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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

 

(Mark One)
☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2017
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from       to        .

 

Commission File Number 001-35549

 

IGNITE RESTAURANT GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware (State or Other Jurisdiction of Incorporation or Organization)	94-3421359 (I.R.S. Employer Identification No.)
10555 Richmond Avenue, Houston, Texas (Address of Principal Executive Offices)	77042 (Zip Code)
Telephone Number: (713) 366-7500

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class		Name of Each Exchange on which Registered
Common Stock, $0.01 par value		NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒.

 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Smaller reporting company ☒

 

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

 

State the aggregate market value of the voting and non-voting common equity held by

non-affiliates of the registrant.

 

The aggregate market value of the common stock of the Registrant held by non-affiliates as of June 27, 2016 (the last business day of the most recently completed second quarter) was $12,954,472, calculated based on the closing price of our common stock as reported by the NASDAQ Global Select market on such date.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock,

as of the latest practicable date.

 

As of March 30, 2017, 26,232,865 shares of the Registrant’s common stock were outstanding.

 

Documents Incorporated by Reference

 

None 

 

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TABLE OF CONTENTS

 

		Page
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	24
Item 2.	Properties	25
Item 3.	Legal Proceedings	26
Item 4.	Mine Safety Disclosures	26
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6.	Selected Financial Data	28
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 8.	Financial Statements and Supplementary Data	50
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	75
Item 9A.	Controls and Procedures	75
Item 9B.	Other Information	75
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	76
Item 11.	Executive Compensation	79
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	85
Item 13.	Certain Relationships and Related Transactions, and Director Independence	86
Item 14.	Principal Accounting Fees and Services	87
	PART IV
Item 15.	Exhibits, Financial Statement Schedules	88
Item 16.	Form 10-K Summary	91
SIGNATURES		92

 

 

PART I

 

Item 1. BUSINESS.

 

Our Company

 

Ignite Restaurant Group, Inc. (referred to herein as the “Company,” “Ignite,” “we,” “us” or “our”) is a diversified restaurant company that operates a portfolio of two restaurant brands, 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 and beverages in a distinctive, casual, high-energy atmosphere, and operate in a diverse set of markets across the United States and internationally. As of January 2, 2017, we operated 112 Joe’s and 25 Brick House restaurants in 32 states. We currently have three Joe’s franchised restaurants in Dubai, U.A.E.

 

The first Joe’s restaurant was opened in Houston, Texas in 1991. On October 13, 2006, in connection with the purchase by JCS Holdings, LLC, an entity controlled by J.H. Whitney VI, L.P., of 120 Joe’s restaurants, we changed our name to Joe’s Crab Shack Holdings, Inc. In 2008, we developed our second brand, Brick House. On July 7, 2009, with the addition of the Brick House brand, we changed our name to Ignite Restaurant Group, Inc. On April 9, 2013, we completed our acquisition of Romano’s Macaroni Grill (“Macaroni Grill”). On April 17, 2015, we completed the sale of Macaroni Grill. Unless specifically stated, all discussions regarding Ignite consolidated operations exclude Macaroni Grill.

 

J.H. Whitney VI, L.P., an affiliate of J.H. Whitney Capital Partners, LLC, owns approximately 66.1% of our total outstanding common stock as of January 2, 2017.

 

Recent Developments

 

On April 3, 2017, we announced the following developments relating to our business:

 

Sale of Our Business

 

Our Board of Directors, working together with our management team and our financial advisor, has commenced a process to pursue the sale of our business, which could be sold as an entirety or through the separate sales of our two restaurant brands, Joe’s Crab Shack and Brick House Tavern + Tap. There can be no assurance that the process that we are undertaking will be successful. In addition, we cannot predict the terms or timing of any transaction that we may undertake or whether any such transaction will result in any proceeds for the holders of our common stock.

 

Changes in Senior Management Team

 

Robert S. Merritt, who has served on our Board of Directors since March 2014 and as Chief Executive Officer since November 2015, will resign from those positions after the filing of this Annual Report on Form 10-K, but will continue to serve as a consultant to the Company. Jonathan Tibus, a Managing Director with Alvarez & Marsal, has been elected our Chief Executive Officer. Most recently, Mr. Tibus served as CEO of Last Call Operating Co., which owned and managed over 80 restaurants under the brand names of Champps, Bailey’s, and Fox & Hound. He also recently served as Chief Restructuring Officer (CRO) to Quiznos, a sandwich restaurant franchisor with over 2,000 domestic and international stores, and as Chief Operating Officer (COO) to Max & Erma’s, a $150 million chain of casual dining restaurants. In addition, Brad Leist, our Senior Vice President and Chief Financial Officer, has been promoted to the additional position of Chief Administrative Officer, and Steve Metzger, our Vice President and General Counsel, has been promoted to Senior Vice President, General Counsel and Secretary of the Company.

 

The Forbearance Agreement 

 

On March 31, 2017, we entered into an agreement with certain of the lenders and the Administrative Agent (collectively, the “Forbearing Lenders”) under our 2014 Credit Facility, whereby the Forbearing Lenders agreed to, among other things, forbear from taking any action to enforce certain of their rights or remedies under the 2014 Credit Facility with respect to certain defaults, events of default, and anticipated events of default (the “Forbearance Agreement”). The Forbearance Agreement is effective until the earliest of (i) May 9, 2017, or (ii) the occurrence or existence of any default or event of default other than defaults, events of default and anticipated events of default that are subject to the Forbearance Agreement. Should we be in default of the Forbearance Agreement or should the required lenders and the Administrative Agent not agree to further extend such Forbearance Agreement, the Administrative Agent and lenders would be free to exercise any rights and remedies with respect to such defaults and events of defaults pursuant to the terms of the 2014 Credit Facility.

 

 Our Restaurants

 

Joe’s Crab Shack

 

Joe’s is a come-as-you-are, family restaurant that offers guests an environment that is laid-back, comfortable, fun, and energetic. Most locations offer an outdoor patio for guests to enjoy eating and drinking and a children’s playground as part of the “I’m relaxed” restaurant experience. Joe’s also has many locations that are located on waterfront property. Interior design elements include a nautical, vacation theme to invoke memories of beach vacations and a genuine crab shack experience. Table tops are decorated with art to prompt dinner conversation, while picnic tables across the patio and interior help guests feel the relaxed tropical vacation experience. Joe’s restaurants are largely free-standing and average 8,000 square feet with over 200 seats. Most Joe’s bars are separated from the dining area to provide for a distinct place to grab a drink while waiting for a table. Many of our restaurants also include a small gift shop where guests can purchase souvenirs to commemorate their dining experience. Our current restaurant prototype, introduced in fiscal year 2010, contemporizes many of our key brand elements, while maintaining our authentic crab shack appeal.

 

Joe’s restaurants perform well in targeted markets with high population density and a propensity for seafood, as well as “destination” markets with national and regional tourist attractions, both of which are key characteristics of our site selection strategy.

 

Brick House Tavern + Tap

 

Brick House is a trend-forward “next generation bar & grill” set in an inviting, comfortable and modern venue that provides a distinctive guest experience. Brick House’s interior décor includes custom lighting, dark mahogany woods, open sight lines, HD TVs, and an inviting fireplace. The interior design of Brick House consists of diverse seating and gathering areas where guests can pick multiple ways to enjoy their experience. In addition to a traditional dining room and bar area, Brick House also offers large communal tables and a section of leather recliners positioned in front of large HD TVs, where guests receive their own TV tray for dining. Each restaurant has a state-of-the-art entertainment package and provides guests with a clear line of sight to HD TVs from every seat, making Brick House restaurants an ideal gathering place for sports enthusiasts. Outdoor seating is also available on the patio or around an open fire pit at nearly all locations. Both food and beverages are served by personable and engaging service staff. The typical Brick House restaurant is approximately 8,500 square feet and averages approximately 250 seats, which includes both traditional tables and unique seating options.

 

 

 Menu and Menu Development

 

We are focused on elevating our high-quality food and beverage offerings. Born out of consumer insights, our in-house Marketing and Culinary departments continually create new food and beverage products for Joe’s and Brick House, which are intended to exceed guest expectations. A variety of research tools are used to identify opportunities and evaluate current offerings, including segmentation and core menu studies, brand screens, social media and in-restaurant surveys. We use a third party econometric consulting firm to provide statistical analysis around pricing, allowing us to make fact-based decisions on pricing and menu engineering.

    

Joe’s Crab Shack

 

Joe’s aims to offer signature, craveable items to its guests. For example, we have shifted the menu mix at Joe’s by focusing on entrées featuring crab over the last several years. Crab is strategically positioned center stage in our menu through the Steampots and Buckets of Crab categories, highlighting the importance of the menu item. Joe’s Steampots and Buckets of Crab allow guests to choose between seasonal varieties of crab (Queen, Snow, Dungeness and King) and whole lobster. Steampots, our bestselling item, are overflowing with generous portions of crab seasoned to our guest’s tastes, other seafood, red potatoes, sausage and a fresh ear of corn. Our Buckets of Crab allow guests to pair their favorite crab with several distinctive seasonings ranging from BBQ to Chesapeake Style or Garlic Herb. Joe’s also leverages its crab-forward menu with other craveable crab items, including Made-From-Scratch Crab Cakes, Crab Nachos and Crazy Good Crab Dip. As a result of this strategy, entrées at Joe’s featuring crab comprise approximately 47% of total food revenues. We believe this crab-focused menu mix has contributed to increases in guest satisfaction and gross profit dollars. In addition to our core crab-focused menu, Joe’s also offers a broad range of seafood entrées like Southern Stuffed Shrimp, Cedar Roasted Salmon and Redfish ‘N Lobster, plus hand-breaded traditional platters including East Coast Platter and Shrimp Sampler. Joe’s also offers several “out of water” options such as Herb Chicken and Joe’s Steak Deal. In addition, alcoholic beverages have significantly evolved to support the elevated food strategy, with vacation-style drinks, including the Shark Bite, Category 5 Hurricane and Mason Jar cocktails emerging as guests’ top choices.

 

Joe’s menu includes more than 12 items made with Lobster, Queen, Snow, Dungeness, or King Crabs sourced from government regulated and sustainable fisheries. Our current menu offers 12 appetizers, including Great Balls of Fire, Crab Nachos and Crazy Good Crab Dip, and over 40 entrées, including Steampots, Buckets of Crab, East Coast Platter and several “out of water” options. For fiscal year 2016, Joe’s average check was $25.86, lunch and dinner represented 26% and 74% of revenue, respectively, and revenue distribution was 86% food, 13% alcohol and 1% retail. Prices currently range from $7.59 to $49.99 for items on Joe’s menu, including appetizers ordered as entrées and entrées that are good for more than one person.

 

New menu roll-outs occur in April/May and October/November. For all new menu roll-outs, new product launches are combined with a new menu design and updated pricing to reflect the current economic environment, as well as the current strategic marketing and creative plan. A menu change typically includes the introduction of new menu items and recipe enhancements while maintaining a balance of about 75 total menu items, including appetizers and lunch only items. Menu items are added or removed only after thorough testing and analysis, which includes guest satisfaction feedback.

 

Brick House Tavern + Tap

 

The Brick House food and beverage menu was created to make the brand feel aspirational while inherently approachable. We believe Brick House’s elevated menu has “changed the game” for the bar and grill customer by offering an innovative premium food selection, along with more than 80 varieties of beer and specialty cocktails made by our bar experts.

 

Brick House offers its guests a broad selection of scratch-made, chef-inspired, contemporary tavern food. Brick House’s menu includes 15 appetizers, 35 entrées, seasonal specials, brunch, dessert and specialty cocktails. Unique handcrafted appetizers include Deviled Eggs, Hickory Smoked Sockeye Salmon and Duck Wings. Brick House offers an array of burgers, including the Bison Burger, chargrilled and topped with jalapeño cilantro mayo and candied slab bacon. Guests can also choose from a broad selection of homemade entrées such as Drunken Chops, Chicken Pot Pie, Chicken & Waffles, our Southern Fried Chicken Sandwich, and our Brick Pizzas. In addition, Brick House’s burgers, including the Farmhouse Burger and the Black & Bleu Burger, offer guests a distinct take on the traditional burger. Brick House’s beverage selection includes imported and domestic beers along with hand-pulled cask beer. Beer is served in vessels unique to our industry such as Brick House’s signature tap-at-your table beer bongs. All Brick House restaurants have a full bar that supports a variety of liquor drinks, wine and beer cocktails like Fiery Apple Cider and the Shandy as well as specialty cocktails like the Twisted Old Fashioned, Apples N’ Oranges and St. Bubbles. For fiscal year 2016, Brick House had four full day parts with lunch, afternoon, dinner and late night accounting for 21%, 25%, 39% and 15%, respectively, and Brick House’s revenue distribution was approximately 60% food and 40% alcohol. Brick House’s entrées range in price from $8.00 to $26.00, including appetizers ordered as entrées.

 

Continuous menu innovation is a key strategy for Brick House. We revise the Brick House menu twice a year with design, pricing and product offerings assessed before each menu implementation. New menu offerings are created to reinforce differentiation in our appetizers, entrées and beverage offerings as part of our effort to provide our guests with exceptional food. Testing of new menu items is executed in-restaurant before a new item is rolled out system-wide.

  

 

Marketing

 

Our marketing strategy is fact-based, using consumer insights to build brand affinity and drive menu optimization. Our marketing expenditures were 3.6%, 4.7% and 4.5% of revenues for the fiscal years 2016, 2015 and 2014, respectively.

  

In 2016, Joe’s Crab Shack deployed a strategic mix of advertising that included 14 weeks of national television, 32 weeks of digital radio and 53 weeks of paid search.  These activities were supplemented with social media outreach, database marketing, local restaurant marketing and added value media.  In 2017, based on insights to the way our guests consume media, we are migrating toward a comprehensive digital strategy that will more efficiently reach consumers who live, work and play within our restaurants’ trading areas.  This will provide 52 weeks of media support, including search, video, radio, banner ads, mobile and social.  Our marketing efforts are designed to increase value perceptions and build frequency across dining occasions.  Examples of our value proposition include All-You-Can-Eat Shrimp on Wednesdays, Build Your Own Boil and the expansion of our lunch menu to new markets.

 

Marketing for Brick House Tavern & Tap continued to focus on menu innovation and weekly specials, as well as local activities, television viewing events and holiday celebrations supported by social media, digital advertising and additional customer engagement.  Examples of initiatives include traveling trays to go, Happiness Hours, and promotions around holidays and viewing events, such as St. Patrick’s Day, March Madness and football.

  

Guest Satisfaction

 

We use third party vendors to systematically gather, record and analyze key guest data for all of our brands. Our marketing research tools include:

 

	•	AAU, or attitude, awareness and usage surveys;
	•	third party analysis of guest sentiment from social media; and
	•	core menu studies.

   

We use the insights gathered from market research and data analytics to support strategic and tactical decisions. We embrace and rely on the use of market research as a tool to better understand our business and drive improved performance. These market research and data analytics provide us with critical guest feedback that guide us to change or refine individual menu items and implement operational initiatives to drive positive results on “Satisfaction,” “Likely to Return” and “Likely to Recommend” metrics. Our AAU also guides us on changes to perception and awareness of our brands when considering shifts in our marketing and advertising strategies and tactics. We believe improved performance of our menu items, in our restaurants and in the effectiveness of our advertising is driven by understanding guest feedback and making changes accordingly.

 

Restaurant Operations

 

While our brands have independent field operations, we maintain a shared services platform, which handles many of the administrative functions for both Joe’s and Brick House. The Operations department is currently headed by our interim Chief Operating Officer (“COO”) who handles both brands. We believe this provides a scalable infrastructure, which will allow us to efficiently adapt as our business changes and increase our profitability.

 

 

Joe’s Crab Shack

 

Joe’s operations are led by two Regional Vice Presidents. Each Regional Vice President oversees six to seven Directors of Operations, who typically manage eight to fifteen restaurants. Restaurant-level management at Joe’s typically includes a General Manager, an Executive Kitchen Manager, a Restaurant Manager and Flex Managers, as needed. The Flex Manager is an hourly employee that is properly trained and may be called upon to perform a managerial role. Our restaurant managers have bonus programs that are based on sales and restaurant-level profits.

 

Joe’s manager training program is designed to train and educate managers at all levels, from the hourly Flex Manager to the General Manager. This comprehensive program is eight weeks in length and covers all aspects of the restaurant, including front-of-house and back-of-house functions as well as back office training. Our certified trainer training program is designed to develop hourly training specialists that reside in a restaurant or market to oversee the training programs in that area. To become a certified trainer, candidates must be a fully validated hourly team member with recommendations from their General Manager and Director of Operations. Through the training process, both hourly and management trainees will attend classroom sessions, take examinations, watch videos and work alongside a certified trainer or a highly trained individual that reports back to the certified trainer on performance and progress. Because Joe’s is committed to the responsible service of alcohol, we have developed an in-house certification program that educates our restaurant personnel on the responsible service of alcoholic beverages. All team members are required to complete this certification bi-annually.

 

  

Brick House Tavern + Tap

 

The Brick House team has one Regional Vice President who oversees three Directors of Operations who, in turn, each manage six to eleven restaurants. Typical restaurant management includes a General Manager, a Service Manager, an Executive Chef and an Executive Beverage Manager. Brick House managers have bonus programs that are based on sales and restaurant-level profits.

 

Our training programs are eight weeks for all salaried managers and five days for all hourly positions. Our new hire training program is conducted by in-house trainers who have been certified by our area training coordinator. At the end of training, there is a comprehensive test and an on-the-job training validation that must be completed before team members are allowed to work independently. Because Brick House is committed to the responsible service of alcohol, we have developed an in-house certification program that educates our restaurant personnel. All team members are required to complete this certification bi-annually.

 

Shared Services

 

Our brands are supported by our Restaurant Support Center (“RSC”) located in Houston, Texas. The RSC provides support services to both brands including accounting, real estate and development, human resources, legal, purchasing and information systems. We believe our RSC allows us to leverage our scale and share best practices across key functional areas that are common to all of our brands.

 

Site Selection

 

We focus our development strategy for Joe’s on new locations in narrowly defined geographic regions with high population density and a propensity for seafood and in close proximity to regional and national tourist attractions. Our development strategy for Brick House is largely intended to focus on opening new locations in the top 50 designated market areas across the country. We take an analytical, data-driven approach to selecting new sites, which is largely based upon, but not limited to, the following criteria:

 

•

with respect to Joe’s, attractiveness of locations from a regional/national and/or “destination market” perspective;

 

•

local market demographics and psychographic profiles;

 

•

characteristics similar to our most successful existing restaurants;

 

•

regional consumer trends and preferences;

 

•

local performance of nationally branded peers;

 

•

vehicle traffic patterns, visibility and access;

 

•

occupancy rates and other performance data from local hotels and other retail establishments, offices and other establishments that draw restaurant traffic;

 

•

available square footage, parking and lease economics;

 

•

local investment and operating costs; and

 

•

development and expansion constraints.

  

 

Restaurant Development and Economics 

 

During 2016, we opened three Brick House restaurants, which were conversions from Joe’s restaurants. Our incremental capital investment, which includes build-out costs and cash pre-opening costs, amounted to $9.9 million for restaurants opened in 2016. Factors contributing to the fluctuation in capital investment per location include size of the property, geographical location, type of construction, cost of liquor and other licenses, and concessions received from landlords. Conversions of other existing restaurants to Joe’s or Brick House typically require less capital investment than newly developed and built restaurants. During the past three fiscal years, we have converted three Macaroni Grill restaurants to Brick House restaurants, and three Joe’s restaurants to Brick House restaurants.

 

We target steady state new restaurant average unit volumes of approximately $3.9 million for Joe’s and $3.2 million for Brick House. We also enter into new restaurant development with planned cash-on-cash returns, which is defined as restaurant-level profit per restaurant divided by total build-out costs and cash pre-opening costs, to exceed our cost of capital. For 2017, we do not plan on opening any new restaurants.

 

Performance of any new restaurant location will usually differ from its originally targeted performance due to a variety of factors, and these differences may be material. New restaurants typically encounter significant guest traffic and high sales in their initial months, which may decrease over time. Furthermore, average sales volumes of our new restaurants are impacted by a range of risks and uncertainties beyond our control, including those described under the caption “Risk Factors.”

 

Purchasing and Distribution

 

Our dedicated purchasing team sources, negotiates and purchases all food supplies, operating supplies, and all restaurant equipment, furniture and fixtures. We have developed an extensive network of suppliers, with many relationships dating back over many years. We maintain relationships with many suppliers and have the ability to shift purchasing among suppliers, should more favorable terms become available in the market. In addition, we maintain multiple approved suppliers for all key components of our menu to mitigate risk and ensure supply. Suppliers are chosen based upon their ability to provide (i) a continuous supply of product that meets all safety and quality specifications, (ii) logistics expertise and freight management, (iii) product innovation, (iv) customer service, (v) transparency of business relationship and (vi) competitive pricing. Specified products are distributed to all restaurants through a national distribution company under a negotiated contract. This distributor delivers products directly to our restaurants either two or three times per week depending on restaurant requirements. Produce is purchased locally from an approved supplier network to maximize operating efficiencies and to ensure freshness and product quality.

 

Historically, our top selling menu items are based on Queen Crab, Snow Crab, Dungeness Crab, King Crab, whole lobster and shrimp, which collectively accounted for approximately 45% to 50% of our total food purchases in previous fiscal years. We have established long-term relationships with key seafood vendors and usually source product directly from producers to get advantageous product access at the most competitive prices. As market conditions warrant, we can use these relationships to lock in forward pricing for six to 18 months. Pricing agreements are entered into for a minimum volume of product and are structured around current and historical prices and the projected menu mix. We employ a team at the RSC that is solely responsible for actively managing these purchases.

 

In addition to using fixed price purchases, our Joe’s menu provides inherent flexibility to help manage food cost. Crab is deliberately placed center stage as a defining item to the Joe’s experience. Joe’s Steampot and Buckets of Crab offerings allow guests to choose between four varieties of crabs (Queen, Snow, Dungeness and King) and lobster. Each of these species has multiple fisheries and seasons. Besides the ability to direct guests to other crab varieties, Steampots, the top selling item on the menu, provide additional product flexibility. The Steampot is a variety of both shellfish and non-seafood items served together in a simmering pot that have individual ingredients that can be adjusted based on prevailing market prices and general input availability. We believe this strategy greatly reduces our reliance on individual inputs and is largely opaque to the guest. We have the ability to adjust menu prices very quickly, if necessary.

 

Crab is harvested during seasons and in accordance with regulations which are determined by various regulatory agencies. The master distributor fulfills restaurant orders by delivering crab, which our restaurants store until preparation for service to the guest. We believe our strong supplier relationships, coupled with the inherent flexibility of our menu, minimizes our exposure to seafood supply chain shortages and market price increases. Cost of sales as a percentage of revenues for fiscal year 2016, 2015 and 2014 were 32.7%, 31.4% and 32.5%, respectively. In fiscal year 2016, our top three suppliers accounted for approximately 31% of our total food purchases.  

 

Food Safety

 

We have food safety and quality assurance programs which are designed to ensure that our restaurant team members and managers are trained in proper food handling techniques. Our restaurants operate in various municipalities, which require us to have systems in place to adhere to various local standards. With the goal of achieving industry leadership in the area of restaurant food safety and sanitation, we have implemented a national operating standard, which includes comprehensive, unannounced inspections by a third party service provider. Restaurant managers receive feedback and coaching as an integral part of the semi-annual visits to each restaurant.

  

 

We require all of our suppliers to adhere to strict Hazard Analysis and Critical Control Points, or HACCP, quality control and environmental standards in the development, harvest, catch, and production of food products. We require chemical, physical and microbiological testing of seafood and other commodities for conformance to safety and quality requirements.

 

All potential suppliers are required to meet our specified minimum standards to achieve approved supplier status for the Ignite system.

 

Information Systems and Restaurant Reporting

 

All of our restaurants use computerized management information systems, which are designed to improve operating efficiencies, provide restaurant and RSC management with timely access to financial and operating data, and reduce administrative time and expense. Our integrated management information systems platform is a combination of in-house and third party systems. The major management information systems are divided by function:

 

•

restaurant point-of-sale;

 

•

restaurant back-of-house;

 

•

financial;

 

•

payroll/human resources; and

 

•

internal operational reporting.

  

All of our restaurants are equipped with computerized point-of-sale (“POS”) and back-of-house systems. We use a third-party vendor for our restaurant POS system. We have the ability to generate weekly and period-to-date operating results on a company-wide, brand-wide, regional and/or individual restaurant basis. Together, this allows us to closely monitor sales, food and beverage costs and labor and operating expenses at each of our restaurants. Our POS system runs on non-proprietary hardware with open architecture, an intuitive touch screen interface and integrated credit and gift card processing. Our back-of-house systems include a kitchen display system for all of our restaurants. These back-of-house systems also run on non-proprietary hardware with open architecture.

 

Our accounting department uses a standard, integrated reporting system to prepare period and year-to-date profit and loss statements, which provide a detailed analysis of sales and costs, and which are compared to budgets and to prior periods. Additionally, we outsource certain payroll functions and use a third-party human resources information system. This system supports standard payroll functions as well as recruiting, hiring, promotion, and benefits administration.

 

Enhancing the security of our financial data and other personal information remains a high priority for us. We continue to innovate and modernize our technology infrastructure to provide improved efficiency, control and security. Our ability to accept credit cards as payment in our restaurants and for online gift card orders depends on us remaining compliant with standards set by the PCI Security Standards Council (“PCI”). The standards set by PCI contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. We maintain security measures that are designed to protect and prevent unauthorized access to such information.

 

 Employees

 

As of January 2, 2017, we employed approximately 7,000 employees, of whom approximately 105 were RSC, executive management and multi-unit restaurant management personnel, approximately 430 were restaurant-level management personnel and the remainder were hourly restaurant personnel. During 2016, total employee counts ranged from 10,000 during peak summer season to 7,000 during the winter. None of our employees are covered by collective bargaining agreements, and we believe we have good relations with our employees.

 

Competition

 

The restaurant industry is fragmented and intensely competitive. We believe guests make their dining selection based on a variety of factors such as menu offering, taste, quality and price of food offered, perceived value, service, atmosphere, location and overall dining experience. Our competitive landscape includes nationally-branded restaurant chains as well as regional and local restaurant operators.

  

 

For Joe’s, our primary competitors in the casual seafood segment include Red Lobster, Bonefish Grill, Landry’s Seafood and Bubba Gump Shrimp Company. Joe’s is America’s only national crab house. Red Lobster is our only large-scale, nationally branded seafood competitor. Brick House competes in the bar and grill segment with brands such as BJ’s Restaurant and Brewhouse, Buffalo Wild Wings and Yard House. Both brands also compete with a broader range of other casual dining restaurant brands such as The Cheesecake Factory, Applebee’s, Chili’s, T.G.I. Friday’s, Texas Roadhouse and Outback Steakhouse.

 

Seasonality

 

There is a seasonal component to Joe’s business which typically peaks in the summer months (June, July and August) and slows in the winter months (November, December, January). Because of the seasonality of our system-wide 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.

 

Trademarks and Service Marks

 

Our registered trademarks and service marks include Joe’s Crab Shack^® and logo design, and Brick House Tavern + Tap^® and logo design. We have used or intend to use all the foregoing marks in connection with our restaurants and our franchised locations. We believe that our trademarks and service marks have significant value and are important to our brand-building efforts and identity and the marketing of our restaurant brand.

 

Licensing and Franchising Arrangements

 

We currently have three Joe’s franchised locations in operation in Dubai, U.A.E. 

 

Our franchising arrangements provide revenue to us through initial franchising fees, ongoing royalties and marketing fees and all start-up costs paid by the franchisee. Our franchising agreements also require and any future agreements will continue to require the franchisee to operate restaurants in accordance with certain defined operating procedures, adhere to our established menus and meet applicable quality, service, health and cleanliness standards.

 

We believe that international franchising presents an opportunity to provide higher returns on investment, while significantly reducing the capital and infrastructure required to own and operate international restaurants. Our international franchising program provides us with the capability to seek further expansion in international markets with our brands. We seek franchising partners that have adequate financial resources, the ability to build out a market, an established customer-facing interface and a track record of successful brand stewardship and awareness.

 

Government Regulation

 

We are subject to a variety of federal, state and local laws. Each of our restaurants is subject to permits, licensing and regulation by a number of government authorities, relating to alcoholic beverage control, health, safety, sanitation, building and fire codes, including compliance with the applicable zoning, land use and environmental laws and regulations. Difficulties in obtaining or failure to obtain required licenses or approvals could delay or prevent the development of a new restaurant in a particular area.

 

Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license that typically must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations affect many aspects of restaurant operations, including minimum age of patrons and employees, hours of operation, advertising, trade practices, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages.

 

We are subject in certain states to “dram shop” statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We carry liquor liability coverage as part of our comprehensive general liability insurance policy.

 

Our restaurant operations are also subject to federal and state laws governing employment (including the Fair Labor Standards Act of 1938 and the Immigration Reform and Control Act of 1986) regarding such matters as the minimum hourly wage, unemployment tax rates, sales tax and similar matters. Significant numbers of our service, food preparation and other personnel are paid at rates related to the federal minimum wage, which currently is $7.25 per hour. The tip credit allowance is the amount an employer is permitted to assume an employee receives in tips when the employer calculates the employee’s hourly wage for minimum wage compliance purposes. Increases in the federal or state minimum wage, directly or by either a decrease in the tip credit amount or an insufficient increase in the tip credit amount to match an increase in the federal minimum wage, would increase our labor costs.

  

 

In addition, our restaurants must comply with the applicable requirements of the ADA and related state accessibility statutes. Under the ADA and related state laws, we must provide equivalent service to disabled persons and make reasonable accommodation for their employment, and when constructing or undertaking significant remodeling of our restaurants, we must make those facilities accessible.

 

We are also subject to laws and regulations relating to nutritional content, nutritional labeling, product safety, menu labeling and other regulations imposed by the FDA, including the Food Safety Modernization Act. Regulations relating to nutritional labeling may lead to increased operational complexity and expenses and may impact our sales.

 

Litigation

 

Occasionally, we are a defendant or otherwise involved in lawsuits arising in the ordinary course of our business including claims resulting from “slip and fall” accidents, “dram shop” claims, construction-related disputes, employment-related claims, and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns. 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. As of the date of this report, we do not believe the potential exposure with respect to any of these pending lawsuits and claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows. Refer to “Legal Proceedings” in Item 3 for additional disclosure.

