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Ignite Restaurant Group, Inc. – ‘10-Q’ for 6/29/15

On:  Thursday, 8/6/15, at 4:45pm ET   ·   For:  6/29/15   ·   Accession #:  1437749-15-15087   ·   File #:  1-35549

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 8/06/15  Ignite Restaurant Group, Inc.     10-Q        6/29/15   53:4.3M                                   RDG Filings/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

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                Carrying Amount of Major Classes of Assets and                   
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‘10-Q’   —   Quarterly Report


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 C: 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

 

For the quarterly period ended June 29, 2015

 

 

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 001-35549

 

IGNITE RESTAURANT GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

  

94-3421359

(State or other jurisdiction of incorporation or organization)

  

(IRS Employer Identification No.)

 

9900 Westpark Drive, Suite 300, Houston, Texas 77063

(Address of principal executive offices and zip code)

 

(713) 366-7500

(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 or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

  

Accelerated filer ☒

  

  

  

Non-accelerated filer ☐

  

Smaller reporting company ☐

 

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

 

The number of shares of the issuer’s common stock, par value $0.01, outstanding as of July 31, 2015 was 26,127,752.

 



 
 

 

 

TABLE OF CONTENTS

 

  

  

Page

  

  

  

PART I - FINANCIAL INFORMATION

  

  

  

  

Item 1.

Financial Statements

  

  

Condensed Consolidated Balance Sheets (unaudited) as of June 29, 2015 and December 29, 2014

3

  

Condensed Consolidated Statements of Operations (unaudited) for the thirteen and twenty-six weeks ended June 29, 2015 and June 30, 2014

4

  

Condensed Consolidated Statements of Cash Flows (unaudited) for the twenty-six weeks ended June 29, 2015 and June 30, 2014

5

  

Notes to Condensed Consolidated Financial Statements (unaudited)

6

Item 2.

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

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

  

  

  

PART II - OTHER INFORMATION

  

  

  

  

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults Upon Senior Securities

28

Item 4.

Mine Safety Disclosures

28

Item 5.

Other Information

28

Item 6.

Exhibits

29

  

  

  

SIGNATURES

30

 

 
2

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

IGNITE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(Unaudited)

  

   

June 29,

2015

   

December 29,

2014

 
                 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 48,418     $ 20,564  

Accounts receivable, net

    7,455       7,992  

Inventories

    6,307       5,848  

Other current assets

    8,398       6,614  

Assets held for sale

    -       82,465  

Total current assets

    70,578       123,483  
                 

Property and equipment, net

    186,869       192,942  

Intangible assets, net

    5,710       5,940  

Other assets

    5,253       5,355  

Total assets

  $ 268,410     $ 327,720  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 18,812     $ 15,651  

Accrued liabilities

    33,906       29,002  

Current portion of debt obligations

    1,650       1,650  

Liabilities associated with assets held for sale

    -       47,986  

Total current liabilities

    54,368       94,289  
                 

Long-term debt obligations

    160,467       161,052  

Deferred rent

    20,348       19,457  

Other long-term liabilities

    3,175       1,623  

Total liabilities

    238,358       276,421  
                 

Commitments and contingencies (Note 7)

               
                 

Stockholders' equity

               

Preferred stock, $0.01 par value per share, 100,000 shares authorized; zero shares issued and outstanding

    -       -  

Common stock, $0.01 par value per share, 500,000 shares authorized; 26,128 and 26,183 shares issued and outstanding as of June 29, 2015 and December 29, 2014, respectively

    258       257  

Additional paid-in capital

    91,844       90,943  

Accumulated deficit

    (62,050 )     (39,901 )

Total stockholders' equity

    30,052       51,299  

Total liabilities and stockholders' equity

  $ 268,410     $ 327,720  

 

See accompanying notes to condensed consolidated financial statements.

 

 
3

 

 

IGNITE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except earnings per share)

(Unaudited)

 

 

   

Thirteen

Weeks Ended

   

Thirteen

Weeks Ended

   

Twenty-Six

Weeks Ended

   

Twenty-Six

Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

   

June 29,

2015

   

June 30,

2014

 
                                 

Revenues

  $ 143,170     $ 143,283     $ 265,389     $ 266,378  

Costs and expenses

                               

Restaurant operating costs and expenses

                               

Cost of sales

    44,065       47,116       82,666       86,151  

Labor expenses

    39,990       39,117       74,807       74,865  

Occupancy expenses

    10,422       9,719       20,644       19,219  

Other operating expenses

    27,571       26,910       49,670       47,910  

General and administrative

    8,363       9,400       16,758       20,043  

Depreciation and amortization

    6,177       5,871       12,406       11,693  

Pre-opening costs

    46       558       514       762  

Asset impairments and closures

    53       65       83       149  

Loss on disposal of assets

    194       227       352       399  

Total costs and expenses

    136,881       138,983       257,900       261,191  

Income from operations

    6,289       4,300       7,489       5,187  

Interest expense, net

    (3,849 )     (1,764 )     (7,725 )     (3,642 )

Income (loss) from continuing operations before income taxes

    2,440       2,536       (236 )     1,545  

Income tax expense (benefit)

    709       202       1,229       (934 )

Income (loss) from continuing operations

    1,731       2,334       (1,465 )     2,479  

Loss from discontinued operations (net of tax benefit of $4,196 and $979 for the thirteen weeks ended June 29, 2015 and June 30, 2014, and tax benefit of $3,830 and $2,157 for the twenty-six weeks ended June 29, 2015 and June 30, 2014, respectively)

    (1,645 )     (567 )     (20,684 )     (977 )

Net income (loss)

  $ 86     $ 1,767     $ (22,149 )   $ 1,502  
                                 

Basic and diluted net income (loss) per share data:

                               

Net income (loss) per share

                               

Basic and diluted

                               

Income (loss) from continuing operations

  $ 0.07     $ 0.09     $ (0.06 )   $ 0.10  

Loss from discontinued operations

  $ (0.06 )   $ (0.02 )   $ (0.80 )   $ (0.04 )

Net income (loss)

  $ 0.00     $ 0.07     $ (0.86 )   $ 0.06  

Weighted average shares outstanding

                               

Basic

    25,721       25,651       25,698       25,645  

Diluted

    25,730       25,749       25,698       25,715  

 

 

See accompanying notes to condensed consolidated financial statements.

 

 
4

 

 

IGNITE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

   

Twenty-Six

Weeks Ended

   

Twenty-Six

Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

 

Cash flows from operating activities

               

Net income (loss)

  $ (22,149 )   $ 1,502  

Loss from discontinued operations, net of tax

    20,684       977  

Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:

               

Depreciation and amortization

    12,406       11,693  

Amortization of debt issuance costs

    532       392  

Amortization of debt discount

    240       -  

Stock-based compensation

    1,288       1,205  

Deferred income tax

    (525 )     (2,599 )

Non-cash loss on disposal of assets

    301       399  

Decrease (increase) in operating assets:

               

Accounts receivable

    20       1,501  

Inventories

    (459 )     (773 )

Other operating assets

    (3,096 )     (1,551 )

Increase in operating liabilities:

               

Accounts payable and accrued liabilities

    12,582       10,855  

Other operating liabilities

    2,239       2,136  

Net cash provided by operating activities - continuing operations

    24,063       25,737  

Net cash provided by (used in) operating activities - discontinued operations

    3,891       (929 )

Net cash provided by operating activities

    27,954       24,808  

Cash flows from investing activities

               

Purchases of property and equipment

    (8,564 )     (10,733 )

Proceeds from disposal of assets

    63       50  

Purchases of intangible assets

    -       (150 )

Net cash used in investing activities - continuing operations

    (8,501 )     (10,833 )

Net cash provided by (used in) investing activities - discontinued operations

    11,639       (517 )

Net cash provided by (used in) investing activities

    3,138       (11,350 )

Cash flows from financing activities

               

Borrowings on revolving credit facility

    -       90,300  

Payments on revolving credit facility

    -       (102,407 )

Payments on long-term debt

    (813 )     (1,199 )

Taxes paid related to net share settlement of equity awards

    (134 )     (125 )

Net cash used in financing activities

    (947 )     (13,431 )

Net increase in cash and cash equivalents

    30,145       27  

Change in cash and cash equivalents - discontinued operations

    (2,291 )     55  

Cash and cash equivalents at beginning of period

    20,564       3,836  

Cash and cash equivalents at end of period

  $ 48,418     $ 3,918  

 

See accompanying notes to condensed consolidated financial statements.

 

 
5

 

 

IGNITE RESTAURANT GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 — Basis of Presentation

 

As of June 29, 2015, Ignite Restaurant Group, Inc. (referred to herein as the “Company,” “Ignite,” “we,” “us” or “our”) owned and operated two full service, casual dining restaurant brands under the names Joe’s Crab Shack (“Joe’s”) and Brick House Tavern + Tap (“Brick House”). As of June 29, 2015, we owned and operated 138 Joe’s restaurants and 23 Brick House restaurants in 33 states within the United States. On April 17, 2015, we completed the sale of Romano’s Macaroni Grill (“Macaroni Grill”). See Note 2 for further discussion.

 

J.H. Whitney VI, L.P., an affiliate of J.H. Whitney Capital Partners, LLC, currently owns approximately 66.4% of our total outstanding common stock.

