Annual Report




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)

770 42
(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 

 



 
 

 

 

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.

 

 
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  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.

   

 
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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.

 

 
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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.

   

 
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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.

   

 
5

 

 

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.

   

 
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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.

   

 
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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.

   

 
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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 curre ntly 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.

 

 
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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.

   

 
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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.

   

 
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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.

   

 
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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 4 2 % 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.

   

 
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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.

   

 
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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:

 

 

incur additional indebtedness;

 

 

create liens on our subsidiaries’ assets;

 

 

make certain investments, guarantees or loans;

 

 

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

 

 

make acquisitions;

 

 

pay dividends or make other restricted payments;

 

 

enter into sale-leaseback transactions; and

 

 

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.

 

 
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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.

   

 
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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.

   

 
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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.

   

 
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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.

   

 
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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:

 

 

the timing of new restaurant openings and related expense;

 

 

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

 

 

labor availability and costs for hourly and management personnel;

 

 

profitability of our restaurants, especially in new markets;

 

 

changes in interest rates;

 

 

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

 

 

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

 

 

macroeconomic conditions, both nationally and locally;

 

 

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

 

 

changes in consumer preferences and competitive conditions;

 

 

expansion to new markets;

 

 

increases in infrastructure costs; and

 

 

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:

 

 

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;

 

 

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

 

 

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

 

 

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.

 

 
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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:

 

 

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

 

 

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

 

 

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:

 

 

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

 

 

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

 

 

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;

 

 

downgrades by any securities analysts who follow our common stock;

 

 

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

 

 

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

 

 

investors’ perceptions of our prospects;

 

 

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

 

 

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

   

 
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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. 

 

 
23

 

 

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.

 

 
24

 

   

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  

 

 
25

 

   

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.

   

 
26

 

 

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.

   

 
27

 

   

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.

 

 
28

 

 

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  

 

 

 
29

 

 

   

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.

 

 
30

 

 

  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.

     

 
31

 

 

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.

 

 
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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.

 

 
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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.

 

 
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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.

 

 
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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.

 

 
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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.

 

 
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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.