 

Available Information

 

We maintain a website with the address www.igniterestaurants.com. On our website, we make available at no charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports, and our proxy statement, as soon as reasonably practicable after these materials are filed with or furnished to the SEC. Our filings are also available on the SEC’s website at www.sec.gov. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The contents of our website are not incorporated by reference into this Form 10-K.

  

  

Item 1A. RISK FACTORS.

 

You should carefully consider the following factors, which could materially affect our business, financial condition or results of operations. You should read these Risk Factors in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our Consolidated Financial Statements and related notes in Item 8.

 

Risks Related to Our Business

 

We are currently seeking to sell the Company, but may not be successful in effecting a sale transaction.

 

On April 3, 2017, we announced that our Board of Directors, working together with our management team and financial advisors, has commenced a process to pursue the sale of our business, which could be sold as an entirety or through the separate sales of our two restaurant brands, Joe’s and Brick House. There can be no assurance that the process that we are undertaking will be successful. In addition, we cannot predict the terms or timing of any transaction that may be undertaken or whether any such transaction will result in any proceeds for the holders of our common stock.

 

We are currently pursuing certain strategic alternatives in an effort to improve our capital structure, but these efforts may not be successful.  

 

We are currently in discussions with our lenders in an effort to pursue various strategic alternatives. We can give no assurance that we will successfully execute any strategic alternatives we are currently pursuing or any others, and our ability to do so could be adversely affected by numerous factors, including changes in the economic or business environment, financial market volatility, the performance of our business, and the terms and conditions of the 2014 Credit Facility.

 

We may be required to file for protection in bankruptcy, even if we are successful in effecting a sale of our business or improving our capital structure. Any bankruptcy proceeding may result in the holders of our common stock receiving no proceeds.

 

It is possible that even a successful implementation of one of the strategic alternatives that we are pursuing will require us to make a filing for protection under Chapter 11 of the U.S. Bankruptcy Code. Our seeking relief under the U.S. Bankruptcy Code, whether or not such relief leads to a quick emergence from Chapter 11, could materially adversely affect the relationships between us and our existing and potential customers, employees, suppliers, and others, and could result in little or no recovery to our existing security holders.

 

You should not rely on historical results in our restaurant sales or our average unit volumes as an indication of our future results of operations because they may fluctuate significantly.

 

A number of factors have historically affected, and will continue to affect, our restaurant sales and average unit volumes, including, among other factors:

 

•

our ability to execute our business strategy effectively;

 

•

unusually strong initial sales performance by new restaurants;

 

•

competition;

 

•

consumer trends and confidence;

 

•

introduction of new menu items; and

 

•

regional and national macroeconomic conditions.

 

Our restaurant sales and average unit volumes may not increase at rates achieved in prior fiscal years or may decrease below levels achieved in recent years. Changes in our restaurant sales and average unit volumes could cause the price of our common stock to fluctuate substantially.

 

Macroeconomic conditions could adversely affect our ability to increase or maintain the sales and profits of existing restaurants or to open new restaurants.

 

Although the global economy has shown signs of recovery over the last several years, the United States may continue to suffer from depressed economic activity. Recessionary economic cycles, higher fuel and other energy costs, lower housing values, low consumer confidence, inflation, increases in commodity prices, higher interest rates, higher levels of unemployment, higher consumer debt levels, higher tax rates and other changes in tax laws or other economic factors that may affect discretionary consumer spending could adversely affect our revenues and profit margins and make opening new restaurants more difficult. Our guests may have lower disposable income and reduce the frequency with which they dine out. This could result in reduced guest traffic, reduced average checks or limitations on the prices we can charge for our menu items, any of which could reduce our sales and profit margins. In addition, many of our Joe’s restaurants are located in areas that we consider tourist or vacation destinations. Therefore, in those locations, we depend in large part on vacation travelers to frequent our Joe’s restaurants, and such destinations typically experience a reduction in visitors during economic downturns, thereby reducing the potential guests that could visit our restaurants. Also, businesses in the shopping vicinity in which some of our restaurants are located may experience difficulty as a result of macroeconomic trends or cease to operate, which could, in turn, further negatively affect guest traffic at our restaurants. All of these factors could have a material adverse impact on our results of operations and growth strategy.

 

  

If we fail to execute our growth strategy, which partially depends on our ability to open new restaurants that are profitable, our business could suffer.

 

Historically, one of the key means of achieving our growth strategies has been through opening new restaurants and operating those restaurants on a profitable basis. We expect this to continue to be an important element of our growth in the future. For fiscal year 2017, we do not plan to open any new restaurants but are targeting opening new restaurants in the future. Competition for prime locations is intense and the prices commanded for such locations have remained high. There is no guarantee that a sufficient number of locations will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan. Delays or failures in opening new restaurants, or achieving lower than expected sales in new restaurants, could materially adversely affect our growth strategy. Once we have identified suitable restaurant sites, our ability to open new restaurants successfully and on the development schedule we anticipate will also depend on numerous other factors, some of which are beyond our control, including, among other items, the following:

 

•

our ability to secure suitable new restaurant sites;

 

•

our ability to control the timing and costs of construction and development of new restaurants;

 

•

our ability to negotiate suitable lease terms;

 

•

our ability to secure required governmental approvals and permits in a timely manner and any changes in local, state or federal laws and regulations that adversely affect our costs or ability to open new restaurants;

 

•

the cost and availability of capital to fund construction costs and pre-opening expenses;

 

•

consumer acceptance of our new restaurants; and

 

•

limitations under our current and future credit facilities.

 

Although we target specified new restaurant average unit volumes, cash on cash returns and capital investment for our brands, new restaurants may not meet these targets. Any restaurant we open may not be profitable or achieve operating results similar to those of our existing restaurants. We may not be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and on our existing infrastructure, or be able to hire or retain the necessary management and operating personnel. Our existing restaurant management systems, financial and management controls and information systems may not be adequate to support our planned expansion. Our ability to manage our growth effectively will require us to continue to enhance these systems, procedures and controls and to locate, hire, train and retain management and operating personnel.

 

There is also the potential that some of our new restaurants will be located near areas where we have existing restaurants, thereby reducing the revenues of such existing restaurants.

 

Our success depends on our ability to compete with many other restaurants.

 

The restaurant industry is intensely competitive, and we compete with many well-established restaurant companies on the basis of food taste, price of products offered, guest service, atmosphere, location and overall guest experience. Our competitors include restaurant chains and individual restaurants that range from independent local operators to well-capitalized national and regional restaurant companies. Our Joe’s restaurants compete against other casual seafood restaurants, including national and regional chains and local seafood restaurants, as well as against casual dining restaurants that provide a different type of food. Our Brick House restaurants compete against casual restaurants in the bar and grill segment and restaurants in the casual dining segment.

 

Some of our competitors have substantially greater financial and other resources than we do, which may allow them to react to changes in the restaurant industry better than we can. Other competitors are local restaurants that in some cases have a loyal guest base and strong brand recognition within a particular geographic market. As our competitors expand their operations or as new competitors enter the industry, we expect competition to intensify. Should our competitors increase their spending on advertising and promotions, we could experience a loss of guest traffic to our competitors. Also, if our advertising and promotions become less effective than those of our competitors, we could experience a material adverse effect on our results of operations. We also compete with other restaurant chains and other retail businesses for quality site locations, management and hourly employees.

  

 

If we fail to establish and maintain effective internal controls over financial reporting and disclosure controls and procedures, we may have material misstatements in our financial statements and we may not be able to report our financial results in a timely manner.

 

As a public company, we are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, so that our management can certify as to the effectiveness of our internal controls over financial reporting. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal controls 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 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 of 1934, as amended, or 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.

 

 There is no guarantee that internal control deficiencies will not be identified in the future. Any future failure in our controls could cause us to fail to meet our reporting obligations or result in a misstatement of our accounts and disclosures that could result in a material misstatement to our annual or interim consolidated financial statements in future periods that would not be prevented or detected. If our financial statements are not timely or accurate, then, in addition to the risks described above, investors may lose confidence in our reported information and our ability to prevent fraud, and we could lose our ability to access capital markets.

  

 Changes in food and supply costs, including the cost of crab, could adversely affect our results of operations.

 

Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. Operating margins for our restaurants are subject to changes in the price and availability of food commodities, including crab, shrimp, lobster and other seafood. In fiscal year 2016, crab, lobster and shrimp accounted for approximately 49% of our total food purchases. Any increase in food prices, particularly for these food items, could adversely affect our operating results. In addition, we are susceptible to increases in food costs as a result of factors beyond our control, such as weather conditions (including hurricanes), oil spills, fisherman strikes, food safety concerns, costs of distribution, product recalls and government regulations. Furthermore, the introduction of or changes to tariffs on seafood, such as imported crab and shrimp or other food products, could increase our costs and possibly impact the supply of those products. We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu items and prices, and a failure to do so could adversely affect our operating results. In addition, because our menu items are moderately priced, we may not seek to or be able to pass along price increases to our guests. If we adjust pricing there is no assurance that we will realize the full benefit of any adjustment due to changes in our guests’ menu item selections and guest traffic.

 

Brick House is a newer and still evolving brand and our plans to expand Brick House may not be successful.

 

While Joe’s and Brick House are subject to the risks and uncertainties described herein, there is an enhanced level of risk and uncertainty related to the expansion of Brick House, our most recently developed brand. While Brick House, since its founding in 2008, has grown to 25 locations as of January 2, 2017, it is still evolving and has not yet proven its long-term growth potential.

 

Initially, we opened Brick House restaurants across a broad range of geographies with the intent of optimizing the brand prior to a continued build out. While we continue to incorporate key insights into our new restaurant rollout plans, we believe the brand is now positioned for expansion. However, there can be no assurance that the enhancements we intend to implement as part of the brand optimization process will be successful or that additional new restaurant growth will occur. Brick House will be subject to the risks and uncertainties that accompany any emerging restaurant brand. If Brick House fails to expand and/or continue generating profits, our operating results could suffer.

  

 

We may incur costs resulting from breaches of security of confidential guest information related to our electronic processing of credit and debit card transactions.

 

 The majority of our restaurant sales are by credit or debit cards. Recently, a number of other retailers, including other restaurant chains, have experienced security breaches in which credit and debit card information has been stolen. Although we use secure private networks to transmit confidential information, third parties may have the technology or know-how to breach the security of the guest information transmitted in connection with credit and debit card sales, and our

security measures and those of technology vendors may not effectively prohibit others from obtaining improper access to this information. If a person is able to circumvent these security measures, he or she could destroy or steal valuable information or disrupt our operations. We may, in the future, become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings relating to these types of incidents. Any such claim or proceeding could cause us to incur significant unplanned expenses, which could have an adverse impact on our financial condition, results of operations and cash flows. Further, adverse publicity resulting from these allegations could significantly harm our reputation and may have a material adverse effect on us and our restaurants.

 

Food safety and food-borne illness concerns may have an adverse effect on our business.

 

Food safety is a top priority, and we dedicate substantial resources to ensure that our guests enjoy safe, quality food products. However, food-borne illnesses, such as salmonella, E. coli, hepatitis A, trichinosis or “mad cow disease,” and food safety issues have occurred in the food industry in the past, and could occur in the future. In addition, publicity regarding certain illnesses and contaminations related to seafood, including high levels of mercury or other carcinogens, oil contaminations, vibrio vulnificus and the Norwalk virus could affect consumer preferences and the consumption of seafood. Any report or publicity linking us to instances of food-borne illness or other food safety issues, including food tampering or contamination, could adversely affect our brands and reputation as well as our revenues and profits. Even instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our competitors could result in negative publicity about the food service industry or seafood restaurants generally and adversely impact our sales.

 

In addition, our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents could be caused by factors outside of our control and that multiple locations would be affected rather than a single restaurant. Although we inspect food products when they are delivered to us, we cannot assure that all food items are properly maintained during transport throughout the supply chain and that our employees will identify all products that may be spoiled and should not be used in our restaurants. New illnesses resistant to any precautions may develop in the future, or diseases with long incubation periods could arise, such as “mad cow disease,” which could give rise to claims or allegations on a retroactive basis. In addition, our industry has long been subject to the threat of food tampering by suppliers, employees or guests, such as the addition of foreign objects in the food that we sell. Reports, whether or not true, of injuries caused by food tampering have in the past severely injured the reputations and brands of restaurant chains in the quick service restaurant segment and could affect us in the future as well. If our guests become ill from food-borne illnesses, we could also be forced to temporarily close some restaurants. Furthermore, any instances of food contamination, whether or not at our restaurants, could subject us or our suppliers to a food recall pursuant to the Food and Drug Administration Food Safety Modernization Act.

 

Changes in consumer preferences could harm our performance.

 

Consumer preferences often change rapidly and without warning, moving from one trend to another among many products or retail concepts. We also depend on trends regarding away-from-home dining. Consumer preferences towards away-from-home dining or certain food products might shift as a result of, among other things, health concerns or dietary trends related to cholesterol, carbohydrate, fat and salt content of certain food items, including crab or other seafood items, in favor of foods that are perceived as more healthy. Changes in consumer preference away from the current menu offerings of our restaurant brands would have a material adverse effect on our business. Negative publicity over the health aspects of such food items may adversely affect demand for our menu items and could result in lower guest traffic, sales and results of operations.

 

If we fail to continue to develop and maintain our restaurant brands, our business could suffer.

 

We believe that maintaining and developing our restaurant brands are critical to our success and our growth strategy, and that the importance of brand recognition is significant as a result of competitors offering products similar to our products. We have made significant marketing expenditures to create and maintain brand loyalty as well as to increase awareness of our brands. If our brand-building strategy is unsuccessful, these expenses may never be recovered, and we may be unable to increase our future sales or implement our business strategy.

  

 

Any incident that erodes consumer affinity for our brands could significantly reduce their respective values and damage our business. If guests perceive or experience a reduction in food quality, service or ambiance, or in any way believe we failed to deliver a consistently positive experience, our brand value could suffer and our business may be adversely affected.

 

The impact of new restaurant openings could result in fluctuations in our financial performance.

 

New restaurants typically experience an adjustment period before sales levels and operating margins normalize. When our new restaurants open, they typically encounter startup costs, but also significant guest traffic and, therefore, high sales in their initial months. However, over time, these new restaurants may experience a decrease in guest traffic and sales compared to their opening months. Accordingly, sales achieved by new or converted restaurants may not be indicative of future operating results. Also, due to the foregoing factors, results for any one fiscal quarter are not necessarily indicative of results to be expected for any other fiscal quarter or for a full fiscal year.

 

We rely heavily on certain vendors, suppliers and distributors, which could adversely affect our business.

 

Our ability to maintain consistent price and quality throughout our restaurants depends in part upon our ability to acquire specified food products and supplies in sufficient quantities, especially with respect to shellfish such as crab. While our seafood offerings are generally caught from government regulated fisheries, crab and other fish are caught in the wild, which could cause volatility in supply. In some cases, we may have only one supplier or a limited number of suppliers for a particular food product. We cannot make assurances regarding the continued supply of our food items since we do not have control over the businesses of our suppliers. Furthermore, such food items are perishable, and we cannot assure that such items will be delivered by such third parties in appropriate condition for sale in our restaurants. In addition, we rely on one primary distributor to deliver products to our restaurants. If any of these vendors, our other suppliers or our distributor is unable to fulfill their obligations, or if we are unable to find replacement providers in the event of a supply or service disruption, we could encounter supply shortages and incur higher costs to secure adequate supplies, which would materially harm our business.

 

In addition, we use various third-party vendors to provide, support and maintain most of our management information systems. We also outsource certain payroll functions to business process service providers. Such third-party vendors may not be able to handle the volume of activity or perform the quality of service necessary for our operations. The failure of such vendors to fulfill their support and maintenance obligations or service obligations could disrupt our operations. Furthermore, the outsourcing of certain of our business processes could negatively impact our internal control processes.

 

Information technology system failures or breaches of our network security could interrupt our operations and adversely affect our business.

 

We rely on our computer systems and network infrastructure across our operations, including point-of-sale processing at our restaurants. Our operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses, worms and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us to litigation or actions by regulatory authorities. While we utilize our personnel, as well as a variety of hardware and software, to monitor our systems, controls, firewalls and encryption and intend to maintain and upgrade our security technology and operational procedures to prevent damage, breaches or other disruptive problems, there can be no assurance that these security measures will be successful.

 

Approximately 42% of our restaurants are located in Texas, California and Florida and, as a result, we are sensitive to economic and other trends and developments in those states.

 

As of January 2, 2017, 58 of our 137 restaurants were spread across Texas (34), California (11) and Florida (13). As a result, we are particularly susceptible to adverse trends and economic conditions in those states, including their labor markets. In addition, given our geographic concentration in these states, negative publicity regarding any of our restaurants in such states could have a material adverse effect on our business and operations, as could other occurrences in these regions such as local competitive changes, changes in consumer preferences, local strikes, new or revised laws or regulations, energy shortages or changes in energy prices, droughts, hurricanes, fires, earthquakes, floods or other natural disasters.

 

In addition, many of our restaurants in California and Florida are located in areas that we consider tourist or vacation destinations. Therefore, we depend in large part on vacation travelers to frequent our restaurants in these locations. Any change in consumer preferences away from California and Florida as their choice of destination could have a material adverse effect on our business and results of operation.

  

 

Allergy concerns relating to crab and other shellfish items could affect consumer preferences and could negatively impact our results of operations.

 

Many of our food items contain crab or other shellfish items. In recent years, there has been negative publicity concerning shellfish and other food allergies. This negative publicity, as well as any other negative publicity concerning food products we serve, may adversely impact demand for our food and could result in a decrease in guest traffic to our restaurants. Owing to the severe nature of certain shellfish allergies, shellfish have recently been identified by the U.S. Food and Drug Administration as a significant allergen. The introduction of seafood and shellfish labeling regulations to the restaurant industry could cause us to modify the operations or atmosphere of our restaurants, which could adversely affect our business and brand differentiation.

 

Health concerns arising from outbreaks of viruses may have a material adverse effect on our business.

 

The United States and other countries have experienced, and may experience in the future, outbreaks of viruses, such as H1N1, Ebola, avian influenza, SARS and various other forms of influenza. To the extent that a virus is transmitted by human-to-human contact, our employees or guests could become infected, or could choose to, or be advised to avoid gathering in public places and avoid eating in restaurant establishments, which could adversely affect our business.

 

We depend upon our executive officers and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.

 

We have recently announced changes in our senior management, with Robert S. Merritt resigning as our Chief Executive Officer following the filing of this Annual Report on Form 10-K and Jonathan Tibus being elected to that position, and Brad A. Leist, currently our Chief Financial Officer, being elected as our Chief Administrative Officer. There can be no assurance that the newly appointed officers will be effective in these roles. The loss of the services of any of our executive officers could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis. In addition, any such departure could be viewed in a negative light by investors and analysts, which could cause our common stock price to decline. As our business expands, our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified executive-level personnel. Our inability to attract and retain qualified executive officers in the future could impair our growth and harm our business.

  

We are dependent on attracting and retaining qualified employees while also controlling labor costs.

 

We are dependent upon the availability of qualified restaurant personnel. Our future performance will depend on our ability to attract, motivate and retain our Regional Vice Presidents, Directors of Operations and restaurant-level managers. Competition for these employees is intense. The loss of the services of members of our restaurant management team or the inability to attract additional qualified personnel as needed could materially harm our business.

 

In addition, availability of staff varies widely from restaurant to restaurant. If we experience high levels of restaurant management and staff turnover, we could suffer higher direct costs associated with recruiting, training and retaining replacement personnel. Moreover, we could suffer from significant indirect costs, including restaurant disruptions due to management changeover and potential delays in new restaurant openings or adverse guest reactions to inadequate guest service levels due to staff shortages. Competition for qualified employees may exert upward pressure on wages paid to attract such personnel, resulting in higher labor costs, together with greater recruitment and training expense.

 

We must comply with the Fair Labor Standards Act and various federal and state laws governing employment matters, such as minimum wage, tip credit allowance, overtime pay practices, child labor laws and other working conditions and citizenship requirements. Federal, state and municipal laws may also require us to provide new or increased levels of employee benefits to our employees, many of whom are not currently eligible for such benefits. Many of our employees are hourly workers whose wages are likely to be affected by an increase in the federal or state minimum wage or changes to the tip credit allowance. Proposals have been made, and continue to be made, at federal and state levels to increase minimum wage levels, including changes to the tip credit allowance. An increase in the minimum wage or a change in the tip credit allowance may require an increase or create pressure to increase the pay scale for our employees. In addition, while we take certain measures to operate our restaurants in strict compliance with federal immigration regulations and the requirements of certain states, some of our employees, especially given the location of many of our restaurants, may fail to meet federal work authorization or residency requirements, which could result in disruptions in our work force, sanctions against us and adverse publicity. A shortage in the labor pool or other general inflationary pressures or changes could also increase our labor costs. A shortage in the labor pool could also cause our restaurants to be required to operate with reduced staff, which could negatively impact our ability to provide adequate service levels to our guests.

  

 

Among the federal laws with which we must comply is the National Labor Relations Act that applies to the election by employees to be represented by a labor organization for purposes of collective bargaining over wages, hours, working conditions and terms and conditions of employment. Currently, none of our employees are represented by labor organizations for these purposes. However, potential union representation and collective bargaining agreements may result in increased labor costs that can have an impact on competitiveness. Labor disputes, as well, may precipitate strikes and picketing that may have an impact on business, including guest patronage and supplier deliveries.

 

Our existing senior secured credit facility contains financial covenants, negative covenants and other restrictions and failure to comply with these requirements could cause the related indebtedness to become due and payable and limit our ability to incur additional debt.

 

The lenders’ obligation to extend credit under our existing senior secured credit facility depends upon our maintaining certain financial covenants. In particular, our senior secured credit facility requires us to maintain a leverage ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization expense, plus certain additional addbacks more particularly specified in the credit agreement), an interest coverage ratio, and capital expenditure limits. The leverage and interest coverage ratios are computed at the end of each fiscal quarter for the most recent 12-month period. The facility 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 on June 28, 2016 through September 26, 2016, (vii) 4.0x on 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 (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. Failure to adhere to these ratios could result in an acceleration of outstanding amounts under the credit facility and restrict us from borrowing amounts under the facility to fund our future liquidity requirements. In addition, our credit facility contains certain negative covenants, which, among other things, limit our ability to:

 

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incur additional indebtedness;

 

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create liens on our subsidiaries’ assets;

 

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make certain investments, guarantees or loans;

 

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merge, consolidate or otherwise dispose of assets other than in the ordinary course of business;

 

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make acquisitions;

 

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pay dividends or make other restricted payments;

 

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enter into sale-leaseback transactions; and

 

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enter into transactions with our or our lenders’ affiliates.

 

Our ability to make scheduled payments and comply with financial covenants will depend on our operating and financial performance, which in turn, is subject to prevailing economic conditions and to other financial, business and other factors beyond our control described herein. Please see “Going Concern” disclosures in Liquidity and Capital Resources in Item 7. Our obligations and the guarantees under the senior secured credit facility are secured by substantially all of our and such subsidiaries’ present and future assets and a perfected first priority lien on the capital stock or other equity interests of our direct and indirect subsidiaries.

 

 

We have entered into a forbearance agreement with certain of the lenders and the Administrative Agent under the 2014 Credit Facility under which they have agreed to forbear from taking any action to enforce their rights and remedies in connection with certain defaults, events of default, and anticipated events of default. Should we be in default of the forbearance agreement or should the required lenders and the Administrative Agent not agree to further extend such forbearance agreement, the Administrative Agent and lenders would be free to exercise any rights and remedies with respect to such defaults and events of default pursuant to the terms of the 2014 Credit Facility.

 

On March 31, 2017, we entered the Forbearance Agreement. The Forbearance Agreement is effective until the earliest of (i) May 9, 2017, or (ii) the occurrence or existence of any default or event of default other than defaults, events of default and anticipated events of default that are subject to the Forbearance Agreement. Should we be in default of the Forbearance Agreement or should the required lenders and the Administrative Agent not agree to further extend such Forbearance Agreement, the Administrative Agent and lenders would be free to exercise any rights and remedies with respect to such defaults and events of defaults pursuant to the terms of the 2014 Credit Facility which could include accelerating the maturity of all our indebtedness. If our lenders accelerate the maturity of our indebtedness, we will not have sufficient liquidity to repay the entire balance of our outstanding borrowings.

 

We may need additional capital in the future, and it may not be available on acceptable terms.

 

The development of our business may require significant additional capital in the future to fund our operations and growth, among other activities. We have historically relied upon cash generated by our operations and our senior secured credit facility to fund our operations. In the future, we intend to rely on funds from operations and, if necessary, our senior secured credit facility. We may also need to access the debt and equity capital markets. There can be no assurance, however, that these sources of financing will be available on acceptable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance, investor sentiment and our ability to incur additional debt in compliance with agreements governing our then-outstanding debt. These factors may make the timing, amount, terms or conditions of additional financings unattractive to us. If we are unable to generate sufficient funds from operations or raise additional capital, our operations could be impacted.

 

As of January 2, 2017, we had approximately $121.3 million of total indebtedness outstanding and available borrowing capacity of $13.9 million under our credit agreement. We may not be able to refinance our indebtedness prior to or at its maturity on acceptable terms or at all.

 

Legal complaints or litigation may impact our business.

 

Occasionally, restaurant guests and/or employees file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to our restaurants, or that we have problems with food quality or operations. We are also subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims and claims alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters. We have been subject to class action lawsuits related to these matters and could be subject to additional class action lawsuits in the future. In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace conditions, employment and similar matters. A number of these industry lawsuits have resulted in the payment of substantial damages by defendants. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their guests.

 

Regardless, however, of whether any claim brought against us in the future is valid or whether we are liable, such a claim would be expensive to defend and may divert time, money and other valuable resources away from our operations and, thereby, hurt our business.

  

 

We are subject to certain state and local “dram shop” statutes, which may subject us to uninsured liabilities. These statutes generally allow a person injured by an intoxicated person to seek to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. In the past, after allegedly consuming alcoholic beverages at our restaurants, there have been isolated instances where certain individuals have been killed or injured or have killed or injured third parties. Because these statutes may allow a plaintiff to seek punitive damages, which may not be fully covered by insurance, this type of action could have an adverse impact on our financial condition and results of operations. A judgment in such an action significantly in excess of our insurance coverage could adversely affect our financial condition, results of operations or cash flows. Further, adverse publicity resulting from any such allegations may adversely affect us, our restaurant brands, and our restaurants taken as a whole.

 

Failure to obtain and maintain required licenses and permits or to comply with alcoholic beverage or food control regulations could lead to the loss of our liquor and food service licenses and, thereby, harm our business.

 

The restaurant industry is subject to various federal, state and local government regulations, including those relating to the sale of food and alcoholic beverages. Such regulations are subject to change from time to time. The failure to obtain and maintain these licenses, permits and approvals could adversely affect our operating results. Typically, licenses must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses and approvals could adversely affect our existing restaurants and delay or result in our decision to cancel the opening of new restaurants, which would adversely affect our business.

 

In fiscal year 2016, approximately 13% of Joe’s gross revenues and 40% of Brick House gross revenues were attributable to the sale of alcoholic beverages. Our alcoholic beverage sales may increase in the future. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on-premises and to provide service for extended hours and on Sundays. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, trade practices, wholesale purchasing, other relationships with alcohol manufacturers, wholesalers and distributors, inventory control and handling, storage and dispensing of alcoholic beverages. In the past, we have been subject to fines for violations of alcoholic beverage control regulations. Any future failure to comply with these regulations and obtain or retain liquor licenses could adversely affect our results of operations and overall financial condition.

 

We are subject to many federal, state and local laws with which compliance is both costly and complex.

 

The restaurant industry is subject to extensive federal, state and local laws and regulations, including the recently enacted comprehensive health care reform legislation and those relating to building and zoning requirements and the preparation and sale of food. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act of 1938, the Immigration Reform and Control Act of 1986 and applicable requirements concerning the minimum wage, overtime, family leave, tip credits, working conditions, safety standards, immigration status, unemployment tax rates, workers’ compensation rates and state and local payroll taxes), federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990 (the “ADA”).

 

Minimum employee health care coverage mandated by state or federal legislation, such as the federal healthcare reform legislation that became law in March 2010 (known as the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010, or the PPACA), could significantly increase our employee health benefit costs or require us to alter the benefits we provide to our employees. To date, we have not experienced material costs related to such legislation. However, due to the phased-in nature of the implementation and the lack of interpretive guidance, it is difficult to determine at this time what impact the health care reform legislation will have on our financial results. Possible adverse effects could include increased costs, exposure to expanded liability and requirements for us to revise the ways in which we provide healthcare and other benefits to our employees. Providing more extensive health insurance benefits to employees than the health insurance benefits we currently provide and to a potentially larger proportion of our employees, or the payment of penalties if the specified level of coverage is not provided at an affordable cost to employees, could have a material adverse effect on our results of operations and financial position. In addition, these laws require employers to comply with a significant number of new reporting and notice requirements from the Departments of Treasury, Labor and Health and Human Services, and we will have to develop systems and processes to track the requisite information and to comply with the reporting and notice requirements. Our suppliers also may be affected by higher minimum wage and benefit standards, which could result in higher costs for goods and services supplied to us.

  

 

The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and therefore have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws, including the ADA, could require us to expend significant funds to make modifications to our restaurants if we failed to comply with applicable standards. Compliance with all of these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.

 

New information or attitudes regarding diet and health could result in additional menu labeling laws and changes in regulations and consumer eating habits that could adversely affect our results of operations.

 

Regulations and consumer eating habits may continue to change as a result of new information and attitudes regarding diet and health. These changes may include regulations that impact the ingredients and nutritional content of our menu items. The federal government as well as a number of states (including California), counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to make certain nutritional information available to guests (including caloric, sugar, sodium and fat content) or have enacted legislation prohibiting the sales of certain types of ingredients in restaurants. In December 2014, the U.S. Food and Drug Administration (FDA) published its final rules on menu labeling, which implement section 4205 of the PPACA, to establish requirements for the nutrition labeling of standard menu items at restaurants with 20 or more locations. Under the rule, which is currently scheduled to become effective on May 5, 2017, calorie information must be provided clearly and conspicuously next to the listed standard menu item on a menu or menu board. In addition to calorie information, each menu or menu board must prominently include a succinct statement concerning suggested caloric intake. Upon request, covered establishments must provide information about the total calories, calories from fat, total fat, saturated fat, trans fat, cholesterol, sodium, total carbohydrates, fiber, sugars, and protein in their standard menu items. The final rule contains detailed requirements for providing calorie and nutrition information and determining nutrient content. The effect of such labeling requirements on consumer choices, if any, is unclear at this time, and the implementation of such requirements may be costly.

