Quarterly Report (10-q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 24, 2017

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

For the transition period from to

Commission File Number 001-37374

LOGO

Bojangles’, Inc.

(Exact name of registrant as specified in its charter)


Delaware		45-2988924
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9432 Southern Pine Boulevard
Charlotte, North Carolina		28273
(Address of principal executive offices)		(Zip Code)

(704) 527-2675

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

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

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

As of October 26, 2017, there were 37,069,240 shares of the registrant’s common stock, par value $0.01 per share outstanding.

BOJANGLES’, INC. AND SUBSIDIARIES

INDEX


		Page
	PART I –FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 24, 2017 and December 25, 2016 (Unaudited)		1

	Condensed Consolidated Statements of Operations and Comprehensive Income for the thirteen and thirty-nine weeks ended September 24, 2017 and September 25, 2016 (Unaudited)		2

	Condensed Consolidated Statement of Stockholders’ Equity for the thirty-nine weeks ended September 24, 2017 (Unaudited)		3

	Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 24, 2017 and September 25, 2016 (Unaudited)		4

	Notes to Condensed Consolidated Financial Statements (Unaudited)		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38

Item 4.	Controls and Procedures		39

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		40

Item 1A.	Risk Factors		40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40

Item 3.	Defaults Upon Senior Securities		40

Item 4.	Mine Safety Disclosures		40

Item 5.	Other Information		40

Item 6.	Exhibits		40

	Signature		43

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements made in this Quarterly Report that are not statements of historical or current facts, such as those under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may be preceded by, followed by or include the words “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “outlook,” “plan,” “potential,” “project,” “projection,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning.

Forward-looking statements are inherently subject to risks, uncertainties and assumptions; they are not guarantees of performance. You should not place undue reliance on these statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that the assumptions and expectations will prove to be correct.

You should understand that the following important factors could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

•

our vulnerability to changes in consumer preferences and economic conditions;

•

our ability to open restaurants in new and existing markets and expand our franchise system;

•

our ability to generate comparable restaurant sales growth;

•

our restaurants and our franchisees’ restaurants may close due to financial or other difficulties;

•

new menu items, advertising campaigns, changes in discounting strategy, technology initiatives and restaurant designs and remodels may not generate increased sales or profits;

•

anticipated future restaurant openings may be delayed or cancelled;

•

increases in the cost of chicken, pork, dairy, wheat, corn and other products;

•

our ability to compete successfully with other quick-service and fast-casual restaurants, including new entrants to the breakfast market and those newly expanding their breakfast menus for all day availability;

•

our reliance on our franchisees, who may be adversely impacted by economic conditions and who may incur financial hardships, be unable to obtain credit, need to close their restaurants or declare bankruptcy;

•

our ability to support our franchise system;

•

our limited degree of control over the actions of our franchisees;

•

our potential responsibility for certain acts of our franchisees;

•

our vulnerability to conditions in the Southeastern United States;

•

negative publicity, whether or not valid;

•

concerns about food safety and quality and about food-borne illnesses, including adverse public perception due to the occurrence of avian flu, swine flu or other food-borne illnesses, such as salmonella, E. coli or others;

•

our dependence upon frequent and timely deliveries of restaurant food and other supplies;

•

our reliance upon a limited number of suppliers for substantially all of our restaurant food and other supplies;

•

our reliance upon just one third-party distributor for substantially all of our restaurant food and other supplies;

•

the adverse impact of economic conditions on our operating results and financial condition, on our ability to comply with the terms and covenants of our debt agreements and on our ability to pay or to refinance our existing debt or to obtain additional financing;

•

our ability to protect our name and logo and other intellectual property;

•

loss of the abilities, experience and knowledge of our existing directors and officers;

•

matters relating to employment and labor laws;

•

labor shortages or increases in labor costs;

•

the impact of litigation, including wage and hour class action lawsuits;

•

our ability and the ability of our franchisees to renew leases at the end of their terms;

•

the impact of federal, state or local government regulations relating to the preparation and sale of food, zoning and building codes, employee wages and benefits, and environmental and other matters;

•

the fact that we are considered a “controlled company” and exempt from certain corporate governance rules primarily relating to board independence, and we may use some or all of these exemptions;

•

the fact that we are a holding company with no operations and will rely on our operating subsidiaries to provide us with funds;

•

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act; and

•

changes in accounting standards.

In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Form 10-Q (including the exhibits hereto) might not occur. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, even if experience or future developments make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law.

See the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 25, 2016 filed with the United States Securities and Exchange Commission (the “SEC”) on March 7, 2017 for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. Those factors and the other risk factors described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, investors are cautioned not to place undue reliance on such forward-looking statements.

iii

PART I – F INANCIAL INFORMATION

Ite m 1. Financial Statements

BOJANGLES’, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)


		September 24,		December 25,
		2017		2016
	Assets
Current assets:
Cash and cash equivalents		$	17,722		13,898
Accounts and vendor receivables, net of allowance for doubtful accounts of $141 and $135			3,819		5,421
Accounts receivable, related parties, net of allowance for doubtful accounts of $21 and $22			352		386
Inventories, net			3,659		3,326
Other current assets			5,661		3,033

Total current assets			31,213		26,064
Property and equipment, net			56,455		52,275
Goodwill			161,140		161,140
Brand			290,500		290,500
Franchise rights, net			23,420		24,243
Favorable leases, net			757		981
Other noncurrent assets			4,128		4,569

Total assets		$	567,613		559,772

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	11,261		16,818
Accrued expenses			23,353		17,940
Current maturities of long-term debt			—		2,132
Current maturities of capital lease obligations			7,666		7,299
Other current liabilities			6,823		4,390

Total current liabilities			49,103		48,579
Long-term debt, less current maturities and deferred debt issuance costs, net			133,846		153,630
Deferred income taxes			110,262		111,312
Capital lease obligations, less current maturities			23,373		22,524
Other noncurrent liabilities			13,551		12,937

Total liabilities			330,135		348,982

Commitments and contingencies (notes 2, 11 and 12)			—		—
Stockholders’ equity:
Preferred stock, $0.01 par value; 25,000 shares authorized and no shares issued and outstanding as of both September 24, 2017 and December 25, 2016			—		—
Common stock, $0.01 par value; 150,000 shares authorized and 37,058 and 36,547 shares issued and outstanding as of September 24, 2017 and December 25, 2016, respectively			370		365
Additional paid-in capital			128,222		124,802
Retained earnings			108,567		85,377
Accumulated other comprehensive income			319		246

Total stockholders’ equity			237,478		210,790

Total liabilities and stockholders’ equity		$	567,613		559,772

See accompanying notes to condensed consolidated financial statements.

BOJANGLES’, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(in thousands, except per share amounts)


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 24, 2017			September 25, 2016			September 24, 2017			September 25, 2016
Revenues:
Company restaurant revenues	$	126,207			126,358			378,048			372,446
Franchise royalty revenues		7,018			6,739			20,509			19,532
Other franchise revenues		200			100			738			470

Total revenues		133,425			133,197			399,295			392,448

Company restaurant operating expenses:
Food and supplies costs		40,525			39,331			119,208			116,872
Restaurant labor costs		37,081			35,115			110,365			102,976
Operating costs		31,009			28,625			90,441			83,645
Depreciation and amortization		3,501			3,225			10,082			9,432

Total Company restaurant operating expenses		112,116			106,296			330,096			312,925

Operating income before other operating expenses		21,309			26,901			69,199			79,523

Other operating expenses:
General and administrative		9,814			9,276			28,584			28,189
Depreciation and amortization		747			745			2,225			2,178
Impairment		126			592			1,123			981
(Gain) loss on disposal of property and equipment and other		(135	)		138			(238	)		(51	)

Total other operating expenses		10,552			10,751			31,694			31,297

Operating income		10,757			16,150			37,505			48,226
Amortization of deferred debt issuance costs		(147	)		(199	)		(440	)		(567	)
Interest income		2			—			15			4
Interest expense		(1,495	)		(1,819	)		(4,776	)		(5,782	)

Income before income taxes		9,117			14,132			32,304			41,881
Income taxes		2,160			4,113			9,114			13,987

Net income		6,957			10,019			23,190			27,894

Other comprehensive income (loss), net of tax
Change in fair value on interest rate swaps, net of income tax (expense) benefit of $(41), $(184), $(43) and $290		69			293			73			(478	)

Comprehensive income	$	7,026			10,312			23,263			27,416

Net income per share:
Basic	$	0.19			0.28			0.63			0.77

Diluted	$	0.18			0.27			0.60			0.74

See accompanying notes to condensed consolidated financial statements.

BOJANGLES’, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

Thirty-Nine Weeks Ended September 24, 2017

(Unaudited)

(in thousands)


										Accumulated
					Additional					other		Total
	Common stock				paid-in			Retained		comprehensive		stockholders’
	Shares		Amount		capital			earnings		income		equity
Balance as of December 25, 2016		36,547	$	365		124,802			85,377		246		210,790
Net income		—		—		—			23,190		—		23,190
Change in fair value on interest rate swaps, net of income tax expense of $43		—		—		—			—		73		73
Stock option exercises		488		5		2,338			—		—		2,343
Vesting of restricted stock units		23		—		(103	)		—		—		(103	)
Stock-based compensation		—		—		1,185			—		—		1,185

Balance as of September 24, 2017		37,058	$	370		128,222			108,567		319		237,478

See accompanying notes to condensed consolidated financial statements.