 

We prepared the accompanying unaudited condensed consolidated financial statements in accordance with Rule 10-01 of Regulation S-X, and hence, the financial statements do not contain certain information included in our annual financial statements and notes thereto. We have made adjustments consisting of normal recurring adjustments that are, in our opinion, necessary for a fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results of operations for a full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 29, 2014, filed with the Securities and Exchange Commission (“SEC”) on March 13, 2015. The December 29, 2014 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Ignite and its wholly-owned subsidiaries as of June 29, 2015. All significant intercompany balances and transactions have been eliminated in consolidation. As of December 29, 2014, the assets and associated liabilities of Macaroni Grill have been reclassified as held for sale. The operating results of Macaroni Grill for the current and prior periods have been aggregated and reclassified as discontinued operations in our condensed consolidated statements of operations for the thirteen and twenty-six weeks ended June 29, 2015 and June 30, 2014. See Note 2 for further discussion.

 

Fiscal Year

 

Our fiscal year ends on the Monday nearest to December 31 of each year. Our quarterly accounting periods are comprised of four equal 13-week periods, except for 53-week fiscal years for which the fourth quarter will be comprised of 14 weeks. Fiscal years 2015 and 2014 are 52-week years.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board issued a converged standard on revenue recognition, Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under this guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer. Its disclosure guidance requires an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative information about contracts with customers, including revenue and impairments recognized, disaggregation of revenue and information about contract balances and performance obligations; significant judgments and changes in judgments; and assets recognized from the costs to obtain or fulfill a contract. This ASU is effective for us for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted, but not before the original effective date. This ASU permits the use of either the retrospective or cumulative effect transition method. We are evaluating the impact of this guidance on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the impact of the standard on our consolidated financial statements.

 

 
6

 

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding on certain principles that are currently in U.S. auditing standards. Specifically, ASU No. 2014-15 (1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effects of management’s plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued or available to be issued. This update is effective for the fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We have evaluated the ASU and determined that it has no material impact on our consolidated financial statements.

 

In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, to simplify income statement classification by removing the concept of extraordinary items from U.S. GAAP. Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of an unusual nature and occurs infrequently. This separate, net-of-tax presentation (and corresponding earnings per share impact) will no longer be allowed. The existing requirement to separately present items that are of an unusual nature or occur infrequently on a pre-tax basis within income from continuing operations has been retained. The new guidance also requires similar separate presentation of items that are both unusual and infrequent. The standard is effective for both public and private companies for periods beginning after December 15, 2015. Early adoption is permitted, but only as of the beginning of the fiscal year of adoption. Upon adoption, a reporting entity may elect prospective or retrospective application. If adopted prospectively, both the nature and amount of any subsequent adjustments to previously reported extraordinary items must be disclosed. We have evaluated the ASU and determined that it has no material impact on our consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, to simplify the presentation of debt issuance costs in the balance sheet. The ASU specifies that debt issuance costs related to a note shall be reported in the balance sheet as a direct deduction from the face amount of that note, and that amortization of debt issuance costs also shall be reported as interest expense. The ASU does not affect the current guidance on the recognition and measurement of debt issuance costs. The update is effective for us in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for all entities for financial statements that have not been previously issued. Entities would apply the new guidance retrospectively to all prior periods presented. We have evaluated the ASU and determined that it has no material impact on our consolidated statements of operations and cash flows.

 

In April 2015, the FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Agreement, as part of the FASB’s simplification initiative to reduce the diversity in practice, and reduce the costs and complexity of assessing fees paid in a cloud computing arrangement. The update provides guidance as to whether a cloud computing arrangement includes a software license and, based on that determination, how to account for such arrangements using existing accounting models. The update is effective for us in annual periods, including interim periods, beginning after December 15, 2015, with early application permitted. Companies will have the option of transitioning to the new guidance either retrospectively or prospectively for all new transactions entered into or materially modified after the date of adoption. We have evaluated the ASU and determined that it has no material impact on our consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires entities to measure most inventory at the lower of cost and net realizable value. The ASU eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (or net realizable value) or below the floor (or net realizable value less normal profit margin). The ASU also defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” The update does not amend other guidance on measuring inventory, such as FIFO, LIFO, or average cost method. The update is effective for us prospectively for annual periods beginning after December 15, 2016, and interim periods therein. Early application of the ASU is permitted. We have evaluated the ASU and determined that it has no material impact on our consolidated financial statements.

 

 
7

 

 

Note 2 — Sale of Macaroni Grill

 

On April 17, 2015, we completed the sale of Macaroni Grill for $7.3 million, net of directly related selling expenses, of which $7.1 million was received as of June 29, 2015. During the thirteen weeks ended March 30, 2015, we recorded a $22.4 million impairment charge to write down the net assets of Macaroni Grill to their estimated fair value less cost to sell, which is included in loss from discontinued operations in our condensed consolidated statements of operations. In addition, during the thirteen weeks ended June 29, 2015, we recorded a $6.1 million loss on disposal of the Macaroni Grill business in loss from discontinued operations.

 

The following tables present the carrying amounts of the major classes of assets and liabilities associated with the held for sale business of Macaroni Grill (in thousands):

 

   

December 29,

2014

 

Assets held for sale

       

Accounts receivable, net

  $ 4,721  

Inventories

    3,471  

Other current assets

    3,031  

Property and equipment, net

    43,012  

Intangible assets, net

    23,039  

Other assets

    5,191  
    $ 82,465  
         

Liabilities associated with assets held for sale

       

Accounts payable

  $ 9,730  

Accrued liabilities

    22,507  

Deferred rent

    4,799  

Unfavorable leases

    5,385  

Noncurrent deferred tax liability

    4,450  

Other long-term liabilities

    1,115  
    $ 47,986  

 

The table below reconciles significant items that comprise loss from discontinued operations, net of tax (in thousands):

 

   

Thirteen

Weeks Ended

   

Thirteen

Weeks Ended

   

Twenty-Six

Weeks Ended

   

Twenty-Six

Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

   

June 29,

2015

   

June 30,

2014

 

Revenues

  $ 12,393     $ 86,564     $ 88,439     $ 178,328  
                                 

Cost of sales

    3,337       23,606       23,187       47,989  

Labor expenses

    4,617       29,878       31,266       60,977  

Occupancy expenses

    1,477       9,858       9,987       19,816  

Other operating expenses

    2,415       20,544       18,190       43,545  

General and administrative

    (28 )     1,802       2,149       3,433  

Depreciation and amortization

    307       2,074       2,066       4,388  

Asset impairments and closures

    6       70       22,807       943  

Loss on disposal of assets

    6,101       277       4,339       370  

Other non-operating items

    2       1       (1,038 )     1  

Loss from discontinued operations before income taxes

  $ (5,841 )   $ (1,546 )   $ (24,514 )   $ (3,134 )

 
8

 

 

Note 3 — Selected Balance Sheet Accounts

 

The components of other current assets are as follows (in thousands):

 

   

June 29,

2015

   

December 29,

2014

 
                 

Prepaid rent

  $ 2,515     $ 939  

Prepaid insurance

    1,876       1,461  

Prepaid taxes

    1,158       1,321  

Prepaid licenses and fees

    870       557  

Deferred income taxes

    462       335  

Other

    1,517       2,001  
    $ 8,398     $ 6,614  

 

Intangible assets consist of the following (in thousands):

 

   

June 29, 2015

   

December 29, 2014

 
   

Cost

   

Accumulated

Amortization and

Impairment

   

Carrying

Value

   

Cost

   

Accumulated

Amortization and

Impairment

   

Carrying

Value

 

Definite lived:

                                               

Trademarks

  $ 4,580     $ 3,801     $ 779     $ 4,580     $ 3,571     $ 1,009  

Indefinite lived:

                                               

Liquor licenses

    4,931       -       4,931       4,931       -       4,931  
    $ 9,511     $ 3,801     $ 5,710     $ 9,511     $ 3,571     $ 5,940  

 

The components of accrued liabilities are as follows (in thousands):

 

   

June 29,

2015

   

December 29,

2014

 
                 

Payroll and related costs

  $ 11,451     $ 7,245  

Insurance

    6,634       7,642  

Interest

    3,473       1,865  

Deferred gift card revenue

    2,850       3,598  

Sales and alcohol taxes

    2,812       1,807  

Utilities

    2,202       1,258  

Property taxes

    2,050       2,632  

Professional fees

    791       1,072  

Other

    1,643       1,883  
    $ 33,906     $ 29,002  

 

 
9

 

 

Note 4 — Debt Obligations

 

Debt obligations consisted of the following (in thousands):

 

   

June 29,

2015

   

December 29,

2014

 

Term loan, due February 2019

  $ 164,175     $ 165,000  

Less unamortized debt discount

    2,058       2,298  

Total debt, net of debt discount

    162,117       162,702  

Less current portion

    1,650       1,650  

Long-term debt obligations

  $ 160,467     $ 161,052  

 

On August 13, 2014, we entered into a new senior secured credit facility (“2014 Credit Agreement”), which consists of a $30.0 million revolving credit facility (“2014 Revolving Credit Facility”) and a $165.0 million term loan (“2014 Term Loan”), which both mature on February 13, 2019. The 2014 Term Loan was issued at 98.5% of par. The principal amount of the 2014 Term Loan is payable in consecutive quarterly installments of $412,500, commencing on December 31, 2014, with the balance payable in full at maturity. At closing, we repaid the balance of our previously amended 2013 Credit Facility using the proceeds from the 2014 Term Loan.