 

The success of our restaurant operations depends, in part, upon our ability to effectively respond to changes in consumer health and disclosure regulations and to adapt our menu offerings to fit the dietary needs and eating habits of our guests without sacrificing flavor. If consumer health regulations or consumer eating habits change significantly, we may be required to modify or discontinue certain menu items. To the extent we are unable to respond with appropriate changes to our menu offerings, it could materially affect guest traffic and our results of operations. Furthermore, a change in our menu could result in a decrease in guest traffic. 

 

We may be subject to increased scrutiny as the result of growing public concern over seafood mislabeling.

 

Although we source our seafood from third-party food suppliers and distributors that we believe accurately identify and label the seafood items that they sell and inspect food products when they are delivered to us, we do not conduct DNA sampling on the products we purchase. Therefore, we cannot assure that the seafood items we purchase from third-parties have been accurately labeled, which could cause us to inadvertently mislabel such items in our restaurants. Recent studies have shown a number of instances of fish products being inaccurately labeled as other species in retail outlets, including grocery stores and restaurants. Although none of our restaurant brands were included in these studies, negative publicity regarding seafood mislabeling, even when not related to our restaurants, could affect consumer preferences and the consumption of seafood and consequently impact our sales. In addition, if any incident of seafood mislabeling were to occur at one of our restaurants, it could erode consumer affinity for our brands and significantly reduce their respective values and damage our business. Furthermore, public concern over seafood mislabeling could result in new regulations relating to the sourcing and labeling of seafood products. For instance, a bill was introduced to the U.S. Congress in July 2012 that was intended to address seafood fraud by requiring fish suppliers and restaurants to provide more information to their customers about the seafood they sell. Although such bill was not enacted, future bills may be proposed and enacted and compliance with any such regulations could cause us to incur additional costs.

 

We occupy most of our restaurants under long-term non-cancelable leases which may obligate us to perform even after a restaurant closes, and we may be unable to renew leases at the end of their terms.

 

All of our restaurant locations are leased under individual lease agreements. Leases are noncancelable and in general, have 10- to 15-year terms, with 3- to 5-year extensions. If we were to close or fail to open a restaurant at a location we lease, we would generally remain committed to perform our obligations under the applicable lease, which could include, among other things, payment of the base rent for the balance of the lease term. Our obligation to continue making rental payments and fulfilling other lease obligations in respect of leases for closed or unopened restaurants could have a material adverse effect on our business and results of operations. Alternatively, at the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without substantial additional cost, if at all. If we cannot renew such a lease we may be forced to close or relocate a restaurant, which could subject us to construction and other costs and risks. If we are required to make payments in respect of leases for closed or unopened restaurants or if we are unable to renew our restaurant leases, our business and results of operations could be adversely affected.

  

 

The impact of negative economic factors, including the availability of credit, on our landlords, developers and surrounding tenants could negatively affect our financial results.

 

Negative effects on our existing and potential landlords due to the inaccessibility of credit and other unfavorable economic factors may, in turn, adversely affect our business and results of operations. If our landlords are unable to obtain financing or remain in good standing under their existing financing arrangements, they may be unable to provide construction contributions or satisfy other lease obligations owed to us. In addition, if our landlords are unable to obtain sufficient credit to continue to properly manage their retail sites, we may experience a drop in the level of quality of such retail centers. Our development of new restaurants may also be adversely affected by the negative economic factors affecting developers and potential landlords. Developers and/or landlords may try to delay or cancel recent development projects (as well as renovations of existing projects) due to the instability in the credit markets and recent declines in consumer spending, which could reduce the number of appropriate locations available that we would consider for our new restaurants. If any of the foregoing affect any of our landlords, developers and/or surrounding tenants, our business and results of operations may be adversely affected. To the extent our restaurants are part of a larger retail project or tourist destination, our guest traffic could be negatively impacted by economic factors affecting our surrounding tenants.

 

We have recorded impairment charges in past periods and may record additional impairment charges in future periods.

 

We periodically evaluate possible impairment of our intangible assets, as well as other fixed assets at the individual restaurant-level, and record an impairment loss whenever we determine that the fair value of these assets is less than their carrying value. We also periodically evaluate the criteria we use as an indication of asset impairment. As a result of our annual impairment testing, we recorded aggregate impairment charges of $23.5 million, $9.4 million and $1.8 million in fiscal year 2016, 2015 and 2014, respectively, related to Joe’s long-lived assets and impairment charges of $2.7 million in fiscal year 2016 related to Brick House’s long-lived assets. If we are unable to improve the performance of our restaurants or if we experience deteriorating results at some of our restaurants, we could recognize additional impairment charges.

 

Our current insurance may not provide adequate levels of coverage against claims.

 

 We currently maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business and results of operations. In addition, we self-insure a significant portion of expected losses under our workers’ compensation, general liability and property insurance programs. Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves for these losses could result in materially different amounts of expense under these programs, which could have a material adverse effect on our financial condition, results of operations and liquidity.

 

Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.

 

Our registered trademarks and service marks include Joe’s Crab Shack and the design, our stylized logos, and Brick House Tavern + Tap and the design, which are protected under applicable intellectual property laws. We believe that our trademarks and other proprietary rights are important to our success and our competitive position, and, therefore, we devote resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, may not be enough to prevent unauthorized use or imitation by others, which could harm our image, brand or competitive position. If we commence litigation to enforce our rights, we will incur significant legal fees.

 

We cannot assure you that third parties will not claim infringement by us of their proprietary rights in the future. Any such claim, whether or not it has merit, could be time-consuming and distracting for executive management, result in costly litigation, cause changes to existing menu items or delays in introducing new menu items, or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.

  

 

Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.

 

Our quarterly operating results may fluctuate significantly because of several factors, including:

 

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the timing of new restaurant openings and related expense;

 

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restaurant operating costs and expenses for our newly-opened restaurants, which are often materially greater during the first several months of operation than thereafter;

 

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labor availability and costs for hourly and management personnel;

 

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profitability of our restaurants, especially in new markets;

 

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changes in interest rates;

 

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increases and decreases in average unit volumes and comparable restaurant sales;

 

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impairment of long-lived assets and any loss on restaurant closures;

 

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macroeconomic conditions, both nationally and locally;

 

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negative publicity relating to the consumption of seafood or other products we serve;

 

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changes in consumer preferences and competitive conditions;

 

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expansion to new markets;

 

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increases in infrastructure costs; and

 

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fluctuations in commodity prices.

 

 

Our business is also subject to seasonal fluctuations. Our revenues are typically highest in the summer months (June, July and August) and lowest in the winter months (November, December and January) with respect to Joe’s restaurants. As a result, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality and the factors discussed above. Accordingly, results for any one fiscal quarter are not necessarily indicative of results to be expected for any other fiscal quarter or for any fiscal year and comparable restaurant sales for any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. In that event, the price of our common stock would likely decrease.

 

 Significant adverse weather conditions and other disasters could negatively impact our results of operations.

 

 Adverse weather conditions and acts of god, such as regional winter storms, fires, floods, hurricanes, tropical storms and earthquakes, and other disasters, such as oil spills or other incidents involving hazardous materials, could negatively impact our results of operations. In particular, a number of our restaurants are located in states which are particularly susceptible to hurricanes, tropical storms, flooding and earthquakes.

 

Any strategic transactions or initiatives that we consider in the future may have unanticipated consequences that could harm our business and our financial condition.

 

From time to time, we evaluate potential mergers, acquisitions of restaurants joint ventures, dispositions of existing brands or other strategic initiatives to acquire or develop additional restaurant brands. To successfully execute any acquisition or development strategy, we will need to identify suitable acquisition or development candidates, negotiate acceptable acquisition or development terms and obtain appropriate financing. Any acquisition, disposition or future development that we pursue, whether or not successfully completed, may involve risks, including:

 

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material adverse effects on our operating results, particularly in the fiscal quarters immediately following the acquisition or development as the restaurants are integrated into our operations;

 

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risks associated with entering into new domestic markets or conducting operations where we have no or limited prior experience, including international markets;

 

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risks inherent in accurately assessing the value, future growth potential, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates and newly developed restaurant brands, and our ability to achieve projected economic and operating synergies;

  

 

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negative impacts on the reputation of our current brands; and

 

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the diversion of management’s attention from other business concerns.

 

We are party to a franchise relationship and may pursue additional franchise relationships, and any current or future franchisees could take actions that could be harmful to our business.

 

We currently have three Joe’s franchised locations in operation in Dubai, U.A.E. We may pursue additional international franchise relationships for both of our brands in the future. The addition of operations in foreign jurisdictions through franchising involves additional risks to us, including complying with foreign regulatory requirements and general economic and political conditions in such foreign markets, and we may be unsuccessful in complying with such requirements. Our ability to pursue future franchise relationships depends in part upon our ability to find and attract quality franchisees. Any franchisees will be contractually obligated to operate their restaurants in accordance with our standards and all applicable laws. However, although we will attempt to properly train and support any franchisees, franchisees are independent third parties that we will not control, and the franchisees own, operate and oversee the daily operations of their restaurants. As a result, the ultimate success and quality of any franchised restaurant rests with the franchisee. Adverse events beyond our control, such as quality issues related to a food product or a failure to maintain quality standards at a franchised restaurant, could negatively impact our brand, business and results of operations. In addition, the failure of any future franchisees or any of their restaurants to remain financially viable could result in their failure to pay royalties owed to us.

 

We have incurred and may continue to incur increased costs as a result of operating as a public company.

 

Ongoing compliance with the various reporting and other requirements applicable to public companies require considerable time and attention of management, particularly if we are no longer a smaller reporting company or an “emerging growth company.”

 

Congress enacted the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” on April 5, 2012. Pursuant to the provisions of the JOBS Act, we qualify as an “emerging growth company.” Section 102 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. However, we chose to “opt out” of such extended transition period, and as a result, we comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period was irrevocable.

 

For as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” Some investors may find our common stock less attractive if we continue to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

We anticipate that we will remain an “emerging growth company” until the earlier of the end of the fiscal year during which we have total annual gross revenues of $1.0 billion or more and May 10, 2017.

 

 

Risks Related to Ownership of Our Common Stock

 

Concentration of ownership by J.H. Whitney VI may prevent new investors from influencing significant corporate decisions.

 

J.H. Whitney VI owns, in the aggregate, approximately 66% of our outstanding common stock. As a result, J.H. Whitney VI is able to exercise control over all matters requiring stockholder approval, including the election of directors, amendment of our amended and restated certificate of incorporation and approval of significant corporate transactions and will continue to have significant control over our management and policies. In addition, one of the six members of our board of directors is a principal of J.H. Whitney. J.H. Whitney VI can take actions that have the effect of delaying or preventing a change in control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them. The concentration of voting power with J.H. Whitney VI may have an adverse effect on the price of our common stock. The interests of J.H. Whitney VI may not be consistent with your interests as a stockholder. J.H. Whitney VI is also able to transfer control of us to a third-party by transferring their common stock, which would not require the approval of our board of directors or our other stockholders.

 

Our amended and restated certificate of incorporation provides that the doctrine of corporate opportunity does not apply against J.H. Whitney, or any of our directors who are employees of or affiliated with J.H. Whitney, in a manner that would prohibit them from investing or participating in competing businesses. To the extent J.H. Whitney-affiliated funds invest in such other businesses, they may have differing interests than our other stockholders. For example, J.H. Whitney-affiliated funds may choose to own other restaurant brands through other investments, which may compete with our brands.

 

We are a “controlled company” within the meaning of The NASDAQ Stock Market rules, and, as a result, we rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

 

J.H. Whitney VI owns more than 50% of the total voting power of our common stock and therefore, we qualify as a “controlled company” under The NASDAQ Stock Market corporate governance listing standards. As a controlled company, we are exempt under The NASDAQ Stock Market listing standards from the obligation to comply with certain of The NASDAQ Stock Market corporate governance requirements, including the requirements:

 

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that a majority of our board of directors consist of independent directors, as defined under the rules of The NASDAQ Stock Market;

 

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that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

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that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

 

Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the price at which you purchased them.

 

The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including those described under “Risks Related to Our Business” and the following:

 

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potential fluctuation in our annual or quarterly operating results due to seasonality and other factors;

 

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changes in capital market conditions that could affect valuations of restaurant companies in general or our goodwill in particular or other adverse economic conditions;

 

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changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;

 

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downgrades by any securities analysts who follow our common stock;

 

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future sales of our common stock by our officers, directors and significant stockholders;

 

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global economic, legal and regulatory factors unrelated to our performance;

 

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investors’ perceptions of our prospects;

 

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announcements by us or our competitors of significant contracts, acquisitions, joint ventures or capital commitments; and

 

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investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives.

  

 

In addition, the stock markets, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many food service companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

 

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

 

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. J.H. Whitney VI has the right, subject to certain conditions, to require us to file registration statements registering additional shares of common stock, and J.H. Whitney VI and members of management have the right to require us to include shares of common stock in registration statements that we may file for ourselves or J.H. Whitney VI. Subject to compliance with restrictions under the registration rights agreement (which may be waived), shares of common stock sold under these registration statements can be freely sold in the public market. In the event such registration rights are exercised and a large number of shares of common stock are sold in the public market, such sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. In addition, we would incur certain expenses in connection with the registration and sale of such shares.

 

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.

 

Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that stockholders might consider favorable.

 

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:

 

•

establish a classified board of directors for a period of time after the consummation of the public offering, so that not all members of our board of directors are elected at one time;

 

•

authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

•

prohibit stockholder action by written consent, requiring all stockholder actions be taken at a meeting of our stockholders, if J.H. Whitney VI owns less than 50% of our outstanding voting stock;

 

•

provide that the board of directors is expressly authorized to make, alter, or repeal our amended and restated bylaws; and

 

•

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

 

These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.

 

Our common stock is no longer listed on a national securities exchange and is quoted only on the over-the-counter (“OTC”) market, which could negatively affect our stock price and liquidity.

 

Effective March 15, 2017, our common stock trades exclusively on the OTC market under the symbol IRGT. The OTC market is a significantly more limited market than NASDAQ, and the quotation of our common stock on the OTC market may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock. This could further depress the trading price of our common stock and could also have a long-term adverse effect on our ability to raise capital. We cannot provide any assurances as to if or when we will be in a position to relist our common stock on a nationally-recognized securities exchange. 

 

 

We do not expect to pay any cash dividends for the foreseeable future.

 

The continued operation and expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, including our senior secured credit facility and other indebtedness we may incur, restrictions imposed by applicable law and other factors our board of directors deems relevant.

   

Item 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

  

Item 2.  PROPERTIES.

 

As of January 2, 2017, we operated 112 Joe’s restaurants in 31 states and 25 Brick House restaurants in 11 states, as shown in the table below. 

 

State		Joe's Crab Shack				Brick House Tavern + Tap				Total
Alabama			1				-				1
Arizona			1				-				1
California			11				-				11
Colorado			3				1				4
Delaware			1				-				1
Florida			11				2				13
Georgia			4				-				4
Idaho			1				-				1
Illinois			3				2				5
Indiana			2				-				2
Iowa			1				-				1
Kentucky			2				1				3
Louisiana			2				-				2
Massachusetts			-				1				1
Maryland			3				-				3
Michigan			3				-				3
Minnesota			1				-				1
Missouri			3				1				4
Nebraska			1				-				1
Nevada			2				-				2
New Jersey			5				3				8
New York			6				2				8
North Carolina			1				-				1
Ohio			1				1				2
Oklahoma			3				-				3
Pennsylvania			3				1				4
South Carolina			3				-				3
Tennessee			3				-				3
Texas			24				10				34
Utah			2				-				2
Virginia			4				-				4
Washington			1				-				1
Total company-owned restaurants			112				25				137

 

  

A summary of new restaurant openings, converted restaurant openings, restaurants permanently closed and restaurants closed for conversions during the last three fiscal years is provided in the table below.

 

		Fiscal Year
		2016				2015				2014
Ignite Restaurant Group
Restaurants at beginning of period			153				313				335
New restaurants opened during period			-				-				3
Restaurants acquired during period			-				-				-
Restaurants sold during period			-				(145	)			-
Converted restaurants opened during period			3				2				1
Restaurants permanently closed during period			(19	)			(14	)			(23	)
Restaurants closed for conversion during period			-				(3	)			(3	)
Restaurants at end of period			137				153				313
Joe's Crab Shack
Restaurants at beginning of period			130				139				136
New restaurants opened during period			-				-				3
Converted restaurants opened during period			-				-				-
Restaurants permanently closed during period			(18	)			(6	)			-
Restaurants closed for conversion during period			-				(3	)			-
Restaurants at end of period			112				130				139
Brick House Tavern + Tap
Restaurants at beginning of period			23				21				20
New restaurants opened during period			-				-				-
Converted restaurants opened during period			3				2				1
Restaurants permanently closed during period			(1	)
Restaurants at end of period			25				23				21
Romano's Macaroni Grill
Restaurants at beginning of period			-				153				179
Restaurants acquired during period			-				-				-
Restaurants sold during period			-				(145	)			-
Restaurants permanently closed during period			-				(8	)			(23	)
Restaurants closed for conversion during period			-				-				(3	)
Restaurants at end of period			-				-				153

 

In fiscal years 2016 and 2015, we opened two and one Joe’s franchised locations, respectively, in Dubai, U.A.E.

 

Our RSC is located in Houston, Texas. The lease on the facility for approximately 50,000 square feet, housing our RSC expires on December 31, 2021 and has two 5-year renewal options.

 

All of our restaurant locations are leased under individual lease agreements. Leases are noncancelable and, in general, have 10- to 15-year terms, with 3- to 5-year extensions. Most of our leases contain a minimum base rent, and generally have escalating base rent increases over the term of the lease. Some of our leases provide for contingent rent, which is determined as a percentage of sales in excess of specified minimum sales levels.

 

Item 3.  LEGAL PROCEEDINGS.

 

Please refer to the discussion of legal proceedings in the “Litigation” section in Note 11 to our consolidated financial statements.

 

Item 4.  MINE SAFETY DISCLOSURES.

 

Not applicable.

  

 

PART II

 

Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

The shares of our common stock have traded on the NASDAQ Global Select Market under the symbol “IRG” from our IPO on May 11, 2012 through March 13, 2017. The following table sets forth the quarterly high and low sales prices of our common stock as reported by NASDAQ in 2016 and 2015:

  

		High				Low
Fiscal Year 2016
First Quarter		$	4.45			$	2.02
Second Quarter		$	3.79			$	1.48
Third Quarter		$	2.06			$	0.75
Fourth Quarter		$	0.88			$	0.19
Fiscal Year 2015
First Quarter		$	8.33			$	4.84
Second Quarter		$	5.56			$	3.37
Third Quarter		$	5.98			$	3.60
Fourth Quarter		$	5.44			$	3.25

 

NASDAQ Delisting 

 

On March 10, 2017, we received a notice (the “Notice”) from the Office of General Counsel of NASDAQ indicating that the NASDAQ Hearings Panel (the “Panel”) has determined that our securities would be delisted from The NASDAQ Global Select Market. Accordingly, trading of our common stock was suspended at the opening of business on March 14, 2017, and a Form 25-Notification of Delisting will be filed with the Securities and Exchange Commission, which will remove our securities from listing and registration on NASDAQ.

 

The Notice indicated that the Panel’s determination was based on concerns about our ability to sustain compliance with all requirements for continued listing on The NASDAQ Stock Market. Specifically, on July 28, 2016, NASDAQ Listing Qualifications Staff (the “Staff”) notified us that we were no longer in compliance with NASDAQ Marketplace Rule 5450(b)(3)(C) since the market value of our publicly held shares closed below the required minimum of $15,000,000 for the previous 30 consecutive business days. In accordance with NASDAQ Marketplace Rule 5810(c)(3)(D), the Staff granted us a 180-day period, or until January 24, 2017, to regain compliance. We were unable to regain compliance with Rule 5450(b)(2)(C) by January 24, 2017. Accordingly, on January 25, 2017, we received a letter from Staff notifying us that our common stock would be delisted from The NASDAQ Global Select Market on February 3, 2017 unless we timely requested a hearing before the Panel. We appealed the Staff’s determination by requesting a hearing before the Panel to seek continued listing. On March 10, 2017, the Panel determined that our shares would be delisted from The NASDAQ Stock Market effective at the open of business on March 14, 2017. Since March 15, 2017, our common stock has traded in the OTC market under the symbol IRGT.

 

The OTC market is a significantly more limited market than the NASDAQ Global Select Market and the quotation of our common stock on the OTC market has resulted in a less liquid market available for existing and potential stockholders to trade shares of our common stock. This could further depress the trading price of our common stock and could also have a long-term adverse effect on our ability to raise capital. We cannot provide assurances as to if or when we will be in a position to relist our common stock on a nationally-recognized securities exchange. See “Item 1A. Risk Factors— Our common stock is no longer listed on a national securities exchange and is quoted only on the over-the-counter (“OTC”) market, which could negatively affect our stock price and liquidity.”

 

Dividend Policy

 

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness, and therefore we do not anticipate paying any cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions on the ability of our subsidiaries and us to pay dividends or make distributions to us under the terms of the agreements governing our indebtedness. Any future determination to pay dividends will be at the discretion of our board of directors, subject to compliance with covenants in current and future agreements governing our indebtedness, and will depend upon our results of operations, financial condition, capital requirements and other factors that our board of directors deems relevant.

 

Holders

 

As of January 2, 2017, there were 149 holders of record of our common stock.

  

  

Price Performance Graph

 

The following graph compares the cumulative total shareholder return on $100.00 invested at the opening of the market on May 11, 2012, the date our common shares first traded on NASDAQ, through and including the market close on December 30, 2016, with the cumulative total return for the same time period of the same amount invested in the NASDAQ Composite Index and the Dow Jones U.S. Restaurants & Bars Index.

 

 

		5/11/2012				6/18/2012				9/10/2012				12/31/2012				4/1/2013				7/1/2013				9/30/2013				12/30/2013				3/31/2014				6/30/2014				9/29/2014				12/29/2014				3/30/2015				6/29/2015				9/28/2015				12/28/2015				3/28/2016				6/27/2016				9/26/2016				12/30/2016
Ignite Restaurant Group, Inc. (IRG)		$	100.00			$	110.80			$	87.42			$	77.15			$	88.66			$	111.63			$	92.11			$	75.67			$	83.50			$	86.41			$	36.38			$	46.82			$	29.26			$	29.97			$	28.25			$	22.67			$	18.28			$	9.20			$	4.81			$	3.20
NASDAQ Composite Index		$	100.00			$	98.69			$	105.80			$	102.92			$	110.41			$	117.07			$	128.55			$	141.60			$	143.12			$	150.25			$	153.58			$	163.84			$	168.63			$	169.01			$	154.88			$	171.82			$	162.48			$	156.60			$	179.20			$	183.49
Dow Jones U.S. Restaurants & Bars Index		$	100.00			$	97.61			$	96.49			$	95.10			$	104.77			$	110.48			$	114.18			$	119.20			$	118.84			$	122.00			$	118.91			$	124.31			$	133.15			$	137.98			$	137.63			$	147.40			$	150.33			$	141.51			$	146.65			$	151.81

 

Item 6.  SELECTED FINANCIAL DATA.

 

The following table provides a summary of our historical consolidated financial and operating data for the periods and as of the dates indicated. We derived the statement of operations data presented below for the fiscal years ended January 2, 2017, December 28, 2015, and December 29, 2014, and selected balance sheet data presented below as of January 2, 2017 and December 28, 2015 from our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. The selected statement of operations data for the fiscal years ended December 31, 2012, and the selected balance sheet data as of December 30, 2013 and December 31, 2012 have been derived from audited consolidated financial statements not included in this report.

 

Our fiscal year ends on the Monday nearest to December 31 of each year. Fiscal year 2016 was a 53-week year and ended on January 2, 2017. Fiscal years 2015, 2014, 2013 and 2012 were 52-week years and ended on December 28, 2015, December 29, 2014, December 30, 2013, December 31, 2012, respectively.

 

 

The historical results presented below are not necessarily indicative of the results to be expected for any future period. This information should be read in conjunction with “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements.

 

		Fiscal Year
		2016				2015				2014				2013				2012
		(dollars and shares in thousands, except per share amounts)
Statements of Operations(1):
Revenues		$	450,279			$	492,044			$	503,508			$	499,151			$	465,056
Costs and expenses
Restaurant operating costs and expenses
Cost of sales			147,036				154,270				163,407				153,820				145,451
Labor expenses			134,048				142,209				142,662				137,286				127,331
Occupancy expenses			38,312				40,890				39,401				35,471				33,286
Other operating expenses			83,582				95,384				94,086				90,727				81,779
General and administrative			23,487				30,523				38,669				42,321				31,725
Depreciation and amortization			23,227				25,831				23,901				21,415				18,572
Pre-opening costs			876				927				2,799				4,824				3,871
Asset impairments and closures			31,360				10,497				1,980				169				115
Loss (gain) on disposal of assets			623				(121	)			1,340				2,067				2,296
Total costs and expenses			482,551				500,410				508,245				488,100				444,426
Income (loss) from operations			(32,272	)			(8,366	)			(4,737	)			11,051				20,630
Interest expense, net			(12,603	)			(16,363	)			(12,521	)			(5,245	)			(9,366	)
Gain (loss) on insurance settlements			755				(428	)			89				1,161				(799	)
Income (loss) from continuing operations before income taxes			(44,120	)			(25,157	)			(17,169	)			6,967				10,465
Income tax expense (benefit)			241				(308	)			16,213				(868	)			1,751
Income (loss) from continuing operations			(44,361	)			(24,849	)			(33,382	)			7,835				8,714
Loss from discontinued operations, net of tax			-				(21,516	)			(20,167	)			(14,420	)			-
Net income (loss)		$	(44,361	)		$	(46,365	)		$	(53,549	)		$	(6,585	)		$	8,714
Per Share Data(1)(6):
Net income (loss) per share
Basic and diluted
Income (loss) from continuing operations		$	(1.72	)		$	(0.97	)		$	(1.30	)		$	0.31			$	0.37
Loss from discontinued operations		$	-			$	(0.84	)		$	(0.79	)		$	(0.56	)		$	-
Net income (loss)		$	(1.72	)		$	(1.80	)		$	(2.09	)		$	(0.26	)		$	0.37
Weighted average shares outstanding
Basic			25,834				25,731				25,659				25,629				23,328
Diluted			25,834				25,731				25,659				25,636				23,329
Selected Other Data(1)(2)(3):
Restaurants open at end of period			137				153				160				156				144
Change in comparable restaurant sales(4)			(7.3	)%			(3.9	)%			(3.5	)%			1.4	%			2.2	%
Restaurant operating weeks			7,946				8,234				8,169				7,754				6,871
Average weekly sales		$	59			$	60			$	62			$	64			$	63
Average unit volumes		$	3,069			$	3,121			$	3,153			$	3,181			$	3,050
Adjusted income (loss) from continuing operations(5)		$	(7,258	)		$	(4,264	)		$	(4,987	)		$	8,309			$	14,675
Capital expenditures		$	9,360			$	16,633			$	25,859			$	49,818			$	44,226

 

 

 

		January 2, 2017				December 28, 2015				December 29, 2014				December 30, 2013				December 31, 2012
		(in thousands)
Selected Balance Sheet Data:
Cash and cash equivalents		$	430			$	7,817			$	20,564			$	3,836			$	6,929
Total assets		$	148,416			$	205,182			$	327,720			$	347,084			$	201,438
Long-term debt (including current portion)		$	118,986			$	124,733			$	162,702			$	131,982			$	45,000
Total liabilities		$	184,856			$	198,569			$	276,421			$	245,477			$	95,221
Total stockholders' equity (deficit)(6)		$	(36,440	)		$	6,613			$	51,299			$	101,607			$	106,217

 

---

(1)	The operating results of Macaroni Grill from the acquisition date, April 9, 2013, have been aggregated and reclassified as discontinued operations, net of tax.

 

(2)	All amounts presented relate to continuing operations.
(3)	See the definitions of key performance indicators beginning on page 32.
(4)	Our comparable restaurant base includes restaurants open for at least 104 weeks, or approximately 24 months. Change in comparable restaurant sales represents the change in period-over-period sales for the comparable restaurant base.

 

(5)	Reconciliation and discussion of non-GAAP financial measures are included under “Non-GAAP Financial Measures.” These measures should be considered in addition to, rather than as a substitute for, U.S. GAAP measures.

 

(6)	Immediately prior to the completion of our IPO, we effected a 19,178.226-to-1 stock split. We also reduced the par value of our common stock from $1.00 per share to $0.01 per share. We issued 6.4 million shares in relation to our IPO in May 2012 and received net proceeds of $81.1 million.

 

 

 Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion together with “Selected Financial Data,” and the historical financial statements and related notes included in this annual report on Form 10-K. 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” included in this report. 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. Fiscal year 2016 was a 53-week year and ended on January 2, 2017. Fiscal years 2015 and 2014 were 52-week years. References to fiscal years 2015 and 2014 are references to fiscal years ended December 28, 2015 and December 29, 2014, respectively.

 

Overview

 

Ignite Restaurant Group, Inc. operates two restaurant brands in the casual dining segment, Joe’s Crab Shack (“Joe’s”) and Brick House Tavern + Tap (“Brick House”). Each 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 and internationally. As of January 2, 2017, we operated 112 Joe’s and 25 Brick House restaurants in 32 states and franchised three Joe’s restaurants 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.

 

In fiscal year 2016, we opened three new Brick House restaurants, all of which were conversions from Joe’s restaurants. We also closed 18 Joe’s restaurants and one Brick House restaurant during 2016.

 

Outlook

 

We have experienced a decline in the operating performance at Joe’s. During fiscal year 2016, the comparable restaurant sales of Joe’s declined by 7.3% which contributed to a decrease in income from operations from the prior year. The largest impact on the decline in comparable restaurant sales is from our Northeast and Texas markets. We are also experiencing sales declines in other geographic regions primarily due to decreased guest traffic. In order to reverse these negative trends, we have deployed many different operational strategies, but so far none have had a meaningful impact on sales or guest traffic. The biggest declines in sales and guest traffic continue to be on weekends. We have started introducing new menu items at both brands to enhance the current offerings as well as to improve the value proposition for our guests. We will continue to evaluate our menu offerings and look for other value offerings that could increase sales and traffic.

 

We have also experienced a decline in operating performance at Brick House. During fiscal year 2016, the comparable restaurant sales of Brick House decreased by 7.7%, which contributed to a $0.6 million decrease in income from operations from the prior year, excluding the $2.7 million non-cash impairment charge in 2016. We are continuing to evaluate our menu to ensure we are offering items that are consistent with the expectations of our guests.

