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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 27, 2016

 

☐

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.)

 

10555 Richmond Avenue, Houston, Texas 77042

(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, 2016 was 26,290,666.

 

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TABLE OF CONTENTS

 

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited) as of June 27, 2016 and December 28, 2015	3
	Condensed Consolidated Statements of Operations (unaudited) for the thirteen and twenty-six weeks ended June 27, 2016 and June 29, 2015	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the twenty-six weeks ended June 27, 2016 and June 29, 2015	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
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	28
SIGNATURES		29

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

IGNITE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(Unaudited)

  

 

See accompanying notes to condensed consolidated financial statements.

  

 

IGNITE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except earnings per share)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

IGNITE RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

  

 

IGNITE RESTAURANT GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

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 28, 2015. 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 is a 52-week year, while fiscal year 2016 is a 53-week year.

 

Overview

 

As of June 27, 2016, 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 offer 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 27, 2016, we operated 127 Joe’s restaurants and 26 Brick House restaurants in 33 states within the United States and franchised one Joe’s restaurant in Dubai, U.A.E.

 

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.

 

During the thirteen weeks ended June 27, 2016, we closed three Joe’s restaurants.

  

Outlook

 

Our near term business strategy focuses on two primary elements: increasing comparable restaurant sales and improving operating margins at Joe’s and Brick House. We have continued to experience sales declines at Joe’s with comparable restaurant sales decreasing 4.3% during the first half of 2016. In order to reverse these negative trends, we continue to focus on improving operational and menu execution in order to enhance the food quality and overall dining experience for the guest. Our all-you-can-eat crab promotion on Wednesdays has remained successful. However, we have continued to experience declines in sales and guest traffic on the weekends. We introduced a new menu in the second quarter which includes fewer items in order to help reduce food preparation times and also increase the speed of service.

  

Brick House has also been experiencing declines in operating performance. During the first half of 2016, the comparable restaurant sales of Brick House decreased 5.4%. We are continuing to evaluate our menu to ensure we are developing compelling menu items that exceed the expectations of our guests.

 

We are also pursuing strategic alternatives for underperforming restaurants. We recorded impairment charges totaling $8.0 million during the thirteen weeks ended June 27, 2016 to reduce the carrying value of long-lived assets at certain Joe’s and Brick House restaurants, and plan to close several of these restaurants in the third quarter of 2016. If the operating performance at Joe’s or Brick House does not improve, we may have to recognize additional asset impairments or closure-related expenses and increase our valuation allowance during 2016 against some or all of our deferred tax assets. We may also be unable to remain in compliance with all of our debt covenants. Refer to “Liquidity and Capital Resources” section for further discussion.

 

 

Results of Operations

  

The following table presents the condensed consolidated statements of operations for the thirteen and twenty-six weeks ended June 27, 2016 and June 29, 2015, expressed as a percentage of revenue.

 

		Thirteen Weeks Ended
		June 27, 2016				June 29, 2015
Revenues			100.0	%			100.0	%
Costs and expenses
Restaurant operating costs and expenses
Cost of sales			32.6				30.8
Labor expenses			29.2				27.9
Occupancy expenses			7.8				7.3
Other operating expenses		20.9					19.3
General and administrative			4.3				5.8
Depreciation and amortization			4.7				4.3
Pre-opening costs			(0.0	)			0.0
Asset impairments and closures			6.3				0.0
Loss on disposal of assets			0.2				0.1
Total costs and expenses			106.0				95.6
Income (loss) from operations			(6.0	)			4.4
Interest expense, net			(2.5	)			(2.7	)
Gain on insurance settlements			0.6				-
Income (loss) from continuing operations before income taxes			(7.9	)			1.7
Income tax expense			0.1				0.5
Income (loss) from continuing operations			(8.0	)			1.2
Loss from discontinued operations, net			-				(1.1	)
Net income (loss)			(8.0	)%			0.1	%

 

 