 

Interest rates for borrowings under the 2014 Credit Agreement for the revolver and the term loan are equal to, at our option, either LIBOR (subject to a 1% floor) or the base rate as defined in the agreement, plus a margin of 7.0% for LIBOR loans and 6.0% for base rate loans. The interest rate for the 2014 Term Loan was 8.0% as of June 29, 2015. In addition, we are required to pay commitment fees on the unused portion of the 2014 Revolving Credit Facility. The commitment fee rate is currently at 0.5%. The commitment fee is subject to adjustment on a quarterly basis based on our leverage ratio as defined by the credit agreement.

 

The 2014 Credit Agreement is guaranteed by each of our subsidiaries and secured by substantially all of our present and future assets and a lien on the capital stock or other equity interests of our direct and indirect subsidiaries. The 2014 Credit Agreement contains covenants which, among other things, limit our ability to incur additional indebtedness, create liens on our assets, make certain investments or loans, merge or otherwise dispose of assets other than in the ordinary course of business, make acquisitions, and pay dividends or make other restricted payments. The 2014 Credit Agreement also contains customary covenants regarding, among other matters, the maintenance of insurance, the preservation and maintenance of our corporate existence, material compliance with laws, and the payment of taxes and other material obligations.

 

The 2014 Credit Agreement provides that (a) the leverage ratio shall not exceed (i) 5.75x through December 29, 2014, (ii) 5.5x from December 30, 2014 through June 29, 2015, (iii) 5.25x from June 30, 2015 through December 28, 2015, (iv) 5.0x from December 29, 2015 through March 28, 2016, (v) 4.75x from March 29, 2016 through June 27, 2016, (vi) 4.25x from June 28, 2016 through September 26, 2016, (vii) 4.0x from September 27, 2016 through April 3, 2017, (viii) 3.75x from April 4, 2017 through October 2, 2017, (ix) 3.5x from October 3, 2017 through April 2, 2018, (x) 3.25x from April 3, 2018 through December 31, 2018, and (xi) 3.0x from January 1, 2019 through maturity date; and requires (b) an interest coverage ratio of at least (i) 2.0x through June 29, 2015, (ii) 2.25x from June 30, 2015 through March 28, 2016, (iii) 2.5x from March 29, 2016 through June 27, 2016, (iv) 2.75x from June 28, 2016 through January 2, 2017, (v) 3.0x from January 3, 2017 through July 3, 2017, (vi) 3.25x from July 4, 2017 through April 2, 2018, (vii) 3.5x from April 3, 2018 through December 31, 2018, and (viii) 3.75x from January 1, 2019 through maturity date. The 2014 Credit Agreement limits capital expenditures to an amount in respect of any period not to exceed (i) $29.5 million from the closing date through December 29, 2014, (ii) $45.5 million for fiscal 2015, (iii) $45.8 million for fiscal 2016, (iv) $52.5 million for fiscal 2017, (v) $53.7 million for fiscal 2018, and (vi) $58.6 million from January 1, 2019 through maturity date, provided that the amount of permitted capital expenditures in any period can be increased by the unused permitted capital expenditures from the immediately preceding period, subject to certain limitations as defined by the agreement. We were in compliance with these covenants as of June 29, 2015.

 

 
10

 

 

We wrote off $2.2 million of debt issuance costs related to the 2013 Credit Facility, and at closing paid $4.8 million in additional debt issuance costs. The debt issuance costs paid at closing and the remaining unamortized debt issuance costs from the 2013 Credit Facility are recorded in other assets and are amortized over the term of the 2014 Credit Agreement. The debt discount is included as a reduction to the carrying value of the debt obligations and is amortized over the term of the 2014 Term Loan using the effective interest rate method.

 

The weighted average interest rate on the 2014 Credit Agreement at June 29, 2015 was 8.0%. As of June 29, 2015, we had outstanding letters of credit of approximately $5.7 million and available borrowing capacity of approximately $24.3 million under the 2014 Revolving Credit Facility.

 

The carrying value of our long-term debt approximates fair value. The estimate of the fair value of our debt is based on observable market information from a third party pricing source, which is classified as a level 2 input within the fair value hierarchy.

 

Note 5 — Stock-Based Compensation

 

During the twenty-six weeks ended June 29, 2015, the board of directors granted approximately 174 thousand shares of restricted stock with a weighted average grant date fair value of $4.22, and approximately 623 thousand stock appreciation rights (“SARs”) with a weighted average grant date fair value of $2.02. As of June 29, 2015, we had unrecognized stock-based compensation expense of approximately $5.4 million related to stock-based compensation awards granted. That cost is expected to be recognized over a weighted average period of 2.7 years.

 

The following table provides the significant weighted average assumptions used to determine the fair value of SARs on the grant date using the Black-Scholes option-pricing model for awards granted during the twenty-six weeks ended June 29, 2015 and June 30, 2014:

 

 

   

Twenty-Six

Weeks Ended

   

Twenty-Six

Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

 

Expected term (in years)

    6.25       6.25  

Expected volatility

    43.6%       42.5%  

Dividend yield

    0.0%       0.0%  

Risk-free interest rate

    1.5% - 1.8%       2.0%  

 

Since we have limited historical exercise experience on SARs, we used the simplified method of estimating expected term. We estimated expected volatility by supplementing our own historical volatility with the volatility of a peer group over a recent historical period equal to the same expected term of the award. The expected dividend yield is based on our history of not paying regular dividends in the past and our current intention to not pay regular dividends in the foreseeable future. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant using the term equal to our expected term. Restricted stock is valued using our closing stock price on the business day prior to the grant date.

 

Note 6 — Net Income (Loss) per Share

 

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period, while diluted net income (loss) per share is computed using the weighted average number of common shares outstanding plus all potentially dilutive common share equivalents outstanding during the period. The table below presents a reconciliation of weighted average common shares used in the calculation of basic and diluted net income (loss) per share (in thousands): 

 

   

Thirteen

Weeks Ended

   

Thirteen

Weeks Ended

   

Twenty-Six

Weeks Ended

   

Twenty-Six

Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

   

June 29,

2015

   

June 30,

2014

 

Denominator:

                               

Basic weighted average shares outstanding

    25,721       25,651       25,698       25,645  

Effect of dilutive securities

    9       98       -       70  

Diluted weighted average shares outstanding

    25,730       25,749       25,698       25,715  

 
11

 

  

For the thirteen weeks ended June 29, 2015, we included 367 thousand shares of restricted stock outstanding, and excluded 1.7 million stock appreciation rights from the calculation of diluted net income per share because their effect was anti-dilutive. For the twenty-six weeks ended June 29, 2015, we excluded 367 thousand shares of restricted stock and 1.7 million stock appreciation rights outstanding from the calculation of diluted net loss per share because their effect was anti-dilutive due to the net loss for the period. For the thirteen and twenty-six weeks ended June 30, 2014, we included 519 thousand shares of restricted stock outstanding in the calculation of diluted net income per share and excluded 1.7 million stock appreciation rights because their effect was anti-dilutive.

 

Note 7 — Commitments and Contingencies

 

In the ordinary course of our business affairs and operations, we are subject to possible loss contingencies arising from third-party litigation and federal, state and local environmental, health and safety laws and regulations.

 

Litigation 

 

We are a defendant or otherwise involved in a number of lawsuits in the ordinary course of business, including personal injury claims, contract claims, claims alleging violation of federal and state law regarding workplace and employment matters, discrimination claims and similar matters. When the potential liability can be estimated and the loss is considered probable, we record the estimated loss. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ from our estimates. We believe that the ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect, individually or in the aggregate, on our consolidated financial position, results of operations, or cash flows.

 

On July 20, 2012, a putative class action complaint was filed in the U.S. District Court for the Southern District of Texas against us following our announced intention to restate our financial statements for the fiscal years ended December 28, 2009, January 3, 2011 and January 2, 2012 and the related interim periods. The complaint lodged against us, certain of our current directors and officers and the underwriters in the initial public offering (“IPO”) was based on allegations related to the Company’s disclosures in its registration statement and prospectus for its IPO. On July 4, 2014, we reached a confidential agreement in principle to settle all pending claims, subject to submission and approval by the court. On January 30, 2015, the court issued preliminary approval of the settlement in the amount of $1.8 million of which $1.6 million is covered by insurance. On June 5, 2015, the court issued final approval of the settlement and termination of all proceedings in this matter.

 

On August 28, 2013, in the United States District Court, Western District of New York, six former tipped employees of various Joe’s Crab Shack locations filed a complaint against us and certain of our officers alleging that the employees were not paid the minimum wage required by federal law as well as the wage-hour laws of the respective states in which they worked. These former employees purport to represent a nationwide class of tipped employees on their federal claims and separate subclasses of tipped employees regarding their state law claims. By order dated January 27, 2015, the court granted conditional certification to the class. We are vigorously contesting this matter and have answered and asserted affirmative defenses. Discovery as to all issues is now in the preliminary stages. At this early stage, we cannot predict with any certainty whether the former employees will prevail or the amount of damages they might recover were they to prevail.