 

We are continuing to evaluate our underperforming restaurants. During 2016, we closed 18 Joe’s and one Brick House restaurant. Additional declines in the operating performance at Joe’s or Brick House could cause us to close or sell more restaurants which may require us to recognize additional asset impairment or closure-related expenses and increase our valuation allowance during 2017 against some or all of our deferred tax assets.

 

The Board of Directors, working together with our management team and our financial advisor, has commenced a process to pursue the sale of our business, which could be sold as an entirety or through the separate sales of our two restaurant brands, Joe’s and Brick House. There can be no assurance that the process that we are undertaking will be successful. In addition, we cannot predict the terms or timing of any transaction that we may undertake or whether any such transaction will result in any proceeds for the holders of our common stock. We are also exploring a variety of strategic alternatives to strengthen our capital structure. For the remainder of 2017, we are committed to preserving liquidity and improving our capital structure. Our capital expenditures will remain at maintenance levels and we will continue to manage working capital and restaurant-level operating expenses. However, there can be no assurance regarding these matters. Further deterioration would negatively impact our anticipated revenues, profitability and cash flows from operations. Our expectations with respect to our performance over the remainder of 2017 are subject to a number of assumptions, many of which are outside of our control.

   

 

We are currently in discussions with our lenders in connection with our pursuit of various strategic alternatives. We can give no assurance that we will successfully execute any strategic alternatives we are currently pursuing or any others, and our ability to do so could be adversely affected by numerous factors, including changes in the economic or business environment, financial market volatility, the performance of our business, and the terms and conditions of the 2014 Credit Facility. See “Liquidity and Capital Resources” below for further discussion of our operational plan to preserve liquidity.

 

Recent Developments 

 

Asset Impairment and Closures

 

We evaluate the recoverability of the carrying amount of long-lived assets, which include property and equipment and intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. Due to continued declines in operating performance at certain Joe’s and Brick House restaurants in 2016 we recorded impairment charges of $26.2 million related to Joe’s and Brick House’s long-lived assets. In 2015 and 2014 we recorded impairment charges of $9.4 and $1.8 million, respectively, related to Joe’s long-lived assets. Additionally, in 2016, 2015 and 2014 we recorded restaurant closure expenses of $5.1 million, $1.1 million and $210 thousand, respectively.

 

Valuation Allowance

 

  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. Due to continued operating losses and asset impairments we are in a three-year cumulative loss position. 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. During fiscal year 2016, 2015 and 2014 we recorded a valuation allowance of $17.8 million, $12.8 million and $25.6 million, respectively in continuing operations.

 

We excluded the deferred tax liabilities related to certain indefinite lived intangibles when calculating the amount of valuation allowance needed as these liabilities cannot be considered as a source of income when determining the realizability of the net deferred tax assets. The valuation allowance was recorded as a reduction to our income tax benefit in our consolidated statement of operations. If we are able to generate sufficient taxable income in the future such that 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.

 

Key Performance Indicators

 

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are comparable restaurant sales growth, average weekly sales, restaurant operating weeks, average check, average unit volume and number of restaurant openings.

 

Comparable Restaurant Sales Growth

 

Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base. We define the comparable restaurant base to include those restaurants open for at least 104 weeks, or approximately 24 months. As of January 2, 2017, December 28, 2015 and December 29, 2014 there were 132, 147 and 142, respectively, in our comparable restaurant base. Comparable restaurant sales growth can be generated by an increase in guest counts and/or by increases in the average check amount resulting from a shift in menu mix and/or increase in price. This measure highlights performance of existing restaurants as the impact of new restaurant openings is excluded.

 

Average Weekly Sales

 

Average weekly sales is a key measure of individual restaurant economic performance of new and existing restaurants. Average weekly sales reflects total sales of all restaurants divided by restaurant operating weeks (see below). This measure is subject to seasonality for periods less than one year.

 

 

Restaurant Operating Weeks

 

Restaurant operating weeks is the aggregate number of weeks that our restaurants are in operation over a specific period of time.

 

Average Check

 

Average check is calculated for Joe’s by dividing net sales by guest counts for a given time period. Management uses this indicator to analyze the dollars spent in our Joe’s restaurants per guest. This measure aids management in identifying trends in guest preferences, as well as the effectiveness of menu price increases and other menu changes.

 

Guest counts represent the estimated number of guests served in our restaurants. The count is estimated based on the number of entrées sold. Our estimates may vary from actual guest counts due to the variability in the level of sharing of certain entrée items on our menu. Given the significant level of alcohol sales and appetizer sales at Brick House, guest count is more difficult to quantify and therefore, we do not currently calculate average check as a key performance indicator for that brand.

 

Average Unit Volume

 

Average unit volume represents the average sales for restaurants included in the comparable restaurant base for a given time period, typically annually. Average unit volume reflects total sales for restaurants in our comparable restaurant base divided by the number of restaurants in our comparable restaurant base. This measure is subject to seasonality for periods less than one year.

 

Number of Restaurant Openings

 

Number of restaurant openings reflects the number of restaurants opened or converted during a particular reporting period. Before we open new restaurants or convert existing restaurants, we incur pre-opening costs. Typically, new restaurants open with an initial start-up period of higher than normalized sales volumes, which subsequently decrease to stabilized levels. While sales volumes are generally higher during the initial opening period, new restaurants typically experience normal inefficiencies in the form of higher cost of sales, labor and other direct operating expenses for several months and as a result, restaurant operating margins are generally lower during the start-up period of operation. The number and timing of restaurant openings has had an impact on our results of operations.

 

 

Results of Operations

 

The following table presents the consolidated statement of operations for the past three fiscal years expressed as a percentage of revenues.

 

		Fiscal Year
		2016				2015				2014
Revenues			100.0	%			100.0	%			100.0	%
Costs and expenses
Restaurant operating costs and expenses
Cost of sales			32.7				31.4				32.5
Labor expenses			29.8				28.9				28.3
Occupancy expenses			8.5				8.3				7.8
Other operating expenses			18.6				19.4				18.7
General and administrative			5.2				6.2				7.7
Depreciation and amortization			5.2				5.2				4.7
Pre-opening costs			0.2				0.2				0.6
Asset impairments and closures			7.0				2.1				0.4
Loss (gain) on disposal of assets			0.1				(0.0	)			0.3
Total costs and expenses			107.2				101.7				100.9
Loss from operations			(7.2	)			(1.7	)			(0.9	)
Interest expense, net			(2.8	)			(3.3	)			(2.5	)
Gain (loss) on insurance settlements			0.2				(0.1	)			0.0
Loss from continuing operations before income taxes			(9.8	)			(5.1	)			(3.4	)
Income tax expense (benefit)			0.1				(0.1	)			3.2
Loss from continuing operations			(9.9	)			(5.1	)			(6.6	)
Loss from discontinued operations, net of tax			-				(4.4	)			(4.0	)
Net loss			(9.9	)%			(9.4	)%			(10.6	)%

 

__________________________

*	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:

 

		Fiscal Year
		2016				2015				2014
		(dollars in thousands)
Selected Other Data(1):
Number of restaurants open (end of period):
Joe's Crab Shack			112				130				139
Brick House Tavern + Tap			25				23				21
Total restaurants			137				153				160
Restaurant operating weeks
Joe's Crab Shack			6,605				7,058				7,107
Brick House Tavern + Tap			1,341				1,176				1,062
Average weekly sales
Joe's Crab Shack		$	55			$	59			$	61
Brick House Tavern + Tap		$	62			$	66			$	66
Average unit volumes
Joe's Crab Shack		$	3,030			$	3,085			$	3,124
Brick House Tavern + Tap		$	3,271			$	3,346			$	3,396
Change in comparable restaurant sales
Joe's Crab Shack			(7.3	)%			(4.5	)%			(4.9	)%
Brick House Tavern + Tap			(7.7	)%			1.0	%			7.9	%
Income (loss) from operations
Joe's Crab Shack		$	(16,606	)		$	9,539			$	21,458
Brick House Tavern + Tap		$	2,164			$	5,541			$	3,828
Corporate		$	(17,830	)		$	(23,446	)		$	(30,023	)
Total		$	(32,272	)		$	(8,366	)		$	(4,737	)
Adjusted loss from continuing operations(2)		$	(7,258	)		$	(4,264	)		$	(4,987	)

__________________________

(1)	See the definitions of key performance indicators beginning on page 32.

 

(2)	Reconciliation and discussion of non-GAAP financial measures are included under “Non-GAAP Financial Measures.” These measures should be considered in addition to, rather than as a substitute for, U.S. GAAP measures.

 

 Fiscal Year 2016 (53 Weeks) Compared to Fiscal Year 2015 (52 Weeks)

 

Revenues

 

Revenues were $450.3 million for fiscal year 2016, a decrease of $41.8 million, or 8.5%, compared to revenues of $492.0 million for fiscal year 2015. The decrease is primarily due to a decrease of 7.3% in comparable restaurant sales and the closure of 19 restaurants.

 

Revenues at Joe’s decreased 11.5% to $366.6 million in fiscal year 2016 compared to $414.3 million in fiscal year 2015. The decrease is primarily caused by a 7.3% decrease in comparable restaurant sales and the closure of 18 restaurants. The comparable restaurant sales decrease is comprised of 8.4% decrease in guest count partially offset by a 1.1% increase in pricing. Joe’s average weekly sales decreased to $55 thousand from $59 thousand in the prior year. Restaurant operating weeks decreased to 6,605 in 2016 from 7,058 in 2015 due to restaurant closures. We believe the decline in comparable restaurant sales is primarily due to a decrease in guest traffic and continued sales declines at restaurants in our Northeast and Texas markets.

 

Brick House revenues increased 7.7% to $83.7 million in fiscal year 2016 versus $77.7 million in fiscal year 2015 due to three new restaurant openings in the first quarter of 2016, partially offset by the closing of one restaurant and a 7.7% decrease in comparable restaurant sales. The comparable restaurant sales decrease was comprised of an 8.1% decrease from traffic and mix and a 0.4% increase in pricing. Brick House’s average weekly sales decreased to $62 thousand from $66 thousand in prior year. Restaurant operating weeks increased to 1,341 in 2016 from 1,176 in 2015 due to new restaurant openings.

 

 

Costs of Sales

 

Cost of sales decreased by $7.2 million, or 4.7%, to $147.0 million in 2016 versus $154.3 million in 2015 mainly due to the decrease in sales volume and restaurant closures, partially offset by increased commodity pricing during 2016. As a percent of revenue, cost of sales increased to 32.7% from 31.4% primarily due to commodity price inflation.

 

Labor Expenses

 

Labor expenses decreased by $8.2 million, or 5.7%, to $134.0 million in 2016 versus $142.2 million in 2015. The decrease is mainly due to the closure of 19 restaurants in 2016 partially offset by the opening of three new Brick House restaurants. As a percent of revenue, labor expenses increased to 29.8% in fiscal year 2016 from 28.9% in fiscal year 2015 due to increases in minimum wage and deleverage from lower sales.

 

Occupancy Expenses

 

Occupancy expenses decreased by $2.6 million, or 6.3%, to $38.3 million in 2016 compared to $40.9 million in 2015. The decrease is primarily caused by the closure of 19 restaurants. As a percentage of revenue, occupancy expenses increased to 8.5% from 8.3% primarily due to deleveraging of fixed rent expense from the decrease in comparable restaurant sales.

 

Other Operating Expenses

 

Other operating expenses decreased by $11.8 million, or 12.4%, to $83.6 million in 2016 versus $95.4 million in 2015. The decrease is primarily caused by the closure of 19 restaurants and the decrease in advertising costs partially offset by higher insurance costs and operating supplies. As a percent of revenue, other operating expenses decreased to 18.6% in 2016 from 19.4% in 2015 primarily due to decreased advertising costs.

 

General and Administrative

 

General and administrative expenses decreased by $7.0 million, or 23.1%, to $23.5 million in 2016 compared to $30.5 million in 2015. As a percent of revenue, general and administrative expenses decreased to 5.2% in fiscal year 2016 from 6.2% in fiscal year 2015 due to decreased personnel costs, including a reduction of $1.6 million in severance costs, and professional fees.

  

Depreciation and Amortization

 

Depreciation and amortization expense decreased by $2.6 million, or 10.1%, to $23.2 million in 2016 versus $25.8 million in 2015. This decrease is primarily due to the closure of 19 restaurants during 2016. As a percentage of revenue, depreciation and amortization remained constant at 5.2% in fiscal year 2016 and 2015.

 

Pre-Opening Costs

 

Pre-opening costs decreased by $51 thousand, or 5.5%, to $0.9 million in 2016 from $0.9 million in 2015. This decrease is mainly due to the timing of scheduled restaurant openings. We converted three restaurants in 2016 and converted two restaurants in 2015.

 

Asset Impairments and Closures

 

Asset impairments and closures increased to $31.4 million for fiscal year 2016 from $10.5 million for fiscal year 2015. The $20.9 million increase is mainly due to the impairment charges on long-lived assets of $26.2 million and $9.4 million in 2016 and 2015, respectively. We also closed 19 restaurants in the current year versus nine in the prior year and recorded $5.1 million and $1.1 million, respectively, in closure-related expenses, primarily comprised of future minimum lease obligations. If we are unable to improve the performance of our restaurants or if we experience deteriorating results at some of our restaurants, we could recognize additional impairment charges or closure related expenses.

 

 

Loss (Gain) on Disposal of Assets

 

Loss on disposal of assets increased by $0.7 million, to a $0.6 million loss in fiscal year 2016. The loss in fiscal year 2016 was primarily due to asset retirement losses for closed and converted restaurants, partially offset by gains on the sale of the leasehold interest for two locations. The gain in fiscal year 2015 included a $2.0 million net gain on restaurants sold, offset by the impact of writing off $0.6 million in book value of replaced restaurant equipment and facilities improvements, and $1.3 million in asset retirement losses for closed, converted and remodeled restaurants.

 

Income (Loss) from Operations

 

As a result of the foregoing, consolidated loss from operations increased by $23.9 million, to a $32.3 million loss in fiscal year 2016 from an $8.4 million loss in fiscal year 2015.

 

Joe’s income from operations decreased by $26.1 million, to a $16.6 million loss in fiscal year 2016 from $9.5 million in income in fiscal year 2015. As a percent of revenue, excluding the impact of non-cash impairment charges, accelerated depreciation, pre-opening costs, severance and other costs related to conversions, remodels and closures, income from operations for Joe’s decreased to 3.2% in the current year from 5.2% in the prior year. This decrease is primarily attributable to lower comparable restaurant sales and deleveraging of fixed costs against lower sales volume and increases in commodity pricing.

 

Income from operations for Brick House decreased by $3.4 million, to $2.2 million in fiscal year 2016 from $5.5 million in fiscal year 2015. As a percent of revenue, excluding the impact of non-cash impairment charges, pre-opening costs, severance and other costs related to conversions, remodels and closures, Brick House’s income from operations decreased to 7.6% in the current year from 8.3% in the prior year. The decrease is primarily due to lower comparable restaurant sales and increases in cost of sales.

 

Interest Expense, Net

 

Interest expense, net decreased by $3.8 million, or 23.0%, to $12.6 million in 2016 from $16.4 million in 2015. The decrease is due to lower average debt balance in 2016 due to voluntary prepayments of $46.5 million since the end of fiscal year 2015. The fiscal 2016 balance includes a $0.3 million write-off of debt issuance costs and debt discount compared to a $1.0 million write-off of debt issuance costs in 2015.

 

Income Tax Expense (Benefit)

 

The income tax expense increased by $0.5 million, to a $0.2 million expense in fiscal year 2016 from a $0.3 million benefit in fiscal year 2015 mainly due to an increase of $17.8 million in valuation allowance in 2016 compared to an increase of $12.8 million in 2015. Excluding the impact of the valuation allowance, the effective income tax rate decreased to 39.8% in fiscal year 2016 from 52.1% in fiscal year 2015 primarily due to the impact of the tax credit carryforwards.

 

Fiscal Year 2015 (52 Weeks) Compared to Fiscal Year 2014 (52 Weeks)

 

Revenues

 

Revenues were $492.0 million for fiscal year 2015, a decrease of $11.5 million, or 2.3%, compared to revenues of $503.5 million for fiscal year 2014. The decrease is primarily due to a decrease of 3.9% in comparable restaurant sales, partially offset by higher operating weeks caused by the timing of restaurant opening and closure activities.

 

Revenues at Joe’s decreased 4.3% to $414.3 million in fiscal year 2015 compared to $433.0 million in fiscal year 2014. The decrease is primarily caused by a 4.5% decrease in comparable restaurant sales. The comparable restaurant sales decrease is comprised of 5.1% decrease in guest count and a 1.0% decrease in mix, partially offset by a 1.6% increase in pricing. Joe’s average weekly sales decreased to $59 thousand from $61 thousand in the prior year. Restaurant operating weeks decreased to 7,058 in 2015 from 7,107 in 2014 due to restaurant closures. We believe the decline in comparable restaurant sales is primarily due to a decrease in guest traffic and continued sales declines at restaurants in the Northeast region.

 

Brick House revenues increased 10.2% to $77.7 million in fiscal year 2015 versus $70.5 million in fiscal year 2014. The increase was the result of a 1.0% increase in comparable restaurant sales and new restaurant openings. The comparable restaurant sales increase is comprised of a 2.8% increase in pricing, partially offset by a 1.8% decrease in combined guest count and mix benefits. Brick House’s average weekly sales were at $66 thousand for both fiscal years 2015 and 2014. Restaurant operating weeks increased to 1,176 in 2015 from 1,062 in 2014 due to new restaurant openings.

 

 

Costs of Sales

 

Cost of sales decreased by $9.1 million, or 5.6%, to $154.3 million in 2015 versus $163.4 million in 2014 mainly due to the decrease in sales volume. As a percent of revenue, cost of sales decreased to 31.4% from 32.5% primarily due to improvement in seafood pricing at Joe’s and reduced discounting at Brick House.

 

Labor Expenses

 

Labor expenses decreased by $0.5 million, or 0.3%, to $142.2 million in 2015 versus $142.7 million in 2014. The decrease is mainly due to lower restaurant management bonuses caused by lower sales, partially offset by decreased productivity in hourly labor at Joe’s. As a percent of revenue, labor expenses increased to 28.9% in fiscal year 2015 from 28.3% in fiscal year 2014 due to decreased productivity, increases in minimum wage, and deleverage from lower sales.

 

Occupancy Expenses

 

Occupancy expenses increased by $1.5 million, or 3.8%, to $40.9 million in 2015 compared to $39.4 million in 2014. The increase is primarily caused by the increase in operating weeks. As a percentage of revenue, occupancy expenses increased to 8.3% from 7.8% primarily due to deleveraging of fixed rent expense from the decrease in comparable restaurant sales.

 

Other Operating Expenses

 

Other operating expenses increased by $1.3 million, or 1.4%, to $95.4 million in 2015 versus $94.1 million in 2014. This is mainly due to increased insurance costs and building expenses, partially offset by lower credit card fees attributable to lower sales in the current year. As a percent of revenue, other operating expenses increased to 19.4% in 2015 from 18.7% in 2014 due to increased insurance costs and deleverage from lower sales.

 

General and Administrative

 

General and administrative expenses decreased by $8.1 million, or 21.1%, to $30.5 million in 2015 compared to $38.7 million in 2014. As a percent of revenue, excluding the items mentioned above, general and administrative expenses decreased to 6.2% in fiscal year 2015 from 7.6% in fiscal year 2014 due to reduction of professional fees and personnel costs, partially offset by an increase of $1.7 million in severance costs.

  

Depreciation and Amortization

 

Depreciation and amortization expense increased by $1.9 million, or 8.1%, to $25.8 million in 2015 versus $23.9 million in 2014. This increase is primarily due to a higher depreciable base from newly opened restaurants and accelerated depreciation on closed restaurants. As a percentage of revenue, depreciation and amortization increased to 5.2% in fiscal year 2015 from 4.7% in fiscal year 2014 due to deleveraging from negative same-restaurant sales.

 

Pre-Opening Costs

 

Pre-opening costs decreased by $1.9 million, or 66.9%, to $0.9 million in 2015 from $2.8 million in 2014. This decrease is mainly due to the timing of scheduled restaurant openings. We opened two converted restaurants in 2015 and opened four new restaurants, including one conversion, in 2014. We also incurred pre-opening costs in both years for restaurants opened in the subsequent fiscal year.

 

Asset Impairments and Closures

 

Asset impairments and closures increased to $10.5 million for fiscal year 2015 from $2.0 million for fiscal year 2014. The $8.5 million increase is mainly due to the impairment charges on long-lived assets of $9.4 million and $1.8 million in 2015 and 2014, respectively. We also closed nine restaurants in the current year versus none in the prior year. The closure-related expenses for fiscal year 2015 were primarily comprised of future minimum lease obligations. If we are unable to improve the performance of our restaurants or if we experience deteriorating results at some of our restaurants, we could recognize additional impairment charges.

 

 

Loss (Gain) on Disposal of Assets

 

Loss on disposal of assets decreased by $1.5 million, or 109.0%, to a $0.1 million gain in fiscal year 2015 from a $1.3 million loss in fiscal year 2014. The gain in fiscal year 2015 included a $2.0 million net gain on restaurants sold, offset by the impact of writing off $0.6 million in book value of replaced restaurant equipment and facilities improvements, and $1.3 million in asset retirement losses for closed, converted and remodeled restaurants. The loss in fiscal year 2014 was primarily from the impact of writing off the book value of replaced restaurant equipment and facilities improvements offset by any related sales proceeds.

 

Income (Loss) from Operations

 

As a result of the foregoing, consolidated loss from operations increased by $3.6 million, or 76.6%, to $8.4 million in fiscal year 2015 from $4.7 million in fiscal year 2014.

 

Joe’s income from operations decreased by $11.9 million, or 55.5%, to $9.5 million in fiscal year 2015 from $21.5 million in fiscal year 2014. As a percent of revenue, excluding the impact of non-cash impairment charges, accelerated depreciation, pre-opening costs, severance and other costs related to conversions, remodels and closures, income from operations for Joe’s decreased to 5.2% in the current year from 5.9% in the prior year. This decrease is primarily attributable to lower comparable restaurant sales and deleveraging of fixed costs against lower sales volume, partially offset by improvement in seafood pricing.

 

Income from operations for Brick House increased by $1.7 million, or 44.7%, to $5.5 million in fiscal year 2015 from $3.8 million in fiscal year 2014. As a percent of revenue, Brick House’s income from operations increased to 7.1% in the current year from 5.4% in the prior year. This margin improvement is primarily due to the increase in comparable restaurant sales, reduced discounting, and lower general and administrative expenses.

 

Interest Expense, Net

 

Interest expense, net increased by $3.8 million, or 30.7%, to $16.4 million in 2015 from $12.5 million in 2014, primarily due to the higher average debt balances and interest rates in the current year, partially offset by higher write-offs of debt issuance costs in the prior year. The fiscal 2015 balance includes $1.0 million write-off of debt issuance costs and debt discount compared to $2.2 million write-off of debt issuance costs in 2014.

 

Income Tax Expense (Benefit)

 

The income tax expense decreased by $16.5 million, or 101.9%, to a $0.3 million benefit in fiscal year 2015 from a $16.2 million expense in fiscal year 2014 mainly due to an increase of $12.8 million in valuation allowance in 2015 compared to an increase of $25.6 million in 2014. The decrease is also attributable to a higher loss before income taxes in the current year. Excluding the impact of the valuation allowance, the effective income tax rate decreased to 52.1% in fiscal year 2015 from 54.9% in fiscal year 2014 primarily due to the impact of the tax credit carryforwards.

 

Discontinued Operations, net

 

Loss from discontinued operations was $21.5 million for fiscal 2015 compared to $20.2 million for fiscal year 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. The loss from discontinued operations in 2014 relates to the full year operating loss of Macaroni Grill, net of related tax expense, which included impairment charges of $6.3 million for Macaroni Grill’s goodwill and $0.7 million related to Macaroni Grill’s long-lived and intangible assets.

 

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 restaurant development, working capital and general corporate needs. Additionally since December 2015, we have repaid $46.5 million of our 2014 Term Loan in an effort to reduce our leverage. 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.

 

 

Going Concern

 

We have continued to experience declines in comparable restaurant sales and income from operations at Joe’s and Brick House. We have closed underperforming restaurants and implemented cost reduction measures to help mitigate the effect of these declines and improve our financial position and liquidity. In late 2016, we engaged a financial advisor to assist us in evaluating various strategic alternatives potentially available to us. As part of this ongoing evaluation of strategic alternatives, on April 3, 2017, we announced that our Board of Directors, working together with our management team and our financial advisor, has commenced a process to pursue the sale of our business, which could be sold as an entirety or through the separate sales of Joe’s or Brick House.  

 

As of January 2, 2017, we were in compliance with all of our debt covenants. However, we are forecasting in 2017 that we may no longer be in compliance with the financial covenant ratios in our 2014 Credit Agreement. In an event of default, our lenders may accelerate the maturity of all of our indebtedness. If our lenders accelerate the maturity of our indebtedness, we will not have sufficient liquidity to repay the entire balance of our outstanding borrowings. The uncertainty associated with our ability to repay our outstanding debt obligations as they become due raises substantial doubt about our ability to continue as a going concern for one year after the issuance date of the financial statements. The report of our independent registered public accounting firm that accompanies our audited consolidated financial statements for the fiscal year ended January 2, 2017 also contains an explanatory paragraph regarding our ability to continue as a going concern.

 

On March 31, 2017, we entered into a forbearance agreement with certain of the lenders and the Administrative Agent (collectively, the “Forbearing Lenders”) under the 2014 Credit Facility, whereby the Forbearing Lenders agreed to, among other things, forbear from taking any action to enforce certain of their rights or remedies under the 2014 Credit Agreement with respect to certain defaults, events of default, and anticipated events of default (the “Forbearance Agreement”). The Forbearance Agreement is effective until the earliest of (i) May 9, 2017, and (ii) the occurrence or existence of any default or event of default other than defaults, events of default and anticipated events of default that are subject to the Forbearance Agreement. Should we be in default of the Forbearance Agreement or should the required lenders and the Administrative Agent not agree to further extend such Forbearance Agreement, the Administrative Agent and lenders would be free to exercise any rights and remedies with respect to such defaults and events of defaults pursuant to the terms of the 2014 Credit Facility. which could include accelerating the maturity of all our indebtedness.

   

We are currently in discussions with our lenders in connection with our pursuit of various strategic alternatives to improve our capital structure. While we pursue these strategic alternatives, we are operating under a cash management strategy to enhance and preserve liquidity. This ongoing cash management strategy limits many of our operational and strategic initiatives designed to grow our business over the long term. We have successfully completed certain elements of our cash management strategy, including, among other things:

 

●

Closed 28 underperforming restaurants in the last two years

●

Reduced inventory levels in the restaurants

●

Sold non-core assets

●

Reduced annual marketing spend by $5.6 million with a focus on more cost-effective marketing strategies

●

Reduced and maintained restaurant-level labor and operating expenses

●

Reduced selling, general, and administrative expenses by over $9.0 million in 2016 through lower personnel costs and professional fees

●

Eliminated new restaurant development and reduced capital expenditures to maintenance levels

 

Based on our current internal forecasts, our cash flows will be sufficient to fund anticipated cash requirements over the next 12 months for minimum capital expenditures, working capital purposes, and scheduled payments of principal and interest required pursuant to the terms of the 2014 Credit Facility. Increased competition and uncertainty in the casual dining industry continue to make it more difficult to accurately forecast our results of operations and cash position, so our revenues may deteriorate beyond what we anticipate. Our current plan for the remainder of 2017 contemplates a comparable restaurant sales decline in the high-single digits. A greater sales decline than reflected in our plan would negatively impact our results of operations and cash flows. If we cannot meet our capital needs using cash on hand and cash from operations as our current forecasts suggest, are not in compliance with the covenants in our debt agreement, and are unable to improve our capital structure, we may have to take other actions such as modify our business plan to close additional restaurants, pursue additional external liquidity generating events, seek additional financing to the extent available, further reduce or delay capital expenditures or file for protection under Chapter 11 of the U.S. Bankruptcy Code. We can give no assurance that we will successfully execute the strategic transactions we are currently pursuing or any others, and our ability to do so could be adversely affected by numerous factors, including changes in the economic or business environment, financial market volatility, the performance of our business, and the terms and conditions of our debt agreement. It is possible that even a successful and efficient implementation of the recapitalization initiatives we are pursuing will require us to make a filing for protection under the U.S. Bankruptcy Code.

 

 

We rely upon vendor financing in managing our liquidity. As a result, if our trade creditors were to impose unfavorable terms on us, it would negatively impact our ability to obtain products and services on acceptable terms and operate our business. In such event, our ability to maintain optimal inventory and service levels would be adversely affected, and our results of operations and financial performance would suffer.

 

Cash Flow  

 

The following table shows summary cash flows information for fiscal years 2016, 2015 and 2014 (in thousands):

  

		Fiscal Year
		2016				2015				2014
Net cash provided by (used in):
Operating activities
Continuing operations		$	6,150			$	25,379			$	18,392
Discontinued operations			-				2,668				(1,432	)
Investing activities
Continuing operations			(6,896	)			(13,908	)			(25,879	)
Discontinued operations			240				11,639				585
Financing activities			(6,881	)			(36,234	)			25,635
Net increase (decrease) in cash and cash equivalents			(7,387	)			(10,456	)			17,301
Increase in cash and cash equivalents - discontinued operations			-				(2,291	)			(573	)
Net increase (decrease) in cash and cash equivalents - continuing operations		$	(7,387	)		$	(12,747	)		$	16,728

 

Operating Activities

 

Net cash provided by operating activities – continuing operations decreased to $6.2 million for fiscal year 2016 from $25.4 million for fiscal year 2015. The decrease was primarily due to lower sales and changes in working capital including the timing of rent payments and collection of accounts receivable, partially offset by lower general and administrative expenses.

 

Net cash provided by operating activities – continuing operations increased to $25.4 million for fiscal year 2015 from $18.4 million for fiscal year 2014. This increase was primarily due to lower general and administrative expenses and changes in working capital including the timing of rent payments and collection of accounts receivable, offset by higher interest payments.

 

Net cash provided by operating activities – discontinued operations was $2.7 million in fiscal year 2015 versus net cash used of $1.4 million in fiscal year 2014 due to decrease in marketing expenses and costs related to restaurant closures.

 

Investing Activities

 

Net cash used in investing activities – continuing operations was $6.9 million, $13.9 million and $25.9 million in 2016, 2015 and 2014, respectively. The net cash used was primarily attributable to capital expenditures for fiscal years 2016, 2015 and 2014 of $9.4 million, $16.6 million and $25.9 million, respectively. Variances in capital expenditures are primarily due to the number and timing of new or converted locations under construction. We also received $1.8 million and $2.0 million of proceeds from disposal of assets, respectively, in 2016 and 2015 primarily related to the closure of Joe’s restaurants.