		Twenty-Six Weeks Ended
		June 27, 2016				June 29, 2015
Revenues			100.0	%			100.0	%
Costs and expenses
Restaurant operating costs and expenses
Cost of sales			32.1				31.1
Labor expenses			29.8				28.2
Occupancy expenses			8.1				7.8
Other operating expenses			18.9				18.7
General and administrative			4.9				6.3
Depreciation and amortization			4.9				4.7
Pre-opening costs			0.4				0.2
Asset impairments and closures			3.4				0.0
Loss on disposal of assets			0.2				0.1
Total costs and expenses			102.6				97.2
Income (loss) from operations			(2.6	)			2.8
Interest expense, net			(2.5	)			(2.9	)
Gain on insurance settlements			0.3				-
Loss from continuing operations before income taxes			(4.8	)			(0.1	)
Income tax expense			0.1				0.5
Loss from continuing operations			(4.9	)			(0.6	)
Loss from discontinued operations, net			-				(7.8	)
Net loss			(4.9	)%			(8.3	)%

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*

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

  

 

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 27, 2016				June 29, 2015(1)
		(dollars in thousands)
Selected Other Data:
Number of restaurants open (end of period):
Joe's Crab Shack			127				138
Brick House Tavern + Tap			26				23
Total restaurants - continuing operations			153				161
Restaurant operating weeks
Joe's Crab Shack			1,676				1,794
Brick House Tavern + Tap			338				299
Average weekly sales
Joe's Crab Shack		$	65			$	68
Brick House Tavern + Tap		$	66			$	70
Change in comparable restaurant sales
Joe's Crab Shack			(6.8	%)			(4.0	%)
Brick House Tavern + Tap			(6.3	%)			2.8	%
Income (loss) from operations
Joe's Crab Shack		$	(2,767	)		$	10,510
Brick House Tavern + Tap			(839	)			2,050
Corporate			(4,270	)			(6,271	)
Total - continuing operations		$	(7,876	)		$	6,289
Adjusted income (loss) from continuing operations(2)		$	(1,074	)		$	2,346

 

 

		Twenty-Six Weeks Ended				Twenty-Six Weeks Ended
		June 27, 2016				June 29, 2015(1)
		(dollars in thousands)
Selected Other Data:
Number of restaurants open (end of period):
Joe's Crab Shack			127				138
Brick House Tavern + Tap			26				23
Total restaurants			153				161
Restaurant operating weeks
Joe's Crab Shack			3,366				3,599
Brick House Tavern + Tap			659				578
Average weekly sales
Joe's Crab Shack		$	61			$	63
Brick House Tavern + Tap		$	67			$	69
Change in comparable restaurant sales
Joe's Crab Shack			(4.3	%)			(3.9	%)
Brick House Tavern + Tap			(5.4	%)			4.0	%
Income (loss) from operations
Joe's Crab Shack		$	2,688			$	17,017
Brick House Tavern + Tap			(53	)			3,271
Corporate			(9,020	)			(12,799	)
Total		$	(6,385	)		$	7,489
Adjusted income (loss) from continuing operations(2)		$	(2,124	)		$	1,306

 

 

(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.

 

 

 Thirteen Weeks Ended June 27, 2016 Compared to Thirteen Weeks Ended June 29, 2015

 

Revenues

 

Revenues were $130.8 million during the second quarter of 2016, a decrease of $12.4 million, or 8.7%, compared to revenues of $143.2 million during the second quarter of 2015. The decrease was primarily caused by a decrease in comparable restaurant sales for Joe’s and Brick House and a net decrease in operating weeks due to the closure of eleven Joe’s restaurants since the second quarter of 2015, partially offset by sales from three new Brick House restaurant openings in the first quarter of 2016.

 

Revenues at Joe’s decreased 11.4% to $108.4 million in the second quarter of 2016 versus $122.4 million in the second quarter of 2015. This decrease was primarily due to a 6.8% decrease in comparable restaurant sales and restaurant closures. The comparable restaurant sales decrease was comprised of a 7.1% decrease in traffic and a 0.8% decrease in mix, partially offset by a 1.1% increase in pricing.