 

Note 8 — Income Taxes

 

Our effective tax rate from continuing operations is generally the combined federal and state statutory rate reduced by the effect of tax credits primarily due to the tax benefit of FICA tax credits for employee reported tip income. The change in the effective tax rate is primarily due to the valuation allowance in the current year and the change in FICA tax credits being generated in the current year compared to the prior year proportionate to the income (loss) before income taxes.

 

 
12

 

 

Income taxes for the thirteen and twenty-six weeks ended June 29, 2015 and June 30, 2014 were estimated using the discrete method, which is based on actual year-to-date loss before income taxes and estimated tax credits generated primarily related to FICA and Medicare taxes paid on employee tip income. We believe that this method yields a more reliable income tax calculation for the interim periods. The estimated annual effective tax rate method was not reasonable due to its sensitivity to small changes in forecasted annual earnings before income taxes, which would result in significant variations in the customary relationship between income tax expense and earnings before income taxes for interim periods.

 

We evaluate our deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. We assess whether a valuation allowance should be established based on our determination of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and prior to the expiration of our credit carryforwards which begin to expire in 2031. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. According to ASC Topic No. 740, Income Taxes, cumulative losses in recent years represent significant negative evidence in considering whether deferred tax assets are realizable. Therefore, during the thirteen weeks ended June 29, 2015, we recorded a valuation allowance of $17.6 million, of which approximately $0.6 million was for continuing operations and approximately $17.0 million was for discontinued operations. During the twenty-six weeks ended June 29, 2015, we recorded a valuation allowance of $27.9 million, of which approximately $2.7 million was for continuing operations and approximately $25.2 million was for discontinued operations. During the second quarter, we also wrote off $22.9 million of net deferred tax assets of Macaroni Grill against the valuation allowance in connection with the sale. If we are able to generate sufficient taxable income in the future and it becomes more likely than not that we will be able to fully utilize the net deferred tax assets on which a valuation allowance was recorded, our effective tax rate may decrease if the valuation allowance is reversed.

 

Note 9 — Segment Information

 

All of our restaurants compete in the full-service casual dining industry. Our brands also possess similar production methods, distribution methods, and economic characteristics, resulting in similar long-term expected financial performance characteristics. Considering the future growth plans of Brick House, we believe reporting information about each of our brands would be useful to readers of our financial statements and is consistent with how management evaluates brand performance. We also believe that providing this additional financial information for each of our brands will provide a better understanding of our overall operating results. Income (loss) from operations represents revenues less restaurant operating costs and expenses, directly allocable general and administrative expenses, and other restaurant-level expenses directly associated with each brand including depreciation and amortization, pre-opening costs, asset impairments and closures, and loss on disposal of assets. Unallocated corporate expenses, capital expenditures, property and equipment, and intangible assets are presented below as reconciling items to the amounts presented in the condensed consolidated financial statements.

 

 
13

 

 

The following tables present information about our reportable segments for the respective periods (in thousands).

 

   

Thirteen

Weeks Ended

   

Thirteen

Weeks Ended

   

Twenty-Six

Weeks Ended

   

Twenty-Six

Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

   

June 29,

2015

   

June 30,

2014

 

Revenues

                               

Joe's Crab Shack

  $ 122,366     $ 125,481     $ 225,475     $ 230,813  

Brick House Tavern + Tap

    20,804       17,802       39,914       35,565  
    $ 143,170     $ 143,283     $ 265,389     $ 266,378  
                                 

Income (loss) from operations

                               

Joe's Crab Shack

  $ 10,510     $ 10,299     $ 17,017     $ 18,076  

Brick House Tavern + Tap

    2,050       1,054       3,271       2,849  

Corporate

    (6,271 )     (7,053 )     (12,799 )     (15,738 )
    $ 6,289     $ 4,300     $ 7,489     $ 5,187  
                                 

Depreciation and amortization

                               

Joe's Crab Shack

  $ 4,793     $ 4,595     $ 9,653     $ 9,150  

Brick House Tavern + Tap

    1,152       1,026       2,234       2,048  

Corporate

    232       250       519       495  
    $ 6,177     $ 5,871     $ 12,406     $ 11,693  
                                 

Capital expenditures

                               

Joe's Crab Shack

  $ 1,831     $ 5,349     $ 2,842     $ 7,313  

Brick House Tavern + Tap

    717       1,436       5,188       2,687  

Corporate

    318       621       534       733  
    $ 2,866     $ 7,406     $ 8,564     $ 10,733  

 

 

   

June 29,

2015

   

December 29,

2014

 

Property and equipment, net

               

Joe's Crab Shack

  $ 142,009     $ 149,105  

Brick House Tavern + Tap

    42,287       40,715  

Corporate

    2,573       3,122  
    $ 186,869     $ 192,942  
                 

Intangible assets, net

               

Joe's Crab Shack

  $ 3,769     $ 3,981  

Brick House Tavern + Tap

    1,930       1,946  

Corporate

    11       13  
    $ 5,710     $ 5,940  

 

 
14

 

 

Item 2.

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

 

You should read the following discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations with the consolidated financial statements and related notes included elsewhere herein. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Forward-Looking Statements” in our most recent Annual Report on Form 10-K for the fiscal year ended December 29, 2014. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

 

Our fiscal year ends on the Monday nearest to December 31 of each year. Our quarterly accounting periods are comprised of 13 weeks, except for 53-week fiscal years for which the fourth quarter will be comprised of 14 weeks. Fiscal years 2015 and 2014 are 52-week years.

 

Overview

 

As of June 29, 2015, Ignite Restaurant Group, Inc. operated two restaurant brands in the casual dining segment, Joe’s Crab Shack (“Joe’s”) and Brick House Tavern + Tap (“Brick House”). Both of our restaurant brands offers a variety of high-quality food in a distinctive, casual, high-energy atmosphere. Joe’s and Brick House operate in a diverse set of markets across the United States. As of June 29, 2015, we owned and operated 138 Joe’s restaurants and 23 Brick House restaurants in 33 states. On April 17, 2015, we completed the sale of Romano’s Macaroni Grill (“Macaroni Grill”). See Note 2 in our Notes to Condensed Consolidated Financial Statements for further information.

 

Joe’s is an established, national chain of casual dining seafood restaurants. Joe’s serves a variety of high-quality seafood items, with an emphasis on crab. Joe’s is a high-energy, family-friendly restaurant that encourages guests to “roll up your sleeves and crack into some crab.” Brick House is a casual restaurant brand that provides guests an elevated experience appropriate for every day usage.

 

Discontinued Operations

 

In April 2013, we acquired Macaroni Grill with the intent of reviving the brand and making it a positive contributor to our earnings. We implemented a number of operations and marketing strategies since our acquisition of Macaroni Grill, including a 22% reduction in the number of restaurants and the roll out of Romano’s Kitchen Counter. While these initiatives improved results, Macaroni Grill was still a negative contributor to our overall results. During the fourth quarter of 2014, we began to evaluate various strategic alternatives for this brand, including continued real estate portfolio reduction and sale of the entire business.

 

On April 17, 2015, we completed the sale of Macaroni Grill for $7.3 million, net of directly related selling expenses, of which $7.1 million was received as of June 29, 2015. During the thirteen weeks ended March 30, 2015, we recorded a $22.4 million impairment charge to write down the net assets of Macaroni Grill to their estimated fair value less cost to sell, which is included in loss from discontinued operations in our condensed consolidated statements of operations. In addition, during the thirteen weeks ended June 29, 2015, we recorded a $6.1 million loss on disposal of the Macaroni Grill business in loss from discontinued operations. We intend to use the net proceeds from the sale primarily for new restaurant development.

 

We believe that our exit from the Macaroni Grill business was a strategic shift which has a significant effect on our operations and financial results. Hence, we considered Macaroni Grill as a discontinued operation. As of December 29, 2014, the assets and associated liabilities of Macaroni Grill have been reclassified as held for sale. The operating results of Macaroni Grill for the current and prior periods have been aggregated and reclassified as discontinued operations in our condensed consolidated statements of operations for the thirteen and twenty-six weeks ended June 29, 2015 and June 30, 2014.

 

Outlook

 

Our near term business strategy focuses on two primary elements: increasing comparable restaurant sales at Joe’s and continuing the growth of our Brick House brand through comparable restaurant sales growth and new unit development.

 

 
15

 

 

We are continuing our growth at Brick House with two new Brick House restaurants opening in the first half of 2015. We also continue to experience positive momentum in the brand with same store sales increasing 2.8% during the second quarter of 2015 compared to prior year. We have continued to experience sales declines at Joe’s with comparable restaurant sales decreasing 4.0% during the second quarter. We have put in place a new operations management team at Joe’s that is focused on increasing sales and traffic, while improving operating margins. We have launched several initiatives including various new menu items and are actively working to identify other potential growth layers for the brand that are intended to improve sales and margins. In addition, shellfish and shrimp pricing has been favorable in 2015, which has contributed to a significant improvement in cost of sales for the year. We continue to be optimistic about the impact the new initiatives and favorable commodity pricing will have on Joe’s operating results. However, there can be no assurance that pricing on shrimp and shellfish will continue to be more favorable in 2015 or that these initiatives, or other changes we implement, will increase traffic or improve the performance at our Joe’s restaurants. We also streamlined our restaurant support team which gives us a more efficient management reporting structure and reduces general and administrative expenses.

