ZOE'S KITCHEN, INC., 10-Q filed on 5/25/2017
Quarterly Report
Document and Entity Information
4 Months Ended
Apr. 17, 2017
May 25, 2017
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
ZOE'S KITCHEN, INC. 
 
Entity Central Index Key
0001594879 
 
Current Fiscal Year End Date
--12-25 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Apr. 17, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q1 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
19,488,754 
Unaudited Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Apr. 17, 2017
Dec. 26, 2016
Current Assets:
 
 
Cash and cash equivalents
$ 3,030 
$ 5,493 
Trade accounts receivable, net of allowance for doubtful accounts
1,774 
2,287 
Other accounts receivable
2,802 
3,708 
Inventories
2,102 
1,878 
Prepaid expenses and other
3,566 
1,818 
Total current assets
13,274 
15,184 
Property and equipment, net
174,737 
162,033 
Goodwill
29,528 
29,528 
Intangibles, net
7,473 
7,962 
Other long-term assets, net
540 
512 
Total long-term assets
212,278 
200,035 
Total assets
225,552 
215,219 
Current liabilities:
 
 
Accounts payable
10,810 
7,229 
Accrued expenses and other
15,556 
14,260 
Total current liabilities
26,366 
21,489 
Long-term liabilities:
 
 
Deemed landlord financing
32,440 
29,777 
Deferred rent
30,048 
28,375 
Deferred income taxes
5,740 
5,476 
Other long-term liabilities, net
84 
136 
Total long-term liabilities
68,312 
63,764 
Total liabilities
94,678 
85,253 
Commitments and contingencies (Note 8)
   
   
Stockholders' equity:
 
 
Common stock: $0.01 par value, 135,000,000 shares authorized as of April 17, 2017 and December 26, 2016; 19,488,754 and 19,460,467 issued and outstanding as of April 17, 2017 and December 26, 2016, respectively.
195 
195 
Additional paid-in capital
149,654 
148,482 
Accumulated deficit
(18,975)
(18,711)
Total stockholders' equity
130,874 
129,966 
Total liabilities and stockholders' equity
$ 225,552 
$ 215,219 
Unaudited Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Apr. 17, 2017
Dec. 26, 2016
Statement of Financial Position [Abstract]
 
 
Common stock, par value (USD per share)
$ 0.01 
$ 0.01 
Common stock, shares authorized (in shares)
135,000,000 
135,000,000 
Common stock, issued (in shares)
19,488,754 
19,460,467 
Common stock, outstanding (in shares)
19,488,754 
19,460,467 
Unaudited Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
4 Months Ended
Apr. 17, 2017
Apr. 18, 2016
Revenue:
 
 
Restaurant sales
$ 90,504 
$ 80,348 
Royalty fees
57 
63 
Total revenue
90,561 
80,411 
Operating expenses:
 
 
Cost of sales
26,496 
23,989 
Labor
26,952 
23,299 
Store operating expenses
19,049 
15,373 
General and administrative expenses
9,985 
9,445 
Depreciation
5,052 
3,992 
Amortization
489 
500 
Pre-opening costs
567 
740 
Loss from disposal of equipment
259 
237 
Total operating expenses
88,849 
77,575 
Income from operations
1,712 
2,836 
Other income and expenses:
 
 
Interest expense, net
1,368 
1,122 
Other income
(29)
(27)
Total other income and expenses
1,339 
1,095 
Income before provision for income taxes
373 
1,741 
Provision for income taxes
354 
345 
Net income
$ 19 
$ 1,396 
Earnings per share:
 
 
Basic (USD per share)
$ 0.00 
$ 0.07 
Diluted (USD per share)
$ 0.00 
$ 0.07 
Weighted average shares of common stock outstanding:
 
 
Basic (in shares)
19,472,124 
19,395,815 
Diluted (in shares)
19,528,915 
19,568,815 
Unaudited Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
4 Months Ended
Apr. 17, 2017
Apr. 18, 2016
Cash flows from operating activities:
 
 
Net income
$ 19 
$ 1,396 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation
5,052 
3,992 
Amortization of intangible assets
489 
500 
Equity-based compensation
888 
703 
Deferred income taxes
264 
345 
Amortization of loan costs
7 
7 
Bad debt expense
3 
10 
Loss from disposal of equipment
259 
237 
Accretion of deemed landlord financing
92 
110 
Changes in operating assets and liabilities:
 
 
Trade accounts receivable
510 
(533)
Other accounts receivable
907 
(1,007)
Inventories
(224)
(150)
Prepaid expenses and other
(1,783)
(772)
Accounts payable
2,095 
1,613 
Accrued expenses and other
350 
449 
Deferred rent
1,705 
2,581 
Net cash provided by operating activities
10,633 
9,481 
Cash flows from investing activities:
 