 

Brick House revenues increased 7.6% to $22.4 million in the second quarter of 2016 versus $20.8 million in the second quarter of 2015 due to three new restaurant openings in the first quarter of 2016, partially offset by a 6.3% decrease in comparable restaurant sales. The comparable restaurant sales decrease was comprised of a 6.9% decrease from traffic and mix, partially offset by a 0.6% increase in pricing.

 

 

Cost of Sales

 

Cost of sales decreased by $1.4 million, or 3.2%, to $42.7 million in the second quarter of 2016 versus $44.1 million in the comparable period of 2015. As a percent of revenue, cost of sales increased to 32.6% from 30.8% in the prior year primarily due to the impact of all-you-can-eat crab, as well as a slight commodity price inflation.

 

Labor Expenses

 

Labor expenses decreased by $1.8 million, or 4.6%, to $38.2 million in the second quarter of 2016 versus $40.0 million in the comparable period last year. The decrease was primarily due to the restaurant closures. Labor expenses, as a percent of revenue, increased to 29.2% from 27.9% due to labor inefficiencies and the impact of fixed cost deleverage on lower sales.

 

Occupancy Expenses

 

Occupancy expenses decreased by $246 thousand, or 2.4%, to $10.2 million in the second quarter of 2016 versus $10.4 million in the comparable period last year. The decrease was primarily due to restaurant closures. As a percent of revenue, occupancy expenses increased to 7.8% from 7.3% in the prior year due to the impact of fixed cost deleverage on lower sales.

 

Other Operating Expenses

 

Other operating expenses decreased by $292 thousand, or 1.1%, to $27.3 million in the second quarter of 2016 compared to $27.6 million in the comparable prior year period. As a percent of revenue, other operating expenses increased to 20.9% from 19.3% primarily due to fixed cost deleverage on lower sales, and increases in marketing, repairs and maintenance, and insurance costs.

 

General and Administrative

 

General and administrative expense decreased by $2.7 million, or 32.0%, to $5.7 million in the second quarter of 2016 versus $8.4 million in the second quarter of 2015, which was primarily due to personnel reductions in connection with the closing of the sale of Macaroni Grill in the second quarter of 2015, lower bonus expense, and a reduction in professional fees. As a percent of revenue, general and administrative expenses decreased to 4.3% from 5.8%.

 

Asset impairments and closures

 

Asset impairments and closures increased to $8.2 million in the second quarter of 2016 from $53 thousand in the comparable period last year, primarily due to an $8.0 million impairment charge and closure-related expenses from three Joe’s restaurants closed in the second quarter of 2016.

 

We periodically evaluate possible impairment of long-lived assets at the restaurant level, and record an impairment charge whenever we determine that the fair value of these assets is less than their carrying value. As a result of our periodic impairment testing, we recorded an impairment charge in the second quarter of 2016 to reduce the carrying value of long-lived assets to their estimated fair value at seven Joe's and two Brick House restaurants, eight of which we plan to close in the third quarter of 2016.

 

Income (Loss) from Operations

 

As a result of the foregoing, consolidated income (loss) from operations decreased to a $7.9 million loss in the second quarter of 2016 compared to $6.3 million income in the comparable period last year.

 

Income (loss) from operations for the Joe’s brand decreased to a $2.8 million loss in the second quarter of 2016 from $10.5 million income in the second quarter of 2015. As a percent of revenue, excluding the $5.4 million impairment charge, Joe’s income from operations was 2.5% for the current quarter compared to 8.6% in the prior year. This decrease was primarily attributable to increased food cost caused by all-you-can-eat crab, and higher labor and marketing expenses, as well as the impact of fixed cost deleverage on lower sales.

 

Income (loss) from operations for Brick House decreased to a $0.8 million loss in the current quarter compared to $2.1 million in the prior year quarter. As a percent of revenue, excluding pre-opening costs and the $2.6 million impairment charge, Brick House income from operations decreased to 7.7% from 10.1% primarily due to higher food cost, operating supplies and utilities, as well as the impact of fixed cost deleverage on lower sales.  