  

Additional declines in the operating performance at Joe’s could cause us to close underperforming restaurants which may require us to recognize asset impairment or closure-related expenses and increase our valuation allowance during 2015 against some or all of our deferred tax assets.

 

Results of Operations

 

We completed the sale of the Macaroni Grill business on April 17, 2015, hence, the operating results of Macaroni Grill for the current and prior periods have been aggregated and reclassified as discontinued operations. We also reclassified to discontinued operations the loss from the sale of Macaroni Grill.

 

Thirteen Weeks Ended June 29, 2015 Compared to Thirteen Weeks Ended June 30, 2014

 

The following table presents the condensed consolidated statements of operations for the thirteen weeks ended June 29, 2015 and June 30, 2014, expressed as a percentage of revenue.

 

   

Thirteen Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

 
                 

Revenues

    100.0

%

    100.0

%

Costs and expenses

               

Restaurant operating costs and expenses

               

Cost of sales

    30.8       32.9  

Labor expenses

    27.9       27.3  

Occupancy expenses

    7.3       6.8  

Other operating expenses

 

19.3

      18.8  

General and administrative

    5.8       6.6  

Depreciation and amortization

    4.3       4.1  

Pre-opening costs

    0.0       0.4  

Asset impairments and closures

    0.0       0.0  

Loss on disposal of assets

    0.1       0.2  

Total costs and expenses

    95.6       97.0  

Income from operations

    4.4       3.0  

Interest expense, net

    (2.7 )     (1.2 )

Income from continuing operations before income taxes

    1.7       1.8  

Income tax expense

    0.5       0.1  

Income from continuing operations

    1.2       1.6  

Loss from discontinued operations, net

    (1.1 )     (0.4 )

Net income

    0.1

%

    1.2

%

 

 


 

*

The percentages reflected are subject to rounding adjustments. They may not foot due to rounding.

 

 
16

 

 

The following table sets forth additional operating information for the periods indicated that we use in assessing our performance:

 

 

   

Thirteen

Weeks Ended

   

Thirteen

Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

 
   

(dollars in thousands)

 

Selected Other Data(1):

               

Number of restaurants open (end of period):

               

Joe's Crab Shack

    138       136  

Brick House Tavern + Tap

    23       20  

Total restaurants - continuing operations

    161       156  
                 

Restaurant operating weeks

               

Joe's Crab Shack

    1,794       1,768  

Brick House Tavern + Tap

    299       260  
                 

Average weekly sales

               

Joe's Crab Shack

  $ 68     $ 71  

Brick House Tavern + Tap

  $ 70     $ 68  
                 

Change in comparable restaurant sales

               

Joe's Crab Shack

    (4.0 )%     (4.7 )%

Brick House Tavern + Tap

    2.8 %     8.5 %
                 

Income (loss) from operations

               

Joe's Crab Shack

  $ 10,510     $ 10,299  

Brick House Tavern + Tap

    2,050       1,054  

Corporate

    (6,271 )     (7,053 )

Total - continuing operations

  $ 6,289     $ 4,300  
                 

Adjusted income from continuing operations(2)

  $ 2,346     $ 2,388  

 

 

(1)

Includes only results of Joe’s and Brick House due to the reclassification of Macaroni Grill’s operations to discontinued operations.

(2)

A reconciliation and discussion of this non-GAAP financial measure is included below under “Non-GAAP Financial Measures.” This measure should be considered in addition to, rather than as a substitute for, U.S. GAAP measures.

 

 

Revenues

 

Revenues were $143.2 million during the thirteen weeks ended June 29, 2015, a decrease of $113 thousand, or 0.1%, compared to revenues of $143.3 million during the thirteen weeks ended June 30, 2014. The decrease was primarily caused by the 4.0% decrease in comparable restaurant sales for Joe’s, partially offset by the 2.8% increase in comparable restaurant sales for Brick House and the increase in operating weeks for both brands.

 

Revenues at Joe’s decreased 2.5% to $122.4 million in the second quarter of 2015 versus $125.5 million in the second quarter of 2014. This decrease was primarily due to a 4.0% decrease in comparable restaurant sales, partially offset by an increase in operating weeks from the prior year. The comparable restaurant sales decrease was comprised of a 5.4% decrease in traffic and a 1.1% decrease in mix, partially offset by a 2.5% increase in pricing.

 

Brick House revenues increased 16.9% to $20.8 million in the second quarter of 2015 versus $17.8 million in the second quarter of 2014 due to a 2.8% increase in comparable restaurant sales and three new restaurant openings since the second quarter of 2014. The comparable restaurant sales increase was comprised of a 3.7% increase in pricing, partially offset by a 0.9% decrease from traffic and mix.

 

 
17

 

 

Cost of Sales

 

Cost of sales decreased by $3.1 million, or 6.5%, to $44.1 million in the second quarter of 2015 versus $47.1 million in the comparable period of 2014. As a percent of revenue, cost of sales decreased to 30.8% from 32.9% in the prior year due primarily to improvement in seafood pricing and reduced discounting compared to last year.

 

Labor Expenses

 

Labor expenses increased by $0.9 million, or 2.2%, to $40.0 million in the current year second quarter versus $39.1 million in the comparable period last year. The increase was primarily due to reduced labor productivity and increased payroll taxes. Labor expenses, as a percent of revenue, increased to 27.9% from 27.3% due to decreased productivity and deleverage from lower sales.

 

Occupancy Expenses

 

Occupancy expenses increased by $0.7 million, or 7.2%, to $10.4 million in the current year second quarter versus $9.7 million in the comparable period last year. The increase was primarily due to the increase in operating weeks. As a percent of revenue, occupancy expenses increased to 7.3% from 6.8% primarily due to deleverage from the lower sales volumes.

 

Other Operating Expenses

 

Other operating expenses increased by $0.7 million, or 2.5%, to $27.6 million in the current year second quarter compared to $26.9 million in the comparable prior year period. This increase was primarily due to higher advertising expense and increased general liability insurance costs, offset partially by lower utilities and repairs and maintenance spending. As a percent of revenue, other operating expenses increased to 19.3% from 18.8% primarily due to deleverage from lower sales.

 

General and Administrative

 

General and administrative expense decreased by $1.0 million, or 11.0%, to $8.4 million in the second quarter of 2015 versus $9.4 million in the second quarter of 2014, which was primarily due to downsizing and personnel reductions implemented in the fourth quarter of fiscal 2014 and in connection with the closing of the sale of Macaroni Grill, and a reduction in professional and outsourcing fees, partially offset by $1.0 million of severance costs in the current quarter. As a percent of revenue, general and administrative expenses decreased to 5.8% from 6.6% due to reduction of professional and outsourcing fees and personnel costs, offset by higher severance costs.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased by $0.3 million, or 5.2%, to $6.2 million in the current year first quarter compared to $5.9 million in the prior year. This increase is mainly due to a higher depreciable asset base from new restaurants opened. As a percent of revenue, depreciation and amortization increased to 4.3% from 4.1% due to the higher depreciable asset base and deleveraging.

 

Pre-Opening Costs

 

Pre-opening costs decreased by $0.5 million, or 91.8%, to $46 thousand in the second quarter of 2015 from $0.6 million in the comparable prior year period. We did not open any restaurants in either current or prior year second quarter, but had incurred pre-opening costs for three restaurants that opened in the third quarter of 2014.

 

Income from Operations

 

As a result of the foregoing, consolidated income from operations increased by $2.0 million, or 46.3%, to $6.3 million in the current 13-week period compared to $4.3 million in the 13-week period of the prior year.

 

Income from operations for the Joe’s brand increased by $0.2 million, or 2.0%, to $10.5 million in the current 13-week period from $10.3 million in the prior year 13-week period. As a percent of revenue, Joe’s income from operations was 8.6% for the current quarter compared to 8.2% in the prior year. This increase was primarily attributable improvement in seafood pricing, partially offset by decreased labor productivity and lower comparable restaurant sales.

 

 
18

 

 

Income from operations for Brick House increased by $1.0 million, or 94.5%, to $2.1 million in the current quarter compared to $1.1 million in the prior year quarter. As a percent of revenue, Brick House income from operations increased to 9.9% from 5.9%. This increase was primarily due to higher comparable restaurant sales, and lower general and administrative and pre-opening costs.  

 

Interest Expense, Net

 

Interest expense, net increased by $2.1 million, or 118.2%, to $3.8 million during the current 13-week period from $1.8 million during the prior year 13-week period primarily due to a higher average debt balance and higher interest rate in the current year.

 

Income Tax Expense

 

Income tax expense increased by $0.5 million to $0.7 million during the current 13-week period from $0.2 million during the prior year 13-week period. The effective income tax rate increased primarily due to the valuation allowance in the current quarter and the change in FICA tax credits being generated in the current quarter compared to the prior year quarter proportionate to the income from continuing operations before income taxes. During the thirteen weeks ended June 29, 2015, we recorded a valuation allowance of $0.6 million for continuing operations.