BOJANGLES’, INC. AND SUBSIDIARIES

C ondensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	Thirty-Nine Weeks Ended
	September 24, 2017			September 25, 2016
Cash flows from operating activities:
Net income	$	23,190			27,894
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax benefit		(1,093	)		(2,244	)
Depreciation and amortization		12,307			11,610
Amortization of deferred debt issuance costs		440			567
Impairment		1,123			981
Gain on disposal of property and equipment and other		(238	)		(51	)
Provision (benefit) for doubtful accounts		3			(65	)
Provision for inventory spoilage		18			7
Benefit for closed stores		—			(51	)
Stock-based compensation		1,185			953
Excess tax benefit from stock-based compensation		—			(1,770	)
Changes in operating assets and liabilities		(117	)		4,950

Net cash provided by operating activities		36,818			42,781

Cash flows from investing activities:
Purchases of franchisee’s assets		—			(100	)
Purchases of property and equipment		(7,476	)		(5,950	)
Proceeds from disposition of property and equipment		148			49

Net cash used in investing activities		(7,328	)		(6,001	)

Cash flows from financing activities:
Principal payments on long-term debt		(22,357	)		(29,736	)
Stock option exercises		2,343			857
Vesting of restricted stock units		(103	)		—
Excess tax benefit from stock-based compensation		—			1,770
Principal payments on capital lease obligations		(5,549	)		(4,455	)

Net cash used in financing activities		(25,666	)		(31,564	)

Net increase in cash and cash equivalents		3,824			5,216
Cash and cash equivalents balance, beginning of fiscal period		13,898			14,263

Cash and cash equivalents balance, end of fiscal period	$	17,722			19,479

Supplemental cash flow disclosures:
Cash paid for interest	$	4,852			5,844
Cash paid for income taxes		11,968			12,820
Assets acquired under capital leases		6,972			5,957
Net change in assets under financing obligations		2,590			4,085
Reduction of capital lease obligations upon return of assets		141			160
Reduction of capital lease obligations upon early termination of lease		—			288
See accompanying notes to condensed consolidated financial statements.

BOJANGLES’, INC. AND SUBSIDIARIES

Notes to Condense d Consolidated Financial Statements (Unaudited)

(1)

Summary of Significant Operations and Accounting Policies

(a)

Operations

Bojangles’, Inc. (formerly known as BHI Holding Corp.) (together with its subsidiaries, “Bojangles’”, the “Company”, “we” or “our”) was formed on June 28, 2011 as a Delaware corporation. The Company’s principal business is the operations and development and franchising, as franchisor, of limited service restaurants. As of September 24, 2017, there were 316 Company-operated restaurants, 62 related party franchised restaurants, and 371 independent franchised restaurants operating under the Bojangles’ ^® name. The restaurants are located principally in the Southeastern United States. The Company’s franchising activity is regulated by the laws of the various states in which it is registered to sell franchises, as well as rules promulgated by the Federal Trade Commission. The legislation and rules, among other things, establish minimum disclosure requirements to a prospective franchisee and require periodic registration by the Company with state administrative agencies.

The following is the number of Bojangles’ franchised, Company-operated and system-wide restaurants at the beginning and end of the thirteen and thirty-nine weeks ended September 24, 2017:


	Thirteen Weeks Ended								Thirty-Nine Weeks Ended
	September 24, 2017								September 24, 2017
	Franchised		Company- Operated			System- Wide			Franchised		Company- Operated			System- Wide
Restaurants at the beginning of the period		426		314			740			407		309			716
Opened during the period		6		4			10			20		17			37
Closed during the period		—		(1	)		(1	)		—		(4	)		(4	)
Refranchised during the period		1		(1	)		—			6		(6	)		—

Restaurants at the end of the period		433		316			749			433		316			749

Restaurants closed during the period reflects permanent closures and excludes any temporary closures for items such as remodels, scrape and rebuilds, casualty events, severe weather conditions or any other short-term closure. A relocation results in a closure and an opening. During the thirteen and thirty-nine weeks ended September 24, 2017, we closed one and four Company-operated restaurants, respectively, of which one and three, respectively, were relocations.

(b)

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and practices of the United States of America (“GAAP”) for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included.

Certain information and footnote disclosures normally included in audited consolidated financial statements presented in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the SEC.

BOJANGLES’, INC. AND SUBSIDIARIES

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

These condensed consolidated financial statements should be read in conjunction with the Company’s results of operations, financial positions and cash flows in the Company’s financial statements as of and for the fiscal year ended December 25, 2016.

The results of operations and cash flows reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire fiscal year.

The Company consolidates entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All significant intercompany accounts and transactions are eliminated in consolidation.

(c)

Fiscal Year

The Company operates on a 52- or 53-week fiscal year ending on the last Sunday of December. Fiscal year 2017 will end on December 31, 2017 and will consist of 53 weeks. Fiscal year 2016 ended on December 25, 2016 and consisted of 52 weeks. The first three fiscal quarters of fiscal year 2017 are each comprised of thirteen weeks, and the fourth fiscal quarter of fiscal year 2017 is comprised of fourteen weeks. Fiscal quarters within fiscal year 2016 are each comprised of thirteen weeks.

(d)

Use of Accounting Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Accordingly, the actual amounts could differ from those estimates. Any adjustments applied to estimated amounts are recognized in the fiscal year in which such adjustments are determined.

(e)

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This update was issued to replace the current revenue recognition guidance, creating a more comprehensive revenue model. This update was originally to be effective in fiscal periods beginning after December 15, 2016 and early application was not permitted. In July 2015, the FASB affirmed its proposal to defer the effective date by one year to annual reporting periods beginning after December 15, 2017. The FASB also affirmed its proposal to permit early adoption of the standard, but not before the original effective date of December 15, 2016. The Company will not early adopt ASU 2014-09. ASU 2014-09 permits two transition approaches: full retrospective or modified retrospective. The Company expects to utilize the full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients. The Company has completed a preliminary review of ASU 2014-09 and does not expect the adoption of ASU 2014-09 to have a material impact on its company restaurant revenues or franchise royalty revenues. The Company expects the adoption of ASU 2014-09 will require the Company to recognize initial and renewal franchisee fees on a straight-line basis over the life of the franchise agreement, which will impact its other franchise revenues. In addition, the Company anticipates funds contributed by franchisees to the advertising funds managed by the Company, as well as the associated advertising fund expenditures, will be reported on a gross basis, and the advertising fund revenues and expenses may be reported in different periods.

BOJANGLES’, INC. AND SUBSIDIARIES

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company expects to adopt ASU 2016-02 on December 31, 2018, which is the first day of its fiscal year 2019. A modified retrospective transition is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company expects that ASU 2016-02 will have a material effect on its condensed consolidated financial statements. While the Company is continuing to assess the impact of adoption, it currently believes the most significant changes relate to (1) the recognition of new ROU assets and lease liabilities on the Company’s condensed consolidated balance sheet for real estate and equipment operating leases and (2) the derecognition of existing assets and liabilities for certain assets under construction in build-to-suit lease arrangements that the Company will lease when construction is complete.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions. ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted ASU 2016-09 prospectively during the first fiscal quarter of 2017, and the adoption did not have a significant impact on the condensed consolidated financial statements. The Company expects the adoption of ASU 2016-09 to cause volatility in its effective tax rates and diluted net income per share due to the tax effects related to share-based payments being recorded to the condensed consolidated statement of operations and comprehensive income. The volatility in future periods will depend on the Company’s stock price on the date awards are exercised or vest and the number of awards that are exercised or vest in each period. In addition, the adoption of ASU 2016-09 resulted in an increase in the weighted average number of common shares outstanding used for computing diluted net income per share as tax effects related to share-based payments are no longer considered assumed proceeds when calculating dilutive potential common shares using the treasury-stock method.

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

BOJANGLES’, INC. AND SUBSIDIARIES

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

(2)

Long-Term Debt

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


	September 24, 2017			December 25, 2016
Term Loan, due October 9, 2020	$	135,101			157,458
Revolving line of credit, due October 9, 2020		—			—

Total long-term debt		135,101			157,458
Less: Current maturities of long term debt		—			(2,132	)
Less: Deferred debt issuance costs, net		(1,255	)		(1,696	)

Long-term debt, less current maturities and deferred debt issuance costs, net	$	133,846			153,630


	September 24, 2017			December 25, 2016
Deferred debt issuance costs	$	4,809			4,809
Less accumulated amortization		(3,554	)		(3,113	)

Deferred debt issuance costs, net	$	1,255			1,696

(a)

Term Loan and Revolving Line of Credit

On October 9, 2012, the Company entered into a credit agreement (“Credit Agreement”) with several financial institutions, collateralized by all of the assets of the Company. The Credit Agreement contains both a term loan component and a revolving line of credit. The Credit Agreement was subsequently amended on May 15, 2013, April 11, 2014, July 23, 2015, September 25, 2015 and October 19, 2016.

As of September 24, 2017, there were outstanding balances under the term loan in one-month Eurodollar loans of $135.1 million, all of which were accruing interest at a rate of approximately 3.24%. As of December 25, 2016, there were outstanding balances under the term loan in one-month Eurodollar loans of $157.5 million, all of which were accruing interest at a rate of approximately 2.61%.

As of September 24, 2017 and December 25, 2016, there were no outstanding balances under the revolving line of credit.

Pursuant to the Credit Agreement, certain covenants restrict the Company from exceeding a maximum consolidated total lease adjusted leverage ratio, require the Company to maintain a minimum consolidated fixed charge coverage ratio, and place certain limitations on cash capital expenditures. The Company was not in violation of any covenants under the Credit Agreement as of September 24, 2017.

Debt issuance costs are capitalized and amortized using the effective interest method over the term of the related loan.

(b)

Interest Rate Swap Agreements

The Company enters into interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. The Company does not speculate using derivative instruments.

BOJANGLES’, INC. AND SUBSIDIARIES

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

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.

The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions.

The Company enters into variable-rate LIBOR debt under the term loan portion of the Credit Agreement. The debt obligations expose the Company to variability in interest payments due to changes in interest rates. Management believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management entered into LIBOR-based interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. These swaps change the variable-rate cash flow exposure on part of the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives LIBOR-based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt for the notional amount of its debt hedged.

In connection with the Credit Agreement, as of September 24, 2017, the Company has two variable-to-fixed interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. On May 17, 2013, the Company entered into an interest rate swap contract with a notional amount of $50.0 million, an effective date of November 30, 2015 and a termination date of September 29, 2017, under which the Company paid interest fixed at 1.3325% and received the one-month LIBOR rate. On October 26, 2015, the Company entered into another interest rate swap contract with an effective date of October 30, 2015, a termination date of October 31, 2019 and a notional amount of $50.0 million, under which the Company pays interest fixed at 1.115% and receives the one-month LIBOR rate.

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


	Thirty-Nine Weeks Ended		Fiscal Year Ended
	September 24, 2017		December 25, 2016
Opening balance, accumulated other comprehensive income	$	246		19
Unrealized gain from effective interest rate swap, net of tax		73		227

Ending balance, accumulated other comprehensive income	$	319		246

(3)

Fair Value Measurements

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

•

Cash and cash equivalents, accounts and vendor receivables, other assets (nonderivatives), notes payable to financial institutions, trade accounts payable, and accrued expenses (nonderivatives): The carrying amounts, at face value or cost plus accrued interest, approximate fair value because of the short maturity of these instruments.