 

 

Interest Expense, Net

 

Interest expense, net decreased by $0.6 million, or 15.6%, to $3.2 million during the current quarter from $3.8 million during the prior year quarter primarily due to a lower average debt balance after the $35.0 million voluntary prepayment in December 2015 partially offset by a $121 thousand write-off of debt discount and debt issuance costs related to the $5.0 million voluntary prepayment at the end of the second quarter of 2016.

 

Gain on Insurance Settlements

 

Gain on insurance settlements increased to $0.8 million from $0 the prior year. The current year gain is related to insurance claims for two restaurants damaged by fire in a prior year, partially offset by a loss on one restaurant damaged by fire in 2016.

 

Income Tax Expense

 

Income tax expense decreased by $627 thousand to $82 thousand during the current quarter from $709 thousand during the prior year quarter primarily due to us having a loss before income taxes during the current quarter versus income in the prior year. This decrease is offset by an increase of $4.8 million in the valuation allowance in the current quarter compared to an increase of $0.6 million in the valuation allowance in the prior year quarter.

 

Discontinued Operations, net

 

Income from discontinued operations was $0 for the second quarter of 2016 compared to a loss from discontinued operations of $1.6 million for the second quarter of 2015. In April 2015, we completed the sale of Macaroni Grill. During the second quarter of 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 27, 2016 Compared to Twenty-Six Weeks Ended June 29, 2015

 

Revenues

 

Revenues were $248.7 million during the first half of 2016, a decrease of $16.7 million, or 6.3%, compared to revenues of $265.4 million during the first half 2015. The decrease was primarily caused by a decrease in comparable restaurant sales for Joe’s and Brick House, and a net decrease in operating weeks due to the closure of nine Joe’s restaurants in fiscal year 2015 and another three Joe’s in the second quarter of 2016, partially offset by sales from new Brick House restaurant openings in the first quarter of 2016.

 

Revenues at Joe’s decreased 9.3% to $204.6 million in the first half of 2016 versus $225.5 million in the first half of 2015. This decrease was primarily due to a 4.3% decrease in comparable restaurant sales and restaurant closures since the second quarter of 2015. The comparable restaurant sales decrease was comprised of a 4.4% decrease in traffic and a 1.3% decrease in mix, partially offset by a 1.4% increase in pricing.

 

Brick House revenues increased 10.4% to $44.1 million in the first half of 2016 versus $39.9 million in the first half of 2015 due to three new restaurant openings since the first half of 2015, partially offset by a 5.4% decrease in comparable restaurant sales. The comparable restaurant sales decrease was comprised of a 6.1% decrease from traffic and mix, partially offset by a 0.7% increase in pricing.

 

 

Cost of Sales

 

Cost of sales decreased by $2.8 million, or 3.4%, to $79.8 million in the first half of 2016 versus $82.7 million in the comparable period of 2015. As a percent of revenue, cost of sales increased to 32.1% from 31.1% in the prior year primarily due to the impact of all-you-can-eat crab, as well as a slight commodity price inflation.

 

Labor Expenses

 

Labor expenses decreased by $0.7 million, or 1.0%, to $74.1 million in the first half of 2016 versus $74.8 million in the comparable period last year primarily due to restaurant closures. Labor expenses, as a percent of revenue, increased to 29.8% from 28.2% due to labor inefficiencies and the impact of fixed cost deleverage on lower sales.

 

Occupancy Expenses

 

Occupancy expenses decreased by $0.6 million, or 2.7%, to $20.1 million in the first half of 2016 versus $20.6 million in the comparable period last year. The decrease was primarily due to restaurant closures. As a percent of revenue, occupancy expenses increased to 8.1% from 7.8% in the prior year due to the impact of fixed cost deleverage on lower sales.