 

Discontinued Operations, net

 

Loss from discontinued operations was $1.6 million for the thirteen weeks ended June 29, 2015 compared to $0.6 million for the thirteen weeks ended June 30, 2014. During the thirteen weeks ended June 29, 2015, we recorded a $6.1 million loss on disposal of the Macaroni Grill business, which was partially offset by the related tax benefit.

 

Twenty-Six Weeks Ended June 29, 2015 Compared to Twenty-Six Weeks Ended June 30, 2014

 

The following table presents the condensed consolidated statements of operations for the twenty-six weeks ended June 29, 2015 and June 30, 2014, expressed as a percentage of revenue.

 

   

Twenty-Six Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

 
                 

Revenues

    100.0

%

    100.0

%

Costs and expenses

               

Restaurant operating costs and expenses

               

Cost of sales

    31.1       32.3  

Labor expenses

    28.2       28.1  

Occupancy expenses

    7.8       7.2  

Other operating expenses

    18.7       18.0  

General and administrative

    6.3       7.5  

Depreciation and amortization

    4.7       4.4  

Pre-opening costs

    0.2       0.3  

Asset impairments and closures

    0.0       0.1  

Loss on disposal of assets

    0.1       0.1  

Total costs and expenses

    97.2       98.1  

Income from operations

    2.8       1.9  

Interest expense, net

    (2.9 )     (1.4 )

Income (loss) from continuing operations before income taxes

    (0.1 )     0.6  

Income tax expense (benefit)

    0.5       (0.4 )

Income (loss) from continuing operations

    (0.6 )     0.9  

Loss from discontinued operations, net

    (7.8 )     (0.4 )

Net income (loss)

    (8.3

)%

    0.6

%

 


 

*

The percentages reflected are subject to rounding adjustments. They may not foot due to rounding.

 

 
19

 

 

The following table sets forth additional operating information for the periods indicated that we use in assessing our performance:

 

 

   

Twenty-Six

Weeks Ended

   

Twenty-Six

Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

 
   

(dollars in thousands)

 

Selected Other Data(1):

               

Number of restaurants open (end of period):

               

Joe's Crab Shack

    138       136  

Brick House Tavern + Tap

    23       20  

Total restaurants

    161       156  
                 

Restaurant operating weeks

               

Joe's Crab Shack

    3,599       3,536  

Brick House Tavern + Tap

    578       520  
                 

Average weekly sales

               

Joe's Crab Shack

  $ 63     $ 65  

Brick House Tavern + Tap

  $ 69     $ 68  
                 

Change in comparable restaurant sales

               

Joe's Crab Shack

    (3.9 )%     (5.3 )%

Brick House Tavern + Tap

    4.0 %     9.2 %
                 

Income (loss) from operations

               

Joe's Crab Shack

  $ 17,017     $ 18,076  

Brick House Tavern + Tap

    3,271       2,849  

Corporate

    (12,799 )     (15,738 )

Total

  $ 7,489     $ 5,187  
                 

Adjusted income from continuing operations(2)

  $ 1,306     $ 2,533  

 

 

(1)

Includes only results of Joe’s and Brick House due to the reclassification of Macaroni Grill’s operations to discontinued operations.

(2)

A reconciliation and discussion of this non-GAAP financial measure is included below under “Non-GAAP Financial Measures.” This measure should be considered in addition to, rather than as a substitute for, U.S. GAAP measures.

 

 

Revenues

 

Revenues were $265.4 million during the twenty-six weeks ended June 29, 2015, a decrease of $1.0 million, or 0.4%, compared to revenues of $266.4 million during the twenty-six weeks ended June 30, 2014. The decrease was primarily caused by the 3.9% decrease in comparable restaurant sales for Joe’s, partially offset by the 4.0% increase in comparable restaurant sales for Brick House and the increase in operating weeks for both brands.

 

Revenues at Joe’s decreased 2.3% to $225.5 million in the first half of 2015 versus $230.8 million in the first half of 2014. This decrease was primarily due to a 3.9% decrease in comparable restaurant sales, partially offset by an increase in operating weeks from the prior year. The comparable restaurant sales decrease was comprised of a 5.7% decrease in traffic and a 0.5% decrease in mix, offset partially by a 2.3% increase in pricing.

 

Brick House revenues increased 12.2% to $39.9 million in the first half of 2015 versus $35.6 million in the first half of 2014 due to a 4.0% increase in comparable restaurant sales and three new restaurant openings since the second quarter of 2014. The comparable restaurant sales increase was comprised of a 2.7% increase in pricing and a 1.3% increase from traffic and mix.

 

 
20

 

 

Cost of Sales

 

Cost of sales decreased by $3.5 million, or 4.0%, to $82.7 million in the first half of 2015 versus $86.2 million in the comparable period of 2014. As a percent of revenue, cost of sales decreased to 31.1% from 32.3% in the prior year due primarily to improvement in seafood pricing and reduced discounting compared to last year.

 

Labor Expenses

 

Labor expenses slightly decreased by $58 thousand, or 0.1%, to $74.8 million in the first half of 2015 versus $74.9 million in the comparable period last year. The decrease was primarily due to decrease in restaurant management incentive due to lower sales. Labor expenses, as a percent of revenue, was 28.2% in the first half of 2015 versus 28.1% in the first half of 2014.

 

Occupancy Expenses

 

Occupancy expenses increased by $1.4 million, or 7.4%, to $20.6 million in the first half of 2015 versus $19.2 million in the comparable period last year. The increase was primarily due to the increase in operating weeks. As a percent of revenue, occupancy expenses increased to 7.8% from 7.2% primarily due to deleverage from the lower sales volumes.

 

Other Operating Expenses

 

Other operating expenses increased by $1.8 million, or 3.7%, to $49.7 million in the first half of 2015 compared to $47.9 million in the comparable prior year period. This increase was primarily due to higher advertising expense and increased general liability insurance costs, offset partially by lower utilities and repairs and maintenance spending. As a percent of revenue, other operating expenses increased to 18.7% from 18.0% primarily due to deleverage from the lower sales volumes.

 

General and Administrative

 

General and administrative expense decreased by $3.3 million, or 16.4%, to $16.8 million in the first half of 2015 versus $20.0 million in the first half of 2014, which was primarily due to downsizing and personnel reductions implemented in the fourth quarter of fiscal 2014 and a reduction in professional and outsourcing fees, partially offset by higher severance costs. As a percent of revenue, general and administrative expenses decreased to 6.3% from 7.5% due to reduction of professional and outsourcing fees and personnel costs, offset by higher severance costs.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased by $0.7 million, or 6.1%, to $12.4 million in the first half of 2015 compared to $11.7 million in the prior year. This increase is mainly due to a higher depreciable asset base from new restaurants opened. As a percent of revenue, depreciation and amortization increased to 4.7% from 4.4% due to the higher depreciable asset base and deleveraging.

 

Pre-Opening Costs

 

Pre-opening costs decreased by $0.2 million, or 32.5%, to $0.5 million in the first half of 2015 from $0.8 million in the comparable prior year period. We opened two restaurants in the first half of 2015 while none for the comparable prior year period, but had incurred pre-opening costs for three restaurants that opened in the third quarter of 2014.

 

Income from Operations

 

As a result of the foregoing, consolidated income from operations increased by $2.3 million, or 44.4%, to $7.5 million in the first half of 2015 compared to $5.2 million in the comparable prior year period.

 

Income from operations for the Joe’s brand decreased by $1.1 million, or 5.9%, to $17.0 million in the first half of 2015 from $18.1 million in the comparable prior year period. As a percent of revenue, Joe’s income from operations was 7.5% for the first half of 2015 compared to 7.8% in the prior year. This decrease was primarily attributable to lower comparable restaurant sales, partially offset by improvement in seafood pricing.

 

 
21

 

 

Income from operations for Brick House increased by $0.4 million, or 14.8%, to $3.3 million in the first half of 2015 compared to $2.8 million in the prior year. As a percent of revenue, Brick House income from operations increased to 8.2% from 8.0%. This increase was primarily due to higher comparable restaurant sales.

 

Interest Expense, Net

 

Interest expense, net increased by $4.1 million, or 112.1%, to $7.7 million during the first half of 2015 from $3.6 million during the comparable prior year period primarily due to a higher average debt balance and higher interest rate in the current year.

 

Income Tax Expense (Benefit)

 

Income tax expense (benefit) increased by $2.2 million, or 231.6% to a $1.2 million expense during the current 26-week period from a $0.9 million benefit during the prior year 26-week period. The effective income tax rate increased primarily due to the valuation allowance in the current 26-week period and the change in FICA tax credits being generated in the current year compared to the prior year proportionate to the income (loss) from continuing operations before income taxes. During the twenty-six weeks ended June 29, 2015, we recorded a valuation allowance of $2.7 million for continuing operations.

 

Discontinued Operations, net

 

Loss from discontinued operations was $20.7 million for the twenty-six weeks ended June 29, 2015 compared to $1.0 million for the twenty-six weeks ended June 30, 2014. In April 2015, we completed the sale of Macaroni Grill. We recorded a $22.4 million impairment charge during the first quarter of 2015 to write down the net assets of Macaroni Grill to their estimated fair value less cost to sell. During the first quarter of 2015, we also recorded a net gain of $2.1 million on the sale of certain assets of Macaroni Grill and a $1.0 million gain on insurance settlements. During the second quarter of 2015, we recorded a $6.1 million loss on disposal of the Macaroni Grill, which was partially offset by the related tax benefit.