 

Net cash provided by investing activities – discontinued operations was $0.2 million, $11.6 million and $0.6 million in 2016, 2015 and 2014, were primarily caused by the sale of Macaroni Grill in 2015.

 

 

We estimate that total capital expenditures for fiscal year 2017 will be approximately $5.0 million to $10.0 million.

 

Financing Activities

 

Net cash used in financing activities was $6.9 million for fiscal year 2016, $36.2 million for fiscal year 2015, while net cash provided by financing activities was $25.6 million for fiscal year 2014. The 2016 balance reflects scheduled quarterly payments on the term loan plus $11.5 million in voluntary prepayments, partially offset by a net $6.0 million borrowing on the revolver. The 2015 balance reflects scheduled quarterly payments on the term loan plus a $35.0 million voluntary prepayment in December 2015. The 2014 balance reflects net borrowings of $25.8 million on our credit facility in fiscal year 2014, representing $41.8 million in net proceeds from our August 2014 refinancing, before accrued interest and fees and net of $4.8 million debt issuance cost payment, and $16.4 million in net repayments from our previous senior secured credit facility.

 

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 was payable in consecutive quarterly installments of $412,500, commencing on December 31, 2014, with the balance payable in full at maturity. Since December 2015, we have made $46.5 million in voluntary prepayments on our 2014 Term Loan, which reduced our quarterly installment payments to $294,886.

 

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 and the 2014 Revolving Credit Facility was 8.0% as of January 2, 2017. 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 January 2, 2017.

 

In December 2015, we made a $35.0 million voluntary prepayment of our 2014 Term Loan and wrote off $0.6 million of debt issuance costs and $0.4 million of debt discount, which are included in interest expense. In 2016, we made $11.5 million in voluntary prepayments of our 2014 Term Loan and wrote off $161 thousand of debt issuance costs and $105 thousand of debt discount, which are included in interest expense.

 

 

As of January 2, 2017, we had letters of credit of approximately $10.1 million outstanding under the 2014 Revolving Credit Facility and had available borrowing capacity of approximately $13.9 million.

 

NASDAQ Delisting 

 

On March 10, 2017, we received a notice (the “Notice”) from the Office of General Counsel of NASDAQ indicating that the NASDAQ Hearings Panel (the “Panel”) has determined that our securities would be delisted from The NASDAQ Global Select Market. Accordingly, trading of our common stock was suspended at the opening of business on March 14, 2017, and a Form 25-Notification of Delisting will be filed with the Securities and Exchange Commission, which will remove our securities from listing and registration on NASDAQ.

 

The Notice indicated that the Panel’s determination was based on concerns about our ability to sustain compliance with all requirements for continued listing on The NASDAQ Stock Market. Specifically, on July 28, 2016, NASDAQ Listing Qualifications Staff (the “Staff”) notified us that we were no longer in compliance with NASDAQ Marketplace Rule 5450(b)(3)(C) since the market value of our publicly held shares closed below the required minimum of $15,000,000 for the previous 30 consecutive business days. In accordance with NASDAQ Marketplace Rule 5810(c) (3)(D), the Staff granted us a 180-day period, or until January 24, 2017, to regain compliance. We were unable to regain compliance with Rule 5450(b)(2)(C) by January 24, 2017. Accordingly, on January 25, 2017, we received a letter from Staff notifying us that our common stock would be delisted from The NASDAQ Global Select Market on February 3, 2017 unless we timely requested a hearing before the Panel. We appealed the Staff’s determination by requesting a hearing before the Panel to seek continued listing. On March 10, 2017, the Panel determined that our shares would be delisted from The NASDAQ Stock Market effective at the open of business on March 14, 2017. Since March 15, 2017, our common stock has traded in the OTC market under the symbol IRGT.

 

The OTC market is a significantly more limited market than the NASDAQ Global Select Market and the quotation of our common stock on the OTC market has resulted in a less liquid market available for existing and potential stockholders to trade shares of our common stock. This could further depress the trading price of our common stock and could also have a long-term adverse effect on our ability to raise capital. We cannot provide any assurances as to if or when we will be in a position to relist our common stock on a nationally-recognized securities exchange. See “Item 1A. Risk Factors—Our common stock is no longer listed on a national securities exchange and is quoted only on the over-the-counter (“OTC”) market, which could negatively affect our stock price and liquidity.”

  

Off-Balance Sheet Arrangements

 

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

 

Contractual Obligations

 

The following table sets forth our contractual obligations and commercial commitments as of January 2, 2017 (in thousands):

 

		Payments Due by Period in Years
		Total				Less than 1 year				1 - 3 years				3 - 5 years				More than 5 years
Long-term debt		$	121,301			$	1,180			$	120,121			$	-			$	-
Operating leases			230,737				29,655				56,091				48,172				96,819
Interest payments(a)			24,447				11,547				12,900				-				-
Uncertain tax positions(b)			-				-				-				-				-
Total		$	376,485			$	42,382			$	189,112			$	48,172			$	96,819

 

__________________________

 

(a)	We estimate future interest payments on our long-term debt using interest rates and applicable margin in effect at January 2, 2017.
(b)	We have $0.4 million of uncertain tax positions, including interest and penalties, recorded in other long-term liabilities or as a reduction to net operating loss carryforwards. It is not reasonably possible to predict at this time when (or if) any of these assessments will be settled.

 

 

Impact of Inflation

 

Our profitability is dependent, among other things, on our ability to anticipate and react to changes in the costs of key operating resources, including food and beverages, labor, energy and other services. Substantial increases in costs and expenses, including the cost of crab and other shellfish, could impact our operating results to the extent such increases cannot be passed along to our guests. We have been able to substantially offset restaurant and operating cost increases resulting from inflation by altering our menu items, increasing menu prices, making productivity improvements or other adjustments. However, certain areas of costs, notably labor and utilities, can be significantly volatile or subject to significant changes due to changes in laws or regulations, such as the minimum wage laws. There can be no assurance that we will generate increases in comparable restaurant sales in amounts sufficient to offset inflationary or other cost pressures.

 

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 Loss from Continuing Operations

 

We calculate adjusted loss from continuing operations by eliminating from loss from continuing operations the impact of items we do not consider indicative of our ongoing operations. Specifically, we believe that this non-GAAP measure provides greater comparability and enhanced visibility into our results of operations, excluding the impact of special charges and certain other expenses. Adjusted loss from continuing operations represents loss from continuing operations less items such as (a) transaction costs, (b) costs related to conversions, remodels and closures, (c) write-off of debt issuance costs and debt discount, (d) asset impairments, (e) loss (gain) on insurance settlements, (f) the current and deferred income tax effect of the above described adjustments (calculated using a marginal rate of 38.5% in fiscal year 2016, 39.0% in fiscal year 2015 and 39.6% in fiscal year 2014, and (g) the deferred tax asset valuation allowance. We believe this measure provides 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 measure 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 loss from continuing operations to adjusted loss from continuing operations is as follows:

 

		Fiscal Year
		2016				2015				2014
		(in thousands)
Loss from continuing operations		$	(44,361	)		$	(24,849	)		$	(33,382	)
Adjustments - continuing operations:
Transaction costs			627				-				510
Costs related to conversions, remodels and closures			5,037				1,954				127
Write-off of debt issuance costs and debt discount			266				962				2,241
Asset impairments			26,237				9,409				1,770
Loss (gain) on insurance settlements			(755	)			428				(89	)
Income tax effect of adjustments above
Current benefit			(59	)			(119	)			(979	)
Deferred benefit			(12,031	)			(4,856	)			(817	)
Valuation allowance			17,781				12,807				25,632
Adjusted loss from continuing operations		$	(7,258	)		$	(4,264	)		$	(4,987	)
Weighted average shares outstanding
Basic			25,834				25,731				25,659
Diluted			25,834				25,731				25,659
Loss from continuing operations per share
Basic and diluted		$	(1.72	)		$	(0.97	)		$	(1.30	)
Adjusted loss from continuing operations per share
Basic and diluted		$	(0.28	)		$	(0.17	)		$	(0.19	)

 

 

 

Restaurant-level Profit and Restaurant-level Profit Margin

 

As used herein, restaurant-level profit represents revenues less (i) licensing and franchising revenues not attributable to core company-owned restaurant operations, (ii) cost of sales, (iii) labor expenses, (iv) occupancy expenses, and (v) other operating expenses (vi) plus non-cash rent related to restaurant operations. Restaurant-level profit margin is calculated as restaurant-level profit divided by restaurant sales. Restaurant-level profit and restaurant-level profit margin are a supplemental measure of operating performance of our restaurants that do not represent and should not be considered as an alternative to net income or revenues as determined by GAAP, and our calculation thereof may not be comparable to that reported by other companies. Restaurant-level profit and restaurant-level profit margin have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Management believes restaurant-level profit and restaurant-level profit margin are an important component of financial results because they are a widely used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant-level profit and restaurant-level profit margin as key metrics to evaluate our financial performance compared with our competitors, to evaluate the profitability of incremental sales and to evaluate our performance across periods.

 

		Fiscal Year
		2016				2015				2014
		(in thousands, except percentages)
Revenues		$	450,279			$	492,044			$	503,508
Less: Other revenues			414				295				179
Restaurant sales(A)		$	449,865			$	491,749			$	503,329
Restaurant operating costs and expenses
Cost of sales			147,036				154,270				163,407
Labor expenses			134,048				142,209				142,662
Occupancy expenses			38,312				40,890				39,401
Other operating expenses			83,582				95,384				94,086
Deferred rent			(1,130	)			(1,692	)			(1,580	)
Restaurant-level profit(B)		$	48,017			$	60,688			$	65,353
Restaurant-level profit margin (B ÷ A)			10.7	%			12.3	%			13.0	%

 

Recent Accounting Pronouncements

 

Disclosure regarding recent accounting pronouncements can be found in Note 2 of our consolidated financial statements contained in this Form 10-K.

 

Critical Accounting Policies

 

We prepare our consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Critical accounting policies are those that management believes are both most important to the portrayal of our financial condition and operating results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience, outside advice from parties believed to be experts in such matters, and on 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. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. Our significant accounting policies can be found in Note 2 to our consolidated financial statements. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

 

Impairment of Long-Lived Assets and Disposal of Property and Equipment

 

We evaluate the recoverability of the carrying amount of long-lived assets, including property and equipment, whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. Our review for impairment of these long-lived assets takes into account estimates of future undiscounted cash flows. Factors considered include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Our asset group for impairment testing is comprised of the assets and liabilities of each of our individual restaurants, since this is the lowest level of identifiable cash flows. We estimate the future cash flows expected to result from the use of the long-lived assets and their eventual disposition. An impairment loss may be recognized if the future undiscounted cash flows associated with the assets are less than their carrying value. Impairment losses are measured as the amount by which the carrying values of the assets exceed their fair values. We estimate fair value by discounting the expected future cash flows of our restaurants over their remaining lease terms.

 

 

The following estimates and assumptions used in the discounted cash flow analysis impact the fair value of restaurant long-lived assets:

 

•

discount rate based on our weighted average cost of capital and the risk-free rate of return;

•

sales growth rates and cash operating margins over the expected remaining lease terms;

•

strategic plans, including projected capital spending and intent to exercise renewal options, for the restaurant;

•

other risks and qualitative factors specific to the asset or conditions in the market in which the asset is located at the time the assessment was made.

 

During Fiscal 2016, the average discount rate, average sales growth rate and average cash operating margin rate used were 9.2%, (0.6)% and 2.5%, respectively. We believe our assumptions in calculating the fair value of our long-lived assets are similar to those used by other marketplace participants.

 

We recorded impairment charges of $26.2 million in fiscal year 2016, $9.4 million in fiscal year 2015 and $1.8 million in fiscal year 2014, which is included in asset impairments and closures in our consolidated statements of operations, related to our long-lived assets. If we are unable to improve the performance of our restaurants or if we experience deteriorating results at some of our restaurants, we could recognize additional impairment charges.

 

From time to time, we have decided to close or dispose of restaurants. Typically, such decisions are made based on operating performance or strategic considerations and must be made before the actual costs or proceeds of disposition are known, and management must make estimates of these outcomes. Such outcomes could include the sale of a leasehold, mitigating costs through a tenant or subtenant, or negotiating a buyout of a remaining lease term. In these instances, management evaluates possible outcomes, frequently using outside real estate and legal advice, and records provisions for the effect of such outcomes. The accuracy of such provisions can vary materially from original estimates, and management regularly monitors the adequacy of the provisions until final disposition occurs.

 

Leases

 

We currently lease all of our restaurant locations under leases classified as operating leases. Minimum base rent for our operating leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term. As such, an equal amount of rent expense is attributed to each period during the term of the lease regardless of when actual payments occur. Lease terms begin on the date we take possession under the lease and include cancelable option periods where failure to exercise such options would result in an economic penalty. The difference between rent expense and actual cash payments is classified as deferred rent in our consolidated balance sheets.

 

Some of our leases provide for contingent rent, which is determined as a percentage of sales in excess of specified minimum sales levels. We recognize contingent rent expense prior to the achievement of the specified sales target that triggers the contingent rent, provided achievement of the sales target is considered probable.

 

Insurance Reserves

 

We maintain large deductibles on workers’ compensation, general liability, property, and business interruption insurance coverage. These policies have been structured to limit our per-occurrence exposure. We record a liability for workers’ compensation and general liability for all unresolved claims based on actuarial information provided by our insurance brokers and insurers, combined with management judgments regarding economic conditions, including future medical and indemnity costs, the frequency and severity of claims and claim development history, case jurisdiction, applicable legislation and settlement practices. Changes in any of these factors in the future may produce materially different amounts of expense than otherwise would be reported under these insurance programs.

 

 

 Income Taxes

 

 We are subject to U.S. federal income tax and income taxes imposed in the state and local jurisdictions where we operate our restaurants. Deferred income taxes are provided on temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their tax bases. Deferred tax assets are recognized for temporary differences that will be deductible in future years’ tax returns and for operating loss and tax credit carryforwards. 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. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years’ tax returns.

 

We account for uncertain tax positions using a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by tax authorities, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. See Note 10 for information regarding changes in our unrecognized tax benefits.

 

Forward-Looking Statements

 

This annual report on Form 10-K includes “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. We caution you that the forward looking information presented in this annual 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 annual 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 annual report include, but are not limited to, our seeking to sell the Company and improve our capital structure and our fiscal year 2017 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 this annual report. Any forward-looking information presented herein is made only as of the date of this 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. Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. These risks and uncertainties and other factors include, among others:

 

(i)

We may not be successful in selling the Company or either of our two restaurant brands, or in improving our capital structure, and the failure of either of these initiatives or may require us to seek relief in bankruptcy or complete a sale as part of a bankruptcy;

 

(ii)

To the extent that we seek relief under the U.S. Bankruptcy Code, whether or not such relief leads to a quick emergence from Chapter 11, through a sale or otherwise, a bankruptcy filing could materially adversely affect the relationships between us and our existing and potential customers, employees, suppliers, and others, and could result in little or no recovery to our existing security holders.

 

(iii)

The increasingly competitive industry conditions under which we operate has negatively impacted our results of operations and cash flows and may continue to in the future. These factors have raised substantial doubt about our ability to continue as a going concern.

 

(iv)

Our borrowings require significant amortization and other debt service payments. We may not be able to make such payments as they become due, which would result in an event of default under the 2014 Credit Agreement. Were this to occur, we might not have, or be able to obtain sufficient cash to pay our accelerated indebtedness.

 

(v)

If our operating results decline we may not be able to generate sufficient cash flows to meet our liquidity needs.

 

(vi)

Our level of indebtedness may make it more difficult for us to pay our debts as they become due and more necessary for us to divert our cash flow from operations to debt service payments.

 

(vii)

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.

 

 

(viii)

We may not achieve all of the expected benefits from our cost saving initiatives.

 

(ix)

Our common stock is no longer listed on a national securities exchange and is quoted only on the OTC market, which may negatively effect on our stock price and liquidity.

 

(x)

The loss of key management personnel and possible difficulties in retaining or replacing such personnel under current circumstances could affect our ability to achieve our operational goals and cost saving initiatives.

  

Item 7A. 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 fiscal year 2016, crab, lobster and shrimp accounted for approximately 49% of our 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, fish and dairy products, may 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 January 2, 2017, we had $121.3 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% change in the interest rate on the outstanding balance of our variable rate debt would result in a $1.2 million change in our annual results of operations.

 

 

 Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Reports of Independent Registered Public Accounting Firm	51
Consolidated Balance Sheets as of January 2, 2017 and December 28, 2015	53
Consolidated Statements of Operations for the years ended January 2, 2017, December 28, 2015, and December 29, 2014	54
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended January 2, 2017, December 28, 2015, and December 29, 2014	55
Consolidated Statements of Cash Flows for the years ended January 2, 2017 December 28, 2015, and December 29, 2014	56
Notes to Consolidated Financial Statements	57

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Ignite Restaurant Group, Inc.

Houston, Texas

 

 

We have audited the accompanying consolidated balance sheet of Ignite Restaurant Group, Inc. and subsidiaries (the "Company") as of January 2, 2017 and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audit. The consolidated financial statements of the Company for the years ended December 28, 2015 and December 29, 2014 were audited by other auditors, whose report, dated March 3, 2016, expressed an unqualified opinion on those statements.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, such 2016 consolidated financial statements present fairly, in all material respects, the financial position of Ignite Restaurant Group, Inc. and subsidiaries as of January 2, 2017, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company’s expectation that they will likely not meet the financial covenant ratios set forth in their 2014 Credit Agreement during fiscal 2017 will result in the Company’s debt becoming due upon demand. The uncertainty associated with the Company’s ability to repay its outstanding debt obligations as they become due raises substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 3 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ Deloitte and Touche LLP

 

Houston, Texas

April 3, 2017

 

 

 Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Ignite Restaurant Group, Inc.

  

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Ignite Restaurant Group, Inc. and its subsidiaries as of December 28, 2015, and the results of their operations and their cash flows for each of the fiscal years ended December 28, 2015 and December 29, 2014, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

  

 

/s/ PricewaterhouseCoopers LLP

 

Houston, Texas

March 3, 2016

 

 

IGNITE RESTAURANT GROUP, INC.

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands, except par value)

  

		January 2, 2017				December 28, 2015
ASSETS
Current assets
Cash and cash equivalents		$	430			$	7,817
Accounts receivable, net			5,195				3,385
Inventories			3,845				5,272
Other current assets			3,736				4,677
Total current assets			13,206				21,151
Property and equipment, net			129,324				176,307
Intangible assets, net			4,464				5,482
Other assets			1,422				2,242
Total assets		$	148,416			$	205,182
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable		$	11,885			$	18,406
Accrued liabilities			29,453				31,532
Current portion of debt obligations			1,180				1,621
Total current liabilities			42,518				51,559
Long-term debt obligations			117,806				123,112
Deferred rent			17,788				20,193
Other long-term liabilities			6,744				3,705
Total liabilities			184,856				198,569
Commitments and contingencies (Note 11)
Stockholders' equity (deficit)
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; 26,246 and 26,180 shares issued and outstanding, respectively			259				258
Additional paid-in capital			93,928				92,621
Accumulated deficit			(130,627	)			(86,266	)
Total stockholders' equity (deficit)			(36,440	)			6,613
Total liabilities and stockholders' equity (deficit)		$	148,416			$	205,182

  

See accompanying notes to consolidated financial statements.

 

 

IGNITE RESTAURANT GROUP, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(in thousands, except earnings per share)

 

		Fiscal Year
		2016				2015				2014
Revenues		$	450,279			$	492,044			$	503,508
Costs and expenses
Restaurant operating costs and expenses
Cost of sales			147,036				154,270				163,407
Labor expenses			134,048				142,209				142,662
Occupancy expenses			38,312				40,890				39,401
Other operating expenses			83,582				95,384				94,086
General and administrative			23,487				30,523				38,669
Depreciation and amortization			23,227				25,831				23,901
Pre-opening costs			876				927				2,799
Asset impairments and closures			31,360				10,497				1,980
Loss (gain) on disposal of assets			623				(121	)			1,340
Total costs and expenses			482,551				500,410				508,245
Loss from operations			(32,272	)			(8,366	)			(4,737	)
Interest expense, net			(12,603	)			(16,363	)			(12,521	)
Gain (loss) on insurance settlements			755				(428	)			89
Loss from continuing operations before income taxes			(44,120	)			(25,157	)			(17,169	)
Income tax expense (benefit)			241				(308	)			16,213
Loss from continuing operations			(44,361	)			(24,849	)			(33,382	)
Loss from discontinued operations, net of tax			-				(21,516	)			(20,167	)
Net loss		$	(44,361	)		$	(46,365	)		$	(53,549	)
Net loss per share
Basic and diluted
Loss from continuing operations		$	(1.72	)		$	(0.97	)		$	(1.30	)
Loss from discontinued operations, net of tax		$	-			$	(0.84	)		$	(0.79	)
Net loss		$	(1.72	)		$	(1.80	)		$	(2.09	)
Weighted average shares outstanding
Basic			25,834				25,731				25,659
Diluted			25,834				25,731				25,659

 

See accompanying notes to consolidated financial statements.

 

 

IGNITE RESTAURANT GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

 

(in thousands)

 

		Common Stock								Additional Paid-in				Accumulated Earnings
		Shares				Amount				Capital				(Deficit)				Total
Balance at December 30, 2013			25,796			$	256			$	87,703			$	13,648			$	101,607
Net loss			-				-				-				(53,549	)			(53,549	)
Issuance of equity awards, net			398				-				-				-				-
Vesting of restricted stock			-				1				(1	)							-
Taxes paid related to net share settlement of equity awards			(11	)			-				(124	)			-				(124	)
Stock-based compensation			-				-				3,365				-				3,365
Balance at December 29, 2014			26,183			$	257			$	90,943			$	(39,901	)		$	51,299
Net loss			-				-				-				(46,365	)			(46,365	)
Issuance of equity awards, net			29				-				-				-				-
Vesting of restricted stock			-				1				(1	)			-				-
Taxes paid related to net share settlement of equity awards			(32	)			-				(134	)			-				(134	)
Stock-based compensation			-				-				1,813				-				1,813
Balance at December 28, 2015			26,180			$	258			$	92,621			$	(86,266	)		$	6,613
Net loss			-				-				-				(44,361	)			(44,361	)
Issuance of equity awards, net			83				-				-				-				-
Vesting of restricted stock			-				1				(1	)			-				-
Taxes paid related to net share settlement of equity awards			(17	)			-				(29	)			-				(29	)
Stock-based compensation			-				-				1,337				-				1,337
Balance at January 2, 2017			26,246			$	259			$	93,928			$	(130,627	)		$	(36,440	)

 

See accompanying notes to consolidated financial statements.

 

  

IGNITE RESTAURANT GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

		Fiscal Year
		2016				2015				2014
Cash flows from operating activities
Net loss		$	(44,361	)		$	(46,365	)		$	(53,549	)
Loss from discontinued operations, net of tax			-				21,516				20,167
Adjustments to reconcile loss from continuing operations to net cash provided by operating activities:
Depreciation and amortization			23,227				25,831				23,901
Amortization of debt issuance costs			1,117				1,663				3,121
Amortization of debt discount			514				870				177
Stock-based compensation			1,337				2,065				2,877
Asset impairments			26,237				9,409				1,770
Deferred income tax			196				(324	)			15,023
Gain on insurance related to property and equipment			(705	)			(695	)			(89	)
Non-cash loss (gain) on disposal of assets			543				(133	)			(649	)
Decrease (increase) in operating assets:
Accounts receivable			(2,063	)			4,076				3,289
Inventories			1,427				576				(92	)
Other operating assets			1,416				1,006				1,314
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities			(3,358	)			3,808				(2,783	)
Other operating liabilities			623				2,076				3,915
Net cash provided by operating activities - continuing operations			6,150				25,379				18,392
Net cash provided by (used in) operating activities - discontinued operations			-				2,668				(1,432	)
Net cash provided by operating activities			6,150				28,047				16,960
Cash flows from investing activities
Purchases of property and equipment			(9,360	)			(16,633	)			(25,859	)
Proceeds from property insurance claims			705				695				89
Proceeds from disposal of assets			1,759				2,030				41
Purchases of intangible assets			-				-				(150	)
Net cash used in investing activities - continuing operations			(6,896	)			(13,908	)			(25,879	)
Net cash provided by investing activities - discontinued operations			240				11,639				585
Net cash used in investing activities			(6,656	)			(2,269	)			(25,294	)
Cash flows from financing activities
Borrowings on revolving credit facility			43,050				-				109,000
Payments on revolving credit facility			(37,050	)			-				(194,207	)
Proceeds from long-term debt			-				-				162,525
Payments on long-term debt			(12,852	)			(36,100	)			(46,775	)
Debt issuance costs paid			-				-				(4,784	)
Taxes paid related to net share settlement of equity awards			(29	)			(134	)			(124	)
Net cash provided by (used in) financing activities			(6,881	)			(36,234	)			25,635
Net increase (decrease) in cash and cash equivalents			(7,387	)			(10,456	)			17,301
Change in cash and cash equivalents - discontinued operations			-				(2,291	)			(573	)
Cash and cash equivalents at beginning of period			7,817				20,564				3,836
Cash and cash equivalents at end of period		$	430			$	7,817			$	20,564

 

See accompanying notes to consolidated financial statements.

 

 

IGNITE RESTAURANT GROUP, INC.

Notes to Consolidated Financial Statements

 

Note 1—Description of Business

 

Ignite Restaurant Group, Inc. (referred to herein as the “Company,” “Ignite,” “we,” “us” or “our”) operates 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 January 2, 2017, we operated 112 Joe’s restaurants and 25 Brick House restaurants in 32 states within the United States, and franchised three Joe’s restaurants in Dubai, U.A.E.

 

J.H. Whitney VI, L.P., an affiliate of J.H. Whitney Capital Partners, LLC, owns approximately 66.1% of our total outstanding common stock as of January 2, 2017.

 

Note 2—Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Ignite and its wholly-owned subsidiaries as of January 2, 2017. All significant intercompany balances and transactions have been eliminated in consolidation. On April 17, 2015, we completed the sale of Romano’s Macaroni Grill (“Macaroni Grill”). The operating results of Macaroni Grill for the prior periods have been aggregated and reclassified as discontinued operations in our consolidated statements of operations. See Note 4 for further discussion.

 

Fiscal Year

 

Our fiscal year ends on the Monday nearest to December 31 of each year. Fiscal year 2016 was a 53-week year. Fiscal years 2015 and 2014 were 52-week years. References to 2016, 2015 and 2014 are references to fiscal years ended January 2, 2017, December 28, 2015, and December 29, 2014 respectively.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Fair Value Measurements

 

We apply fair value accounting for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, we assume the highest and best use of the asset by market participants in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and credit risk.

 

We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and base the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

Level 1—	Quoted prices in active markets for identical assets or liabilities.
Level 2—	Observable inputs other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—	Inputs that are both unobservable and significant to the overall fair value measurement reflect an entity’s estimates of assumptions that market participants would use in pricing the asset or liability.

 

 

Financial Instruments

 

We record all financial instruments at cost, which is the fair value at the date of transaction. The amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate their fair value because of the short-term maturities of these instruments.

 

Revenue Recognition

 

Revenues from food and beverage sales are recognized when payment is tendered at the point-of-sale and are presented net of promotional allowances, discounts, and employee meals. Sales taxes collected from customers and remitted to governmental authorities are presented on a net basis, or excluded from revenues, in our consolidated statements of operations. Initial franchise fees received are deferred and recognized as revenue upon opening of the franchised restaurant, which is when we have performed substantially all initial services required by the franchise agreement. Continuing licensing and royalty revenues are recognized when earned. Licensing and royalty revenues were $0.3 million, $0.2 million, and $4 thousand in 2016, 2015, and 2014, respectively.

 

Proceeds from the sale of gift cards are deferred and recognized as revenue upon redemption. Deferred gift card revenue is included in accrued liabilities in our consolidated balance sheets. Our gift cards do not have an expiration date and we do not deduct non-usage fees from outstanding gift card balances. We recognize gift card breakage income exclusive of amounts subject to state escheatment laws when the likelihood of redemption of the cards becomes remote. We recorded breakage income of $0.5 million, $0.4 million, and $0.3 million during 2016, 2015 and 2014, respectively, which is included in revenues in our consolidated statements of operations.

 

We also benefit from certain vendor rebates which are recorded as a reduction to cost of sales. Additionally, we may enter into certain contracts that provide marketing allowances, which are amortized over the life of the contract.

 

Cash and Cash Equivalents

 

We consider cash on hand in restaurants, deposits in banks, and short-term marketable securities with original maturities of 90 days or less as cash and cash equivalents.

 

Accounts Receivable

 

Accounts receivable, net of allowance for doubtful accounts, represent their estimated net realizable value, and includes receivables from credit card processors, franchisees, the sale of gift cards in retail outlets, and allowances due to us from landlords based on lease terms.

 

Inventories

 

Inventories are stated at the lower of cost or market, and consist of food, beverage, and retail merchandise. Inventory cost is determined using the average cost method.

 

Property and Equipment

 

Property and equipment acquired is stated at cost less accumulated depreciation and impairment. Depreciation is calculated using the straight-line method, based on the following estimated useful lives:

 

Leasehold improvements		Shorter of effective lease term or estimated useful life (in years)
Restaurant equipment				10
Furniture and fixtures			5	–	10
Computer equipment and software			3	–	5

 

We capitalize major replacements and improvements that increase the useful life of the asset, whereas we expense repairs and maintenance as incurred. The cost and accumulated depreciation and impairment of assets sold, retired or otherwise disposed of are removed from the balance sheet and any gain or loss is included in the statement of operations.

 

We capitalize direct costs associated with the site acquisition and construction of restaurant units, including direct internal payroll and payroll-related costs, incremental travel expenses, and interest cost as leasehold improvements. If we subsequently determine that we will not continue acquiring or developing a project for which we have been capitalizing costs, any previously capitalized internal development and third-party costs will be written off as dead deals and included in general and administrative expenses.

 

 

Impairment of Long-Lived Assets

 

We evaluate the recoverability of the carrying amount of long-lived assets, including property and equipment, whenever events and circumstances indicate that the carrying value of an asset may not be fully recoverable. Our review for impairment of these long-lived assets takes into account estimates of future undiscounted cash flows. Factors considered include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Our asset group for impairment testing is comprised of the assets and liabilities of each of our individual restaurants, since this is the lowest level of identifiable cash flows. We estimate the future cash flows expected to result from the use of the long-lived assets and their eventual disposition. An impairment loss may be recognized if the future undiscounted cash flows associated with the assets are less than their carrying value. Impairment losses are measured as the amount by which the carrying values of the assets exceed their fair values. We estimate fair value by discounting the expected future cash flows of our restaurants over their remaining lease terms. We recorded impairment charges of $26.2 million, $9.4 million and $1.8 million in fiscal year 2016, 2015 and 2014, respectively, which is included in asset impairments and closures in our consolidated statements of operations.  