 

Other Operating Expenses

 

Other operating expenses decreased by $2.7 million, or 5.5%, to $46.9 million in the first half of 2016 compared to $49.7 million in the comparable prior year period. This decrease was primarily due to a decrease of $1.6 million in advertising expense and lower insurance and utilities expenses, partially offset by increased repairs and maintenance expenses. As a percent of revenue, other operating expenses increased to 18.9% from 18.7%.

 

General and Administrative

 

General and administrative expense decreased by $4.5 million, or 27.0%, to $12.2 million in the first half of 2016 versus $16.8 million in the first half of 2015, which was primarily due to personnel reductions in connection with the closing of the sale of Macaroni Grill in the second quarter of 2015, lower bonus expense, and a reduction in professional fees. As a percent of revenue, general and administrative expenses decreased to 4.9% from 6.3%.

 

Depreciation and Amortization

 

Depreciation and amortization decreased by $263 thousand, or 2.1%, to $12.1 million in the first half of 2016 compared to $12.4 million in the first half of 2015. This decrease is mainly due to lower restaurant count. As a percent of revenue, depreciation and amortization increased to 4.9% from 4.7%.

 

Pre-Opening Costs

 

Pre-opening costs increased to $876 thousand in the first half of 2016 from $514 thousand in the comparable prior year period. We opened three new restaurants in the first half of 2016 compared to two restaurants opened in the comparable period last year.

 

Asset Impairments and Closures

 

Asset impairments and closures increased to $8.4 million in the first half of 2016 from $83 thousand in the comparable period last year, primarily due to an $8.0 million impairment charge and closure-related expenses from three Joe’s restaurants closed in the first half of 2016 compared to one restaurant closed in the first half of 2015.

 

We periodically evaluate possible impairment of long-lived assets at the restaurant level, and record an impairment charge whenever we determine that the fair value of these assets is less than their carrying value. As a result of our periodic impairment testing, we recorded an impairment charge of $8.0 million in the second quarter of 2016 to reduce the carrying value of long-lived assets to their estimated fair value at seven Joe's and two Brick House restaurants, eight of which we plan to close in the third quarter of 2016.

 

 

Income (Loss) from Operations

 

As a result of the foregoing, consolidated income (loss) from operations decreased to a $6.4 million loss in the first half of 2016 compared to a $7.5 million income in the comparable period last year.

 

Income from operations for the Joe’s brand decreased to $2.7 million in the first half of 2016 from $17.0 million in the first half of 2015. As a percent of revenue, excluding the $5.4 million impairment charge, Joe’s income from operations was 4.0% for the current year compared to 7.5% in the prior year. This decrease was primarily attributable to increased food cost caused by all-you-can-eat crab, higher labor expenses, and reduced leverage on fixed costs on lower sales.

 

Income (loss) from operations for Brick House decreased to a $0.1 million loss in the current year compared to a $3.3 million income in the prior year. As a percent of revenue, excluding pre-opening costs and the $2.6 million impairment charge, Brick House income from operations decreased to 7.7% from 9.5% due to increased food cost and higher labor, occupancy, marketing and repairs and maintenance expenses.  

 

Interest Expense, Net

 

Interest expense, net decreased by $1.5 million, or 18.9%, to $6.3 million during the current year from $7.7 million during the prior year primarily due to a lower average debt balance after the $35.0 million voluntary prepayment in December 2015, partially offset by a $121 thousand write-off of debt discount and debt issuance costs related to the $5.0 million voluntary prepayment at the end of the second quarter of 2016.

 

Gain on Insurance Settlements

 

Gain on insurance settlements increased to $0.8 million from $0 the prior year. The current year gain is related to insurance claims for two restaurants damaged by fire in a prior year, partially offset by a loss on one restaurant damaged by fire in 2016.

 

Income Tax Expense

 

Income tax expense decreased by $1.1 million to $171 thousand during the first half of 2016 from $1.2 million during the comparable prior year period primarily due to a larger loss before income taxes during the current year. This decrease is offset by an increase of $5.3 million in the valuation allowance in the current year compared to an increase of $2.7 million in the valuation allowance in the prior year and a $0.7 million increase in tax benefit shortfalls related to vested stock-based compensation awards that were forfeited by terminated employees.