 

Seasonality

 

There is a seasonal component to the Joe’s business which typically peaks in the summer months (June, July and August) and slows in the winter months (November, December and January). Because of the seasonality of our business, results for any fiscal quarter are not necessarily indicative of the results that may be achieved for future fiscal quarters or for the full fiscal year.

 

Liquidity and Capital Resources

 

General

 

Our primary sources of liquidity and capital resources are cash provided from operating activities, cash and cash equivalents, and our senior secured credit facility. In August 2014, we entered into a new senior secured credit facility, which provided us with net proceeds of $41.8 million after repayment of the previous credit facility and payment of debt issuance costs. Our primary requirements for liquidity and capital are new restaurant development, working capital and general corporate needs. Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate, and will continue to operate, with negative working capital. Our requirement for working capital is not significant since our restaurant guests pay for their food and beverage purchases in cash or payment cards (credit or debit) at the time of sale. Thus, we are able to sell and collect payment for 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 believe that these sources of liquidity and capital will be sufficient to finance our continued operations and expansion plans for at least the next twelve months.

 

 
22

 

 

The following table shows summary cash flows information for the twenty-six weeks ended June 29, 2015 and June 30, 2014 (in thousands):

 

   

Twenty-Six

Weeks Ended

   

Twenty-Six

Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

 

Net cash provided by (used in):

               

Operating activities

               

Continuing operations

  $ 24,063     $ 25,737  

Discontinued operations

    3,891       (929 )

Investing activities

               

Continuing operations

    (8,501 )     (10,833 )

Discontinued operations

    11,639       (517 )

Financing activities

    (947 )     (13,431 )

Net increase in cash and cash equivalents

    30,145       27  

Decrease (increase) in cash and cash equivalents - discontinued operations

    (2,291 )     55  

Net increase in cash and cash equivalents - continuing operations

  $ 27,854     $ 82  

 

 

Operating Activities

 

Net cash provided by operating activities – continuing operations was $24.1 million for the twenty-six weeks ended June 29, 2015 and $25.7 million for the twenty-six weeks ended June 30, 2014. The $1.7 million decrease from the prior year period is primarily due to higher interest payments and changes in working capital, partially offset by lower general and administrative expenses.

 

Net cash from operating activities – discontinued operations increased to a $3.9 million net cash provided in the current year versus a $0.9 million net cash used in the prior year. The increase year over year was primarily due to a decrease in marketing expenses and costs related to restaurant closures.

 

Investing Activities

 

Net cash used in investing activities – continuing operations decreased by $2.3 million to $8.5 million for the twenty-six weeks ended June 29, 2015 compared to $10.8 million for the twenty-six weeks ended June 30, 2014 mainly due to the decrease in capital expenditures from prior year. Capital expenditures decreased to $8.6 million in the current year compared to $10.7 million in the prior year primarily due to the timing of new restaurant openings.

 

Net cash from investing activities – discontinued operations increased to $11.6 million net cash provided in the current year compared to $0.5 million net cash used in the prior year. The increase is primarily due to the $7.1 million net proceeds from sale of the Macaroni Grill business and $4.3 million from the sale of certain Macaroni Grill assets prior to the sale of the entire business in the current year.

 

We estimate that total capital expenditures for fiscal year 2015 will be approximately $15.0 million to $20.0 million.

 

Financing Activities

 

Net cash used in financing activities was $0.9 million for the twenty-six weeks ended June 29, 2015 compared to $13.4 million for the twenty-six weeks ended June 30, 2014, primarily due to net payments on our term loan in the current year and on our revolving credit facility in the prior year.

 

 
23

 

 

Senior Secured Credit Facility

 

On August 13, 2014, we entered into a new senior secured credit facility (“2014 Credit Agreement”), which consists of a $30.0 million revolving credit facility (“2014 Revolving Credit Facility”) and a $165.0 million term loan (“2014 Term Loan”), which both mature on February 13, 2019. The 2014 Term Loan was issued at 98.5% of par. The principal amount of the 2014 Term Loan is payable in consecutive quarterly installments of $412,500, commencing on December 31, 2014, with the balance payable in full at maturity. At closing, we repaid the balance of our previously amended 2013 Credit Facility using the proceeds from the 2014 Term Loan.

 

Interest rates for borrowings under the 2014 Credit Agreement for the revolver and the term loan are equal to, at our option, either LIBOR (subject to a 1% floor) or the base rate as defined in the agreement, plus a margin of 7.0% for LIBOR loans and 6.0% for base rate loans. The interest rate for the 2014 Term Loan was 8.0% as of June 29, 2015. In addition, we are required to pay commitment fees on the unused portion of the 2014 Revolving Credit Facility. The commitment fee rate is currently at 0.5%. The commitment fee is subject to adjustment on a quarterly basis based on our leverage ratio as defined by the credit agreement.

 

The 2014 Credit Agreement is guaranteed by each of our subsidiaries and secured by substantially all of our present and future assets and a lien on the capital stock or other equity interests of our direct and indirect subsidiaries. The 2014 Credit Agreement contains covenants which, among other things, limit our ability to incur additional indebtedness, create liens on our assets, make certain investments or loans, merge or otherwise dispose of assets other than in the ordinary course of business, make acquisitions, and pay dividends or make other restricted payments. The 2014 Credit Agreement also contains customary covenants regarding, among other matters, the maintenance of insurance, the preservation and maintenance of our corporate existence, material compliance with laws, and the payment of taxes and other material obligations.

 

The 2014 Credit Agreement provides that (a) the leverage ratio shall not exceed (i) 5.75x through December 29, 2014, (ii) 5.5x from December 30, 2014 through June 29, 2015, (iii) 5.25x from June 30, 2015 through December 28, 2015, (iv) 5.0x from December 29, 2015 through March 28, 2016, (v) 4.75x from March 29, 2016 through June 27, 2016, (vi) 4.25x from June 28, 2016 through September 26, 2016, (vii) 4.0x from September 27, 2016 through April 3, 2017, (viii) 3.75x from April 4, 2017 through October 2, 2017, (ix) 3.5x from October 3, 2017 through April 2, 2018, (x) 3.25x from April 3, 2018 through December 31, 2018, and (xi) 3.0x from January 1, 2019 through maturity date; and requires (b) an interest coverage ratio of at least (i) 2.0x through June 29, 2015, (ii) 2.25x from June 30, 2015 through March 28, 2016, (iii) 2.5x from March 29, 2016 through June 27, 2016, (iv) 2.75x from June 28, 2016 through January 2, 2017, (v) 3.0x from January 3, 2017 through July 3, 2017, (vi) 3.25x from July 4, 2017 through April 2, 2018, (vii) 3.5x from April 3, 2018 through December 31, 2018, and (viii) 3.75x from January 1, 2019 through maturity date. The 2014 Credit Agreement limits capital expenditures to an amount in respect of any period not to exceed (i) $29.5 million from the closing date through December 29, 2014, (ii) $45.5 million for fiscal 2015, (iii) $45.8 million for fiscal 2016, (iv) $52.5 million for fiscal 2017, (v) $53.7 million for fiscal 2018, and (vi) $58.6 million from January 1, 2019 through maturity date, provided that the amount of permitted capital expenditures in any period can be increased by the unused permitted capital expenditures from the immediately preceding period, subject to certain limitations as defined by the agreement. We were in compliance with these covenants as of June 29, 2015.

 

We wrote off $2.2 million of debt issuance costs related to the 2013 Credit Facility, and at closing paid $4.8 million in additional debt issuance costs. The debt issuance costs paid at closing and the remaining unamortized debt issuance costs from the 2013 Credit Facility are recorded in other assets and are amortized over the term of the 2014 Credit Agreement. The debt discount is included as a reduction to the carrying value of the debt obligations and is amortized over the term of the 2014 Term Loan using the effective interest rate method.

 

The weighted average interest rate on the 2014 Credit Agreement at June 29, 2015 was 8.0%. As of June 29, 2015, we had outstanding letters of credit of approximately $5.7 million and available borrowing capacity of approximately $24.3 million under the 2014 Revolving Credit Facility.

 

Off-Balance Sheet Arrangements

 

Except for restaurant operating leases, we have no material off-balance sheet arrangements.

 

 
24

 

 

Non-GAAP Financial Measures

 

We utilize financial measures and terms not calculated in accordance with accounting principles generally accepted in the United States (“GAAP”) to evaluate our operating performance. These non-GAAP measures are provided to enhance the reader’s overall understanding of our current financial performance. These measurements are used by many investors as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations from one period to the next and would ordinarily add back events that are not part of normal day-to-day operations of our business. Management and our principal stockholder also use such measures as measurements of operating performance, for planning purposes, and to evaluate the performance and effectiveness of our operational strategies.

 

These non-GAAP measures may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. We have provided a definition below for these non-GAAP financial measures, together with an explanation of why management uses these measures and why management believes that these non-GAAP financial measures are useful to investors. In addition, we have provided a reconciliation of these non-GAAP financial measures utilized to their equivalent GAAP financial measures.