 

From time to time, we have decided to close or dispose of restaurants. Typically, such decisions are made based on operating performance or strategic considerations and must be made before the actual costs or proceeds of disposition are known, and management must make estimates of these outcomes. Such outcomes could include the sale of a leasehold, mitigating costs through a tenant or subtenant, or negotiating a buyout of a remaining lease term. In these instances, management evaluates possible outcomes, frequently using outside real estate and legal advice, and records provisions for the effect of such outcomes. The accuracy of such provisions can vary materially from original estimates, and management regularly monitors the adequacy of the provisions until final disposition occurs.

 

Intangible Assets

 

We recognize acquired intangible assets apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged, either individually or in combination with a related contract, asset or liability. Intangible assets subject to amortization are amortized on a straight-line basis over their estimated useful lives. We evaluate the recoverability of the carrying amount of intangible assets with definite useful lives whenever events and circumstances indicate that the carrying value of the asset may not be fully recoverable. Impairment losses are recognized if the carrying value of an intangible asset is not recoverable from expected future cash flows and its carrying amount exceeds its estimated fair value.

 

Intangible assets consist of the following (in thousands):

 

		January 2, 2017												December 28, 2015
		Cost				Accumulated Amortization and Impairment				Carrying Value				Cost				Accumulated Amortization and Impairment				Carrying Value
Definite lived:
Trademarks		$	4,580			$	4,417			$	163			$	4,580			$	4,029			$	551
Indefinite lived:
Liquor licenses			4,376				75				4,301				4,931				-				4,931
		$	8,956			$	4,492			$	4,464			$	9,511			$	4,029			$	5,482

 

The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangibles and included in intangible assets, net in the consolidated balance sheets. The costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies are expensed as incurred. Annual liquor license renewal fees are expensed over the renewal term. Liquor licenses are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We determined estimated fair value based on prices in the open market for licenses in similar jurisdictions (level 2 in the fair value hierarchy). We recorded impairment charges for liquor licenses in 2016 of $0.1 million. In 2016, we sold two liquor licenses for $0.5 million. No impairment charge for liquor licenses was recorded in 2015.

  

 

Definite-lived trademarks are amortized on a straight-line basis over their estimated useful life of 10 years. Amortization expense for definite-lived trademarks was approximately $0.4 million, $0.5 million and $0.5 million for 2016, 2015 and 2014, respectively.

 

Scheduled amortization of definite-lived intangible assets is as follows (in thousands):

  

Fiscal Year		Amount
2017			35
2018			35
2019			29
2020			15
2021			15
Thereafter			34
		$	163

 

Deferred Charges

 

Debt issuance costs representing costs to obtain long-term financing are accounted for as a deferred charge and are included in our consolidated balance sheets in other assets for our revolving credit facility and as a reduction to our debt obligation for our term loan. They are amortized using the interest method for the term loan and straight-line method for the revolving credit facility over the term of the related financing. Amortization of debt issuance costs, which was approximately $1.1 million, $1.7 million, and $3.1 million for 2016, 2015 and 2014, respectively, is included in interest expense in our consolidated statements of operations. See Note 7 regarding write-off of debt issuance costs related to debt pay down and refinancing transactions.

 

Leases

 

We currently lease all of our restaurant locations under leases classified as operating leases. Minimum base rent for our operating leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term. As such, an equal amount of rent expense is attributed to each period during the term of the lease regardless of when actual payments occur. Lease terms begin on the date we take effective control of the property and include cancelable option periods where failure to exercise such options would result in an economic penalty. The difference between rent expense and actual cash payments is classified as deferred rent in the consolidated balance sheets.

 

Certain leases contain provisions that require additional rental payments based upon restaurant sales volume. Contingent rentals are accrued each period as the liabilities are incurred, in addition to the straight-line rent expense noted above.

 

Insurance Liabilities

 

We maintain large deductibles on workers’ compensation, general liability, property, and business interruption insurance coverage. These policies have been structured to limit our per-occurrence exposure. Our estimated liabilities for workers’ compensation and general liability are undiscounted and are based on our judgment regarding a number of assumptions and factors, including the frequency and severity of claims, claims development history, case jurisdiction, applicable legislation, and our claims settlement practices.

 

Advertising Expenses

 

Advertising production costs are expensed at the time the advertising is first aired. All other advertising costs are expensed as incurred. Advertising expenses were approximately $16.1 million, $22.9 million and $22.9 million for 2016, 2015 and 2014, respectively, and are included in other operating expenses in our consolidated statements of operations.

 

Pre-opening Costs

 

Non-capital expenditures associated with the opening of new or converted restaurants are expensed as incurred. Pre-opening costs consist of costs incurred prior to opening a new or converted restaurant and are made up primarily of manager salaries, employee payroll, and other costs related to training and preparing new or converted restaurants for opening. Pre-opening costs also include an accrual for straight-line rent recorded during the period between the date we take effective control of our leased properties and the restaurant opening date.

 

 

Stock-based Compensation

 

We recognize expense for stock-based compensation awards, which is equal to the fair value of the awards at grant date, ratably in labor expenses and general and administrative expenses in our consolidated statements of operations over the requisite service period.

 

The following table provides the significant weighted average assumptions used to determine the fair value of stock appreciation rights on the grant date using the Black-Scholes option-pricing model for awards granted during the fiscal years 2016, 2015 and 2014:

 

		Fiscal Year
		2016						2015						2014
Expected term (in years)				6.3						6.3						6.3
Expected volatility				46.4%						43.9%						42.5%
Dividend yield				0.0%						0.0%						0.0%
Risk-free interest rate			1.3%	-	1.6%				1.5%	-	1.9%				1.7%	-	2.0%

 

Since we have limited historical exercise experience on stock appreciation rights, 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. Risk-free 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 the closing stock price of the business day prior to the grant date.

 

 Income Taxes

 

We are subject to U.S. federal income tax and income taxes imposed in the state and local jurisdictions where we operate our restaurants. Deferred income taxes are provided on temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their tax bases. Deferred tax assets are recognized for temporary differences that will be deductible in future years’ tax returns and for operating loss and tax credit carryforwards. 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. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years’ tax returns.

 

We account for uncertain tax positions using a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by tax authorities, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. See Note 10 for information regarding changes in our unrecognized tax benefits.

 

Net Loss per Share

 

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period, while diluted net 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 following table summarizes the components to determine the denominators of basic and diluted net loss per share (in thousands):

  

		Fiscal Year
		2016				2015				2014
Denominator:
Basic weighted average shares outstanding			25,834				25,731				25,659
Effect of dilutive securities			-				-				-
Diluted weighted average shares outstanding			25,834				25,731				25,659

 

 

For fiscal year 2016, 2015 and 2014, we excluded 0.7 million, 1.2 million and 1.6 million stock appreciation rights (“SARs”) and 349 thousand, 405 thousand and 510 thousand restricted stock, respectively, from the calculation of net loss per share because the effect was anti-dilutive due to the net loss during the respective periods.

 

Claims and Other Contingencies

 

We recognize legal claims and other loss contingencies when information becomes available indicating that a loss is probable and the amount can be reasonably estimated. Predicting the outcome of claims and litigation involves substantial uncertainties that could cause actual results to vary materially from estimates. We recognize legal expenses, including those related to loss contingencies, as incurred.

 

Generally, we do not recognize gain contingencies until all contingencies have been resolved, but we recognize gain contingencies that are recoveries of previously recognized contingent losses when realization of the recovery is deemed probable and reasonably estimable.

 

Reclassifications

 

We reclassified certain items in the prior year financial statements to conform to the current year financial statement presentation. The reclassification had no effect on our previously reported financial position, results of operations or cash flows.

 

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’s effective date has been deferred by the issuance of ASU No. 2015-14, and 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 of December 15, 2016. This ASU permits the use of either the retrospective or cumulative effect transition method. We are in the process of selecting a transition method. This guidance will not impact our recognition of revenue for company-operated restaurant sales. 

 

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. As of January 2, 2017, we adopted ASU 2014-15. Please see Note 3.

 

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. Our adoption of this ASU effective December 29, 2015 did not have a significant impact on our consolidated financial statements. We reclassified $2.2 million of debt issuance costs related to our term loan from other assets to reduce the carrying value of our debt obligations as of December 28, 2015 to conform to current year financial statement presentation. The debt issuance costs balance related to our revolving credit facility will continue to be classified in other assets in our consolidated balance sheets. 

 

 

In August 2015, the FASB issued ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, to amend SEC paragraphs in Subtopic 835-30 pursuant to SEC Staff announcement at the Emerging Issues Task Force meeting on June 18, 2015. The ASU addresses presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements, which were not addressed in ASU No. 2015-03. Given the absence of authoritative guidance within ASU No 2015-03 for debt issuance costs related to line-of credit arrangements, the SEC Staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The effective date and transition guidance of this ASU is in conjunction with the effective date and transition guidance of ASU No. 2015-03. Our adoption of this ASU effective December 29, 2015 did not have a significant impact on our consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidance requires the recognition of assets and liabilities that arise from lease transactions wherein current off-balance sheet leasing activities is required to be reflected in the balance sheet. The FASB lessee accounting model retains two types of leases, and is consistent with the lessee accounting model under existing GAAP. One type of lease (finance leases) will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The other type of lease (operating leases) will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with operating leases under existing GAAP. However, as it relates to the balance sheet, lessees will recognize lease liabilities based upon the present value of remaining lease payments and corresponding lease assets for operating leases with limited exception. The new standard also will require lessees and lessors to provide additional qualitative and quantitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide supplemental information about the nature of an organization’s leasing activities. This ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements, but we expect this will have a material effect on our balance sheet since we have a significant amount of operating leases.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU is effective for us for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.

 

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which amends certain aspects of ASU 2014-09, specifically the standard’s guidance on identifying performance obligations and the implementation guidance on licensing. This ASU’s effective date and transition provisions are aligned with the requirements of ASU 2014-09. We are currently evaluating the impact of this ASU on our consolidated financial statements, including the recognition of transactions such as franchise area development fees and initial fees from franchisees.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses the classification of cash receipts and cash payments and their presentation in the statement of cash flows. This ASU is effective for annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact of this ASU on our consolidated financial statements.

 

Note 3—Going Concern

 

We have continued to experience declines in comparable restaurant sales and income from operations at Joe’s and Brick House. We have closed underperforming restaurants and implemented cost reduction measures to help mitigate the effect of these declines and improve our financial position and liquidity. In late 2016, we engaged a financial advisor to assist us in evaluating various strategic alternatives potentially available to us. As part of this ongoing evaluation of strategic alternatives, we announced that our Board of Directors, working together with our management team and financial advisor, has commenced a process to pursue the sale of our business, which could be sold as an entirety or through the separate sales of Joe’s or Brick House.  

 

 

As of January 2, 2017, we were in compliance with all of our debt covenants. However, we are forecasting in 2017 that we may no longer be in compliance with the financial covenant ratios in our 2014 Credit Agreement. In an event of default, our lenders may accelerate the maturity of all of our indebtedness. If our lenders accelerate the maturity of our indebtedness, we will not have sufficient liquidity to repay the entire balance of our outstanding borrowings. The uncertainty associated with our ability to repay our outstanding debt obligations as they become due raises substantial doubt about our ability to continue as a going concern for one year after the issuance date of the financial statements.

 

We are currently in discussions with our lenders in connection with our pursuit of various strategic alternatives to improve our capital structure. It is possible that even a successful implementation of one of the strategic alternatives that we are pursuing will require us to make a filing for protection under Chapter 11 of the U.S. Bankruptcy Code. Our consolidated financial statements as of and for the year ended January 2, 2017 have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve month period following the date of these consolidated financial statements.

 

Note 4—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 in 2015 and $0.2 million was received in 2016. 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 table below reconciles significant items that comprise loss from discontinued operations before income taxes (in thousands):

 

		2015				2014
Revenues		$	88,439			$	333,677
Cost of sales			23,187				89,848
Labor expenses			31,266				114,473
Occupancy expenses			9,987				38,499
Other operating expenses			18,190				81,427
General and administrative			2,149				6,619
Depreciation and amortization			2,066				9,873
Asset impairments and closures			22,807				10,714
Loss (gain) on disposal of assets			4,339				(859	)
Other non-operating items			(1,038	)			124
Loss from discontinued operations before income taxes		$	(24,514	)		$	(17,041	)

 

Note 5—Selected Balance Sheet Accounts

 

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

 

		January 2, 2017				December 28, 2015
Prepaid insurance		$	1,709			$	1,663
Prepaid rent			851				-
Prepaid licenses and fees			308				742
Prepaid taxes			166				1,194
Prepaid advertising			43				135
Other			659				943
		$	3,736			$	4,677

 

 

 

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

  

		January 2, 2017				December 28, 2015
Payroll and related costs		$	7,272			$	8,084
Insurance			6,953				7,158
Property taxes			3,139				3,476
Deferred gift card revenue			3,060				3,833
Restaurant closures liability			2,540				384
Sales and alcohol taxes			1,741				1,652
Utilities			1,187				1,466
Occupancy			1,071				936
Interest			913				2,664
Other			1,577				1,879
		$	29,453			$	31,532

 

Note 6—Property and Equipment, net

 

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

 

		January 2, 2017				December 28, 2015
Leasehold improvements		$	226,146			$	257,244
Equipment			35,010				37,193
Furniture and fixtures			17,897				19,165
Construction in progress			266				8,607
			279,319				322,209
Less accumulated depreciation			149,995				145,902
		$	129,324			$	176,307

 

Depreciation expense was approximately $22.8 million, $25.4 million and $23.4 million fiscal years 2016, 2015 and 2014, respectively.

  

Note 7—Debt Obligations

 

Debt obligations consisted of the following as of the dates presented below (in thousands):

 

		January 2, 2017				December 28, 2015
Term loan, due February 2019		$	115,301			$	128,350
Revolving credit facility, expiring February 2019			6,000				-
Less unamortized debt discount and loan costs			2,315				3,617
Total debt, net of debt discount and loan costs			118,986				124,733
Less current portion			1,180				1,621
Long-term debt obligations		$	117,806			$	123,112

 

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. Since December 2015, we have made $46.5 million in voluntary prepayments on our 2014 Term Loan, which reduced our quarterly installment payments to $294,886.

 

 

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 and 2014 Revolving Credit Facility was 8.0% as of January 2, 2017. 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 January 2, 2017.

 

In December 2015, we made a $35.0 million voluntary prepayment of our 2014 Term Loan and we wrote off $0.6 million of debt issuance costs and $0.4 million of debt discount, which are included in interest expense. In 2016 we made $11.5 million in voluntary prepayments and we wrote off $161 thousand of debt issuance costs and $105 thousand of debt discount, which are included in interest expense.

 

As of January 2, 2017, we had letters of credit of approximately $10.1 million outstanding under the 2014 Revolving Credit Facility and had available borrowing capacity of approximately $13.9 million.

  

The carrying value of our long-term debt approximates fair value. The estimated 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 8—Restaurant Closures

 

Costs associated with restaurant closures are recorded when the restaurant is closed. Expenses and losses related to closed restaurants are recorded in asset impairments and closures and loss on disposal of assets in our consolidated statements of operations.

 

During fiscal year 2016, we closed 18 Joe’s restaurants and one Brick House restaurant. We recognized $5.0 million in closure-related expenses, including $5.1 million in asset impairments and closures primarily related to future minimum lease obligations, and a net gain of $0.1 million recorded in loss (gain) on disposal of assets. We also reclassified $3.9 million of accrued liabilities to the restaurant closure liability, primarily related to the deferred rent balances for the closed restaurants. The corresponding restaurant closure liability is approximately $7.0 million of which $4.5 million is reflected in other long-term liabilities in our consolidated balance sheet as of January 2, 2017.

 

During fiscal year 2015, we closed nine Joe’s restaurants, included in the nine restaurants closed in the current year were three that were converted to Brick House restaurants and one Joe’s that was sold resulting in a net gain of $2.5 million. We recognized $2.0 million in closure-related expenses, including $1.0 million in asset impairments and closures primarily related to future minimum lease obligations, $1.7 million of accelerated depreciation, and a net gain of $0.7 million recorded in loss (gain) on disposal of assets. The corresponding restaurant closure liability was approximately $1.3 million of which $0.9 million is reflected in other long-term liabilities in our consolidated balance sheet as of December 28, 2015.

 

 

An analysis of our restaurant closure liability, including current and long-term portions, is shown below (in thousands):

  

		December 29, 2014				Additions				Adjustments				Payments				December 28, 2015				Additions				Adjustments				Payments				January 2, 2017
Facility and other exit costs		$	272			$	1,041			$	560			$	(606	)		$	1,267			$	4,926			$	3,913			$	(3,111	)		$	6,995
Severance costs			-				46				-				(46	)			-				196				-				(196	)			-
Restaurant closure liability		$	272			$	1,087			$	560			$	(652	)		$	1,267			$	5,122			$	3,913			$	(3,307	)		$	6,995

  

 Note 9—Insurance and Other Recoveries

 

Our Joe’s restaurant in Oceanside, New York was temporarily closed in the fourth quarter of 2012 due to damage sustained from Hurricane Sandy. In 2014, we received $89 thousand in insurance proceeds related to Hurricane Sandy.

 

In 2015, a Joe’s restaurant in Indianapolis was razed by fire. We recorded a $0.4 million loss in the third quarter of 2015 related to this fire.

 

In 2016, we recorded $0.8 million gain 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.

 

In relation to each of these casualty events, the following amounts were recorded in our consolidated financial statements (in thousands):

 

		2016				2015				2014
Proceeds from property insurance claims		$	705			$	695			$	89
Gain on insurance related to property and equipment		$	705			$	695			$	89

  

Note 10—Income Taxes

 

Income tax expense (benefit) included in continuing operations consisted of the following (in thousands):

  

		Fiscal Year
		2016				2015				2014
Current income tax
Federal		$	28			$	106			$	(1,457	)
State			17				(100	)			2,618
Foreign			-				10				29
			45				16				1,190
Deferred income tax
Federal			3				(481	)			14,372
State			193				157				651
			196				(324	)			15,023
Total income tax expense (benefit)		$	241			$	(308	)		$	16,213

 

In addition, included in discontinued operations was an income tax expense (benefit) of ($3.0) million and $3.1 million in 2015 and 2014, respectively.

 

At January 2, 2017, we had federal income tax credit carryforwards of approximately $29.3 million, comprised of a $28.8 million credit for FICA and Medicare taxes paid on reported employee tip income, Alternative Minimum Tax (“AMT”) credits of approximately $0.4 million, and a Texas margin tax credit of approximately $0.1 million. The FICA credit will begin to expire in 2031 if unused prior to that time, while the AMT credit may be carried forward indefinitely. The Texas margin tax credit will expire in 2028 if unused prior to that time. We also have state net operating loss carryforwards of approximately $74.2 million which will begin to expire in 2024 if unused prior to that time. At January 2, 2017, we have federal net operating loss carryforwards of approximately $68.1 million, which will begin to expire in 2036 if unused prior to that time. In addition, at January 2, 2017, we have federal capital loss carryforwards of approximately $4.1 million, which will begin to expire in 2021 if unused prior to that time.

 

 

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. Due to the continued operating losses and the asset impairments we are in a three-year cumulative loss position. 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. During fiscal year 2016, we recorded a valuation allowance of $17.8 million. During fiscal year 2015 and 2014, we recorded a valuation allowance of $12.8 million and $25.6 million for continuing operations and $6.8 million and $10.3 million for discontinued operations, respectively, against our deferred tax assets. We excluded the deferred tax liabilities related to certain indefinite lived intangibles when calculating the amount of valuation allowance needed as these liabilities cannot be considered as a source of income when determining the realizability of the net deferred tax assets. The valuation allowance was recorded as a reduction to our income tax benefit in our consolidated statement of operations. If we are able to generate sufficient taxable income in the future such that 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.

  

		Fiscal Year
		2016				2015				2014
Tax expense (benefit) at the federal statutory income tax rate		$	(15,442	)		$	(8,805	)		$	(6,009	)
Permanent differences			15				191				45
State income taxes, net of federal impact			(453	)			(1,410	)			51
Tax credit carryforwards			(2,766	)			(3,377	)			(3,662	)
Change in valuation allowance			17,781				12,807				25,632
Other			1,106				286				156
Total income tax expense (benefit)		$	241			$	(308	)		$	16,213
Effective income tax rate			(0.5%	)			1.2	%			(94.4%	)

 

The components of our deferred tax assets and liabilities are as follows (in thousands):

  

		January 2, 2017				December 28, 2015
Deferred tax assets
Credit carryforwards		$	29,333			$	25,080
Net operating loss carryforwards			28,345				20,610
Deferred rent			6,975				7,955
Closure reserve			2,661				494
Accrued insurance			2,000				2,103
Property and equipment			1,858				-
Intangibles			1,037				1,030
Stock-based compensation			820				1,752
Accrued expenses			64				347
Other			858				866
Valuation allowance			(73,305	)			(55,598	)
			646				4,639
Deferred tax liabilities
Property and equipment			-				(3,475	)
Intangibles			(387	)			(393	)
Prepaid expenses			(188	)			(319	)
Net deferred tax asset		$	71			$	452

 

 

We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. We are subject to U.S. federal income tax examinations by tax authorities for the fiscal years ended December 30, 2013, December 29, 2014 and December 28, 2015. We did not have any tax examinations during fiscal year 2016, and we have no other income tax audits open at this time. We are also subject to various state income tax examinations by state tax authorities for the fiscal year ended December 30, 2013 and forward.

 

The following table shows the changes in the amount of our uncertain tax positions, exclusive of the effect of interest and penalties (in thousands):

  

		Fiscal Year
		2016				2015				2014
Balance at beginning of year		$	470			$	609			$	582
Additions for tax positions of the current year			53				119				122
Reductions for tax positions of prior years			(186	)			(258	)			(95	)
Balance at end of year		$	337			$	470			$	609

 

The full balance of approximately $337 thousand, if recognized, would affect the annual effective rate, net of any federal tax benefits. We do not expect any changes that will significantly impact our uncertain tax positions within the next twelve months.

 

We accrue interest and penalties related to our uncertain tax positions as a component of income tax expense. During the fiscal years 2016, 2015 and 2014, we recognized approximately ($93) thousand, ($43) thousand and $32 thousand of interest and penalties (reversals), net, respectively. We had approximately $50 thousand and $143 thousand accrued for interest and penalties as of January 2, 2017 and December 28, 2015, respectively.

 

Note 11—Commitments and Contingencies

 

In the course of 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.

 

Minimum Lease Commitments

 

We lease our restaurants, office facilities, and certain equipment under operating lease agreements. The future minimum rental commitments for these noncancelable operating leases with initial or remaining lease terms in excess of one year are as follows (in thousands):

 

Fiscal Year		Amount
2017		$	29,655
2018			28,485
2019			27,606
2020			25,569
2021			22,603
Thereafter			96,819
		$	230,737

 

The above amounts do not include property taxes, insurance, and normal maintenance that we are required to pay. Rental expense relating to operating leases amounted to approximately $32.4 million, $35.5 million and $34.7 million for 2016, 2015 and 2014, respectively. A number of our leases also provide for contingent rentals based on a percentage of sales above a specified minimum. Total contingent rentals, included in rent expense, amounted to approximately $1.4 million, $1.6 million and $1.9 million for 2016, 2015 and 2014, respectively.

 

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 related interim periods. The complaint lodged against us, certain of our 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. There are pending motions and discovery issues regarding members of the putative class. 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.

 

On August 22, 2016, in the Superior Court of California, County of San Francisco, a former manager at Joe’s Crab Shack in San Francisco filed a complaint against the Company alleging that he, and all other salaried employees in California (with the exception of those who worked at restaurants in Orange County, Los Angeles County and/or Ventura County), were misclassified as exempt employees and are therefore entitled to unpaid overtime, as well as compensation for missed meal and rest breaks. This former employee purports to represent a statewide class of salaried employees as to their state law claims. We have removed this complaint to federal court, answered and asserted affirmative defenses and are vigorously contesting this matter. At this 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.

 

On August 24, 2016, in the Superior Court of California, County of Los Angeles, two former managers at Joe’s Crab Shack locations in California filed a complaint against the Company alleging that they, and all other salaried employees who worked at Joe’s Crab Shack locations in Orange County, Los Angeles County and/or Ventura County, California, were misclassified as exempt employees and are therefore entitled to unpaid overtime, as well as compensation for missed meal and rest breaks. These former employees purport to represent a statewide class of salaried employees as to their state law claims. We have removed this complaint to federal court, answered and asserted affirmative defenses and are vigorously contesting this matter. At this 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.

 

In July 2016, we were contacted by counsel for two former Joe’s Crab Shack managers concerning a potential nationwide collective action and state class action alleging, on behalf of the subordinate Joe’s Crab Shack managers outside of California, that they were misclassified as exempt from federal and state overtime laws.  In September 2016, we entered into a tolling agreement with these former managers so that the parties could gather information, examine the allegations in more detail and engage in discussions via mediation, which ultimately took place on January 30, 2017.  The mediation did not result in a resolution and the former managers have threatened to move forward with the filing of a putative class action lawsuit. At this 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 12—Stock-Based Compensation

 

In May 2012, our stockholders approved the adoption of our 2012 Omnibus Incentive Plan (“2012 Plan”). Under the 2012 Plan, we are authorized to grant stock-based awards in the form of stock options, restricted stock, restricted stock units, SARs, and other stock-based awards. The maximum number of common shares reserved for the grant of awards under the 2012 Plan is 3,180,074 shares. Other specific terms for awards granted under the 2012 Plan shall be determined by our board of directors (or a committee of its members). As of January 2, 2017, 1,623,856 shares were available for future grants under the 2012 Plan.

 

 

Stock-based compensation expense was approximately $1.3 million, $2.1 million and $2.9 million for fiscal years 2016, 2015 and 2014, respectively. As of January 2, 2017, we had unrecognized stock-based compensation expense of approximately $1.1 million related to stock-based compensation awards granted. That cost is expected to be recognized over a weighted average period of 2.4 years.

 

Stock Appreciation Rights

 

Stock appreciation rights granted under the 2012 Plan generally vest over four years from the date of grant with 25% vesting each year following the date of grant. SARs may not have a term exceeding ten years from the date of grant. The weighted average grant date fair value of SARs granted during the fiscal years 2016, 2015 and 2014 was $1.22, $1.94 and $6.34, respectively.

 

Below is a summary of SARs activity during the fiscal year ended January 2, 2017:

  

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value (in thousands)
Outstanding at December 28, 2015			1,222,573			$	10.55
Granted			421,078			$	2.63
Forfeited			(719,013	)		$	11.94
Outstanding at January 2, 2017			924,638			$	5.86				8.5			$	-
Exercisable at January 2, 2017			236,522			$	10.51				7.4			$	-

 

 No SARs were exercised during fiscal years 2016, 2015 and 2014.

  

Restricted Stock

 

Restricted stock, which converts one for one at the end of the vesting period, has been granted to certain employees and independent directors. Restricted stock generally vests from one to five years from the date of grant.

  

The following table summarizes restricted stock activity for the fiscal year ended January 2, 2017:

  

		Number of Shares				Weighted Average Grant Date Fair Value
Nonvested at December 28, 2015			404,948			$	6.42
Granted			172,875			$	2.72
Vested			(125,726	)		$	4.71
Forfeited			(89,798	)		$	7.39
Nonvested at January 2, 2017			362,299			$	5.01

 

The aggregate fair value of restricted stock that vested during the fiscal years 2016, 2015 and 2014 was $0.6 million, $1.1 million and $629 thousand, respectively. The weighted average grant date fair value of restricted stock granted in fiscal years 2016, 2015 and 2014 was $2.72, $4.05 and $12.54, respectively.

  

Note 13—Related Party Transaction

 

Under an eighteen month contract which ended September 30, 2015, we received certain creative marketing-related services, including print design, digital branding, and food photography from Norton Creative LLC (“Norton”). We also engaged Norton for television direction and production services, which were not covered in the scope of the original agreement. On September 12, 2015, our then President and CEO married the majority owner and CEO of Norton. Prior to becoming a related party, Norton provided services in the amount of $2.2 million during fiscal year 2015, of which $162 thousand related to discontinued operations. Amounts billed to us for services provided by Norton after becoming a related party, which were reviewed and approved by the Audit Committee, totaled $341 thousand for fiscal year 2015. As of December 28, 2015, we no longer used Norton for creative marketing services.

 

 

Note 14—Supplemental Disclosure of Cash Flow Information

 

The following table sets forth certain cash and non-cash activities from continuing operations, as follows (in thousands):

  

		2016				2015				2014
Cash paid for interest, net of capitalized interest		$	12,723			$	13,031			$	7,360
Cash paid (refunded) for income taxes		$	(515	)		$	(445	)		$	1,581
Supplemental noncash investing and financing activities
Increase (decrease) in unpaid liabilities for property and equipment		$	(5,604	)		$	3,911			$	(358	)

 

Note 15—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. We believe reporting information about each of our brands is 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 provides 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 other intangibles assets are presented below as reconciling items to the amounts presented in the consolidated financial statements.