 

Discontinued Operations, net

 

Income from discontinued operations was $0 in the first half of 2016 compared to a loss from discontinued operations of $20.7 million in the first half of 2015. 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. 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 for at least the next twelve months.

 

We have experienced declines in comparable restaurant sales and income from operations at Joe’s and Brick House. While we expect to be in compliance with our debt covenants over the next twelve months, a number of factors, including but not limited to continued declines in comparable restaurant sales, increased labor costs and underperforming restaurants, could cause us to be in violation of our debt covenants, and as such, in default of our 2014 Credit Agreement. In an event of default, our lenders may accelerate the maturity of all of our indebtedness. Our on-going efforts to voluntarily prepay a portion of our outstanding debt and close certain underperforming restaurants are aimed at improving our current and future financial covenant ratios. If our initiatives to improve our financial covenant ratios fail and we are unable to obtain a waiver or modification of our current debt agreement, we may not have sufficient liquidity to repay the entire balance of our borrowings and support our daily operations.

 

However, we can manage and supplement our liquidity position by closing or selling underperforming restaurants, postponing restaurant development, cutting discretionary capital expenditure spending, and divesting non-core assets. We may also decide to raise additional funds through the sale of common stock or debt in the public capital markets or in privately negotiated transactions. We are currently exploring options to amend or refinance our current debt agreement. There can be no assurance, however, that any of these financing options would be available on favorable terms, if at all.

 

 

The following table shows summary cash flows information for the twenty-six weeks ended June 27, 2016 and June 29, 2015 (in thousands):

 

		Twenty-Six Weeks Ended				Twenty-Six Weeks Ended
		June 27, 2016				June 29, 2015
Net cash provided by (used in):
Operating activities
Continuing operations		$	12,464			$	24,063
Discontinued operations			-				3,891
Investing activities
Continuing operations			(7,890	)			(8,501	)
Discontinued operations			240				11,639
Financing activities			(5,589	)			(947	)
Net increase (decrease) in cash and cash equivalents			(775	)			30,145
Increase in cash and cash equivalents - discontinued operations			-				(2,291	)
Net increase (decrease) in cash and cash equivalents - continuing operations		$	(775	)		$	27,854

 

Operating Activities

 

Net cash provided by operating activities – continuing operations was $12.5 million for the twenty-six weeks ended June 27, 2016 and $24.1 million for the twenty-six weeks ended June 29, 2015. The $11.6 million decrease from the prior year period is primarily due to lower sales and changes in working capital, partially offset by lower general and administrative expenses and interest payments.

 

Net cash provided by operating activities – discontinued operations was $0 for the twenty-six weeks ended June 27, 2016 and $3.9 million for the twenty-six weeks ended June 29, 2015. The $3.9 million was due to the lower marketing expenses during the operations of Macaroni Grill in 2015.

 

Investing Activities

 

Net cash used in investing activities – continuing operations decreased by $0.6 million to $7.9 million for the twenty-six weeks ended June 27, 2016 compared to $8.5 million for the twenty-six weeks ended June 29, 2015 mainly due to the decrease in capital expenditures from prior year, proceeds from the sale of two liquor licenses and insurance claims in the current year. Capital expenditures decreased primarily due to the timing of new restaurant openings.

 

We estimate that total capital expenditures for fiscal year 2016 will be approximately $10.0 million to $15.0 million.

 

Net cash provided by investing activities – discontinued operations was $240 thousand for the twenty-six weeks ended June 27, 2016 and $11.6 million for the twenty-six weeks ended June 29, 2015. The net cash provided in 2015 related to the sale of Macaroni Grill during the second quarter of 2015 and the sale of certain Macaroni Grill restaurants prior to the sale of the Macaroni Grill business, while the net cash provided in 2016 relates to the remaining selling price of Macaroni Grill held in escrow at closing date and released during the second quarter of 2016.