BOJANGLES’, INC. AND SUBSIDIARIES

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

•

Interest rate swaps: The fair value of interest rate swaps is determined using an income approach using the following significant inputs: the term of the swaps, the notional amount of the swaps, the rate on the fixed leg of the swaps and counterparty credit worthiness. There were two interest rate swaps outstanding as of September 24, 2017, one of which expired on September 29, 2017.

The following table presents financial assets and liabilities measured at fair value on a recurring basis, which include derivatives designated as cash flow hedging instruments, and other investments, which consists of money market accounts and mutual funds held in a rabbi trust established by the Company to fund a portion of the Company’s current and future obligations under its deferred compensation plan (in thousands):


				Quoted Prices
				in active		Significant
				markets for		other			Significant
				identical		observable			unobservable
	Carrying			instruments		inputs			inputs
	value			(Level 1)		(Level 2)			(Level 3)
Fair value measurement as of September 24, 2017:
Investments for nonqualified deferred compensation plan (included with other noncurrent assets on the consolidated balance sheets)	$	2,935			2,935		—			—
Interest rate swap (included with other noncurrent assets on the consolidated balance sheets)		511			—		511			—
Interest rate swap (included with other current liabilities on the consolidated balance sheets)		(1	)		—		(1	)		—
Fair value measurement as of December 25, 2016:
Investments for nonqualified deferred compensation plan (included with other noncurrent assets on the consolidated balance sheets)	$	3,112			3,112		—			—
Interest rate swap (included with other current assets and other other noncurrent assets on the consolidated balance sheets)		561			—		561			—
Interest rate swap (included with other current liabilities on the consolidated balance sheets)		(166	)		—		(166	)		—

There were no transfers into or out of Level 1 and Level 2 fair value measurements during the thirty-nine weeks ended September 24, 2017.

Our investments for the nonqualified deferred compensation plan are comprised of investments held in a rabbi trust. These investments consist of money market funds and mutual funds and the fair value measurements are derived using quoted prices in active markets for the specific funds which are based on Level 1 inputs of the fair value hierarchy.

BOJANGLES’, INC. AND SUBSIDIARIES

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

Our interest rate swaps are valued using a discounted cash flow analysis that incorporates observable market parameters, such as interest rate yield curves and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by us or the counterparty.

(4)

Other Current Assets

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


	September 24, 2017		December 25, 2016
Prepaid expenses	$	2,395		1,517
Income taxes refundable		3,266		1,505
Interest rate swap asset		—		11

Other current assets	$	5,661		3,033

(5)

Property and Equipment, Net

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


	Useful lives	September 24, 2017			December 25, 2016
Land	—	$	1,509			1,509
Buildings	Up to 40 years		1,330			1,330
Furniture, fixtures and equipment	Up to 5 years		20,081			18,342
Computer hardware and software	Up to 5 years		10,763			9,673
Leasehold improvements	Up to 20 years		29,746			25,171
Capital leases, buildings	Lesser of lease term or 40 years		8,286			8,286
Capital leases, equipment	Lesser of lease term or 5 years		32,162			28,707
Capital leases, automobiles	Lesser of lease term or 5 years		3,560			3,478
Construction-in-progress	—		10,760			8,086

Total			118,197			104,582
Less:
Accumulated depreciation			(39,087	)		(33,462	)
Accumulated amortization			(22,655	)		(18,845	)

Property and equipment, net		$	56,455			52,275

Depreciation and amortization expense related to property and equipment was $4.0 million and $3.7 million for the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively, and $11.5 million and $10.8 million for the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively.

BOJANGLES’, INC. AND SUBSIDIARIES

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

(6)

Franchise Rights, Net

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


	September 24, 2017			December 25, 2016
Franchise rights, including reacquired franchise rights	$	29,623			29,623
Less accumulated amortization		(6,203	)		(5,380	)

Franchise rights, net	$	23,420			24,243

Amortization expense related to franchise rights was $0.3 million during each of the thirteen weeks ended September 24, 2017 and September 25, 2016, and $0.8 million during each of the thirty-nine weeks ended September 24, 2017 and September 25, 2016.

(7)

Other Noncurrent Assets

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


	September 24, 2017		December 25, 2016
Investments for nonqualified deferred compensation plan	$	2,935		3,112
Interest rate swap asset		511		550
Other noncurrent assets		682		907

Other noncurrent assets	$	4,128		4,569

(8)

Accrued Expenses

Accrued expenses consist of the following (in thousands):


	September 24, 2017		December 25, 2016
Payroll & related	$	9,634		9,791
Sales and property taxes		6,433		2,620
Gift cards		775		1,135
Utilities		1,338		1,232
Occupancy		321		445
Interest		540		616
Bank fees		711		711
Other		3,601		1,390

Accrued expenses	$	23,353		17,940

BOJANGLES’, INC. AND SUBSIDIARIES

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

(9)

Other Current Liabilities

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


	September 24, 2017		December 25, 2016
Financing obligations under build-to-suit transactions	$	6,704		4,114
Closed store obligation		118		110
Interest rate swap liability		1		166

Other current liabilities	$	6,823		4,390

(10)

Other Noncurrent Liabilities

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


	September 24, 2017		December 25, 2016
Deferred rents	$	8,460		7,434
Unfavorable lease liability, net		1,324		1,527
Deferred compensation		2,935		3,112
Deferred revenue		675		565
Closed store obligation		157		246
Other noncurrent liabilities		—		53

Other noncurrent liabilities	$	13,551		12,937

Deferred revenue includes initial franchise license fees that have been received, but for which the Company has not completed its obligations under these franchise agreements; therefore, revenue has not been recognized.

(11)

Commitments and Contingencies

(a)

Litigation

The Company is subject to various claims and litigation that arise in the normal course of business. Management is of the opinion that, although the outcome of the litigation cannot be predicted with any certainty, the ultimate liability, if any, will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

(b)

Concentration of Credit Risk

Certain financial instruments potentially subject the Company to a concentration of credit risk. These financial instruments consist primarily of cash and cash equivalents and accounts and vendor receivables. The Company places its cash and cash equivalents with high-credit, quality financial institutions. At times, the balances in the accounts exceed the amounts insured by the Federal Deposit Insurance Corporation.

BOJANGLES’, INC. AND SUBSIDIARIES

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

Concentration of credit risk with respect to receivables is primarily limited to franchisees, which are primarily located in the Southeastern United States, and certain vendors. Royalty revenues from three franchisees, one of which is a related party, accounted for approximately 43% and 44% of the Company’s total franchise royalty revenues for the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively, and approximately 43% and 44% of the Company’s total franchise royalty revenues for the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively. Royalty and franchise fee accounts receivable from three franchisees, one of which is a related party, accounted for approximately 39% and 40% of the Company’s gross royalty and franchise fee accounts receivable as of September 24, 2017 and December 25, 2016, respectively. The Company continually evaluates and monitors the credit history of its franchisees and believes it has an adequate allowance for bad debts.

(c)

Debt Guarantees

Prior to July 25, 2011, a franchisee of the Company assumed a portion of the Company’s then outstanding term debt, which the Company guarantees through 2018. The Company may be required to perform under this guarantee in the event of default or nonperformance by this franchisee. The Company has determined that default by the franchisee is unlikely due to its timely and consistent payments; therefore, the Company has not recorded a liability for this guarantee on its condensed consolidated balance sheets. The carrying value of debt covered by this additional guarantee of the Company was $30 thousand and $0.1 million as of September 24, 2017 and December 25, 2016, respectively.

(12)

Leases

On May 5, 2017, the Company entered into an agreement with a financial institution providing for up to $2.1 million for leasing of equipment, which is scheduled to expire on September 30, 2017. Under this leasing arrangement, each of the scheduled leases has a 60-month term, a fixed interest rate equal to the three-year interest rate swap rate as published by the Intercontinental Exchange, Inc. on the lease commencement date for the specific equipment project plus 275 basis points, and a bargain purchase option at the end of the lease of $1. As a result of the bargain purchase option, the Company has classified the leases under this leasing arrangement as capital leases.

On May 5, 2017, the Company entered into an agreement with another financial institution providing for up to $3.0 million for leasing of equipment, which is scheduled to expire on June 30, 2018. Under this leasing arrangement, each of the scheduled leases has a 60-month term, a fixed interest rate equal to the average of two- and three-year interest rate swap rates as published by the Bloomberg Swap report on the lease commencement date for the specific equipment project plus 300 basis points, and a bargain purchase option at the end of the lease of $1. As a result of the bargain purchase option, the Company has classified the leases under this leasing arrangement as capital leases.

The Company has an agreement with another financial institution providing for up to $3.5 million for leasing of equipment that was originally scheduled to expire on March 1, 2016, which was initially extended to September 30, 2016. As the Company had utilized all capacity under this agreement, on June 27, 2016, the financial institution increased the capacity under this agreement by an additional $8.1 million and further extended the expiration of the agreement to June 1, 2017. On May 31, 2017, the financial institution replaced the agreement scheduled to expire on June 1, 2017 with a new agreement providing for up to $10.0 million of leasing capacity, which is scheduled to expire on June 1, 2018. Under this leasing arrangement, each of the scheduled leases has a 60-month term, a fixed interest rate equal to the interest rate swap for a 2.61 year weighted average life as published by the Bloomberg Swap report on the lease commencement date for the specific equipment project plus 300 basis points, and a bargain purchase option at the end of the lease of $1. As a result of the bargain purchase option, the Company has classified the leases under this leasing arrangement as capital leases.

BOJANGLES’, INC. AND SUBSIDIARIES

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

(13)

Net Income per Share

Basic net income per share is calculated using the weighted-average number of shares of common stock outstanding during the thirteen and thirty-nine weeks ended September 24, 2017 and September 25, 2016.

Diluted net income per share is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method.