  

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

 

		Fiscal Year
		2016				2015				2014
Revenues
Joe's Crab Shack		$	366,617			$	414,335			$	432,969
Brick House Tavern + Tap			83,662				77,709				70,539
		$	450,279			$	492,044			$	503,508
Income (loss) from operations
Joe's Crab Shack		$	(16,606	)		$	9,539			$	21,458
Brick House Tavern + Tap			2,164				5,541				3,828
Corporate			(17,830	)			(23,446	)			(30,023	)
		$	(32,272	)		$	(8,366	)		$	(4,737	)
Depreciation and amortization
Joe's Crab Shack		$	17,307			$	20,304			$	18,654
Brick House Tavern + Tap			4,900				4,483				4,190
Corporate			1,020				1,044				1,057
		$	23,227			$	25,831			$	23,901
Capital expenditures
Joe's Crab Shack		$	2,092			$	7,804			$	19,390
Brick House Tavern + Tap			6,121				7,916				5,502
Corporate			1,147				913				967
		$	9,360			$	16,633			$	25,859

 

 

		January 2, 2017				December 28 2015
Property and equipment, net
Joe's Crab Shack		$	82,993			$	122,450
Brick House Tavern + Tap			44,060				51,351
Corporate			2,271				2,506
		$	129,324			$	176,307
Intangible assets, net
Joe's Crab Shack		$	2,576			$	3,559
Brick House Tavern + Tap			1,881				1,913
Corporate			7				10
		$	4,464			$	5,482

  

Note 16—Quarterly Financial Information (Unaudited)

 

The following table summarizes unaudited quarterly data for 2016 and 2015 (in thousands, except per share data):

 

		Fiscal Year 2016
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Revenues		$	117,899			$	130,757			$	119,937			$	81,686
Loss from continuing operations(1)		$	(1,626	)		$	(10,443	)		$	(15,163	)		$	(17,129	)
Loss from continuing operations per share
Basic and diluted		$	(0.06	)		$	(0.40	)		$	(0.59	)		$	(0.66	)

 

		Fiscal Year 2015
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Revenues		$	122,219			$	143,170			$	133,357			$	93,298
Income (loss) from continuing operations(2)		$	(3,196	)		$	1,731			$	(4,288	)		$	(19,096	)
Income (loss) from continuing operations per share
Basic and diluted		$	(0.12	)		$	0.07			$	(0.17	)		$	(0.74	)

________________________

(1)

Full year 2016 loss from continuing operations includes $5.1 million of costs related to conversions, remodels and closures ($0.1 million in the first quarter, $0.3 million in the second quarter, $4.5 million in the third quarter and a $0.2 million in the fourth quarter); $0.3 million in debt issuance cost and debt discount write-offs ($0.1 million in the second quarter and $0.2 million in the third quarter); $26.2 million in asset impairment ($8.0 million in the second quarter, $11.1 million in the third quarter and $7.1 million in the fourth quarter); $0.8 million in gain on insurance settlements (in the second quarter); and $17.8 million in deferred tax asset valuation allowance ($0.5 million in the first quarter, $4.8 million in the second quarter, $6.4 million in the third quarter and $6.1 million in the fourth quarter).

 

(2)

Full year 2015 loss from continuing operations includes $2.0 million of costs related to conversions, remodels and closures ($0.1 million in the first quarter, $1.6 million in the third quarter and a $0.3 million in the fourth quarter); $1.0 million in debt issuance cost and debt discount write-offs (in the fourth quarter); $9.4 million in asset impairment ($3.9 million in the third quarter and $5.5 million in the fourth quarter); $0.4 million in loss on insurance settlements (in the third quarter); and $12.8 million in deferred tax asset valuation allowance ($2.1 million in the first quarter, $0.6 million in the second quarter, $2.6 million in the third quarter and $7.5 million in the fourth quarter).

 

 

Note 17—Subsequent Event

 

On March 31, 2017, we entered into a forbearance agreement with certain of the lenders and the Administrative Agent (collectively, the “Forbearing Lenders”) under the 2014 Credit Facility, whereby the Forbearing Lenders agreed to, among other things, forbear from taking any action to enforce certain of their rights or remedies under the 2014 Credit Agreement with respect to certain defaults, events of default, and anticipated events of default (the “Forbearance Agreement”). Absent any additional default or the occurrence of certain events, the Forbearance Agreement will be effective until May 9, 2017. Should we be in default of the forbearance agreement or should the required lenders and the Administrative Agent not agree to further extend such forbearance agreement, the Administrative Agent and lenders would be free to exercise any rights and remedies with respect to such default and events of defaults pursuant to the terms of the 2014 Credit Facility, which could include accelerating the maturity of all our indebtedness.

 

 

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

Item 9A. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures defined in Rule 13a-15(e) and 15d-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 Annual Report on Form 10-K for the year ended January 2, 2017, 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 January 2, 2017.

 

Management’s Report on Internal Control over Financial Reporting and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

 

Based on this evaluation, management concluded that our internal control over financial reporting was effective as of January 2, 2017.

 

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 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 January 2, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

Item 9B. OTHER INFORMATION.

 

Changes in Senior Management Team

 

Robert S. Merritt, who has served on the Company’s Board of Directors since March 2014 and as its Chief Executive Officer since November 2015, will resign from those positions after the filing of this Annual Report on Form 10-K (the “Separation Date”), but will continue to serve as a consultant to the Company.

 

On March 30, 2017, the Company entered into a Separation Agreement and General Release (the “Agreement”) with Mr. Merritt. Pursuant to the terms of the Agreement, Mr. Merritt will receive severance payments equal to his base salary as in effect immediately prior to the Separation Date for a period of twelve months, paid in substantially equal semi-monthly installments. Mr. Merritt will also receive COBRA continuation coverage for the twelve month period following the Separation Date. The premiums for such COBRA coverage will be reimbursed by the Company. The Agreement contains customary confidentiality provisions and a release of claims by Mr. Merritt against the Company. Mr. Merritt will be subject to customary non-solicitation and non-competition covenants for a period of twelve months. The foregoing description of the Agreement is a general description and is qualified in its entirely by reference to the actual agreement, which is attached hereto as Exhibit 10.25.

 

On March 30, 2017, the Company entered into a Consulting Agreement with Mr. Merritt (the “Consulting Agreement”), pursuant to which Mr. Merritt will provide consulting services to the Company for a term of seven months, beginning on the Separation Date. The Company will pay Mr. Merritt $25,000 per month for six months, plus an initial payment of $50,000, for an aggregate of $200,000. The foregoing description of the Consulting Agreement is a general description and is qualified in its entirely by reference to the actual agreement, which is attached hereto as Exhibit 10.26.

 

  

Jonathan Tibus, a Managing Director with Alvarez & Marsal, has been elected Chief Executive Officer of the Company. Mr. Tibus serves as Managing Director at A&M Restaurant Credentials with a specialization in developing, evaluating, and implementing restructuring and performance improvement plans, largely in the restaurant, retail, and hospitality sectors. He has over 19 years of experience in the interim management and financial advisory roles. Prior to joining the Company, Mr. Tibus served as Chief Executive Officer of Last Call Operating Co., which owned and managed over 80 restaurants. He also recently served as Chief Restructuring Officer to Quiznos, a sandwich restaurant franchisor. He has served as restructuring advisor to various other companies including an $800 million golf and sports equipment retailer, a multi-unit retail and wholesale nursery business, and an Atlantic City resort and casino prior to and during its first bankruptcy filing. In addition to advising companies directly, Mr. Tibus also has extensive experience advising lenders, creditors, and franchisees. He served as restructuring advisor to the lenders of Garden Fresh (d/b/a/ Souplantation and Sweet Tomatoes) and e-brands restaurants Timpano and Aquaknox, among others, and as advisor to franchisees of Wendy’s and various YUM! Brand, and advisor to the Unsecured Creditor’s Committee of RoomStore, Inc., a chain of furniture retail stores. In these roles he has provided operational analysis and restructuring advisory, including detailed store-level operating analyses, overhead analyses, and bankruptcy-related analyses to help frame negotiations and expectations. Mr. Tibus is 44 years old and is not the beneficial owner of any shares of Company common stock.

 

On April 3, 2017, the Company and Alvarez & Marsal North America, LLC (“Alvarez & Marsal”) entered into an agreement regarding Mr Tibus’s service as the Company’s Chief Executive Officer. Under the terms of the agreement, Mr. Tibus will continue to be employed by Alvarez & Marsal and will not receive any compensation directly from the Company. The Company will instead pay Alvarez & Marsal the lesser of $25,000 per week or $795 per hour. Under the agreement, the Company may not solicit, recruit, hire or otherwise engage any employee of Alvarez & Marsal or any of its affiliates who perform services for the Company for a period of two years after the termination of the agreement. The Company also entered into an indemnification and limitation on liability agreement (“Indemnification Agreement”) with Alvarez & Marsal on April 3, 2017, pursuant to which the Company agreed to indemnify Alvarez & Marsal and Mr. Tibus for any activities performed for the Company. The foregoing descriptions of the agreement with Marsal & Alvarez and the Indemnification Agreement are general descriptions and are qualified in their entirely by reference to the actual agreements, which are attached hereto as Exhibits 10.27 and 10.28.

 

The Board of Directors also promoted Brad Leist, the Company’s Senior Vice President and Chief Financial Officer, to the additional position of Chief Administrative Officer, and elected Steve Metzger, our Vice President and General Counsel, has been promoted to Senior Vice President, General Counsel and Secretary of the Company. In connection with the additional responsibilities that Mr. Leist and Mr. Metzger are taking on, their salaries have been increased to $400,000 and $300,000, respectively. In addition, the Company increased the salary of Ellen Clarry, the Company’s Chief Supply Officer, to $340,000.

 

Director Compensation

 

As of April 3, 2017, our independent director compensation program was modified as follows: in lieu of historic compensation, our independent directors will receive (i) a monthly cash retainer of $10,000, and (ii) payments of $2,500 per meeting of the full Board attended other than regularly scheduled quarterly board meetings. No additional meeting fees will be paid for attendance at Board committee meetings. These board fees may not exceed the prior board compensation level of $150,000 for any director in any fiscal year. In addition, the chairs of the Audit, Compensation and Corporate Governance and Nominating Committee, if independent, will receive a supplemental annual cash retainer of $12,000, $10,000 and $7,000, respectively.

 

The Forbearance Agreement

  

On March 31, 2017, the Company entered into a forbearance agreement with certain of the lenders and the Administrative Agent (collectively, the “Forbearing Lenders”) under our 2014 Credit Facility, whereby the Forbearing Lenders agreed to, among other things, forbear from taking any action to enforce certain of their rights or remedies under the 2014 Credit Facility with respect to certain defaults, events of default, and anticipated events of default (the “Forbearance Agreement”). The Forbearance Agreement is effective until the earliest of (i) May 9, 2017, or (ii) the occurrence or existence of any default or event of default other than defaults, events of default and anticipated events of default that are subject to the Forbearance Agreement. Should we be in default of the Forbearance Agreement or should the required lenders and the Administrative Agent not agree to further extend such Forbearance Agreement, the Administrative Agent and lenders would be free to exercise any rights and remedies with respect to such defaults and events of defaults pursuant to the terms of the 2014 Credit Facility.

 

PART III

 

Item 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

As of April 3, 2017, our directors and executive officers and their respective positions are as follows:

 

Name		Age		Position
Paul R. Vigano		45		Affiliated Non-Employee Director
Shauna R. King		60		Independent Director
Joseph N. Stein		56		Independent Director
F. Phillip Handy		72		Independent Director
Ann Iverson		73		Independent Director
Robert S. Merritt		65		Chief Executive Officer
Brad A. Leist		42		Chief Financial Officer
Ellen J. Clarry		62		Chief Supply Officer

 

 Paul R. Vigano was elected as Chairman of our board of directors in May 2012 and serves in the class of directors whose term expires in 2017. Mr. Vigano is a Senior Managing Director at J.H. Whitney Capital Partners, LLC (“J.H. Whitney”), a Connecticut-based private equity firm. Mr. Vigano joined J.H. Whitney in 1998. Prior to joining J.H. Whitney, he was a member of the mergers and acquisitions group at Goldman, Sachs & Co. Mr. Vigano holds a B.B.A. degree from the University of Michigan where he graduated Phi Beta Kappa and an M.B.A. from Stanford Graduate School of Business. Mr. Vigano is 45 years old.

 

Mr. Vigano currently serves as a director of several private companies, including several consumer product companies. His in-depth knowledge and experience in the branded consumer products industry, coupled with his skills in corporate finance, strategic planning and leadership of complex organizations, provide him with the qualifications and skills to serve as a director. 

 

 

 

Shauna R. King was appointed as a member of our board of directors in August 2014 and serves in the class of directors whose term expires in 2017. Ms. King served as Vice President, Finance and Business Operations for Yale University where her responsibilities included strategic and financial planning, capital and operating budgeting, departmental business operations, information technology, dining operations, shared services and procurement. Prior to her role at Yale University, Ms. King provided management, financial and operations consulting to select clients with SKing Consulting from 2003 to 2006, as well as from 1994 to 1998. Between her consulting endeavors, Ms. King held numerous leadership positions at PepsiCo, Inc., including Chief Transformation Officer; President and Global Information Officer, PepsiCo Shared Services; Vice President and General Manager, Club Channel and Vice President, Field Finance at Frito-Lay, Inc. Prior to these roles, Ms. King held various business development, finance and marketing related roles at PepsiCo Food Systems, Frito-Lay, Inc. and PepsiCo Bottling Group, in addition to starting her career as a CPA at PriceWaterhouse. Ms. King graduated magna cum laude with a BS in Psychology from St. Lawrence University followed by an MBA from Cornell University and an Honorary Master’s Degree from Yale University. Ms. King is 60 years old.

 

Ms. King’s extensive leadership experience in both the public and private sectors, her accounting and financial expertise and her experience as a business consultant provide her with the qualifications and skills to serve as a director. Ms. King’s experience and understanding of finance led to her designation as an “audit committee financial expert.” 

 

 Joseph N. Stein was elected as a member of our board of directors in June 2013 and serves in the class of directors whose term expires in 2017. Mr. Stein has served as a restaurant and franchise consultant since February 2011 and is President of R&J Restaurants, LLC, a Blaze Pizza franchise. He also serves on the Board of Directors of Del Taco Restaurants, Inc., Home Franchise Concepts, Inc. and the Orange County affiliate of the Susan G. Komen Foundation, a non-profit charity. Mr. Stein has served in a variety of executive positions with restaurant companies during his over 25-year career, including with El Pollo Loco, Inc., Rubio’s Restaurants, Inc., Checkers Drive-In Restaurants, Inc. and CKE Restaurants, Inc. Mr. Stein was previously a certified public accountant for KPMG LLP and served as a director of ROI Acquisitions Corp., a special purpose acquisition corporation in the restaurant and consumer goods industry. Mr. Stein is 56 years old.

 

Mr. Stein’s extensive experience as a senior executive officer in the restaurant industry, his accounting and financial expertise and his experience with strategic transactions provides him with the qualifications and skills to serve as a director. Mr. Stein’s experience and understanding of finance led to his designation as an “audit committee financial expert.” 

 

F. Philip Handy was elected as a member of our board of directors on March 11, 2016 and serves in the class of directors whose term expires in 2018. Over a career that spans more than forty years, Mr. Handy has demonstrated business and financial acumen. Mr. Handy founded the investment firm, Winter Park Capital, in 1980, and he currently serves as its Chief Executive Officer. Mr. Handy has held leadership positions in companies such as Maryland Club Foods, a nationally branded coffee/beverage company, Majik Markets, a thousand-unit convenience store and gasoline retailer, Rewards Network, Inc., a leading provider of dining and loyalty programs for restaurants, airlines and retailers, and Chart House Restaurant Group. Further, Mr. Handy serves on the boards of directors of Owens Corning, Inc., a prominent global supplier of insulation, roofing and fiberglass composites, and Anixter International, Inc., a leading global supplier of communications and security products. He is also a philanthropist and he currently serves as President of the board of directors of the Foundation for Excellence in Education, a non-profit organization dedicated to education reform. Mr. Handy is a cum laude graduate of Economics, B.A. from Princeton University and he holds an MBA from Harvard Business School. Mr. Handy is 72 years old.

 

Mr. Handy’s experience within the retail and restaurant industries, combined with his public board service and his successful strategic planning and leadership of complex organizations provide Mr. Handy with the qualifications and skills to serve as a director of the Company. Mr. Handy’s experience and understanding of finance led to his designation as an “audit committee financial expert.” 

 

Ann Iverson was elected as a member of our board of directors in December 2012 and serves in the class of directors whose term expires in 2019. Ann Iverson brings over three decades of executive leadership in retail and wholesale business as a Chairman and CEO and also brings board member experience of both publicly traded and privately held companies including Owens Corning, Storehouse Plc, Shoe Pavillion, and Iconix where she was a member of audit, finance and corporate governance committees. Ms. Iverson has provided international consulting services in Carefree, Arizona since 1998. Prior to that, Ms. Iverson served as Chief Executive Officer of Laura Ashley Holdings plc, Mothercare plc and Kay-Bee Toy Stores, and Chairperson of Brooks Sports, Inc. and Chairman of the board of trustees of Thunderbird-The School of Global Management. She has held executive positions with Bloomingdales and Federated Department Stores, Inc. Ms. Iverson also has been awarded the Ellis Island Medal of Honor. Ms. Iverson is 73 years old.

 

Ms. Iverson has significant leadership experience as a chief executive officer in both the public and private sectors and as a business consultant. She provides the board a global perspective, with over 10 years of experience as chief executive officer of large multinational companies. Ms. Iverson brings to the board, among other skills and qualifications, expertise in international business, branding, finance and marketing.  

 

Robert S. Merritt currently serves as our Chief Executive Officer, from November 17, 2015, through the date of the filing of this Annual Report on Form 10-K, and a member of the board of directors of the Company, from March 2014. Mr. Merritt’s career in the restaurant industry has spanned over three decades. Prior to his appointment to our board of directors in 2014, he served as President and Chief Executive Officer of Benjamin Moore & Co., a producer of high-quality paints and finishes from July 2012 until September 2013. Prior to that, he was an original member of the senior management team of Outback Steakhouse, Inc. (currently, Bloomin’ Brands, Inc. (NASDAQ: BLMN)) where he oversaw their initial public offering and helped to expand the company’s initial operations from 5 restaurants in Florida in 1990 to over 1,250 restaurants in 22 countries by his retirement in 2005. Mr. Merritt served on the Outback Steakhouse, Inc. board of directors from 1991 to 2005, and served on the boards of each of Outback’s operating subsidiaries and joint ventures. Mr. Merritt served on the board of directors for Cosi, Inc. (NASDAQ: COSI) and currently serves on the board of directors for Ruth’s Hospitality Group, Inc. (NASDAQ: RUTH). Mr. Merritt is 65 years old. As noted in Item 9B., Mr. Merritt will resign as a director and as our CEO after the filing of this Annual Report on From 10-K, but will continue in a consulting capacity with the Company.

 

Brad A. Leist has served as our Senior Vice President and Chief Financial Officer since April 17, 2015, and became our Chief Administrative Officer effective upon the filing of this Annual Report. Prior to his current role, he served as our Senior Vice President of Accounting and Finance and prior to that, as Vice President of Accounting. Before joining Ignite in 2012, Mr. Leist served in a variety of positions, most recently as Vice President – Corporate Controller at Builders FirstSource, Inc. from May 2004 to February 2012. Builders FirstSource, Inc. is a publicly traded supplier and manufacturer of structural and related building products primarily for residential new construction. Prior to joining Builders FirstSource, Mr. Leist worked for seven years in public accounting for PricewaterhouseCoopers LLP. Mr. Leist holds a Masters in Accounting and a Bachelor of Business Administration from Texas A&M University and is a licensed CPA in Texas. Mr. Leist is 42 years old.

 

 

Ellen Clarry has served as our Chief Supply Officer since August 12, 2015. Prior to this, she served as our Senior Vice President of Quality Assurance and Global Supply Chain from January 2012. She joined Ignite in November 2006 and initially served as our Director of Purchasing, then as Vice President of Quality Assurance and Global Supply Chain. Ms. Clarry has over 30 years of product development and management, quality assurance, planning, pricing and procurement experience in the restaurant and food processing industries. Prior to joining Ignite, Ms. Clarry held leadership roles with Tyson Foods, Ventura Foods, Carlson Restaurants Worldwide, S&A Restaurant Corp. and Ingredient Technology Corporation. Ms. Clarry serves on the board of directors and executive committee of National Fisheries Institute, a trade Association committed to helping its members succeed in the global seafood marketplace. Ms. Clarry holds a Bachelor of Arts degree from Excelsior College, in Albany, New York. Ms. Clarry is 62 years old.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Directors, officers and persons who beneficially own more than 10% of our common stock are required by Section 16(a) of the Exchange Act to file reports of ownership and changes in ownership of our common stock with the SEC, the NASDAQ Capital Market and us. To the Company’s knowledge, all filings were timely filed during fiscal year 2016.

 

Code of Conduct and Ethics

 

We have adopted a code of business conduct and ethics applicable to our principal executive, financial and accounting officers and all persons performing similar functions. A copy of that code is available on our corporate website at www.igniterestaurants.com, which does not form a part of this Annual Report on Form 10-K. Any waivers to the code, or any waivers of its requirements, will be posted on our website.

 

Board Committees and Membership

 

Our board of directors has established an Audit Committee, a Compensation Committee, and a Corporate Governance and Nominating Committee. Each of the committees report to the board of directors as they deem appropriate, and as the board may request. The composition, duties and responsibilities of these committees are described below. The table below sets forth the current membership of each of the committees:

 

Director		Audit		Compensation		Corporate Governance and Nominating
Paul R. Vigano		—		X		X
Shauna R. King		Chair		—		X
Joseph N. Stein		X		Chair		—
F. Phillip Handy		X		X		—
Ann Iverson		—		X		Chair
Robert S. Merritt		—		—		—

 

Audit Committee

 

The Audit Committee is responsible for, among other matters: (i) appointing, compensating, retaining, evaluating, terminating and overseeing our independent registered public accounting firm; (ii) discussing with our independent registered public accounting firm their independence from management; (iii) reviewing with our independent registered public accounting firm the scope and results of their audit; (iv) approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm; (v) overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC; (vi) reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls and compliance with legal and regulatory requirements; and (vii) establishing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters.

 

The SEC rules and the NASDAQ Stock Market rules require us to have all independent Audit Committee members. Our board of directors has affirmatively determined that Ms. King, Mr. Handy and Mr. Stein meet the definition of “independent directors” for purposes of serving on an Audit Committee under applicable SEC and the NASDAQ Stock Market rules and therefore, we have an entirely independent Audit Committee. In addition, Ms. King, Mr. Handy and Mr. Stein each qualify as an “audit committee financial expert,” as such term is defined in Item 401(h) of Regulation S-K. Our board of directors has adopted a written charter for the Audit Committee. The Audit Committee held eleven meetings during the 2016 fiscal year.

 

 

 Compensation Committee

 

The Compensation Committee is responsible for, among other matters: (i) reviewing key employee compensation goals, policies, plans and programs; (ii) reviewing and approving the compensation of our directors, chief executive officer and other executive officers; (iii) overseeing chief executive officer and executive succession planning; and (iv) administering our stock plans and other incentive compensation plans.

 

Our board of directors has affirmatively determined that Ms. Iverson, Mr. Handy and Mr. Stein meet the definition of an “independent director” for purposes of serving on a compensation committee under applicable SEC and the NASDAQ Stock Market rules.

 

Our board of directors has adopted a written charter for the Compensation Committee. The Compensation Committee held eight meetings during the 2016 fiscal year.

 

Corporate Governance and Nominating Committee

 

Our Corporate Governance and Nominating Committee is responsible for, among other matters: (i) identifying individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors; (ii) overseeing the organization of our board of directors to discharge the board’s duties and responsibilities properly and efficiently; (iii) identifying best practices and recommending corporate governance principles; and (iv) overseeing our corporate governance guidelines and other governance principles applicable to us.

 

Our board of directors has affirmatively determined that Ms. Iverson and Ms. King meet the definition of an “independent director” for purposes of serving on a corporate governance and nominating committee under applicable SEC and the NASDAQ Stock Market rules.

 

Our board of directors has adopted a written charter for the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee held six meetings during the 2016 fiscal year.

 

Item 11. EXECUTIVE COMPENSATION.

 

This compensation discussion provides an overview of our executive compensation program, together with a description of the material factors underlying the decisions that resulted in the compensation provided to our chief executive officer and our two other highest paid executive officers during fiscal year 2016 (collectively, the “Named Executive Officers”), as presented in the tables which follow this discussion. This discussion contains statements regarding our performance targets and goals. These targets and goals are disclosed in the limited context of our compensation program and should not be understood to be statements of management’s expectations or estimates of financial results or other guidance. We specifically caution investors not to apply these statements to other contexts.

 

Summary Compensation Table  

 

The following table sets forth the total compensation for all services rendered in all capacities to us in fiscal year 2015 and 2016.

 

																				Non-Equity
												Stock				Options/SARs				Incentive Plan				All Other
Name and Principal				Salary				Bonus				Awards				Awards				Compensation				Compensation				Total
Position		Year		($)				($)				($)(1)				($)(2)				($)(3)				($)(4)				($)
Robert S. Merritt		2016			687,981				—				—				135,957				—				19,013				842,951
Chief Executive Officer		2015			64,904				—				315,425				245,313				—				17,827				643,469
Brad A. Leist		2016			288,721				—				—				56,775				—				10,396				355,892
Chief Financial Officer		2015			260,635				—				57,750				134,297				—				6,944				459,626
Ellen J. Clarry		2016			265,181				—				—				52,645								4,650				322,476
Chief Supply Officer		2015			239,038				—				71,700				124,465				33,479				4,650				473,332

________________________

(1)

Amounts represent the aggregate grant date fair value for the restricted stock awards granted in the applicable year, computed in accordance with FASB ASC Topic 718. Information about the assumptions used to value these awards can be found in Note 2 to the consolidated financial statements for the fiscal year ended January 2, 2017 in Item 8.

 

 

(2)	Amounts represent the aggregate grant date fair value for the stock appreciation rights granted in the applicable year, computed in accordance with FASB ASC Topic 718. Information about the assumptions used to value these awards can be found in Note 2 to the consolidated financial statements for the fiscal year ended January 2, 2017 in Item 8.
(3)	Represents annual cash incentive awards under our Management Incentive Plan.
(4)	The amounts included in this column for fiscal 2016 include the following:

  

						Financial
		Automobile				Counseling and				Medical
		Allowance				Tax Preparation				Examination				Relocation				Total
Name		($)				($)				($)				($)				($)
Robert S. Merritt			10,396				—				—				8,617				19,013
Brad A. Leist			10,396				—				—				—				10,396
Ellen J. Clarry			—				3,000				1,650				—				4,650

 

 

Narrative to Summary Compensation Table

 

Employee Agreements

 

Each of our Named Executive Officers has an employment agreement as follows:

 

Mr. Merritt — Pursuant to an offer letter dated November 17, 2015, as amended, between us and Mr. Merritt, Mr. Merritt’s annual base salary was set at $675,000. This salary was subject to review by the Board of Directors annually and could be increased at the Board’s discretion. In addition, pursuant to this offer letter, Mr. Merritt was entitled to participate in all bonus compensation plans, in accordance with the terms of such plans. The target level for his annual bonus is to be at least 50% of his annual salary, but entitlement to any such bonus and the amount of any bonus actually paid to Mr. Merritt is to be determined by the Board in its good faith discretion. For each of 2015 and 2016, Mr. Merritt’s target bonus level was set at 50% of his annual base salary. Mr. Merritt’s offer letter also provided for certain perquisites, including an automobile allowance of up to $10,200 annually, and standard Company-sponsored health benefits.

 

On March 30, 2017, the Company entered into a Separation Agreement and General Release (the “Agreement”) with Mr. Merritt. Pursuant to the terms of the Agreement, Mr. Merritt will receive severance payments equal to his base salary as in effect immediately prior to the Separation Date for a period of twelve months, paid in substantially equal semi-monthly installments. Mr. Merritt will also receive COBRA continuation coverage for the twelve month period following the Separation Date. The premiums for such COBRA coverage shall be reimbursed by the Company. The Agreement contains customary confidentiality provisions and a release of claims by Mr. Merritt against the Company. Mr. Merritt will be subject to customary non-solicitation and non-competition covenants for a period of twelve months. The foregoing description of the Agreement is a general description and is qualified in its entirely by reference to the actual agreement, which is attached hereto as Exhibit 10.25.

 

On March 30, 2017, the Company entered into a Consulting Agreement with Mr. Merritt (the “Consulting Agreement”), pursuant to which Mr. Merritt will provide consulting services to the Company for a term of seven months, beginning on the Separation Date. The Company will pay Mr. Merritt $25,000 per month for six months, plus an initial payment of $50,000, for an aggregate of $200,000. The foregoing description of the Consulting Agreement is a general description and is qualified in its entirely by reference to the actual agreement, which is attached hereto as Exhibit 10.26.

 

Mr. Leist— On April 17, 2015, Mr. Leist entered into an employment agreement to serve as the Company’s Chief Financial Officer. Pursuant to the employment agreement and subsequently approved pay increases, Mr. Leist’s annual base salary is set at $300,000. This salary is subject to review by the Board of Directors annually and may be increased at the Board’s discretion. In connection with taking on the additional responsibilities as Chief Administrative Officer, Mr. Leist’s salary was increased to $400,000 effective April 3, 2017. In addition, pursuant to this employment agreement, Mr. Leist is entitled to participate in the Company’s annual incentive plan, with a potential target bonus level set at 50% of his annual base salary, subject to achievement of various performance criteria, and further subject to the Board’s discretion. For each of 2015 and 2016, Mr. Leist’s target bonus level was set at 50% of his annual base salary. Pursuant to his employment agreement, Mr. Leist is entitled to certain other benefits, including an automobile allowance of up to $10,200 annually, and standard Company-sponsored health benefits.

 

Ms. Clarry — Pursuant to an offer letter dated August 31, 2015 and subsequently approved pay increases, Ms. Clarry’s annual base salary is set at $285,000 for her services as the Company’s Chief Supply Officer. This salary is subject to review by the Board of Directors annually and may be increased at the Board’s discretion. Effective April 3, 2017, Ms. Clarry’s salary was increased to $340,000. In addition, pursuant to her offer letter, Ms. Clarry is entitled to participate in the Company’s annual incentive plan, with a potential target bonus level set at 50% of her annual base salary, subject to achievement of various performance criteria, and further subject to the Board’s discretion. For each of 2015 and 2016, Ms. Clarry’s target bonus level was set at 50% of her annual base salary. Pursuant to her offer letter, Ms. Clarry is entitled to certain other benefits, including standard Company-sponsored health benefits.

 

 

Equity Incentive Plan Awards

 

As described below in the “Outstanding Equity Awards at Fiscal Year End” table, the Compensation Committee granted stock appreciation rights to all Named Executive Officers in May 2016. The grants were made to incentivize our Named Executive Officers to work to grow our stock price over time and as a retention incentive. In each case of equity awards granted, 25% of the stock appreciation rights described above will vest on each individual grant’s anniversary date in 2017, 2018, 2019 and 2020.

  

Non-Equity Incentive Plan Awards

 

In addition to receiving base salaries, our named executive officers are eligible to earn annual incentive awards under our Management Incentive Plan (“MIP”) based upon the attainment of specific financial performance objectives and, for certain executives, individual performance objectives. The annual cash incentive awards under our MIP are intended to offer incentive compensation by rewarding the achievement of corporate objectives linked to our overall financial results. Our Compensation Committee has authority to award annual cash incentives under our MIP to our executive officers. We believe that establishing annual cash incentive opportunities under our MIP helps us attract and retain qualified and highly skilled executives. These annual cash incentive awards under our MIP are intended to reward executive officers who have a positive impact on corporate results.