 

Financing Activities

 

Net cash used in financing activities was $5.6 million for the twenty-six weeks ended June 27, 2016 compared to $947 thousand for the twenty-six weeks ended June 29, 2015 due to a $5.0 million voluntary prepayment on the term loan in June 2016.

 

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. In December 2015, we made a $35.0 million voluntary prepayment of our 2014 Term Loan, which reduced our quarterly installment payments to $324,116. In June 2016, we made a $5.0 million voluntary prepayment of our 2014 Term Loan, which further reduced our quarterly installment payments to $311,426.

 

 

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 27, 2016. 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 27, 2016.

 

As of June 27, 2016, we had outstanding letters of credit of approximately $4.1 million and available borrowing capacity of approximately $25.9 million under the 2014 Revolving Credit Facility.

 

Off-Balance Sheet Arrangements

 

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

 

 

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 (loss) from continuing operations and adjusted income (loss) from continuing operations per share

 

We calculate adjusted income (loss) 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 (loss) from continuing operations represents income (loss) from continuing operations less items such as (a) costs related to conversions, remodels and closures, (b) gain on insurance settlements, (c) write-off of debt issuance costs and debt discount, (d) asset impairments, (e) the current and deferred income tax effect of the above described adjustment (calculated using a marginal year-to-date tax rate of 39.0% for the twenty-six weeks ended June 27, 2016 and 39.6% for the twenty-six weeks ended June 29, 2015), and (f) 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 (loss) from continuing operations is as follows (in thousands, except earnings per share):

 

		Thirteen Weeks Ended				Thirteen Weeks Ended				Twenty-Six Weeks Ended				Twenty-Six Weeks Ended
		June 27, 2016				June 29, 2015				June 27, 2016				June 29, 2015
Income (loss) from continuing operations		$	(10,443	)		$	1,731			$	(12,069	)		$	(1,465	)
Adjustments - continuing operations:
Costs related to conversions, remodels and closures			185				14				238				63
Gain on insurance settlements			(763	)			-				(755	)			-
Write-off of debt issuance costs and debt discount			121				-				121				-
Asset impairments			8,003				-				8,003				-
Income tax effect of adjustments above
Current expense (benefit)			92				(1	)			68				(8	)
Deferred benefit			(3,036	)			(5	)			(3,036	)			(17	)
Deferred tax asset valuation allowance			4,767				607				5,306				2,733
Adjusted income (loss) from continuing operations		$	(1,074	)		$	2,346			$	(2,124	)		$	1,306
Weighted average shares outstanding
Basic			25,815				25,721				25,795				25,698
Diluted			25,815				25,730				25,795				25,711
Income (loss) from continuing operations per share
Basic and diluted		$	(0.40	)		$	0.07			$	(0.47	)		$	(0.06	)
Adjusted income (loss) from continuing operations per share
Basic and diluted		$	(0.04	)		$	0.09			$	(0.08	)		$	0.05

 

 

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 27, 2016, 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 28, 2015 filed with the SEC on March 3, 2016.

 

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. An example of forward-looking statements in this quarterly report is our fiscal year 2016 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 3, 2016 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.

 

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 27, 2016, crab, lobster and shrimp accounted for approximately 53% of total food purchases. 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 4% to 10% of our food purchases. 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 27, 2016, we had $122.7 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 senior secured credit facility, a 1% increase in the interest rate on the outstanding balance of our variable rate debt would result in a $0.8 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 27, 2016, 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 27, 2016.

 

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 a smaller reporting company or 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 27, 2016 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 28, 2015.

 

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.

 

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		Amendment of the Amended and Restated Certificate of Incorporation of Ignite Restaurant Group, Inc.
3.3		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).
10.1		Separation Agreement and General Release dated July 14, 2016 by and between Ignite Restaurant Group – RSC, LLC and David Catalano.
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.

 

 

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 3, 2016	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)

 

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