The computations of basic and diluted net income per share for the thirteen and thirty-nine weeks ended September 24, 2017 and September 25, 2016 are as follows (in thousands, except per share amounts):


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 24, 2017		September 25, 2016		September 24, 2017		September 25, 2016
Net income	$	6,957		10,019		23,190		27,894

Weighted average number of common shares outstanding-basic		37,012		36,355		36,760		36,195

Weighted average dilutive effect of stock-based compensation		1,463		1,295		1,801		1,366

Weighted average number of common shares outstanding-diluted		38,475		37,650		38,561		37,561

Net income per share-basic	$	0.19		0.28		0.63		0.77

Net income per share-diluted	$	0.18		0.27		0.60		0.74

(14)

Income Taxes

The Company’s effective income tax rates were 23.7% and 29.1% for the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively, and 28.2% and 33.4% for the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively. The effective income tax rates for the thirteen and thirty-nine weeks ended September 24, 2017 and September 25, 2016 reflect a deferred income tax benefit due to a reduction in the North Carolina corporate income tax rate and the recognition of certain tax credits. In addition, the effective income tax rates for the thirteen and thirty-nine weeks ended September 24, 2017 reflect the recognition of $0.4 million and $1.7 million, respectively, of excess tax benefits associated with the exercise of stock options and the vesting of restricted stock units.

(15)

Stock Compensation Plan

Under the Amended and Restated 2011 Equity Incentive Plan (the “Amended 2011 Plan”), the Company’s board of directors may grant awards representing up to 8.5 million shares of the Company’s common stock in the form of stock options, restricted stock awards, restricted stock units and performance awards to officers, directors, employees, and consultants of the Company and its subsidiaries. At September 24, 2017, there were 3.7 million additional shares available for grant under the Amended 2011 Plan.

Stock Options

Stock options are granted at a price determined by the board of directors or a committee designated by the board at not less than the fair market value of a share on the date of grant. The term of each option shall be determined by the board of directors or a committee designated by the board at the time of grant and shall be no greater than ten years.

BOJANGLES’, INC. AND SUBSIDIARIES

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

Stock option activity during the period indicated is as follows:


						Weighted
				Weighted		average		Aggregate
				average		remaining		intrinsic
	Number			exercise		contractual		value
	of shares			price		term		(in thousands)
Balance as of December 25, 2016		3,767,273		$	4.59		6.0	$	55,023
Granted		275,925			17.10
Exercised		(488,119	)		4.80				5,928
Repurchased		—
Forfeited		(117,727	)		11.95
Expired		—

Balance as of September 24, 2017		3,437,352		$	5.32		5.5	$	30,324

Exercisable as of September 24, 2017		2,028,391		$	4.44		5.2	$	19,012

On June 8, 2017, the Company granted a total of 275,925 stock options to certain employees of the Company to purchase shares of its common stock at a price of $17.10 per share. The fair value of the stock options on the date of the grant was $5.03 per share. The stock options will vest in equal annual installments over four years, subject to continued service to the Company.

As of September 24, 2017, there was $2.2 million of total unrecognized compensation cost related to time based stock options, which is expected to be recognized over a weighted average period of approximately 2.8 years. As of September 24, 2017, there was approximately $2.5 million of total unrecognized compensation cost related to 0.9 million unvested performance based stock options. These performance based stock options will vest and become exercisable upon the achievement of certain performance metrics indicated in the stock option grant.

Restricted Stock Units

Restricted stock unit activity during the period indicated is as follows:


				Weighted
				average
				fair value
	Number			at grant
	of shares			date
Nonvested as of December 25, 2016		81,850		$	18.05
Granted		155,507			17.10
Forfeited		(21,839	)		17.64
Vested		(28,470	)		18.05

Nonvested as of September 24, 2017		187,048		$	17.31

On June 8, 2017, the Company granted a total of 137,969 restricted stock units to certain employees of the Company. The restricted stock units will vest in equal annual installments over four years, subject to continued service to the Company. Vested shares will be delivered within ten days of the vesting date of such restricted stock unit.

BOJANGLES’, INC. AND SUBSIDIARIES

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

On June 8, 2017, the Company granted 2,923 restricted stock units to each of its then six non-employee directors who are not affiliated with Advent International Corporation. The restricted stock units will vest on the date of the Company’s next annual meeting, subject to continued service to the Company. Vested shares will be delivered within ten days of the vesting date of such restricted stock unit.

As of September 24, 2017, there was $2.9 million of total unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average period of approximately 3.3 years.

(16)

Related Party Transactions

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

Cajun Jack’s, LLC (“Cajun”) is owned by family members of certain indirect stockholders and a member of the board of directors of the Company. Cajun is a franchisee of the Company. Cajun remits payments to the Company for royalties, marketing, and franchise license fees.

New Generation Foods, LLC (“New Generation”) is owned by family members of certain indirect stockholders and a member of the board of directors of the Company. New Generation is a franchisee of the Company. New Generation remits payments to the Company for royalties, marketing, and franchise license fees.

Tri-Arc Food Systems, Inc. (“Tri-Arc”) owns an interest in the Company. In addition, an owner of Tri-Arc is a member of the board of directors of the Company. Tri-Arc is a franchisee of the Company. Tri-Arc remits payments to the Company for royalties, marketing, and franchise license fees. In addition, the Company reimburses Tri-Arc for shared marketing costs.

JZF Properties, LLC (“JZF”) is owned by family members of certain indirect stockholders and a member of the board of directors of the Company. JZF leases a building and land to the Company for use as a restaurant operated by the Company.

MAR Real Estate, LLC (“MRE”) is owned by a certain indirect stockholder of the Company. MRE leases land and buildings to the Company for use as restaurants operated by the Company.

Catco Bo Memorial, LLC (“CBM”) is owned by a certain indirect stockholder of the Company. CBM leases land, equipment and a building to the Company for use as a restaurant operated by the Company.

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

BOJANGLES’, INC. AND SUBSIDIARIES

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

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


		Thirteen Weeks Ended				Thirty-Nine Weeks Ended
		September 24,		September 25,		September 24,		September 25,
Related Party	Description	2017		2016		2017		2016
The Panthers	Marketing/sponsorship expense	$	354		270		354		370
Tri-Arc	Marketing expense		18		18		54		54
JZF	Rent payments		49		48		175		169
MRE	Rent payments		71		35		223		105
CBM	Rent payments		25		25		75		75
MRMJ	Rent payments		15		16		45		16

The following tables present franchise royalty revenues and other franchise revenues from transactions with the Company’s related parties (in thousands):


	Franchise Royalty Revenues
	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 24,		September 25,		September 24,		September 25,
Related Party	2017		2016		2017		2016
Cajun	$	26		26		73		73
New Generation		149		143		441		419
Tri-Arc		1,288		1,276		3,850		3,777

	Other Franchise Revenues
	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 24,		September 25,		September 24,		September 25,
Related Party	2017		2016		2017		2016
Cajun	$	—		—		—		—
New Generation		—		—		—		—
Tri-Arc		—		—		—		13

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


	Gross Accounts Receivable
	September 24,		December 25,
Related Party	2017		2016
Cajun	$	8		8
New Generation		49		51
Tri-Arc		368		382

(17)

Subsequent Event

On October 31, 2017, the Company’s board of directors authorized a share repurchase program under which we may purchase up to $50.0 million of our outstanding common stock through April 30, 2019. The purchases may be made from time to time in the open market (including, without limitation, the use of Rule 10b5-1 plans), depending on a number of factors, including the Company’s evaluation of general market and economic conditions, the trading price of the common stock, regulatory requirements, and compliance with the terms of the Company’s outstanding indebtedness. The share repurchase program may be extended, modified, suspended or discontinued at any time. The Company expects to fund the share repurchase program with either, or a combination of, existing cash on hand, cash generated from operations, and borrowings under its revolving line of credit.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the consolidated financial condition and results of operations for Bojangles’, Inc. (“Bojangles’” or the “Company”) should be read in conjunction with the financial statements of the Company and notes thereto included elsewhere in this Quarterly Report. In this Quarterly Report, unless the context otherwise requires, references to “we,” “us,” and “our” mean the Company, together with its subsidiaries, on a consolidated basis.

Operating results for any one fiscal quarter are not necessarily indicative of results to be expected for any other fiscal quarter or for the fiscal year, and our key performance indicators, as discussed below, may decrease for any future period. Unless otherwise stated, comparable restaurant sales and average unit volumes are presented on a system-wide basis, which means they include sales at both company-operated restaurants and franchised restaurants. Franchise sales represent sales at all franchised restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our franchise royalty revenues include royalties based on a percentage of franchise sales.

Overview

Bojangles’ is a highly differentiated and growing restaurant operator and franchisor dedicated to serving customers high-quality, craveable food made from our Southern recipes. We opened our first store in Charlotte, North Carolina in 1977 and, as of September 24, 2017, have expanded our system-wide restaurants to 749 across eleven states, the District of Columbia and Roatan Island, Honduras. Our system of restaurants, which includes both company-operated and franchised restaurants, generated approximately $319.5 million and $939.3 million of system-wide sales during the thirteen and thirty-nine weeks ended September 24, 2017, respectively. We offer fast-casual quality food and preparation combined with quick-service speed, convenience and value.

Key Performance Indicators

To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company restaurant revenues, franchise royalty and other franchise revenues, system-wide average unit volumes (“AUVs”), comparable restaurant sales, restaurant openings and net income. In addition, we also evaluate Adjusted Net Income and Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA, and restaurant contribution and restaurant contribution margin, which are considered to be non-GAAP financial measures.

Company Restaurant Revenues

Company restaurant revenues consists of sales of food and beverages in company-operated restaurants. Company restaurant revenues in a period are influenced by several factors, including the number of operating weeks in such period, the number of open restaurants and comparable restaurant sales.

Seasonal factors cause our revenues to fluctuate from quarter to quarter. Our revenues per restaurant are typically lower in the first quarter. As a result, our quarterly and annual operating results and key performance indicators may fluctuate significantly.

Franchise Royalty and Other Franchise Revenues

Franchise royalty and other franchise revenues represents royalty income and initial and renewal franchise fees. While we expect the majority of our total revenue growth will be driven by company-operated restaurants, our franchised restaurants and growth in franchise royalty and other franchise revenues remain an important part of our financial success.

System-wide Average Unit Volumes

We measure system-wide AUVs on a fiscal year basis and on a trailing twelve-month basis for each non-fiscal year-end period for system-wide restaurants. Annual AUVs are calculated using the following methodology: first, we determine the domestic free-standing restaurants with both a drive-thru and interior seating that have been open for a full twelve-month period (excluding express units); and second, we calculate the revenues for these restaurants and divide by the number of restaurants in that base to arrive at our AUV calculation. Refranchised restaurants are excluded from our AUV calculation for the twelve-month period following the date of the refranchising. This methodology is similar for each trailing twelve-month period outside the fiscal year end.