 

Adjusted income from continuing operations and adjusted income from continuing operations per share

 

We calculate adjusted income from continuing operations by eliminating from income (loss) from continuing operations the impact of items we do not consider indicative of our ongoing operations. Specifically, we believe that these non-GAAP measures provide greater comparability and enhanced visibility into our results of operations, excluding the impact of special charges and certain other expenses. Adjusted income from continuing operations represents income (loss) from continuing operations less items such as (a) transaction costs, (b) costs related to conversions, remodels and closures, (c) the income tax effect of the above described adjustment, and (d) the deferred tax asset valuation allowance. We believe these measures provide additional information to facilitate the comparison of our past and present financial results. We utilize results that both include and exclude the identified items in evaluating business performance. However, our inclusion of these adjusted measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items. In the future, we may incur expenses or generate income similar to these adjustments.

 

A reconciliation of income (loss) from continuing operations to adjusted income from continuing operations is as follows (in thousands):

 

 

 

 

Thirteen

Weeks Ended

   

Thirteen

Weeks Ended

   

Twenty-Six

Weeks Ended

   

Twenty-Six

Weeks Ended

 
   

June 29,

2015

   

June 30,

2014

   

June 29,

2015

   

June 30,

2014

 
   

(in thousands)

 

Income (loss) from continuing operations

  $ 1,731     $ 2,334     $ (1,465 )   $ 2,479  

Adjustments - continuing operations:

                               

Transaction costs

    -       89       -       89  

Costs related to conversions, remodels and closures

    14       -       63       -  

Income tax effect of adjustments above

    (6 )     (35 )     (25 )     (35 )

Deferred tax asset valuation allowance

    607       -       2,733       -  
                                 

Adjusted income from continuing operations

  $ 2,346     $ 2,388     $ 1,306     $ 2,533  
                                 

Weighted average shares outstanding

                               

Basic

    25,721       25,651       25,698       25,645  

Diluted

    25,730       25,749       25,698       25,715  

Income (loss) from continuing operations per share

                               

Basic and diluted

  $ 0.07     $ 0.09     $ (0.06 )   $ 0.10  

Adjusted income from continuing operations per share

                               

Basic and diluted

  $ 0.09     $ 0.09     $ 0.05     $ 0.10  

 

 
25

 

 

Recent Accounting Pronouncements

 

Disclosure regarding recent accounting pronouncements can be found in Note 1 of our condensed consolidated financial statements (unaudited) contained in this Form 10-Q.

 

Critical Accounting Policies

 

The preparation of the unaudited financial statements requires that we make estimates that affect the reported accounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

 

During the thirteen and twenty-six weeks ended June 29, 2015, there were no significant changes in our accounting policies or estimates.

 

For a description of those accounting policies that, in our opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgments or estimates were made, materially affect our reported results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2014 filed with the SEC on March 13, 2015.

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q includes and incorporates by reference “forward-looking statements” within the meaning of the Securities Act of 1933, as amended (“Securities Act”) and the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that the forward-looking information presented in this quarterly report is not a guarantee of future events, and that actual events and results may differ materially from those made in or suggested by the forward-looking information contained in this quarterly report. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “plan,” “seek,” “comfortable with,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology. Examples of forward-looking statements in this quarterly report include expectations about new restaurant openings and conversions, and our fiscal year 2015 capital expenditure expectations. A number of important factors could cause actual events and results to differ materially from those contained in or implied by the forward-looking statements, including the risk factors discussed in Item 1A of this Form 10-Q and our Annual Report on Form 10-K, filed on March 13, 2015 with the Securities and Exchange Commission. Any forward-looking information presented herein is made only as of the date of this quarterly report, and we do not undertake any obligation to update or revise any forward-looking information to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

 

 
26

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Commodity Price Risk

 

Many of the food products we purchase are affected by commodity pricing that is subject to price volatility caused by weather, production problems, delivery difficulties and other factors that are outside our control and are generally unpredictable. For the twenty-six weeks ended June 29, 2015, crab, lobster and shrimp accounted for approximately 39% of total food purchases, excluding Macaroni Grill. Crab and lobster are wild caught and sourced from government regulated and sustainable fisheries. Other categories affected by the commodities markets, such as seafood, beef and fish, each account for approximately 3% to 12% of our food purchases, excluding Macaroni Grill. While we have some of our food items prepared to our specifications, our food items are based on generally available products, and if any existing suppliers fail, or are unable to deliver in quantities we require, we believe that there are sufficient other quality suppliers in the marketplace that our sources of supply can be replaced as necessary. We also recognize, however, that commodity pricing is extremely volatile and can change unpredictably and over short periods. Our purchasing department negotiates prices and quantities for all of our ingredients through either cancellable contracts (with varying length terms), spot market purchases or commodity pricing formulas. Changes in commodity prices would generally affect us and our competitors similarly, depending on the terms and duration of supply contracts. We also enter into fixed price supply contracts for certain products in an effort to minimize volatility of supply and pricing. In many cases, or over the longer term, we believe we will be able to pass through some or all of the increased commodity costs by adjusting menu pricing. From time to time, competitive circumstances, or judgments about consumer acceptance of price increases, may limit menu price flexibility, and in those circumstances, increases in commodity prices can have an adverse effect on margins.

 

Interest Rate Risk

 

We are subject to interest rate risk in connection with borrowings under our 2014 Credit Facility, which bear interest at variable rates. As of June 29, 2015, we had $164.2 million outstanding under our 2014 Credit Facility. Derivative financial instruments, such as interest rate swap agreements and interest rate cap agreements, may be used for the purpose of managing fluctuating interest rate exposures that exist from our variable rate debt obligations that are expected to remain outstanding. We do not currently have any such derivative financial instruments in place. Interest rate changes do not affect the market value of such debt, but could impact the amount of our interest payments, and accordingly, our future earnings and cash flows, assuming other factors are held constant. Taking into account the 1% floor on our LIBOR borrowings under our new senior secured credit facility, a 1% increase in the interest rate on the outstanding balance of our variable rate debt would result in a $0.5 million change in our annual results of operations.

 

Item 4.

Controls and Procedures.

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that the information required to be disclosed in the reports that it files or submits with the SEC 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 management of the company with the participation of its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

 

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended June 29, 2015, an evaluation was performed under the supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures were effective as of June 29, 2015.

 

 
27

 

 

Limitations on Effectiveness of Controls and Procedures

 

Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In addition, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date we are no longer an “emerging growth company” as defined in the JOBS Act, if we continue to take advantage of the exemptions contained in the JOBS Act. We expect that we will remain an “emerging growth company” until the earliest of (i) the last day of our fiscal year following the fifth anniversary of our IPO; (ii) the last day of our fiscal year in which we have annual gross revenue of $1.0 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and (iv) the date on which we are deemed to be a “large accelerated filer,” which will occur at such time as we have (1) an aggregate worldwide market value of common equity securities held by non-affiliates of $700.0 million or more as of the last business day of our most recently completed second fiscal quarter, (2) been required to file annual, quarterly, and current reports under the Exchange Act for a period of at least 12 calendar months and (3) filed at least one annual report pursuant to the Exchange Act. As a result, we may qualify as an “emerging growth company” until as late as May 10, 2017. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

 

Changes in Internal Control over Financial Reporting

 

No changes in our internal control over financial reporting occurred during the quarter ended June 29, 2015 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.

 

Disclosure regarding legal proceedings can be found in Note 7 of our condensed consolidated financial statements (unaudited) contained in this Form 10-Q.

 

Item 1A.

Risk Factors.

 

There were no material changes in our Risk Factors as previously disclosed in Item 1A of the our Annual Report on Form 10-K for the year ended December 29, 2014.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

Not applicable.

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

Item 5.

Other Information.

 

None.

 

 
28

 

 

Item 6.

Exhibits. 

 

Exhibit
No.

  

Description

3.1

  

Amended and Restated Certificate of Incorporation of Ignite Restaurant Group, Inc. (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the twelve weeks ended June 18, 2012 filed on October 30, 2012 and incorporated herein by reference).

3.2

  

Amended and Restated Bylaws of Ignite Restaurant Group, Inc. (filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the twelve weeks ended June 18, 2012 filed on October 30, 2012 and incorporated herein by reference).

31.1

  

Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

  

Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

  

Certificate of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

  

Certificate of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

  

The following financial information for the Company, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements.

 

 

 


*Indicates a management contract or compensatory plan or arrangement.

 

 
29

 

 

SIGNATURES

 

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.

 

  

IGNITE RESTAURANT GROUP, INC.

  

  

  

  

  

  

August 6, 2015

By:

/s/ Brad A. Leist

  

  

Name:

Brad A. Leist

  

  

Title:

Senior Vice President and Chief Financial Officer

  

  

  

(On behalf of the Registrant and as Principal Financial Officer)

 

 

30


Dates Referenced Herein   and   Documents Incorporated by Reference

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5/10/17
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4/3/1710-K,  10-Q,  3,  S-8 POS
1/3/17
1/2/1710-K
12/15/16
9/27/16
9/26/1610-Q
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6/30/1410-Q
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