 

On an annual basis, or at the commencement of an executive officer’s employment with us, our Compensation Committee, based upon input from our Chief Executive Officer and Chief Financial Officer, and our human resources personnel, typically sets a target level of annual cash incentive award opportunity under our MIP that is structured as a percentage of such executive officer’s base salary at the end of the fiscal year. An executive officer’s target level of annual cash incentive award opportunity is set between 40% to 50% of his or her base salary.

 

For fiscal year 2016, each of Messrs. Merrit and Leist and Ms. Clarry’s target annual cash incentive award opportunity was set based upon each executive’s scope of responsibility and impact upon our overall financial performance at 50%.

 

All or part of a named executive officer’s annual cash incentive award opportunity under our MIP is determined based upon the achievement level of our Adjusted EBITDA. Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization adjusted for certain additions and eliminations such as deferred rent, asset impairment, restaurant closure expenses, non-cash loss on disposal of property and equipment, pre-opening costs, stock-based compensation, and certain other expenses.

 

The Compensation Committee determined that each Named Executive Officer did not achieve his or her respective quantitative targets under the MIP for 2016. As such, no bonuses were paid in respect of 2016 performance under the MIP.

 

 

Outstanding Equity Awards at Fiscal Year End

 

The following table sets forth information with respect to outstanding stock appreciation rights and stock awards for each of the named executive officers as of January 2, 2017:

 

				Option Awards (1)																Stock Awards
				Number of				Number of
				Securities				Securities																Market Value
				Underlying				Underlying												Number of Shares				of Shares of
				Unexercised				Unexercised				SAR/Option				SAR/Option				of Stock That				Stock That Have
		Grant		SARs/Options (#)				SARs/Options (#)				Exercise Price				Expiration				Have Not Vested				Not Vested
Name		Date		Exercisable				Unexercisable (1)				($)				Date				(#)(2)				($)(3)
Robert S. Merritt		11/17/2015			39,063				117,188				3.41			11/17/2025					-				-
		11/17/2015			-				-				-				-				69,375				37,463
		5/18/2016			-				104,166				2.82			5/18/2026					-				-
Brad A. Leist		5/11/2012			7,000				-				14.00			5/11/2022					-				-
		6/3/2013			4,500				1,500				18.30			6/3/2023					-				-
		11/22/2013			7,500				2,500				11.93			11/22/2023					-				-
		6/19/2014			7,680				7,680				14.59			6/19/2024					-				-
		6/19/2014			-				-				-				-				960				518
		4/17/2015			6,250				18,750				3.85			4/17/2025					-				-
		4/17/2015			-				-				-				-				11,250				6,075
		5/20/2015			10,958				32,874				4.67			5/20/2025					-				-
		5/18/2016			-				43,499				2.82			5/18/2026					-				-
Ellen J. Clarry		5/11/2012			15,000				-				14.00			5/11/2022					-				-
		6/3/2013			11,250				3,750				18.30			6/3/2023					-				-
		6/19/2014			7,680				7,680				14.59			6/19/2024					-				-
		6/19/2014			-				-				-				-				960				518
		5/20/2015			8,567				25,702				4.67			5/20/2025					-				-
		8/12/2015			6,250				18,750				4.78			8/12/2025					-				-
		8/12/2015			-				-				-				-				11,250				6,075
		5/18/2016			-				40,335				2.82			5/18/2026

________________________

(1)

These awards are in the form of stock appreciation rights. Upon exercise of a stock appreciation right, the named executive officer will be entitled to a payment in shares of our common stock equal in value to the excess of the fair market value of our common stock on the date of exercise over the exercise price of the stock appreciation right. The stock appreciation rights issued on May 11, 2012 vested 25% on each of June 30, 2013, 2014, 2015 and 2016, all other stock appreciation rights issued vest 25% on each given anniversary date.

 

(2)	The restricted stock awards shown in this column represent the number of shares of common stock of the Company the named executive officer received on respective grant dates. Restricted stock awards vest 25% on each grant anniversary date.

 

(3)	The market value of awards is based on the closing price of our common stock on the NASDAQ Stock Market as of December 30, 2016, which was $0.54.

 

 

Potential Payments Upon Termination or Change in Control

 

The information below describes and quantifies certain compensation that would become payable under each named executive officer’s respective employment offer letters and respective amendments if, as of January 2, 2017, their respective employment with us had been terminated. In addition, in connection with a change in control, as defined in the Omnibus Plan, the Compensation Committee may accelerate vesting of outstanding awards under the Omnibus Plan. Due to the number of factors that affect the nature and amount of any benefits provided upon the events discussed below, any actual amounts paid or distributed may be different. Factors that could affect these amounts include the timing during the year of any such event.

 

												Termination				Termination
				Death or				Change in				Without				for Good
Named Executive Officer		Benefit		Disability				Control (1)				Cause				Reason
Robert S. Merritt		Cash severance			-			$	675,000			$	675,000				-
		Acceleration of equity			-				-				-				-
		Health benefits continuation			-				17,571				17,571				-
		Total			-			$	692,571			$	692,571				-
Brad A. Leist		Cash severance			-			$	300,000			$	300,000				-
		Acceleration of equity			-				-				-				-
		Health benefits continuation			-				5,712				5,712				-
		Total			-			$	305,712			$	305,712				-
Ellen J. Clarry		Cash severance			-			$	285,000			$	285,000				-
		Acceleration of equity			-				-				-				-
		Health benefits continuation			-				11,230				11,230				-
		Total			-			$	296,230			$	296,230				-

________________________

(1)	Assumes the executive is terminated without cause following a change in control. Without a termination, the executive would receive only an acceleration of equity upon a change in control with approval of the Compensation Committee.

 

Mr. Merritt

 

In accordance with his employment offer letter, if his employment was to have been terminated without cause, then he was, subject to his execution of a separation agreement and general release and his compliance with post-termination obligations relating to confidentiality, intellectual property, non-competition and non-solicitation, entitled to the following:

 

	•	the lesser of 12 months salary continuation or the remaining term of his contract; provided, however, that if he becomes employed, this payment obligation ceases on the later of 12 months after termination or the date he is otherwise employed; and
	•	12 months continuation of medical and dental coverage.

  

Mr. Leist

 

In accordance with his employment offer letter and subsequent amendments, if Mr. Leist’s employment is terminated without cause, then he is, subject to his execution of a general release and his compliance with post-termination obligations relating to confidentiality, intellectual property, non-competition and non-solicitation, entitled to the following:

 

	•	12 months salary continuation; and
	•	12 months continuation of medical and dental coverage.

  

 

Ms. Clarry

 

In accordance with her employment offer letter and subsequent amendments, if Ms. Clarry’s employment is terminated without cause, then she is, subject to her execution of a general release and her compliance with post-termination obligations relating to confidentiality, intellectual property, non-competition and non-solicitation, entitled to the following:

 

	•	12 months salary continuation; and
	•	12 months continuation of medical and dental coverage.

  

Change in Control under Omnibus Plan

 

In connection with a change in control, as defined in the Omnibus Plan, the Compensation Committee may accelerate vesting of outstanding awards under the Omnibus Plan. In addition, such awards will be, in the discretion of the Compensation Committee, (i) assumed and continued or substituted in accordance with applicable law, (ii) purchased by us for an amount equal to the excess of the price of a share of our common stock paid in a change in control over the exercise price of the award(s), or (iii) cancelled if the price of a share of our common stock paid in a change in control is less than the exercise price of the award. The Compensation Committee may also, in its sole discretion, provide for accelerated vesting or lapse of restrictions of an award at any time.

 

Compensation of Directors

 

Only independent directors receive compensation for their participation on our board of directors, or service as a chair or member of a committee of the board. Non-independent directors receive no compensation for their participation on the board or involvement in any of its Committees.

 

Fiscal Year 2016 Compensation

 

For our fiscal year 2016, our independent directors received an (i) annual cash retainer of $50,000, paid on a quarterly basis, (ii) an annual equity grant in shares of restricted stock equal in value to $100,000 as of the grant date, subject to a one year time-based vesting schedule, and (iii) the chairs of the Audit, Compensation and Corporate Governance and Nominating Committee, if independent, received a supplemental annual cash retainer of $12,000, $10,000 and $7,000, respectively.

 

Fiscal Year 2017 Compensation

 

As of April 3, 2017, our independent director compensation program was modified as follows: in lieu of historic compensation, our independent directors will receive (i) a monthly cash retainer of $10,000, and (ii) payments of $2,500 per meeting of the full Board that are attended other than regularly scheduled quarterly board meetings. No additional meeting fees will be paid for attendance at Board committee meetings. These board fees may not exceed the prior board compensation level of $150,000 for any director in any fiscal year. In addition, the chairs of the Audit, Compensation and Corporate Governance and Nominating Committee, if independent, will receive a supplemental annual cash retainer of $12,000, $10,000 and $7,000, respectively

 

 Director Compensation Table for Fiscal Year 2016

 

The following table sets forth information concerning the fiscal year 2016 compensation of our non-employee directors:

 

		Fees Earned				Stock
		in Cash				Awards				Total
Name		($)				($)(1)				($)(2)
Paul R. Vigano			—				—				—
Shauna R. King			62,000				99,997				161,997
Joseph N. Stein			60,000				99,997				159,997
F. Phillip Handy			40,385				116,663				157,048
Ann Iverson			57,000				99,997				156,997
Robert S. Merritt (3)			—				—				—
Tamara Polewik (4)			—				—				—

________________________

(1)

On May 18, 2016, each independent director serving on the board at such time received a grant of 35,460 shares of restricted stock with a grant date fair value of $2.82 that will vest on the earlier of May 18, 2017, or the date of the Annual Meeting. Additionally on March 11, 2016, Mr. Handy received a grant of 5,035 shares of restricted stock with a grant date fair value of $3.31 that vested on March 11, 2017. This grant was compensation for time served on the board from the grant date to the date of the 2016 Annual Meeting. The amount shown in the table represents the grant date fair value of the restricted stock granted in 2016, computed in accordance with FASB ASC Topic 718.

 

(2)	No perquisites were received by any of our non-employee directors during fiscal year 2016.
(3)	All compensation earned and received by Mr. Merritt as CEO is included in the Summary Compensation Table above.
(4)	Ms. Polewik resigned from our board of directors effective March 10, 2016.

 

 

Our non-employee directors are reimbursed for all reasonable out-of-pocket expenses incurred in attending board meetings and director education programs.

 

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The following table sets forth information concerning beneficial ownership of our common stock as of March 28, 2017, unless otherwise indicated, by each of our current directors, by each of our current named executive officers, by all directors and executive officers as a group, and by beneficial owners of more than five percent of our common stock:

 

		Shares of
		Common
		Stock				Number of				Percent
		Beneficially				Exercisable				of Shares
Name		Owned (1)(2)(3)				SARs (4)				Outstanding (5)
Robert S. Merritt			128,376				39,063				*
Brad A. Leist			36,167				61,096				*
Ellen J. Clarry			34,125				67,397				*
Ann Iverson			91,432				—				*
Shauna R. King			71,057				—				*
Joseph N. Stein			67,517				—				*
F. Phillip Handy			40,495				—				*
Paul R. Vigano (6)			17,359,690				—				66.1	%
All directors and executive officers as a group (8 persons)			17,828,859				131,698				68.1	%
J.H. Whitney VI, L.P. (7)			17,359,690				—				66.1	%

 

________________________

*	Represents less than one percent of our common stock.

(1)	Subject to applicable community property laws and, except as otherwise indicated, each beneficial owner has sole voting and investment power with respect to all shares shown.

(2)

Includes time-vesting restricted shares granted under our 2012 Omnibus Incentive Plan. The executives have sole voting power over these restricted shares. Restricted shares are included for the following individuals: Mr. Merritt, 69,375 shares; Mr. Leist, 12,210 shares; Ms. Clarry, 12,210 shares; Ms. Iverson, 35,460 shares; Ms. King, 35,460 shares; Mr. Stein, 35,460 shares; Mr. Handy, 35,460 shares; and all current directors and executive officers as a group, 235,635 shares.

(3)	Does not include shares of common stock issuable upon the exercise of SARs within 60 days of March 28, 2017 based on the March 28, 2017 closing price of our common stock due to the fact that all exercisable SARs are not in-the-money.

(4)	Includes SARs that become exercisable on or before May 27, 2017.

(5)	Based on aggregate of 26,232,865 shares of Ignite common stock issued and outstanding as of March 30, 2017.

(6)

Shares owned by J.H. Whitney VI, L.P. J.H. Whitney Equity Partners VI, LLC, is the sole general partner of J.H. Whitney VI, L.P. Mr. Vigano is a managing member of J.H. Whitney Equity Partners VI, LLC, and has an interest in a limited partner of J.H. Whitney VI, L.P. Mr. Vigano may be deemed to share voting and dispositive power with respect to such shares. Mr. Vigano disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. This does not include 33,767 shares held by JCS Holdings LLC, which relate to common unit options forfeited by certain former employees and directors of the Company. J.H. Whitney VI, L.P. holds a controlling voting interest in JCS Holdings, LLC, and as such may be deemed to have beneficial ownership of such shares. J .H. Whitney VI, L.P., J.H. Whitney Equity Partners VI, LLC and Mr. Vigano disclaim beneficial ownership of such shares.

(7)

This information is based on a Schedule 13G filed with the SEC by J.H. Whitney VI, L.P., 130 Main Street, New Canaan, Connecticut 06840, on February 11, 2015 containing information as of December 31, 2014. J.H. Whitney VI, L.P. is an investment fund, principally engaged in the business of making private equity investments. J.H. Whitney Equity Partners VI, LLC is the sole general partner of J.H. Whitney VI, L.P. and as such may be deemed to have beneficial ownership of the shares held by J.H. Whitney VI. The managing members of J.H. Whitney Equity Partners VI, LLC have voting and disposition power over the shares of common stock held by J.H. Whitney VI. The managing members of J.H. Whitney Equity Partners VI, LLC are Michael C. Salvator, Paul R. Vigano and Robert M. Williams, Jr. Each of Messrs. Salvator, Vigano and Williams disclaim beneficial ownership of the shares held by J.H. Whitney Equity Partners VI, LLC and its affiliated entities, except to the extent of his pecuniary interest therein. Does not include 33,767 shares of common stock held by JCS Holdings, LLC, which relate to unvested common unit options held by certain employees and directors of the Company. J.H. Whitney VI, L.P, holds a controlling voting interest in JCS Holdings, LLC and as such may be deemed to have beneficial ownership of such shares. J.H. Whitney VI, L.P., J.H. Whitney Equity Partners VI, LLC and the members of J.H. Whitney Equity Partners VI, LLC disclaim beneficial ownership of such shares.

 

 

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Registration Rights Agreement

 

Pursuant to a registration rights agreement that we entered into in connection with our initial public offering, we have granted registration rights to J.H. Whitney and members of management. Pursuant to the terms of the registration rights agreement, so long as we do not have an effective shelf registration statement with respect to our common stock and securities delivered in connection therewith (the “registrable securities”), J.H. Whitney may request registration of all or a portion of its registrable securities (a “demand registration”). We shall not be obligated to effectuate more than three demand registrations in any 12-month period. The registration rights agreement also provides that subject to certain limitations, at any time that we are eligible to use Form S-3, we will upon request of J.H. Whitney file a shelf registration statement covering all registrable securities and, if such shelf registration statement is not automatically effective, use reasonable best efforts to cause the shelf registration statement to be declared effective. Once the shelf registration statement is effective, we are required to use reasonable best efforts to keep the shelf registration statement continuously effective and usable for resale of registrable securities. The registration rights agreement will also provide that any holder with registrable securities registered pursuant to a shelf registration may affect an underwritten offering of its registrable securities after delivery of advance notice to us. The other holders shall have the right to elect to include in such underwritten offering such portion of their registrable securities as they may request, subject to cutback provisions. Any underwritten offering must reasonably be expected to result in at least $10.0 million in gross proceeds. Under the registration rights agreement, we agreed, subject to certain limitations, to indemnify J.H. Whitney VI and its officers, directors, managers and partners, and each person controlling such holder against all losses, claims, actions, damages, liabilities and expenses in certain circumstances and to pay any expenses reasonably incurred in connection with investigating, preparing or defending these, except insofar as the same are caused by or contained in any information furnished in writing to us by such holder expressly for use therein. 

 

Policies and Procedures With Respect to Related Party Transactions

 

In accordance with our Related Party Transactions Policy, our Audit Committee is responsible for reviewing and approving related party transactions. In addition, our Code of Conduct requires that all of our employees and directors inform the General Counsel of any material transaction or relationship that comes to their attention that could reasonably be expected to create a conflict of interest. Further, at least annually, each director and executive officer will complete a detailed questionnaire that asks questions about any business relationship that may give rise to a conflict of interest and all transactions in which we are involved and in which the executive officer, a director or a related person has a direct or indirect material interest.

 

Director Independence

 

We follow the director independence standards set forth in the NASDAQ Stock Market corporate governance standards and the federal securities laws.

 

The board of directors reviewed and analyzed the independence of each director. The purpose of the review was to determine whether any particular relationships or transactions involving directors or their affiliates or immediate family members were inconsistent with a determination that the director is independent for purposes of serving on the board of directors and its committees. During this review, the board of directors examined whether there were any transactions and/or relationships between directors or their affiliates or immediate family members and the Company and the substance of any such transactions or relationships.

 

As a result of this review, the board of directors affirmatively determined that Messrs. Stein and Handy and Mses. Iverson and King are “independent” for purposes of serving on the board of directors and meet the requirements set forth in our director independence guidelines.

 

 

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

In fiscal year 2016, Deloitte & Touche LLP was appointed as our new independent registered accountant. The following table sets forth the aggregate fees billed during the fiscal year ended January 2, 2017:

  

		Fiscal Year
		2016
Fees Billed:
Audit fees		$	630,000
Audit-related fees			-
Tax fees			-
All other fees			2,132
Total		$	632,132

 

Audit fees include fees for services rendered for the audit of our annual financial statements and the review of the interim financial statements. Audit fees also include fees associated with the review of filings made with the SEC.

 

Audit-related fees include amounts billed for accounting advisory fees related to financial accounting matters and mergers and acquisitions.

 

Tax fees include assistance with the income tax return preparation and audits, tax planning, and advising management as to the tax implications of certain transactions.

 

All other fees include a subscription to an accounting research website.

 

The Audit Committee has established policies and procedures for the approval and pre-approval of audit services and permitted non-audit services. The Audit Committee has the responsibility to engage and terminate our independent registered public accounting firm, to pre-approve the performance of all audit and permitted non-audit services provided to us by our independent registered public accounting firm in accordance with Section 10A of the Exchange Act, and to review with our independent registered public accounting firm their fees and plans for all auditing services. All fees paid to Deloitte & Touche LLP were pre-approved by the Audit Committee and there were no instances of waiver of approval requirements or guidelines.

 

The Audit Committee considered the provision of non-audit services by the independent registered public accounting firm and determined that provision of those services was compatible with maintaining auditor independence.

 

There were no “reportable events” as that term is described in Item 304(a)(1)(v) of Regulation S-K.

 

 

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

Exhibit No.		Description
2.1		Purchase Agreement, dated as of February 6, 2013, by and among Ignite Restaurant Group, Inc., Mac Parent LLC, Restaurant Holdings LLC—Series A, Brinker Services Corporation and Mac Management Investors LLC		Filed as Exhibit 2.1 of registrant’s Current Report on Form 8-K as filed with the Commission on February 7, 2013 and incorporated herein by reference.
2.2		First Amendment to the Purchase Agreement, dated as of April 8, 2013, by and between Ignite Restaurant Group, Inc. and Restaurant Holdings LLC—Series A (on behalf of the Sellers).		Filed as Exhibit 2.1 of registrant’s Current Report on Form 8-K as filed with the Commission on April 11, 2013 and incorporated herein by reference.
2.3		Equity Purchase Agreement, dated as of March 7, 2015, by and among Ignite Restaurant Group, Inc., Mac Parent LLC, Redrock Partners, LLC, and Rimrock Partners LLC		Filed as Exhibit 2.1 of registrant’s Current Report on Form 8-K as filed with the Commission on March 10, 2015 and incorporated herein by reference.
2.4		Letter Agreement, dated April 10, 2015, by and among Ignite Restaurant Group, Inc., Mac Parent LLC, Redrock Partners, LLC, and Rimrock Partners LLC		Filed as Exhibit 2.2 of registrant’s Current Report on Form 8-K as filed with the Commission on April 14, 2015 and incorporated herein by reference.
3.1		Amended and Restated Certificate of Incorporation of Ignite Restaurant Group, Inc.		Filed as Exhibit 3.1 of registrant’s Quarterly Report on Form 10-Q for the quarter ended June 18, 2012 as filed with the Commission 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 of registrant’s Quarterly Report on Form 10-Q for the quarter ended June 18, 2012 as filed with the Commission on October 30, 2012 and incorporated herein by reference.
3.3		Amendment of the Amended and Restated Certificate of Incorporation of Ignite Restaurant Group, Inc.		Filed as Exhibit 3.2 of registrant’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2016 as filed with the Commission on August 3, 2016 and incorporated herein by reference.
4.1		Specimen Common Stock Certificate.		Filed as Exhibit 4.1 of registrant’s Amendment No. 4 to Form S-1 (No. 333-175878) as filed with the Commission on April 24, 2012 and incorporated herein by reference.
10.1*		Ignite Restaurant Group, Inc. 2012 Omnibus Incentive Plan.		Filed as Appendix A of registrant’s Definitive Proxy Statement as filed with the Commission on July 8, 2013 and incorporated herein by reference.
10.2*		Amendment No. 1 to Ignite Restaurant Group, Inc. 2012 Omnibus Incentive Plan.		Filed as Exhibit 10.1 of registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2013 as filed with the Commission on August 12, 2013 and incorporated herein by reference.
10.3*		Form of JCS Holdings, LLC Unit Grant Agreement		Filed as Exhibit 10.4 of registrant’s Amendment No. 4 to Form S-1 (No. 333-175878) as filed with the Commission on April 24, 2012 and incorporated herein by reference.
10.4*		Form of Restricted Stock Agreement		Filed as Exhibit 10.1 of registrant’s Current Report on Form 8-K filed with the Commission on December 10, 2013 and incorporated herein by reference.
10.5		Third Amended and Restated Limited Liability Company Operating Agreement of JCS Holdings, LLC.		Filed as Exhibit 10.5 of registrant’s Amendment No. 4 to Form S-1 (No. 333-175878) as filed with the Commission on April 24, 2012 and incorporated herein by reference.

 

 

Exhibit No.		Description
10.6		First Amendment to the Third Amended and Restated Limited Liability Company Operating Agreement of JCS Holdings, LLC.		Filed as Exhibit 10.10 of registrant’s Amendment No. 7 to Form S-1 (No. 333-175878) as filed with the Commission on May 8, 2012 and incorporated herein by reference.
10.7*		Form of Directors and Officers Indemnification Agreement.		Filed as Exhibit 10.12 of registrant’s Amendment No. 7 to Form S-1 (No. 333-175878) as filed with the Commission on May 8, 2012 and incorporated herein by reference.
10.8		Registration Rights Agreement, dated as of May 16, 2012, by and among Ignite Restaurant Group, Inc. and J.H. Whitney VI, L.P. and the stockholders set forth in Schedule I attached thereto.		Filed as Exhibit 10.1 of registrant’s Quarterly Report on Form 10-Q for the quarter ended June 18, 2012 as filed with the Commission on October 30, 2012 and incorporated herein by reference.
10.9		Credit Agreement, dated as of October 29, 2012, by and among Ignite Restaurant Group, Inc., the financial institutions party thereto, as lenders, KeyBank National Association, as joint lead arranger, joint book runner and administrative agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arranger and joint book runner and Bank of America, N.A., as syndication agent.		Filed as Exhibit 10.14 of registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the Commission on March 20, 2013 and incorporated herein by reference.
10.10		Amended and Restated Credit and Security Agreement, dated as of April 9, 2013, by and among Ignite Restaurant Group, Inc. and a syndicate of commercial banks and other financial institutions party thereto, as lenders, KeyBank National Association, as joint lead arranger, joint book runner and administrative agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arranger and joint book runner and Bank of America, N.A., as syndication agent.		Filed as Exhibit 10.1 of registrant’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2013 as filed with the Commission on May 7, 2013 and incorporated herein by reference.
10.11		First Amendment to the Amended and Restated Credit and Security Agreement, dated as of October 25, 2013, by and among Ignite Restaurant Group, Inc., the financial institutions party thereto, as lenders, KeyBank National Association, as joint lead arranger, joint book runner and administrative agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arranger and joint book runner and Bank of America, N.A., as syndication agent.		Filed as Exhibit 10.1 of registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 as filed with the Commission on November 5, 2013 and incorporated herein by reference.
10.12		Credit and Security Agreement, dated as of August 13, 2014, by and among Ignite Restaurant Group, Inc., the financial institutions party thereto, as lenders, Credit Suisse AG, as administrative agent, Credit Suisse Securities (USA) LLC and KeyBanc Capital Markets Inc., as joint lead arrangers and joint book runners, and KeyBank National Association, as syndication agent.		Filed as Exhibit 10.1 of registrant’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2014 as filed with the Commission on October 30, 2014 and incorporated herein by reference.

 

 

Exhibit No.		Description
10.13*		Offer Letter, effective as of February 28, 2013, between Ignite Restaurant Group, Inc. and David Catalano.		Filed as Exhibit 10.3 of registrant’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2013 as filed with the Commission on May 7, 2013 and incorporated herein by reference.
10.14*		Separation and Release Agreement, dated as of January 27, 2014, by and among Ignite Restaurant Group, Inc. and James W. Kuhn.		Filed as Exhibit 10.18 of registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the Commission on March 5, 2014 and incorporated herein by reference.
10.15*		Employment Agreement dated April 17, 2015 by and between Ignite Restaurant Group, Inc. and Brad A. Leist.		Filed as Exhibit 10.1 of registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2015 as filed with the Commission on May 4, 2015 and incorporated herein by reference.
10.16*		Separation and Release Agreement dated April 17, 2015 by and between Ignite Restaurant Group, Inc. and Michael J. Dixon.		Filed as Exhibit 10.2 of registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2015 as filed with the Commission on May 4, 2015 and incorporated herein by reference.
10.17*		Separation and Release Agreement dated April 17, 2015 by and between Ignite Restaurant Group, Inc. and James F. Mazany.		Filed as Exhibit 10.3 of registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2015 as filed with the Commission on May 4, 2015 and incorporated herein by reference.
10.18*		Separation Agreement and General Release dated December 1, 2015 by and between Ignite Restaurant Group, Inc. and Raymond A. Blanchette.		Filed as Exhibit 10.1 of registrant’s Current Report on Form 8-K as filed with the Commission on December 4, 2015 and incorporated herein by reference.
10.19*		Offer Letter, effective as of August 31, 2015, by and between Ignite Restaurant, Group, Inc. and Ellen Clarry.		Filed as Exhibit 10.21 of registrant’s Annual Report on Form 10-K for the year ended December 28, 2015 as filed with the Commission on March 3, 2016 and incorporated herein by reference.
10.20*		Offer Letter, effective as of November 17, 2015, by and between Ignite Restaurant Group, Inc. and Robert S. Merritt.		Filed as Exhibit 10.22 of registrant’s Annual Report on Form 10-K for the year ended December 28, 2015 as filed with the Commission on March 3, 2016 and incorporated herein by reference.
10.21		Waiver and Consent Agreement dated December 11, 2015, by and among Ignite Restaurant Group, Inc., the financial institutions party thereto, as lenders and Credit Suisse AG, as administrative agent.		Filed as Exhibit 10.2 of registrant’s Current Report on Form 8-K as filed with the Commission on December 11, 2015 and incorporated herein by reference.
10.22*		Separation Agreement and General Release dated July 14, 2016 by and between Ignite Restaurant Group, Inc. and David Catalano		Filed as Exhibit 10.1 of registrant’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2016 as filed with the Commission on August 3, 2016 and incorporated herein by reference.
10.23*		Consulting Agreement dated November 29, 2016 by and between Ignite Restaurant Group, Inc. and Debra Eybers		Filed herewith.
10.24		Forbearance Agreement, dated as of March 31, 2017, by and among Ignite Restaurant Group, Inc., Credit Suisse AG, as Administrative Agent, and the Lenders party thereto		Filed herewith.
10.25*		Separation Agreement and General Release, dated March 30, 2017, between Ignite Restaurant Group, Inc. and Robert S. Merritt		Filed herewith.
10.26*		Consulting Agreement, dated March 30, 2017, between Ignite Restaurant Group, Inc. and Robert S. Merritt		Filed herewith.
10.27		Interim Management Engagement Letter, effective as of April 3, 2017, between Ignite Restaurant Group, Inc. and Alvarez & Marsal North America, LLC		Filed herewith.
10.28		Indemnification and Limitation on Liability Agreement, effective as of April 3, 2017, between Ignite Restaurant Group, Inc. and Alvarez & Marsal North America, LLC		Filed herewith.
14.1		Code of Ethics		Filed as Exhibit 14.1 of registrant’s Annual Report on Form 10-K for the year ended December 28, 2015 as filed with the Commission on March 3, 2016 and incorporated herein by reference.
21.1		List of Subsidiaries of Ignite Restaurant Group, Inc.		Filed herewith.

 

 

Exhibit No.		Description
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.		Filed herewith.
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.		Filed herewith.
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.		Filed herewith.
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.		Filed herewith.
101		The following financial information for the Company, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Changes in Stockholders’ Equity (Deficit), (vi) the Consolidated Statements of Cash Flows, and (vii) the Notes to the Consolidated Financial Statements.

 

________________________

*	Indicates a management contract or compensatory plan or arrangement.

 

Item 16. Form 10-K Summary.

 

None.

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.
April 3, 2017	By:	/s/ Robert S. Merritt
		Name:	Robert S. Merritt
		Title:	Chief Executive Officer (Principal Executive Officer)
April 3, 2017	By:	/s/ Brad A. Leist
		Name:	Brad A. Leist
		Title:	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on April 3, 2017.

 

/s/ Paul R. Vigano		Chairman of the Board
Paul R. Vigano
/s/ Robert S. Merritt		Chief Executive Officer and Director
Robert S. Merritt
/s/ Ann Iverson		Director
Ann Iverson
/s/ Shauna R. King		Director
Shauna R. King
/s/ F. Philip Handy		Director
F. Philip Handy
/s/ Joseph Stein		Director
Joseph Stein

 

 

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