	Trailing Twelve Months Ended
	September 24, 2017		September 25, 2016
(Dollar amounts in thousands)
Average Unit Volumes
Total system-wide	$	1,773		1,825

Comparable Restaurant Sales

Comparable restaurant sales reflects the change in year-over-year sales for the comparable restaurant base. A restaurant enters our comparable restaurant base the first full day of the month after being open for fifteen months using a mid-month convention. Refranchised restaurants are excluded from our comparable restaurant base for the twelve-month period following the date of the refranchising. If a company-operated restaurant is temporarily closed for a full calendar week due to items such as a remodel, scrape and rebuild, casualty event, severe weather conditions or any other short-term closure, it is removed from the comparable restaurant sales calculations for such period it is temporarily closed. If a franchised restaurant is temporarily closed for a full calendar week due to items such as a remodel, scrape and rebuild, casualty event, severe weather conditions or any other short-term closure, it is removed from the comparable restaurant sales calculations for the entire month(s) impacted by the temporary closure. While we do not record franchised restaurant sales as revenues, our royalty revenues are calculated based on a percentage of franchised restaurant sales.


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 24, 2017			September 25, 2016			September 24, 2017			September 25, 2016
Comparable Restaurant Sales:
Company-operated		(3.3	)%		(0.2	)%		(3.4	)%		1.1	%
Franchised		(1.5	)%		1.4	%		(0.7	)%		0.9	%
Total system-wide		(2.2	)%		0.8	%		(1.8	)%		1.0	%

Restaurant Openings

The number of restaurant openings reflects the number of restaurants opened during a particular reporting period. Before we open company-operated restaurants, we incur preopening costs. System-wide, some of our restaurants open with an initial start-up period of higher than normal sales volume, which subsequently decreases to stabilized levels. Newly opened restaurants typically have lower annual sales volumes than our established company-operated restaurants. Newly opened company-operated restaurants typically experience normal inefficiencies such as higher food and supplies, labor and other direct operating costs and, as a result, restaurant contribution margins are typically lower during the start-up period of operations. In addition, newly opened restaurants typically have high occupancy costs compared to existing restaurants and may cannibalize sales of existing restaurants. When entering new markets, we may be exposed to longer start-up times and lower contribution margins than reflected in our average historical experience.

The following is the number of Bojangles’ franchised, company-operated and system-wide restaurants at the beginning and end of the thirteen and thirty-nine weeks ended September 24, 2017:


	Thirteen Weeks Ended								Thirty-Nine Weeks Ended
	September 24, 2017								September 24, 2017
	Franchised		Company- Operated			System- Wide			Franchised		Company- Operated			System- Wide
Restaurants at the beginning of the period		426		314			740			407		309			716
Opened during the period		6		4			10			20		17			37
Closed during the period		—		(1	)		(1	)		—		(4	)		(4	)
Refranchised during the period		1		(1	)		—			6		(6	)		—

Restaurants at the end of the period		433		316			749			433		316			749

Restaurants closed during the period reflects permanent closures and excludes any temporary closures for items such as remodels, scrape and rebuilds, casualty events, severe weather conditions or any other short-term closure. A relocation results in a closure and an opening. During the thirteen and thirty-nine weeks ended September 24, 2017, we closed one and four company-operated restaurants, respectively, of which one and three, respectively, were relocations.

Net Income, Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA

We consider net income to be a key performance indicator that shows the overall health of our entire business. We typically utilize net income in conjunction with the non-GAAP financial measures Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA when assessing the operational strength and the performance of our business.

Adjusted Net Income represents company net income before items that we do not consider representative of our ongoing operating performance as identified in the reconciliation table below. Adjusted Diluted Net Income per Share represents company diluted net income per share before items that we do not consider representative of our ongoing operating performance as identified in the reconciliation table below.

EBITDA represents company net income before interest expense (net of interest income), provision for income taxes and depreciation and amortization. Adjusted EBITDA represents company net income before interest expense (net of interest income), provision for income taxes, depreciation and amortization, items that we do not consider representative of our ongoing operating performance and certain non-cash items, as identified in the reconciliation table below.

Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA as presented in this Form 10-Q are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA. Our presentation of Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Adjusted Net Income, Adjusted Diluted Net Income per share, EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.

We believe Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary significantly among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to evaluate our operating performance or compare our performance to that of our competitors.

The following tables set forth reconciliations of net income to Adjusted Net Income and diluted net income per share to Adjusted Diluted Net Income per Share:


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
(Dollar amounts in thousands)	September 24, 2017			September 25, 2016			September 24, 2017			September 25, 2016
Net income	$	6,957			10,019		$	23,190			27,894

Certain professional, transaction and other costs ^(a)		—			24			3			66
Payroll taxes associated with stock option exercises ^(b)		24			8			122			79
Distributor transition costs ^(c)		—			—			—			81
Executive separation expenses ^(d)		—			197			551			197
State income tax rate change ^(e)		(367	)		(908	)		(367	)		(908	)
Tax impact of adjustments ^(f)		(9	)		(82	)		(253	)		(156	)

Total adjustments		(352	)		(761	)		56			(641	)

Adjusted Net Income	$	6,605			9,258		$	23,246			27,253


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 24, 2017			September 25, 2016			September 24, 2017			September 25, 2016
Diluted net income per share	$	0.18			0.27		$	0.60			0.74

Certain professional, transaction and other costs ^(a)		—			—			—			—
Payroll taxes associated with stock option exercises ^(b)		—			—			—			—
Distributor transition costs ^(c)		—			—			—			—
Executive separation expenses ^(d)		—			—			0.02			0.01
State income tax rate change ^(e)		(0.01	)		(0.02	)		(0.01	)		(0.02	)
Tax impact of adjustments ^(f)		—			—			(0.01	)		—

Total adjustments		(0.01	)		(0.02	)		—			(0.01	)

Adjusted Diluted Net Income per Share	$	0.17			0.25		$	0.60			0.73

(a)

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

(b)

Represents payroll taxes associated with stock option exercises related to stock options that were outstanding prior to our initial public offering (“IPO”). We expect to incur similar expenses in future periods when our directors or employees exercise stock options that were outstanding prior to our IPO.

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

(d)	Represents severance and legal fees associated with former executives departing the Company.

(e)

As a result of the enacted reductions to the North Carolina corporate income tax rate during both of the thirteen weeks ended September 24, 2017 and September 25, 2016, we adjusted our deferred income taxes by applying the lower rate, which resulted in a corresponding decrease to income tax expense .

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

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


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
(Dollar amounts in thousands)	September 24, 2017		September 25, 2016		September 24, 2017		September 25, 2016
Net income	$	6,957		10,019	$	23,190		27,894
Income taxes		2,160		4,113		9,114		13,987
Interest expense, net		1,493		1,819		4,761		5,778
Depreciation and amortization ^(a)		4,395		4,169		12,747		12,177

EBITDA		15,005		20,120		49,812		59,836
Non-cash rent ^(b)		321		414		1,090		1,185
Stock-based compensation ^(c)		505		404		1,185		953
Payroll taxes associated with stock option exercises ^(d)		24		8		122		79
Preopening expenses ^(e)		302		346		1,026		942
Certain professional, transaction and other costs ^(f)		—		24		3		66
Distributor transition costs ^(g)		—		—		—		81
Executive separation expenses ^(h)		—		197		551		197
Impairment and dispositions ⁽ⁱ⁾		99		730		1,033		979

Adjusted EBITDA	$	16,256		22,243	$	54,822		64,318

(a)	Includes amortization of deferred debt issuance costs.

(b)

Includes deferred rent, which represents the extent to which our rent expense has been above or below our cash rent payments, amortization of favorable (unfavorable) leases and closed store reserves for rent net of cash payments. We expect to continue to incur similar expenses in future periods as we record rent expense in accordance with GAAP, as well as continue to amortize favorable (unfavorable) leases and record closed store reserves.

(c)	Represents non-cash, stock-based compensation. We expect to incur similar expenses in future periods as we record stock-based compensation related to existing grants (and any potential future grants) in accordance with GAAP.

(d)	Represents payroll taxes associated with stock option exercises related to stock options that were outstanding prior to our IPO. We expect to incur similar expenses in future periods when our directors or employees exercise stock options that were outstanding prior to our IPO.

(e)	Includes expenses directly associated with the opening of company-operated restaurants and incurred prior to the opening of a company-operated restaurant. We expect to continue to incur similar expenses as we open company-operated restaurants.

(f)

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

(h)	Represents severance and legal fees associated with former executives departing the Company.

(i)

Includes (gain) loss on disposal of property and equipment and other, impairment and cash proceeds on disposals from disposition of property and equipment. We could continue to record impairment expense in future periods if performance of company-operated restaurants is not sufficient to recover the carrying amount of the related long-lived assets. We may incur future (gains) losses and receive cash proceeds on disposal of property and equipment associated with retirement, replacement or write-off of fixed assets.

Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined as company restaurant revenues less food and supplies costs, restaurant labor costs, and operating costs. Restaurant contribution margin is defined as restaurant contribution as a percentage of company restaurant revenues. Fluctuations in restaurant contribution and restaurant contribution margin can be attributed to company comparable restaurant sales, sales volumes of newly opened company restaurants, and changes in company food and supplies costs, restaurant labor costs and operating costs.

Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants and our calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP. We believe that restaurant contribution and restaurant contribution margin are important tools for investors as they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. We use restaurant contribution and restaurant contribution margin as key metrics to evaluate profitability and performance of our restaurants across periods and to evaluate our restaurant financial performance compared to our competitors.

The following table reconciles our restaurant contribution to the line item on the condensed consolidated statements of operations and comprehensive income entitled “Company restaurant revenues,” which we believe is the most directly comparable GAAP measure on our condensed consolidated statements of operations and comprehensive income.


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
(Dollar amounts in thousands)	September 24, 2017			September 25, 2016			September 24, 2017			September 25, 2016
Company restaurant revenues	$	126,207			126,358		$	378,048			372,446
Food and supplies costs		(40,525	)		(39,331	)		(119,208	)		(116,872	)
Restaurant labor costs		(37,081	)		(35,115	)		(110,365	)		(102,976	)
Operating costs		(31,009	)		(28,625	)		(90,441	)		(83,645	)

Restaurant contribution	$	17,592			23,287		$	58,034			68,953

Restaurant contribution margin		13.9	%		18.4	%		15.4	%		18.5	%

Key Financial Definitions

Total Revenues

Our revenues are derived from two primary sources: company restaurant revenues and franchise revenues. Franchise revenues are comprised of franchise royalty revenues and, to a lesser extent, other franchise revenues which include initial and renewal franchisee fees.