 
Purchase of property and equipment
(13,217)
(10,569)
Proceeds from sale-leaseback transactions
0 
2,089 
Proceeds from sale of property and equipment
0 
12 
Net cash used in investing activities
(13,217)
(8,468)
Cash flows from financing activities:
 
 
Proceeds from deemed landlord financing
121 
(10)
Proceeds from exercise of stock options
0 
480 
Net cash provided by financing activities
121 
470 
Net change in cash and cash equivalents
(2,463)
1,483 
Cash and cash equivalents:
 
 
Beginning of period
5,493 
19,131 
End of period
3,030 
20,614 
Supplemental disclosure of cash flow information:
 
 
Cash paid for interest related to deemed landlord financing
1,455 
1,122 
Non-cash deemed landlord financing
2,450 
(1,450)
Change in accrued purchases of property and equipment
$ 2,400 
$ 2,846 
Nature of Operations and Basis of Presentation
Nature of Operations and Basis of Presentation
Nature of Operations and Basis of Presentation
Nature of Operations
Zoe’s Kitchen, Inc. (the "Company", "Zoës", "we" or "us") primarily develops and operates fast-casual restaurants serving a distinct menu of freshly prepared Mediterranean-inspired dishes. As of April 17, 2017, we operated 211 Company-owned restaurants and three franchise restaurants in 20 states across the United States. We have determined that we have one operating and reportable segment. All of our revenues are derived in the United States. All of our assets are located in the United States.
Interim Financial Statements
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 omitted pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). Due to the seasonality of our business, results for any interim financial period are not necessarily indicative of the results that may be achieved for a full fiscal year. In addition, quarterly results of operations may be impacted by the timing and amount of sales and costs associated with the opening of new restaurants. These interim unaudited condensed consolidated financial statements do not represent complete financial statements and should be read in conjunction with our annual financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 2016 (the "2016 Form 10-K"). While the condensed consolidated balance sheet data as of December 26, 2016 was derived from audited financial statements, it does not include all disclosures required by GAAP.
Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) is the same as net income (loss) for all periods presented. Therefore, a separate statement of comprehensive income (loss) is not included in the accompanying condensed consolidated financial statements.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Zoe’s Kitchen, Inc. and its wholly owned subsidiaries, Zoe’s Kitchen USA, LLC and Soho Franchising, LLC. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements presented herein reflect our financial position, results of operations and cash flows in conformity with GAAP.
Fiscal Year
We operate on a 52- or 53-week fiscal year that ends on the last Monday of the calendar year. Fiscal years ended December 25, 2017 and December 26, 2016 consist of 52 weeks. Our first fiscal quarter consists of 16 weeks, and each of our second, third and fourth fiscal quarters consists of 12 weeks, except for a 53-week year when the fourth quarter has 13 weeks.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions, such as valuation of long-lived, definite and indefinite-lived assets, estimated useful lives of assets, the reasonably assured lease terms of operating leases, the construction costs of leases where the Company is considered the owner during and after the construction period, allowance for doubtful accounts, the fair value related to equity-based compensation, the calculation of self-insurance reserves, and deferred tax valuation allowances, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Recently Adopted Accounting Standards
In March 2016, the FASB issued Accounting Standard Update ("ASU") No. 2016-09, “Compensation – Stock Compensation (Topic 718).” The pronouncement was issued to simplify the accounting for share-based payment transactions, including income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2016. We adopted ASU 2016-09 effective December 27, 2016. The portion of ASU 2016-09 related to the accounting for income taxes was adopted using a modified retrospective approach and resulted in a net zero effect on our statement of financial position. As permitted under the new standard, the Company elected to recognize forfeitures as they occur rather than using an estimated forfeiture rate. Adopted using a modified retrospective approach, this election resulted in an increase to Accumulated deficit of $0.3 million offset by an equal increase to Additional paid-in capital.
Recently Issued Accounting Standards
In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity will account for the effects of a modification unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified award are the same as the original award, and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. This pronouncement is effective for reporting periods beginning after December 15, 2017 and early adoption is permitted. We do not expect the adoption of ASU 2017-09 to have a material impact on our financial position or results of operations.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment,” which eliminates Step 2 from the goodwill impairment test. Under the new standard, annual and interim goodwill impairment tests will compare the fair value of a reporting unit with its carrying amount. An impairment charge will be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill. The pronouncement is effective for goodwill impairments tests in fiscal years beginning after December 15, 2019 and should will be applied on a prospective basis. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. We are currently evaluating the impact of adopting this update.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash payments,” which provides specific guidance regarding presentation and classification on a variety of cash payments and receipts. Among the issues addressed is the classification of proceeds from the settlement of insurance claims. This pronouncement is effective for reporting periods beginning after December 15, 2017 and early adoption is permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our financial position or results of operations.
In March 2016, the FASB issued ASU No. 2016-04, "Liabilities - Extinguishments of Liabilities (Subtopic 405-20)", which amends subtopic 405-20 to provide a scope exception that requires breakage for prepaid stored-value product liabilities to be accounted for consistent with the breakage guidance in Topic 606. The amendment is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We do not expect the adoption of ASU 2016-04 to have a material impact on our financial position or results of operations.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. Previous lease accounting did not require certain lease types to be recognized on the balance sheet. This update is an amendment to the codification and is effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years applied using a modified retrospective approach. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our financial position and results of operations, but expect that it will result in a significant increase in our long-term assets and liabilities given we have a significant number of leases. In addition, rental payments under most of our leases for which we are the accounting owner will no longer be considered debt service applied to deemed landlord financing and interest expense. Instead, these rental payments will be classified as rent expense.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This update was issued to replace the current revenue recognition guidance, creating a more comprehensive revenue model. In August 2015, the FASB issued ASU 2015-14 to defer the effective date for adoption. The update is now effective for reporting periods beginning after December 15, 2017. In March 2016, April 2016, May 2016, and December 2016 the FASB also issued ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively, to further clarify performance obligations and licensing implementation guidance and other general topics. We expect to adopt the new standard using the modified retrospective approach for the fiscal year and quarter beginning December 26, 2017. We do not expect the adoption to have an impact on revenue from Company-owned restaurants or the recognition of royalty fees from our franchise agreement. In addition, we do not expect a material impact related to recognition of gift card breakage.
Supplemental Information
Supplemental Information
Supplemental Information
Property and equipment, net consisted of the following (in thousands):
 
 
April 17,
2017
 
December 26,
2016
Land
 
$
813

 
$
—

Buildings under deemed landlord financing
 
26,280

 
23,830

Leasehold improvements
 
132,578

 
125,666

Machinery and equipment
 
34,371

 
32,566

Furniture and fixtures
 
6,927

 
6,604

Automobiles
 
4,019

 
4,019

Computer equipment
 
10,906

 
9,848

Construction in progress
 
10,298

 
6,256

Property and equipment, gross
 
226,192

 
208,789

Less: Accumulated depreciation
 
(51,455
)
 
(46,756
)
Total Property and equipment, net
 
$
174,737

 
$
162,033


Accrued expenses and other consisted of the following (in thousands):
 
 
April 17,
2017
 
December 26,
2016
Accrued payroll and payroll taxes
 
$
4,736

 
$
5,448

Accrued capital purchases
 
3,261

 
2,347

Sales tax payable
 
2,943

 
1,218

Gift card payable
 
740

 
1,200

Other accrued expenses
 
3,876

 
4,047

Total Accrued expenses and other
 
$
15,556

 
$
14,260

Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to the short maturities of these instruments.
Bank Line of Credit and Term Loan
Bank Line of Credit and Term Loan
Bank Line of Credit and Term Loan
On February 6, 2015, we entered into a credit facility with Wells Fargo Bank, National Association (the "2015 Credit Facility"). The 2015 Credit Facility consists of a revolving loan commitment in the aggregate amount of $20.0 million, together with an incremental revolving credit commitment up to an aggregate amount of $30.0 million. The 2015 Credit Facility has a five year term and matures on February 6, 2020. As of April 17, 2017, we had no indebtedness under the 2015 Credit Facility.
Revolving credit loans under the 2015 Credit Facility bear interest, at the Company’s election, at either the base rate plus an applicable margin, or LIBOR plus an applicable margin. The base rate consists of the highest of the prime rate, the federal funds rate plus 0.5% and LIBOR plus 1.0%. The applicable margin and associated loan commitment fee consists of two pricing levels based on the Company’s consolidated total debt ratio. If this debt ratio is greater than or equal to 2.50 to 1, then the unused commitment fee is 0.15% per annum, and the applicable margin is LIBOR plus 1.5% or the base rate plus 0.5%. If this debt ratio is less than 2.50 to 1, then the unused commitment fee is 0.125% per annum and the applicable margin is LIBOR plus 1.0% or the base rate.
The 2015 Credit Facility includes specific financial covenants such as a leverage ratio and an interest coverage ratio. We are also subject to other customary covenants, including limitations on additional borrowings, dividend payments and acquisitions. As of April 17, 2017, we were in compliance with these financial and other customary covenants.
Equity-based Compensation
Equity-based Compensation
Equity-based Compensation
In connection with our initial public offering in April 2014 (the "IPO"), we adopted the 2014 Omnibus Incentive Plan (the “2014 Incentive Plan”), which provides for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards available to directors, officers and other employees of us and our subsidiaries, as well as others performing consulting or advisory services to us. The number of shares of common stock available for issuance under the 2014 Incentive Plan may not exceed 1,905,799.
The following table summarizes our stock option plan activity during the sixteen weeks ended April 17, 2017:
 
 
Stock Options
 
Weighted Average Exercise Price
Outstanding as of December 26, 2016
 
710,597

 
$
26.28

Granted
 
311,169

 
23.26

Exercised
 
—

 
—

Forfeited
 
(1,407
)
 
42.05

Expired
 
(468
)
 
42.05

Outstanding as of April 17, 2017
 
1,019,891

 
$
25.33


There were 250,000 stock options granted, included in the summary of stock option plan activity, that vested immediately upon completion of the IPO. All other options vest in four equal annual installments following the date of the grant with a contractual term of 10 years.
The following table reflects the weighted-average assumptions utilized in the Black-Scholes option-pricing model to value the stock options granted.
 
 
Sixteen Weeks Ended
 
 
April 17, 2017
Expected volatility (1)
 
31.5%
Risk-free rate of return
 
2.1%
Expected life (in years) (2)
 
6.3
Dividend yield
 
0%
Weighted-average fair value per share at date of grant
 
$8.17

(1) Expected volatility was based on competitors within the industry.
(2) Expected life was calculated using the simplified method, which is an average of the contractual term of the option and its ordinary vesting period, as we do not have sufficient historical data for determining the expected term of our stock option awards.

The following table summarizes our restricted stock unit plan activity sixteen weeks ended April 17, 2017:
 
 
Restricted Stock Units
 
Weighted Average Grant Date Fair Value
Non-vested at December 26, 2016
 
83,411

 

$28.13

Granted
 
62,069

 
21.85

Vested
 
(28,287
)
 
27.84

Forfeited
 
(365
)
 
27.42

Non-vested at April 17, 2017
 
116,828

 
24.86



The fair value of the non-vested restricted stock units is based on the closing price on the date of grant. All of our outstanding restricted stock units vest in three equal annual installments following the date of the grant.
We recognized equity-based compensation as a component of general and administrative expenses of $0.9 million and $0.7 million during the sixteen weeks ended April 17, 2017 and April 18, 2016, respectively. As of April 17, 2017, total unrecognized compensation expense related to non-vested stock awards was $8.3 million, which is expected to be recognized over a weighted-average period of 2.7 years.
Earnings Per Share
Earnings Per Share
Earnings Per Share
Basic net income per share is calculated by dividing net income by the weighted average shares outstanding during the period, without consideration of common stock equivalents. Diluted net income per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method.
The following table presents the computation of basic and diluted net income per share for the period indicated:
 
 
Sixteen Weeks Ended
 
 
April 17,
2017
 
April 18,
2016
Net income (in thousands):
 
$
19

 
$
1,396

Shares:
 
 
 
 
Basic weighted average shares outstanding
 
19,472,124

 
19,395,815

Diluted weighted average shares outstanding
 
19,528,915

 
19,568,815

Earnings per share:
 
 
 
 
Basic EPS
 
$
0.00

 
$
0.07

Diluted EPS
 
$
0.00

 
$
0.07


During the sixteen weeks ended April 17, 2017, there were 607,105 stock options and 85,094 restricted stock units excluded from the diluted earnings per share calculation because their inclusion would have been anti-dilutive. During the sixteen weeks ended April 18, 2016, there were 432,227 stock options and 417 restricted stock units excluded from the diluted earnings per share calculation because their inclusion would have been anti-dilutive.
Income Taxes
Income Taxes
Income Taxes
Provision for income taxes was $0.4 million and $0.3 million for the sixteen weeks ended April 17, 2017 and April 18, 2016, respectively. The effective tax rate was 95% and 20% for the sixteen weeks ended April 17, 2017 and April 18, 2016, respectively. Our tax expense typically remains relatively constant as it primarily reflects the accrual of income tax expense related to a valuation allowance in connection with the tax amortization of the Company’s goodwill that was not available to offset existing deferred tax assets. Due to the uncertain timing of the reversal of this temporary difference, it cannot be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore the deferred tax liability cannot offset deferred tax assets. Our quarterly provision for income taxes is measured using an annual estimated effective tax rate for the full year applied to period earnings. The comparison of our effective tax rate between periods is significantly impacted by the level of pre-tax income earned and projected for the year.
We continue to monitor and evaluate the rationale for recording a full valuation allowance for the net amount of the deferred tax assets which are in excess of the indefinite-lived intangible asset deferred tax liabilities. We intend to continue maintaining a full valuation allowance on these net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility within the foreseeable future, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Franchise Agreement
Our Kentucky franchise agreement, which requires the franchisee to remit continuing royalty fees at a specified percentage of the franchisee's gross sales revenue, provides that we as franchisor, or its authorized representative, will: (a) provide franchisee with written schedules of all foods, food products, beverages, and other items for sale, and the furniture, fixtures, supplies and equipment necessary and required for the operation of the restaurant; (b) provide franchisee with a list of approved suppliers for the products and services necessary and required for the restaurant; (c) upon the reasonable written request of franchisee, render reasonable advisory services by telephone or in writing pertaining to the operation of the restaurant; (d) provide franchisee with a sample of the standard Zoës Kitchen menu, and any modifications to the menu; (e) loan franchisee a copy of the System's operating manual and any supplements to the manual that may be published by us; and, (f) provide franchisee the opportunity to participate in group purchasing programs that we may use, develop, sponsor or provide on terms and conditions determined solely by us. In addition, as a condition to the commencement of business by any of our franchises, the franchisee must attend and successfully complete our training program. The costs related to our franchise agreement are not significant.
Litigation
We are currently involved in various claims and legal actions that arise in the ordinary course of our business, including claims resulting from employment related matters. None of these claims, most of which are covered by insurance, has had a material effect on us, and as of the date of this report, other than as set forth below, we are not party to any material pending legal proceedings and are not aware of any claims that could have a material adverse effect on our business, financial condition, results of operations or cash flows. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims could materially and adversely affect our business, financial condition, results of operations or cash flows.
On October 31, 2014, Forsyth Consulting, Inc. ("Forsyth"), a former music vendor for the Company, filed a complaint against the Company in the Circuit Court of Jefferson County, Alabama alleging breach of contract with respect to its prior music service contract. We have removed the action to federal court and, on December 19, 2014, we filed a counterclaim in the United States District Court for the Northern District of Alabama, alleging breach of contract and tortious interference with business relations claims against Forsyth. The discovery period is complete, and both parties' motions for summary judgment were denied in all material respects. We do not anticipate the results of this proceeding to have a material effect on our results of operations.
Subsequent Events
Subsequent Events
Subsequent Events
On April 20, 2017, we borrowed $5.0 million on the 2015 Credit Facility. The proceeds will be used to fund capital expenditures and working capital obligations.
Nature of Operations and Basis of Presentation (Policies)
Basis of Accounting 
Interim Financial Statements
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 omitted pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). Due to the seasonality of our business, results for any interim financial period are not necessarily indicative of the results that may be achieved for a full fiscal year. In addition, quarterly results of operations may be impacted by the timing and amount of sales and costs associated with the opening of new restaurants. These interim unaudited condensed consolidated financial statements do not represent complete financial statements and should be read in conjunction with our annual financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 2016 (the "2016 Form 10-K"). While the condensed consolidated balance sheet data as of December 26, 2016 was derived from audited financial statements, it does not include all disclosures required by GAAP.
Comprehensive Income (Loss) 
Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) is the same as net income (loss) for all periods presented. Therefore, a separate statement of comprehensive income (loss) is not included in the accompanying condensed consolidated financial statements.
Principles of Consolidation 
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Zoe’s Kitchen, Inc. and its wholly owned subsidiaries, Zoe’s Kitchen USA, LLC and Soho Franchising, LLC. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements presented herein reflect our financial position, results of operations and cash flows in conformity with GAAP.
Fiscal Period 
Fiscal Year
We operate on a 52- or 53-week fiscal year that ends on the last Monday of the calendar year. Fiscal years ended December 25, 2017 and December 26, 2016 consist of 52 weeks. Our first fiscal quarter consists of 16 weeks, and each of our second, third and fourth fiscal quarters consists of 12 weeks, except for a 53-week year when the fourth quarter has 13 weeks.
Use of Estimates 
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions, such as valuation of long-lived, definite and indefinite-lived assets, estimated useful lives of assets, the reasonably assured lease terms of operating leases, the construction costs of leases where the Company is considered the owner during and after the construction period, allowance for doubtful accounts, the fair value related to equity-based compensation, the calculation of self-insurance reserves, and deferred tax valuation allowances, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Recently Issued Accounting Standards 
Recently Adopted Accounting Standards
In March 2016, the FASB issued Accounting Standard Update ("ASU") No. 2016-09, “Compensation – Stock Compensation (Topic 718).” The pronouncement was issued to simplify the accounting for share-based payment transactions, including income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2016. We adopted ASU 2016-09 effective December 27, 2016. The portion of ASU 2016-09 related to the accounting for income taxes was adopted using a modified retrospective approach and resulted in a net zero effect on our statement of financial position. As permitted under the new standard, the Company elected to recognize forfeitures as they occur rather than using an estimated forfeiture rate. Adopted using a modified retrospective approach, this election resulted in an increase to Accumulated deficit of $0.3 million offset by an equal increase to Additional paid-in capital.
Recently Issued Accounting Standards
In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity will account for the effects of a modification unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified award are the same as the original award, and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. This pronouncement is effective for reporting periods beginning after December 15, 2017 and early adoption is permitted. We do not expect the adoption of ASU 2017-09 to have a material impact on our financial position or results of operations.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment,” which eliminates Step 2 from the goodwill impairment test. Under the new standard, annual and interim goodwill impairment tests will compare the fair value of a reporting unit with its carrying amount. An impairment charge will be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill. The pronouncement is effective for goodwill impairments tests in fiscal years beginning after December 15, 2019 and should will be applied on a prospective basis. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. We are currently evaluating the impact of adopting this update.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash payments,” which provides specific guidance regarding presentation and classification on a variety of cash payments and receipts. Among the issues addressed is the classification of proceeds from the settlement of insurance claims. This pronouncement is effective for reporting periods beginning after December 15, 2017 and early adoption is permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our financial position or results of operations.
In March 2016, the FASB issued ASU No. 2016-04, "Liabilities - Extinguishments of Liabilities (Subtopic 405-20)", which amends subtopic 405-20 to provide a scope exception that requires breakage for prepaid stored-value product liabilities to be accounted for consistent with the breakage guidance in Topic 606. The amendment is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We do not expect the adoption of ASU 2016-04 to have a material impact on our financial position or results of operations.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. Previous lease accounting did not require certain lease types to be recognized on the balance sheet. This update is an amendment to the codification and is effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years applied using a modified retrospective approach. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our financial position and results of operations, but expect that it will result in a significant increase in our long-term assets and liabilities given we have a significant number of leases. In addition, rental payments under most of our leases for which we are the accounting owner will no longer be considered debt service applied to deemed landlord financing and interest expense. Instead, these rental payments will be classified as rent expense.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This update was issued to replace the current revenue recognition guidance, creating a more comprehensive revenue model. In August 2015, the FASB issued ASU 2015-14 to defer the effective date for adoption. The update is now effective for reporting periods beginning after December 15, 2017. In March 2016, April 2016, May 2016, and December 2016 the FASB also issued ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively, to further clarify performance obligations and licensing implementation guidance and other general topics. We expect to adopt the new standard using the modified retrospective approach for the fiscal year and quarter beginning December 26, 2017. We do not expect the adoption to have an impact on revenue from Company-owned restaurants or the recognition of royalty fees from our franchise agreement. In addition, we do not expect a material impact related to recognition of gift card breakage.
Supplemental Information (Tables)
Schedule of Property and Equipment, Net 
Property and equipment, net consisted of the following (in thousands):
 
 
April 17,
2017
 
December 26,
2016
Land
 
$
813

 
$
—

Buildings under deemed landlord financing
 
26,280

 
23,830

Leasehold improvements
 
132,578

 
125,666

Machinery and equipment
 
34,371

 
32,566

Furniture and fixtures
 
6,927

 
6,604

Automobiles
 
4,019

 
4,019

Computer equipment
 
10,906

 
9,848

Construction in progress
 
10,298

 
6,256

Property and equipment, gross
 
226,192

 
208,789

Less: Accumulated depreciation
 
(51,455
)
 
(46,756
)
Total Property and equipment, net
 
$
174,737

 
$
162,033

Schedule of Accrued Expenses 
Accrued expenses and other consisted of the following (in thousands):
 
 
April 17,
2017
 
December 26,
2016
Accrued payroll and payroll taxes
 
$
4,736

 
$
5,448

Accrued capital purchases
 
3,261

 
2,347

Sales tax payable
 
2,943

 
1,218

Gift card payable
 
740

 
1,200

Other accrued expenses
 
3,876

 
4,047

Total Accrued expenses and other
 
$
15,556

 
$
14,260

Equity-based Compensation (Tables)
Schedule of Equity-based Compensation, Stock Options, Activity 
The following table summarizes our stock option plan activity during the sixteen weeks ended April 17, 2017:
 
 
Stock Options
 
Weighted Average Exercise Price
Outstanding as of December 26, 2016
 
710,597

 
$
26.28

Granted
 
311,169

 
23.26

Exercised
 
—

 
—

Forfeited
 
(1,407
)
 
42.05

Expired
 
(468
)
 
42.05

Outstanding as of April 17, 2017
 
1,019,891

 
$
25.33

Schedule of Valuation Assumptions 
The following table reflects the weighted-average assumptions utilized in the Black-Scholes option-pricing model to value the stock options granted.
 
 
Sixteen Weeks Ended
 
 
April 17, 2017
Expected volatility (1)
 
31.5%
Risk-free rate of return
 
2.1%
Expected life (in years) (2)
 
6.3
Dividend yield
 
0%
Weighted-average fair value per share at date of grant
 
$8.17

(1) Expected volatility was based on competitors within the industry.
(2) Expected life was calculated using the simplified method, which is an average of the contractual term of the option and its ordinary vesting period, as we do not have sufficient historical data for determining the expected term of our stock option awards.

Schedule of Share-based Compensation, Restricted Stock Units Award Activity 
The following table summarizes our restricted stock unit plan activity sixteen weeks ended April 17, 2017:
 
 
Restricted Stock Units
 
Weighted Average Grant Date Fair Value
Non-vested at December 26, 2016
 
83,411

 

$28.13

Granted
 
62,069

 
21.85

Vested
 
(28,287
)
 
27.84

Forfeited
 
(365
)
 
27.42

Non-vested at April 17, 2017
 
116,828

 
24.86

Earnings Per Share (Tables)
Schedule of Earnings Per Share, Basic and Diluted
The following table presents the computation of basic and diluted net income per share for the period indicated:
 
 
Sixteen Weeks Ended
 
 
April 17,
2017
 
April 18,
2016
Net income (in thousands):
 
$
19

 
$
1,396

Shares:
 
 
 
 
Basic weighted average shares outstanding
 
19,472,124

 
19,395,815

Diluted weighted average shares outstanding
 
19,528,915

 
19,568,815

Earnings per share:
 
 
 
 
Basic EPS
 
$
0.00

 
$
0.07

Diluted EPS
 
$
0.00

 
$
0.07

Nature of Operations and Basis of Presentation - Nature of Operations (Details)
4 Months Ended
Apr. 17, 2017
segment
state
Apr. 18, 2016
Franchisor Disclosure [Line Items]
 
 
Number of states in which entity operates
20 
 
Number of operating segments
1 
 
Number of reporting segments
1 
 
Days in fiscal year
364 days 
364 days 
Days in first fiscal quarter
112 days 
112 days 
Days in second fiscal quarter
84 days 
84 days 
Days in third fiscal quarter
84 days 
84 days 
Days in fourth fiscal quarter
84 days 
84 days 
Company-owned
 
 
Franchisor Disclosure [Line Items]
 
 
Number of restaurants
211 
 
Franchised
 
 
Franchisor Disclosure [Line Items]
 
 
Number of restaurants
3 
 
Nature of Operations and Basis of Presentation New Accounting Pronouncement (Details) (USD $)
In Thousands, unless otherwise specified
Apr. 17, 2017
Dec. 26, 2016
Dec. 27, 2016
ASU201609CumulativeEffetofActualForfeitreRate [Member]
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
 
 
 
Adjustment to Additional Paid in Capital
$ 149,654 
$ 148,482 
$ 300 
Adjustment to Retained Earnings (Accumulated Deficit)
$ (18,975)
$ (18,711)
$ 300 
Supplemental Information - Schedule of Property and Equipment, Net (Details) (USD $)
In Thousands, unless otherwise specified
Apr. 17, 2017
Dec. 26, 2016
Property, Plant and Equipment [Line Items]
 
 
Property and equipment, gross
$ 226,192 
$ 208,789 
Less: Accumulated depreciation
(51,455)
(46,756)
Total Property and equipment, net
174,737 
162,033 
Land [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and equipment, gross
813 
0 
Buildings under deemed landlord financing
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and equipment, gross
26,280 
23,830 
Leasehold improvements
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and equipment, gross
132,578 
125,666 
Machinery and equipment
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and equipment, gross
34,371 
32,566 
Furniture and fixtures
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and equipment, gross
6,927 
6,604 
Automobiles
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and equipment, gross
4,019 
4,019 
Computer equipment
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and equipment, gross
10,906 
9,848 
Construction in progress
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and equipment, gross
$ 10,298 
$ 6,256 
Supplemental Information - Schedule of Accrued Expenses (Details) (USD $)
In Thousands, unless otherwise specified
Apr. 17, 2017
Dec. 26, 2016
Statement of Financial Position [Abstract]
 
 
Accrued payroll and payroll taxes
$ 4,736 
$ 5,448 
Accrued capital purchases
3,261 
2,347 
Sales tax payable
2,943 
1,218 
Gift card payable
740 
1,200 
Other accrued expenses
3,876 
4,047 
Total Accrued expenses and other
$ 15,556 
$ 14,260 
Bank Line of Credit and Term Loan - Narrative (Details) (Credit Facility 2015 [Member], Line of Credit, Revolving Credit Facility [Member], USD $)
0 Months Ended 4 Months Ended
Feb. 6, 2015
Apr. 17, 2017
Feb. 6, 2015
Debt Instrument [Line Items]
 
 
 
Borrowing Capacity
 
 
$ 20,000,000 
Maximum borrowing capacity
 
 
30,000,000 
Term (in years)
5 years 
 
 
Line of credit, outstanding amount
 
$ 0 
 
Federal Funds Effective Swap Rate [Member]
 
 
 
Debt Instrument [Line Items]
 
 
 
Basis Spread on Variable Rate
0.50% 
 
 
London Interbank Offered Rate (LIBOR) [Member]
 
 
 
Debt Instrument [Line Items]
 
 
 
Basis Spread on Variable Rate
1.00% 
 
 
Scenario One [Member]
 
 
 
Debt Instrument [Line Items]
 
 
 
Debt ratio (greater than or equal to)
 
 
2.50 
Unused commitment fee
0.15% 
 
 
Scenario One [Member] |
Base Rate [Member]
 
 
 
Debt Instrument [Line Items]
 
 
 
Basis Spread on Variable Rate
0.50% 
 
 
Scenario One [Member] |
London Interbank Offered Rate (LIBOR) [Member]
 
 
 
Debt Instrument [Line Items]
 
 
 
Basis Spread on Variable Rate
1.50% 
 
 
Scenario Two [Member]
 
 
 
Debt Instrument [Line Items]
 
 
 
Debt ratio (less than)
 
 
2.50 
Unused commitment fee
0.125% 
 
 
Scenario Two [Member] |
London Interbank Offered Rate (LIBOR) [Member]
 
 
 
Debt Instrument [Line Items]
 
 
 
Basis Spread on Variable Rate
1.00% 
 
 
Equity-based Compensation - Narrative (Details) (USD $)
In Millions, except Share data, unless otherwise specified
4 Months Ended 4 Months Ended 0 Months Ended 4 Months Ended
Apr. 17, 2017
Apr. 16, 2014
2014 Omnibus Incentive Plan
Apr. 17, 2017
2014 Omnibus Incentive Plan
Employee Stock Option
Apr. 17, 2017
2014 Omnibus Incentive Plan
Restricted Stock Units (RSUs)
Apr. 16, 2014
2014 Omnibus Incentive Plan
Immediate Vesting
Employee Stock Option
Apr. 17, 2017
2014 Omnibus Incentive Plan
Four Year Vesting
Employee Stock Option
Apr. 17, 2017
General and Administrative Expense
Apr. 18, 2016
General and Administrative Expense
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
 
 
 
Number of shares authorized
 
1,905,799 
 
 
 
 
 
 
Grants in period
311,169 
 
 
 
250,000 
 
 
 
Award vesting period
 
 
 
3 years 
 
4 years 
 
 
General and administrative expenses
 
 
 
 
 
 
$ 0.9 
$ 0.7 
Unrecognized compensation costs
$ 8.3 
 
 
 
 
 
 
 
Period of recognition
2 years 8 months 19 days 
 
 
 
 
 
 
 
Contractual term
 
 
10 years 
 
 
 
 
 
Equity-based Compensation - Schedule of Equity-based Compensation, Stock Options, Activity (Details) (USD $)
4 Months Ended
Apr. 17, 2017
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
 
Stock options outstanding, beginning
710,597 
Stock options, grants in period
311,169 
Stock options, exercised in period
0 
Stock options, forfeitures in period
(1,407)
Stock options, expired in period
(468)
Stock options outstanding, ending
1,019,891 
Weighted Average Exercise Price
 
Stock options outstanding, weighted average exercise price, beginning
$ 26.28 
Stock options, weighted average exercise price, grants in period
$ 23.26 
Stock Options, weighted average exercise price, exercises in period
$ 0.00 
Stock Options, weighted average exercise price, forfeitures in period
$ 42.05 
Stock Options, weighted average exercise price, expirations in period
$ 42.05 
Stock options outstanding, weighted average exercise price, ending
$ 25.33 
Equity-based Compensation - Schedule of Valuation Assumptions (Details)
4 Months Ended
Apr. 17, 2017
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
 
Expected volatility
31.50% 1
Risk-free rate of return
2.10% 
Expected life (in years)
6 years 3 months 2
Dividend yield
0.00% 
Weighted-average fair value per share at date of grant
$ 8.17 
Equity-based Compensation Schedule of Restricted Stock Unit Plan Activity (Details) (Omnibus Incentive Plan 2014 [Member], