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 $301.8 million of system-wide sales during the thirteen weeks ended March 26, 2017. 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.

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.

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
	March 26, 2017		March 27, 2016
(Dollar amounts in thousands)
Average Unit Volumes
Total system-wide	$	1,805		1,839

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. If a company-operated restaurant is temporarily closed for a full calendar week due to items such as a remodel, scrape and rebuild, casualty event, severe weather conditions or any other short-term closure, it is removed from the comparable restaurant sales calculations for such period it is temporarily closed. If a franchised restaurant is temporarily closed for a full calendar week due to items such as a remodel, scrape and rebuild, casualty event, severe weather conditions or any other short-term closure, it is removed from the comparable restaurant sales calculations for the entire month(s) impacted by the temporary closure. 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
	March 26, 2017			March 27, 2016
Comparable Restaurant Sales:
Company-operated		(3.5	)%		2.7	%
Franchised		(0.5	)%		1.6	%
Total system-wide		(1.7	)%		2.0	%

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 restaurants typically have lower annual sales volumes than our established company-operated restaurants. 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 and may cannibalize sales of 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.

The following is the number of Bojangles’ franchised, company-operated and system-wide restaurants at the beginning and end of the thirteen weeks ended March 26, 2017:


	Thirteen Weeks Ended
	March 26, 2017
	Franchised		Company- Operated			System- Wide

Restaurants at the beginning of the period		407		309			716
Opened during the period		7		6			13
Closed during the period		—		(1	)		(1	)
Refranchised during the period		—		—			—

Restaurants at the end of the period		414		314			728

Restaurants closed during the period reflects permanent closures and excludes any temporary closures for items such as remodels, scrape and rebuilds, casualty events, severe weather conditions or any other short-term closure. A relocation results in a closure and an opening. During the thirteen weeks ended March 26, 2017, we closed one company-operated restaurant, which was a relocation.

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 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 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.

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.

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
(Dollar amounts in thousands)	March 26, 2017			March 27, 2016
Net income	$	7,617			7,844


Certain professional and transaction costs ^(a)		3			33
Payroll taxes associated with stock option exercises^(b)		26			20
Distributor transition costs^(c)		—			65
Executive separation expenses^(d)		5			—
Tax impact of adjustments^(e)		(11	)		(44	)

Total adjustments		23			74

Adjusted Net Income	$	7,640			7,918


	Thirteen Weeks Ended
	March 26, 2017			March 27, 2016
Diluted net income per share	$	0.20			0.21


Certain professional and transaction costs ^(a)		—			—
Payroll taxes associated with stock option exercises^(b)		—			—
Distributor transition costs^(c)		—			—
Executive separation expenses^(d)		—			—
Tax impact of adjustments^(e)		—			—

Total adjustments		—			—

Adjusted Diluted Net Income per Share	$	0.20			0.21

(a)	Includes costs associated with third-party consultants for one-time projects and public offering expenses. We could incur similar expenses in future periods if we commence additional public offerings, financing transactions or other one-time projects.

(b)

Represents payroll taxes associated with stock option exercises related to stock options that were outstanding prior to our initial public offering (“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.

(c)	Includes expenses incurred in connection with the transition to our new distributor.

(d)	Represents legal fees associated with a former executive’s departure from the Company. We expect to incur similar severance and legal fees in future periods associated with another former executive’s departure from the Company, including $0.6 million during the thirteen weeks ended June 25, 2017.

(e)	Represents the income tax expense associated with the adjustments in (a) through (d) that are deductible for income tax purposes.

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


	Thirteen Weeks Ended
(Dollar amounts in thousands)	March 26, 2017		March 27, 2016
Net income	$	7,617		7,844
Income taxes		4,169		4,059
Interest expense, net		1,666		2,023
Depreciation and amortization^(a)		4,051		3,946

EBITDA		17,503		17,872
Non-cash rent ^(b)		404		378
Stock-based compensation^(c)		374		276
Payroll taxes associated with stock option exercises ^(d)		26		20
Preopening expenses^(e)		375		218
Certain professional, transaction and other costs ^(f)		3		33
Distributor transition costs^(g)		—		65
Executive separation expenses^(h)		5		—
Impairment and dispositions⁽ⁱ⁾		332		11

Adjusted EBITDA	$	19,022		18,873

(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 costs associated with third-party consultants for one-time projects and public offering expenses. We could incur similar expenses in future periods if we commence additional public offerings, financing transactions or other one-time projects.

(g)	Includes expenses incurred in connection with the transition to our new distributor.

(h)	Represents legal fees associated with a former executive’s departure from the Company. We expect to incur similar severance and legal fees in future periods associated with another former executive’s departure from the Company, including $0.6 million during the thirteen weeks ended June 25, 2017.

(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 may incur future losses (gains) and receive cash proceeds on disposal of property and equipment associated with retirement, replacement or write-off of fixed assets.

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. 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, 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 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
(Dollar amounts in thousands)	March 26, 2017			March 27, 2016
Company restaurant revenues	$	124,783			121,413
Food and supplies costs		(38,684	)		(38,521	)
Restaurant labor costs		(36,347	)		(33,336	)
Operating costs		(29,691	)		(28,413	)

Restaurant contribution	$	20,061			21,143

Restaurant contribution margin		16.1	%		17.4	%

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.

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.

Although the implementation of the Department of Labor (“DOL”) regulations related to overtime and exempt versus non-exempt classification that were scheduled to become effective December 1, 2016 were enjoined, we increased the salaries of certain of our team members during the fourth fiscal quarter of fiscal 2016 in response to these regulations. Increasing the salary of these employees, along with various labor initiatives we intend to implement, including service enhancements and employing more full-time versus part-time team members, and higher health care costs will increase our restaurant labor costs. Our restaurant labor costs could increase further if the DOL regulations related to overtime and exempt versus non-exempt classification that were scheduled to become effective December 1, 2016 ultimately go in to effect.

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 as restaurant remodels, 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 increases in general and administrative expenses as a result of being 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 as 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 the 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.

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.

Results of Operations

Thirteen Weeks Ended March 26, 2017 Compared with the Thirteen Weeks Ended March 27, 2016

Our operating results for the thirteen weeks ended March 26, 2017 and March 27, 2016 are compared below:


	Thirteen Weeks Ended
	March 26, 2017			March 27, 2016			Increase/ (Decrease)			Percentage Change
	(Dollar amounts in thousands)
Statement of Operations Data:
Revenues:
Company restaurant revenues	$	124,783		$	121,413		$	3,370			2.8	%
Franchise royalty revenues		6,513			6,172			341			5.5	%
Other franchise revenues		200			70			130			185.7	%

Total revenues		131,496			127,655			3,841			3.0	%

Company restaurant operating expenses:
Food and supplies costs		38,684			38,521			163			0.4	%
Restaurant labor costs		36,347			33,336			3,011			9.0	%
Operating costs		29,691			28,413			1,278			4.5	%
Depreciation and amortization		3,208			3,083			125			4.1	%

Total company restaurant operating expenses		107,930			103,353			4,577			4.4	%

Operating income before other operating expenses		23,566			24,302			(736	)		(3.0	)%

Other operating expenses:
General and administrative		8,953			9,511			(558	)		(5.9	)%
Depreciation and amortization		725			717			8			1.1	%
Impairment		296			201			95			47.3	%
Loss (gain) on disposal of property and equipment		22			(199	)		221			(111.1	)%

Total other operating expenses		9,996			10,230			(234	)		(2.3	)%

Operating income		13,570			14,072			(502	)		(3.6	)%
Amortization of deferred debt issuance costs		(118	)		(146	)		28			(19.2	)%
Interest income		1			1			—			0.0	%
Interest expense		(1,667	)		(2,024	)		357			(17.6	)%

Income before income taxes		11,786			11,903			(117	)		(1.0	)%
Income taxes		4,169			4,059			110			2.7	%

Net income	$	7,617		$	7,844		$	(227	)		(2.9	)%

Company Restaurant Revenues

Company restaurant revenues increased $3.4 million, or 2.8%, during the thirteen weeks ended March 26, 2017 compared to the thirteen weeks ended March 27, 2016. The growth in company restaurant revenues was primarily due to an increase in the non-comparable restaurant base (net additions of 26 company-operated restaurants as of March 26, 2017 compared to March 27, 2016) accounting for $7.5 million, partially offset by a decrease in comparable company restaurant sales of $4.1 million, or 3.5%, composed of decreases in transactions and mix, partially offset by increases in price at our comparable restaurants.

Franchise Royalty Revenues

Franchise royalty revenues increased $0.3 million during the thirteen weeks ended March 26, 2017 compared to the thirteen weeks ended March 27, 2016. The increase was primarily due to a net additional 31 franchised restaurants at March 26, 2017 compared to March 27, 2016, partially offset by a decrease in franchised comparable restaurant sales of 0.5%.

Other Franchise Revenues

Other franchise revenues increased $0.1 million during the thirteen weeks ended March 26, 2017 compared to the thirteen weeks ended March 27, 2016. The decrease was primarily due to the timing of the opening of franchised restaurants.

Food and Supplies Costs

Food and supplies costs increased $0.2 million during the thirteen weeks ended March 26, 2017 compared to the thirteen weeks ended March 27, 2016. 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 March 26, 2017 was 31.0% versus 31.7% during the thirteen weeks ended March 27, 2016. This percentage decrease was primarily due to our menu price increases and lower commodity costs.

Restaurant Labor Costs

Company-operated restaurant labor costs increased $3.0 million during the thirteen weeks ended March 26, 2017 compared to the thirteen weeks ended March 27, 2016, 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 29.1% during the thirteen weeks ended March 26, 2017 from 27.5% during the thirteen weeks ended March 27, 2016. This increase was primarily driven by an increase in direct labor and medical costs, partially offset by lower incentive compensation.

We expect our restaurant labor costs will continue to increase due to the tightening labor market and higher medical costs, as well as certain labor initiatives across company-operated restaurants, including service enhancements and 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 increasing the salaries of certain of our team members in response to the DOL regulations related to overtime and exempt versus non-exempt classification that were scheduled to go in to effect December 1, 2016. Our restaurant labor costs could increase further if these DOL regulations ultimately go in to effect.

Operating Costs

Operating costs increased $1.3 million during the thirteen weeks ended March 26, 2017 compared to the thirteen weeks ended March 27, 2016, primarily due to higher company restaurant revenues, partially offset by a decrease in marketing costs as a result of the timing of expenses incurred during the thirteen weeks ended March 27, 2016. As a percentage of company restaurant revenues, operating costs increased to 23.8% during the thirteen weeks ended March 26, 2017 from 23.4% during the thirteen weeks ended March 27, 2016. Operating costs as a percentage of company restaurant revenues increased primarily due to higher occupancy and utilities costs, partially offset by lower marketing costs.

Restaurant Depreciation and Amortization

Restaurant depreciation and amortization increased $0.1 million during the thirteen weeks ended March 26, 2017 compared to the thirteen weeks ended March 27, 2016, due primarily to the increased number of company-operated restaurants. As a percentage of company restaurant revenues, depreciation and amortization was 2.6% and 2.5% during the thirteen weeks ended March 26, 2017 and March 27, 2016, respectively.

General and Administrative Expenses

General and administrative expenses decreased $0.6 million during the thirteen weeks ended March 26, 2017 compared to the thirteen weeks ended March 27, 2016. The decrease during the thirteen weeks ended March 26, 2017 was due primarily to lower incentive compensation, partially offset by headcount added to support an increased number of restaurants in our system. As a percentage of total revenues, general and administrative expenses were 6.8% and 7.5% during the thirteen weeks ended March 26, 2017 and March 27, 2016, respectively.

We expect our recurring general and administrative expenses will 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 thirteen weeks ended March 26, 2017 compared to the thirteen weeks ended March 27, 2016. The decrease was due primarily to principal payments of $41.2 million on our long-term debt from March 28, 2016 to March 26, 2017 and a reduction in our applicable rate, partially offset by an increase in the LIBOR rate.

Income Taxes

Income taxes increased $0.1 million during the thirteen weeks ended March 26, 2017 compared to the thirteen weeks ended March 27, 2016. Our effective income tax rates were 35.4% and 34.1% during the thirteen weeks ended March 26, 2017 and March 27, 2016, respectively. The effective income tax rate for both of the thirteen weeks ended March 26, 2017 and March 27, 2016 was impacted by the recognition of certain tax credits. In addition, the income tax rate for the thirteen weeks ended March 26, 2017 was impacted by the recognition of $0.2 million of excess tax benefits associated with the exercise of stock options.

Contractual Obligations

During the thirteen weeks ended March 26, 2017, 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 25, 2016, 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 March 26, 2017 and December 25, 2016.

Emerging Growth Company

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”) and 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 of 2002, 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 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.”

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 $1.07 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 consolidated financial statements. The preparation of our consolidated 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 consolidated 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 herein 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 25, 2016.

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 will not early adopt ASU 2014-09. ASU 2014-09 permits two transition approaches: retrospective or modified retrospective. We are still evaluating our transition approach and expect to reach a decision in the second fiscal quarter of fiscal year 2017. We have completed a preliminary review of ASU 2014-09 and do not expect the adoption of ASU 2014-09 to have a material impact on our company restaurant revenues or franchise royalty revenues. We expect the adoption of ASU 2014-09 will require us to recognize initial and renewal franchisee fees on a straight-line basis over the life of the franchise agreement, which will impact our other franchise revenues. In addition, we anticipate funds contributed by franchisees to the advertising funds we manage, as well as the associated advertising fund expenditures, will be reported on a gross basis, and the advertising fund revenues and expenses may be reported in different periods.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We expect to adopt ASU 2016-02

on December 31, 2018, which is the first day of our fiscal year 2019. A modified retrospective transition is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We expect that ASU 2016-02 will have a material effect on our condensed consolidated financial statements. While we are continuing to assess the impact of adoption, we currently believe the most significant changes relate to (1) the recognition of new ROU assets and lease liabilities on our condensed consolidated balance sheet for real estate and equipment operating leases and (2) the derecognition of existing assets and liabilities for certain assets under construction in build-to-suit lease arrangements that we will lease when construction is complete.

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. We adopted ASU 2016-09 prospectively during the first fiscal quarter of 2017, and the adoption did not have a significant impact on the condensed consolidated financial statements. We expect the adoption of ASU 2016-09 to cause volatility in our effective tax rates and diluted net income per share due to the tax effects related to share-based payments being recorded to the condensed consolidated statement of operations and comprehensive income. The volatility in future periods will depend on the price of our common stock on the date awards are exercised or vest and the number of awards that are exercised or vest in each period. In addition, the adoption of ASU 2016-09 resulted in an increase in the weighted average number of common shares outstanding used for computing diluted net income per share as tax effects related to share-based payments are no longer considered assumed proceeds when calculating dilutive potential common shares using the treasury-stock method.

The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, financial statement presentation, financial instruments and hedging. Some of the proposed changes are significant and could have a material impact on our reporting. We have not yet fully evaluated the potential impact of all of these proposals, but will make such an evaluation as the standards are finalized.

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 primarily 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 do 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 utilize a build-to-suit development strategy, our new restaurant strategy may change over time.

We currently expect our cash capital expenditures for fiscal year 2017 will range between $17.5 million and $18.0 million excluding approximately $1.6 million to $1.7 million of restaurant preopening costs for restaurants that are not capitalized. These capital estimates are based on restaurant capital expenditures for the opening of 27 to 28 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.

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


	Thirteen Weeks Ended
	March 26, 2017			March 27, 2016
Net cash provided by (used in)
Operating activities	$	14,236		$	12,325
Investing activities		(3,001	)		(830	)
Financing activities		(3,720	)		(4,349	)

Net increase in cash	$	7,515		$	7,146

Operating Activities

Net cash provided by operating activities increased from $12.3 million during the thirteen weeks ended March 27, 2016 to $14.2 million during the thirteen weeks ended March 26, 2017. The increase was primarily attributable to an increase in cash generated from our operations due to the net increase in company-operated restaurants and an increase in franchise royalty revenues.

Investing Activities

Net cash used in investing activities increased from $0.8 million during the thirteen weeks ended March 27, 2016 to $3.0 million during the thirteen weeks ended March 26, 2017. The increase was attributable to higher purchases of property and equipment, including expenditures related to new and remodeled company-operated restaurants, as well as our technology initiatives.

Financing Activities

Net cash used in financing activities decreased from $4.3 million during the thirteen weeks ended March 27, 2016 to $3.7 million during the thirteen weeks ended March 26, 2017. This decrease was primarily due to $1.5 million of lower principal payments on long-term debt, partially offset by $0.4 million of higher principal payments on capital lease obligations and a $0.4 million decrease in the excess tax benefit from stock-based compensation which, beginning in fiscal year 2017, is now recorded in the condensed consolidated statement of operations and comprehensive income.

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 an initial 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. On October 19, 2016, we further amended the Credit Agreement to, among other things, increase allowable indebtedness associated with capital lease obligations, synthetic lease obligations and purchase money obligations, as well as to increase allowable cash capital expenditures during each fiscal year. We had $155.3 million of outstanding term loans and no outstanding borrowings under our revolving credit facility as of March 26, 2017.

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 March 26, 2017, all of our outstanding term loan debt was in one-month Eurodollar loans with an interest rate of approximately 2.78%.

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 March 26, 2017.

Hedging Arrangements

In connection with our Credit Agreement, as of March 26, 2017, 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 year 2015. In addition to the factors we can control that could increase labor costs, such as our labor initiatives, the DOL regulations related to overtime and exempt versus non-exempt classifications that were scheduled to become effective December 1, 2016 but are currently enjoined could further increase our restaurant labor costs should they ultimately go into effect. 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 March 26, 2017, we had outstanding borrowings of $155.3 million under our Credit Agreement. As of March 26, 2017, $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 $0.3 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 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 March 26, 2017 and March 27, 2016. Royalty and franchise fee accounts receivable from three franchisees, one of which is a related party, accounted for approximately 42% and 40% of our gross royalty and franchise fee accounts receivable as of March 26, 2017 and December 25, 2016, 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.

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 March 26, 2017.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the thirteen weeks ended March 26, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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 25, 2016.

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.

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: May 2, 2017


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)

EXHIBIT INDEX


Exhibit No.		Description

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 March 26, 2017, 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.

*	Filed herewith

‡	Furnished herewith

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