Food and Supplies Costs

Food and supplies costs include the direct costs associated with food, beverage and packaging of our menu items at company-operated restaurants. The components of food and supplies are variable in nature, change with sales volume, are affected by menu mix and are subject to fluctuations in commodity costs.

Restaurant Labor Costs

Restaurant labor costs, including preopening labor, consist of company-operated restaurant-level management and hourly labor costs, including salaries, wages, payroll taxes, workers’ compensation expense, benefits and bonuses paid to our company-operated restaurant-level team members. Like other cost items, we expect restaurant labor costs at our company-operated restaurants to grow due to inflation and as our company restaurant

revenues grows. Factors that influence labor costs include minimum wage and employer payroll tax legislation, exempt versus non-exempt classification, a tightening labor market, employee turnover levels, health care costs and the performance of our restaurants. In addition, the Patient Protection and Affordable Care Act (“PPACA”) has increased health care costs for our restaurants, and we expect the PPACA will continue to result in increased health care costs for our restaurants in the future.

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

Operating Costs

Restaurant operating costs include all other company-operated restaurant-level operating expenses, such as repairs and maintenance, utilities, credit and debit card processing, occupancy expenses and other restaurant operating costs. In addition, our advertising costs are included in operating costs and are comprised of our company-operated restaurants’ portion of spending on all advertising which includes, but is not limited to, television, radio, social media, billboards, point-of-sale materials, sponsorships, and creation of media, such as commercials and marketing campaigns.

Company Restaurant Depreciation and Amortization

Company restaurant depreciation and amortization primarily consists of the depreciation of property and equipment and amortization of intangible assets at the restaurant level. We expect that growth in company-operated restaurant count, as well as restaurant remodels, investments in technology and other initiatives, will increase company restaurant depreciation and amortization.

General and Administrative Expenses

General and administrative expenses include expenses associated with corporate and administrative functions that support our operations, including compensation and benefits, travel expense, stock-based compensation expense, legal and professional fees, training, and other corporate costs. We expect our recurring general and administrative expenses will increase as we grow our business and incur additional expenses related to being a newer public company.

Other Depreciation and Amortization

Other depreciation and amortization primarily consists of the depreciation of property and equipment and amortization of intangible assets not directly located at company-operated restaurants. We expect that growth in system-wide restaurant count, as well as investments in technology and other initiatives, will increase other depreciation and amortization.

Impairment

Long-lived assets such as property, equipment and intangible assets are reviewed on a unit-by-unit basis for impairment. When circumstances indicate the carrying value of the assets may not be recoverable, an appropriate impairment is recorded. Impairments could increase if performance of company-operated restaurants is not sufficient to recover the carrying amount of the related long-lived assets.

Loss (Gain) on Disposal of Property and Equipment and Other

Loss (gain) on disposal of property and equipment and other includes the net loss (gain) on disposal of assets related to retirements and replacements or write-off of leasehold improvements, equipment and other fixed assets. These losses (gains) are related to normal disposals in the ordinary course of business and gains from insurance proceeds, if any.

Amortization of Deferred Debt Issuance Costs

Deferred debt issuance costs are amortized over the term of the related debt on the effective interest method.

Interest Expense

Interest expense primarily consists of interest on our debt outstanding under our credit facility and capital lease obligations.

Income Taxes

Income taxes represent federal, state, and local current and deferred income tax expense.

Results of Operations

Thirteen Weeks Ended September 24, 2017 Compared with the Thirteen Weeks Ended September 25, 2016

Our operating results for the thirteen weeks ended September 24, 2017 and September 25, 2016 are compared below:


	Thirteen Weeks Ended
	September 24, 2017			September 25, 2016			Increase/ (Decrease)			Percentage Change
	(Dollar amounts in thousands)
Statement of Operations Data:
Revenues:
Company restaurant revenues	$	126,207		$	126,358		$	(151	)		(0.1	)%
Franchise royalty revenues		7,018			6,739			279			4.1	%
Other franchise revenues		200			100			100			100.0	%

Total revenues		133,425			133,197			228			0.2	%

Company restaurant operating expenses:
Food and supplies costs		40,525			39,331			1,194			3.0	%
Restaurant labor costs		37,081			35,115			1,966			5.6	%
Operating costs		31,009			28,625			2,384			8.3	%
Depreciation and amortization		3,501			3,225			276			8.6	%

Total company restaurant operating expenses		112,116			106,296			5,820			5.5	%

Operating income before other operating expenses		21,309			26,901			(5,592	)		(20.8	)%

Other operating expenses:
General and administrative		9,814			9,276			538			5.8	%
Depreciation and amortization		747			745			2			0.3	%
Impairment		126			592			(466	)		(78.7	)%
(Gain) loss on disposal of property and equipment and other		(135	)		138			(273	)		(197.8	)%

Total other operating expenses		10,552			10,751			(199	)		(1.9	)%

Operating income		10,757			16,150			(5,393	)		(33.4	)%
Amortization of deferred debt issuance costs		(147	)		(199	)		52			(26.1	)%
Interest income		2			—			2			n/m
Interest expense		(1,495	)		(1,819	)		324			(17.8	)%

Income before income taxes		9,117			14,132			(5,015	)		(35.5	)%
Income taxes		2,160			4,113			(1,953	)		(47.5	)%

Net income	$	6,957		$	10,019		$	(3,062	)		(30.6	)%

n/m = not meaningful

Company Restaurant Revenues

Company restaurant revenues decreased $0.2 million, or 0.1%, during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. The decline in company restaurant revenues was primarily due to decrease in comparable company restaurant sales of $3.9 million, or 3.3%, due to a decrease in transactions and mix, partially offset by increases in price at our comparable restaurants. The decrease in comparable company restaurant sales was partially offset by an increase in the non-comparable restaurant base (net additions of 15 company-operated restaurants at September 24, 2017 compared to September 25, 2016) accounting for $3.7 million.

Franchise Royalty Revenues

Franchise royalty revenues increased $0.3 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. The increase was primarily due to a net additional 35 franchised restaurants at September 24, 2017 compared to September 25, 2016, partially offset by a decrease in franchised comparable restaurant sales of 1.5%.

Other Franchise Revenues

Other franchise revenues increased $0.1 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. The increase was primarily due to the timing of the opening of franchised restaurants.

Food and Supplies Costs

Food and supplies costs increased $1.2 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. This increase was primarily driven by higher commodity costs. Food and supplies costs as a percentage of company restaurant revenues during the thirteen weeks ended September 24, 2017 was 32.1% versus 31.1% during the thirteen weeks ended September 25, 2016. This increase was primarily due to commodity inflation and menu mix changes, partially offset by our menu price increases.

Restaurant Labor Costs

Company-operated restaurant labor costs increased $2.0 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016, primarily due to an increase in the number of company-operated restaurants and wage inflation. As a percentage of company restaurant revenues, restaurant labor costs increased to 29.4% during the thirteen weeks ended September 24, 2017 from 27.8% during the thirteen weeks ended September 25, 2016. This increase was primarily driven by an increase in direct labor, partially offset by lower incentive compensation.

We expect that our restaurant labor costs will continue to increase due to the tightening labor market and higher medical costs, as well as certain labor initiatives across company-operated restaurants, including service enhancements and increasing the number of full-time versus part-time team members. In addition, we expect that our restaurant labor costs will increase as a result of increasing the salaries of certain of our team members in November 2016 and overall labor inflation. The foregoing November 2016 salary increase was in response to proposed DOL regulations related to overtime and exempt versus non-exempt classification that were ultimately invalidated. We may incur increased labor costs if the DOL were to propose new regulations and those regulations are adopted and implemented.

Operating Costs

Operating costs increased $2.4 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016, primarily due to an increase in the number of company-operated restaurants. As a percentage of company restaurant revenues, operating costs increased to 24.6% during the thirteen weeks ended September 24, 2017 from 22.7% during the thirteen weeks ended September 25, 2016. The increase was primarily due to higher occupancy and utilities costs, as well as our uniform refresh program.

Restaurant Depreciation and Amortization

Restaurant depreciation and amortization increased $0.3 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016, due primarily to the increased number of company-operated restaurants. As a percentage of company restaurant revenues, depreciation and amortization was 2.8% and 2.6% during the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively.

General and Administrative Expenses

General and administrative expenses increased $0.5 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. The increase during the thirteen weeks ended September 24, 2017 was due primarily to $0.2 million of higher expense recorded in connection with the identification and due diligence of potential new locations for company-operated restaurants that we ultimately decided not to pursue, $0.2 million of higher employee relocation expenses and headcount added to support an increased number of restaurants in our system, partially offset by lower incentive compensation. As a percentage of total revenues, general and administrative expenses were 7.4% and 7.0% during the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively.

We expect our recurring general and administrative expenses will increase as we grow our business and incur additional expenses related to being a newer public company.

Interest Expense

Interest expense decreased $0.3 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. The decrease was due primarily to principal payments of $35.4 million on our long-term debt from September 26, 2016 to September 24, 2017, a reduction in our applicable rate and lower interest expense associated with interest rate swaps, partially offset by an increase in the LIBOR rate.

Income Taxes

Income taxes decreased $2.0 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. Our effective income tax rates were 23.7% and 29.1% during the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively. The effective income tax rates for the thirteen weeks ended September 24, 2017 and September 25, 2016 reflect a deferred income tax benefit due to a reduction in the North Carolina corporate income tax rate and the recognition of certain tax credits. In addition, the income tax rate for the thirteen weeks ended September 24, 2017 reflects the recognition of $0.4 million of excess tax benefits associated with the exercise of stock options.

Thirty-Nine Weeks Ended September 24, 2017 Compared with the Thirty-Nine Weeks Ended September 25, 2016

Our operating results for the thirty-nine weeks ended September 24, 2017 and September 25, 2016 are compared below:


	Thirty-Nine Weeks Ended
	September 24, 2017			September 25, 2016			Increase/ (Decrease)			Percentage Change
	(Dollar amounts in thousands)
Statement of Operations Data:
Revenues:
Company restaurant revenues	$	378,048		$	372,446		$	5,602			1.5	%
Franchise royalty revenues		20,509			19,532			977			5.0	%
Other franchise revenues		738			470			268			57.0	%

Total revenues		399,295			392,448			6,847			1.7	%

Company restaurant operating expenses:
Food and supplies costs		119,208			116,872			2,336			2.0	%
Restaurant labor costs		110,365			102,976			7,389			7.2	%
Operating costs		90,441			83,645			6,796			8.1	%
Depreciation and amortization		10,082			9,432			650			6.9	%

Total company restaurant operating expenses		330,096			312,925			17,171			5.5	%

Operating income before other operating expenses		69,199			79,523			(10,324	)		(13.0	)%

Other operating expenses:
General and administrative		28,584			28,189			395			1.4	%
Depreciation and amortization		2,225			2,178			47			2.2	%
Impairment		1,123			981			142			14.5	%
Gain on disposal of property and equipment and other		(238	)		(51	)		(187	)		366.7	%

Total other operating expenses		31,694			31,297			397			1.3	%

Operating income		37,505			48,226			(10,721	)		(22.2	)%
Amortization of deferred debt issuance costs		(440	)		(567	)		127			(22.4	)%
Interest income		15			4			11			n/m
Interest expense		(4,776	)		(5,782	)		1,006			(17.4	)%

Income before income taxes		32,304			41,881			(9,577	)		(22.9	)%
Income taxes		9,114			13,987			(4,873	)		(34.8	)%

Net income	$	23,190		$	27,894		$	(4,704	)		(16.9	)%

n/m = not meaningful

Company Restaurant Revenues

Company restaurant revenues increased $5.6 million, or 1.5%, during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016. The growth in company restaurant revenues was primarily due to an increase in the non-comparable restaurant base (net additions of 15 company-operated restaurants at September 24, 2017 compared to September 25, 2016) accounting for $17.5 million, partially offset by a decrease in comparable company restaurant sales of $11.9 million, or 3.4%, composed of a decrease in transactions, partially offset by increases in price at our comparable restaurants.

Franchise Royalty Revenues

Franchise royalty revenues increased $1.0 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016. The increase was primarily due to a net additional 35 franchised restaurants at September 24, 2017 compared to September 25, 2016, partially offset by a decrease in franchised comparable restaurant sales of 0.7%.

Other Franchise Revenues

Other franchise revenues increased $0.3 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016. The increase was primarily due to franchise fees related to the refranchising of five company-operated restaurants, as well as the timing of the opening of franchised restaurants.

Food and Supplies Costs

Food and supplies costs increased $2.3 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016. This increase was primarily driven by an increase in company restaurant revenues. Food and supplies costs as a percentage of company restaurant revenues during the thirty-nine weeks ended September 24, 2017 was 31.5% versus 31.4% during the thirty-nine weeks ended September 25, 2016. This increase was primarily due to commodity inflation and menu mix changes, partially offset by our menu price increases.

Restaurant Labor Costs

Company-operated restaurant labor costs increased $7.4 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016, primarily due to an increase in the number of company-operated restaurants and wage inflation. As a percentage of company restaurant revenues, restaurant labor costs increased to 29.2% during the thirty-nine weeks ended September 24, 2017 from 27.6% during the thirty-nine weeks ended September 25, 2016. This increase was primarily driven by an increase in direct labor, partially offset by lower incentive compensation.

Operating Costs

Operating costs increased $6.8 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016, primarily due to an increase in the number of company-operated restaurants. As a percentage of company restaurant revenues, operating costs increased to 23.9% during the thirty-nine weeks ended September 24, 2017 from 22.5% during the thirty-nine weeks ended September 25, 2016. This increase was primarily due to higher occupancy and utilities costs, as well as our uniform refresh program.

Restaurant Depreciation and Amortization

Restaurant depreciation and amortization increased $0.7 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016, due primarily to the increased number of company-operated restaurants. As a percentage of company restaurant revenues, depreciation and amortization was 2.7% and 2.5% during the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively.

General and Administrative Expenses

General and administrative expenses increased $0.4 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016. The increase during the thirty-nine weeks ended September 24, 2017 was due primarily to $0.5 million of higher expense recorded in connection with the identification and due diligence of potential new locations for company-operated restaurants that we ultimately decided not to pursue, $0.4 million of higher executive separation expenses, $0.2 million of higher stock-based compensation expense, $0.2 million of higher employee relocation expenses and headcount added to support an increased number of restaurants in our system, partially offset by lower incentive compensation. As a percentage of total revenues, general and administrative expenses was 7.2% during each of the thirty-nine weeks ended September 24, 2017 and September 25, 2016.

We expect our recurring general and administrative expenses will increase as we grow our business and incur additional expenses related to being a newer public company.

Interest Expense

Interest expense decreased $1.0 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016. The decrease was due primarily to principal payments of $35.4 million on our long-term debt from September 26, 2016 to September 24, 2017, a reduction in our applicable rate and lower interest expense associated with interest rate swaps, partially offset by an increase in the LIBOR rate.

Income Taxes

Income taxes decreased $4.9 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016. Our effective income tax rates were 28.2% and 33.4% during the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively. The effective income tax rates for the thirty-nine weeks ended September 24, 2017 and September 25, 2016 reflect a deferred income tax benefit due to a reduction in the North Carolina corporate income tax rate and the recognition of certain tax credits. In addition, the income tax rate for the thirty-nine weeks ended September 24, 2017 reflects the recognition of $1.7 million of excess tax benefits associated with the exercise of stock options and vesting of restricted stock units.

Contractual Obligations

During the thirty-nine weeks ended September 24, 2017, there were no material changes to the contractual obligations as disclosed in the Annual Report on Form 10-K for the fiscal year ended December 25, 2016, other than those made in the ordinary course of business.

Off-Balance Sheet Arrangements

We have guaranteed through 2018 debt from a previous credit facility which was assumed by a franchisee. We may be required to perform this guarantee in the event of default or nonperformance by this franchisee. We have determined that default by the franchisee is unlikely due to its timely and consistent payments and have therefore not recorded a liability for the debt assumed by this franchisee on our condensed consolidated balance sheets. The carrying value of debt covered by this additional guarantee by us was approximately $30 thousand and $0.1 million at September 24, 2017 and December 25, 2016, respectively.

Emerging Growth Company

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”) and as modified by the Jumpstart our Business Startups Act of 2012, or the JOBS Act (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,”

including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of stockholder approval of any golden parachute payments not previously approved.

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

We will remain an “emerging growth company” until the earliest of (a) December 27, 2020, (b) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (c) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (d) the date on which we have issued more than $1 billion in non-convertible debt securities in the preceding three-year period.

Critical Accounting Policies and Use of Estimates

Our discussion and analysis of operating results and financial condition are based upon our consolidated financial statements. The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

Accounting policies are an integral part of our consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that the critical accounting policies and estimates discussed herein involve the most difficult management judgments due to the sensitivity of the methods and assumptions used. Our significant accounting policies are described in Note 1 to our condensed consolidated financial statements contained elsewhere in this Form 10-Q.

There have been no material changes to our critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 25, 2016.

New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This update was issued to replace the current revenue recognition guidance, creating a more comprehensive revenue model. This update was originally to be effective in fiscal periods beginning after December 15, 2016 and early application was not permitted. In July 2015, the FASB affirmed its proposal to defer the effective date by one year to annual reporting periods beginning after December 15, 2017. The FASB also affirmed its proposal to permit early adoption of the standard, but not before the original effective date of December 15, 2016. We will not early adopt ASU 2014-09. ASU 2014-09 permits two transition approaches: full retrospective or modified retrospective. We expect to utilize the full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients. We have completed a preliminary review of ASU 2014-09 and do not expect the adoption of ASU 2014-09 to have a material impact on our company restaurant revenues or franchise royalty revenues. We expect the adoption of ASU 2014-09 will require us to recognize

initial and renewal franchisee fees on a straight-line basis over the life of the franchise agreement, which will impact our other franchise revenues. In addition, we anticipate funds contributed by franchisees to the advertising funds we manage, as well as the associated advertising fund expenditures, will be reported on a gross basis, and the advertising fund revenues and expenses may be reported in different periods.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We expect to adopt ASU 2016-02 on December 31, 2018, which is the first day of our fiscal year 2019. A modified retrospective transition is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We expect that ASU 2016-02 will have a material effect on our condensed consolidated financial statements. While we are continuing to assess the impact of adoption, we currently believe the most significant changes relate to (1) the recognition of new ROU assets and lease liabilities on our condensed consolidated balance sheet for real estate and equipment operating leases and (2) the derecognition of existing assets and liabilities for certain assets under construction in build-to-suit lease arrangements that we will lease when construction is complete.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions. ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted ASU 2016-09 prospectively during the first fiscal quarter of 2017, and the adoption did not have a significant impact on the condensed consolidated financial statements. We expect the adoption of ASU 2016-09 to cause volatility in our effective tax rates and diluted net income per share due to the tax effects related to share-based payments being recorded to the condensed consolidated statement of operations and comprehensive income. The volatility in future periods will depend on the price of our common stock on the date awards are exercised or vest and the number of awards that are exercised or vest in each period. In addition, the adoption of ASU 2016-09 resulted in an increase in the weighted average number of common shares outstanding used for computing diluted net income per share as tax effects related to share-based payments are no longer considered assumed proceeds when calculating dilutive potential common shares using the treasury-stock method.

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

Liquidity and Capital Resources

Our primary requirements for liquidity and capital are new company-operated restaurants, existing restaurant capital investments (remodels and maintenance), information technology investments, principal and interest payments on our term debt and capital lease obligations, operating lease obligations and working capital and general corporate needs. Our customers primarily pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Therefore, we are able to sell many of our inventory items before we have to pay our suppliers for such items. Our restaurants do not require significant inventories or receivables. We do have accounts receivable from our franchisees, which are primarily related to royalty revenues, as well as from certain vendors.

Our growth plan is dependent upon many factors, including economic conditions, real estate markets, restaurant locations and the nature of our lease agreements. Our capital expenditure outlays are also dependent on costs for maintenance in our existing restaurants as well as information technology and other general corporate expenditures. We primarily utilize build-to-suit developments and equipment financing leases for our new company-operated restaurants, requiring minimal upfront cash investment. While we currently utilize a build-to-suit development strategy, our new restaurant strategy may change over time. The average investment for new company-operated restaurants has increased during fiscal year 2017 primarily due to higher land costs, inflation and the incorporation of certain design features of our “Bojangles’ of the Future” into our company-operated restaurant construction projects.

We currently expect our cash capital expenditures for fiscal year 2017 will range between $12.0 million and $13.0 million excluding approximately $1.5 million to $1.6 million of restaurant preopening costs for restaurants that are not capitalized. These capital estimates are based on restaurant capital expenditures for the opening of 25 to 26 company-operated restaurants as well as investments to remodel and improve our existing restaurants, investments in technology and expenditures for general corporate purposes. We continue to evaluate our long-term growth strategy related to the opening of new company-operated restaurants and the proportion of company-operated restaurants and franchised units. During fiscal year 2018, and for the foreseeable future, we expect to open fewer new company-operated restaurants than we have in recent fiscal years.

We believe that cash and cash equivalents and expected cash flow from operations are adequate to fund debt service requirements, capital lease obligations, operating lease obligations, capital expenditures and working capital needs for at least the next twelve months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flow from operations, our ability to manage costs and working capital successfully and the continued availability of build-to-suit and equipment financing leases for our new company-operated restaurants. We have used excess cash flows to make payments on our outstanding long-term debt in advance of the required due date, and we may continue to do so in future periods.

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


	Thirty-Nine Weeks Ended
	September 24, 2017			September 25, 2016
Net cash provided by (used in)
Operating activities	$	36,818		$	42,781
Investing activities		(7,328	)		(6,001	)
Financing activities		(25,666	)		(31,564	)

Net increase in cash	$	3,824		$	5,216

Operating Activities

Net cash provided by operating activities decreased from $42.8 million during the thirty-nine weeks ended September 25, 2016 to $36.8 million during the thirty-nine weeks ended September 24, 2017. The decrease was primarily attributable to a decline in cash generated from our operations and higher estimated federal income tax payments in relation to our taxable income, partially offset by an increase in franchise royalty revenues.

Investing Activities

Net cash used in investing activities increased from $6.0 million during the thirty-nine weeks ended September 25, 2016 to $7.3 million during the thirty-nine weeks ended September 24, 2017. The increase was attributable to higher purchases of property and equipment, including expenditures related to new and remodeled company-operated restaurants, as well as our technology initiatives.

Financing Activities

Net cash used in financing activities decreased from $31.6 million during the thirty-nine weeks ended September 25, 2016 to $25.7 million during the thirteen weeks ended September 24, 2017. This decrease was primarily due to $7.4 million of lower principal payments on long-term debt and $1.5 million of higher proceeds from the exercise of stock options, partially offset by $1.1 million of higher principal payments on capital lease obligations and a $1.8 million decrease in the excess tax benefit from stock-based compensation which, beginning in fiscal year 2017, is now recorded in the condensed consolidated statement of operations and comprehensive income.

Debt and Other Obligations

Credit Agreement

On October 9, 2012, we entered into a credit agreement (“Credit Agreement”) with several financial institutions. The Credit Agreement is secured by substantially all of our assets and originally provided for borrowings under a term loan of $175.0 million and a revolving credit facility of $25.0 million, with an initial maturity date of October 9, 2017. In May 2013, we amended the Credit Agreement to provide for an additional $50.0 million term loan, the proceeds of which were used to fund a distribution to the holders of our Series A preferred stock. In April 2014, we further amended the Credit Agreement to provide for an additional $50.0 million term loan, the proceeds of which were also used to fund a distribution to the holders of our Series A preferred stock, and to extend the maturity date to October 9, 2018. On July 23, 2015, we amended the Credit Agreement in order to permit the merger of BHI Intermediate Holding Corp., our former wholly owned subsidiary, into us. On September 25, 2015, we further amended the Credit Agreement to, among other things, extend the maturity date on the Credit Agreement to October 9, 2020 and lower the applicable interest rate. On October 19, 2016, we further amended the Credit Agreement to, among other things, increase allowable indebtedness associated with capital lease obligations, synthetic lease obligations and purchase money obligations, as well as to increase allowable cash capital expenditures during each fiscal year. We had $135.1 million of outstanding term loans and no outstanding borrowings under our revolving credit facility as of September 24, 2017.

Borrowings under the Credit Agreement are allowed under base rate and Eurodollar rate loans. Base rate loans bear interest at the higher of (1) the Bank of America prime rate, (2) the Federal Funds Rate plus 0.50%, or (3) the LIBOR rate for one-month loans plus 1.00% and an applicable rate. Eurodollar rate loans may be entered or converted into one-, two-, three-, or six-month periods and are charged interest at the LIBOR rate on the effective date for the period selected, plus an applicable rate. As of September 24, 2017, all of our outstanding term loan debt was in one-month Eurodollar loans with an interest rate of approximately 3.24%.

Debt Covenants

Our Credit Agreement contains various covenants that, among other things, do not allow us to exceed a maximum consolidated total lease adjusted leverage ratio, require us to maintain a minimum consolidated fixed charge coverage ratio, and place certain limitations on cash capital expenditures. We were in compliance with all of the covenants under our Credit Agreement as of September 24, 2017.

Hedging Arrangements

In connection with our Credit Agreement, as of September 24, 2017, we have two variable-to-fixed interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. On May 17, 2013, we entered into an interest rate swap contract with a notional amount of $50.0 million, an effective date of November 30, 2015 and a termination date of September 29, 2017, under which we paid interest fixed at 1.3325% and received the one-month LIBOR rate. On October 26, 2015, we entered into another interest rate swap contract with an effective date of October 30, 2015, a termination date of October 31, 2019 and a notional amount of $50.0 million, under which we pay interest fixed at 1.115% and receive the one-month LIBOR rate.

Share Repurchase Program

On October 31, 2017, our board of directors authorized a share repurchase program under which we may purchase up to $50.0 million of our outstanding common stock through April 30, 2019. The purchases may be made from time to time in the open market (including, without limitation, the use of Rule 10b5-1 plans), depending on a number of factors, including our evaluation of general market and economic conditions, the trading price of the common stock, regulatory requirements, and compliance with the terms of our outstanding indebtedness. The share repurchase program may be extended, modified, suspended or discontinued at any time. We expect to fund the share repurchase program with either, or a combination of, existing cash on hand, cash generated from operations, and borrowings under our revolving line of credit.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Inflation Risk

The primary inflationary factors affecting our operations are food and supplies, labor costs, energy costs and materials used in the construction of new company-operated restaurants. Increases in the minimum wage (whether market driven or as a result of regulatory action) directly affect our labor costs and the PPACA has increased our health insurance costs beginning in fiscal year 2015. Our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflationary increases in the costs of labor and material which results in higher rent expense on new restaurants.

Interest Rate Risk

Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. We are exposed to market risk from changes in interest rates on our debt, which bears interest at variable rates. As of September 24, 2017, we had outstanding borrowings of $135.1 million under our Credit Agreement. As of September 24, 2017, $100.0 million of our outstanding borrowings under the Credit Agreement were covered by interest rate swaps that effectively fix the interest rate on those borrowings for certain periods of time. A 1.00% increase in the effective interest rate applied to our borrowings subject to variable interest rates as of September 24, 2017 would result in a pre-tax interest expense increase of $0.4 million on an annualized basis. Subsequent to September 24, 2017, one of our interest rate swaps covering $50.0 million of our outstanding borrowings under the Credit Agreement expired. If the interest rate swap that expired on September 29, 2017 had expired prior to September 24, 2017, a 1.00% increase in the effective interest rate applied to our borrowings then subject to variable interest rates would have resulted in a pre-tax interest expense increase of $0.9 million on an annualized basis.

Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. Debt under our Credit Agreement has floating interest rates. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates for our floating rate debt. Our floating rate debt requires payments based on a variable interest rate index such as LIBOR. Therefore, increases in interest rates may reduce our net income by increasing the cost of our debt. However, we seek to mitigate our floating interest rate risk on the long-term debt under our Credit Agreement by entering into fixed pay interest rate derivatives on a portion of the long-term debt under our Credit Agreement, as discussed above under “Debt and Other Obligations – Hedging Arrangements”.

Commodity Market Risk

We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our condensed consolidated balance sheets. Typically, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing or promotional mix, or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase food and supplies costs as a percentage of company restaurant revenues and customers may react negatively to increases in our menu prices which could adversely impact customer traffic and revenues.

Credit Risk

Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows.

Certain financial instruments potentially subject us to a concentration of credit risk. These financial instruments consist primarily of cash and cash equivalents and accounts and vendor receivables. We place our cash and cash equivalents with high-credit, quality financial institutions. At times, the balances in the accounts exceed the amounts insured by the Federal Deposit Insurance Corporation.

Concentration of credit risk with respect to receivables is primarily limited to franchisees, which are primarily located in the Southeastern United States, and vendors. Royalty revenues from three franchisees, one of which is a related party, accounted for approximately 43% and 44% of our total franchise royalty revenues for the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively, and approximately 43% and 44% of our total franchise royalty revenues for the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively. Royalty and franchise fee accounts receivable from three franchisees, one of which is a related party, accounted for approximately 39% and 40% of our gross royalty and franchise fee accounts receivable as of September 24, 2017 and December 25, 2016, respectively. We continually evaluate and monitor the credit history of our franchisees and believe we have an adequate allowance for bad debts.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As of the end of the period covered by this Quarterly Report, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of September 24, 2017.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the thirteen weeks ended September 24, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various claims and litigation that arise in the normal course of business. Management is of the opinion that, although the outcome of the litigation cannot be predicted with any certainty, the ultimate liability, if any, will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2016.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.		Description

31.1		Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2		Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1		Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡

32.2		Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡

101		Sections of the Bojangles’, Inc. Quarterly Report on Form 10-Q for the quarterly period ended September 24, 2017, formatted in XBRL (eXtensible Business Reporting Language), submitted in the following files:

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.


101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

*		Filed herewith

‡		Furnished herewith

EXHIBIT INDEX


Exhibit No.		Description

31.1		Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2		Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1		Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡

32.2		Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡

101		Sections of the Bojangles’, Inc. Quarterly Report on Form 10-Q for the quarterly period ended September 24, 2017, formatted in XBRL (eXtensible Business Reporting Language), submitted in the following files:

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

*	Filed herewith

‡	Furnished herewith

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 1, 2017


Bojangles’, Inc.

By:		/s/ M. John Jordan
		M. John Jordan
		Senior Vice President of Finance, Chief Financial Officer and Treasurer

		(Principal Financial Officer and Authorized Signatory)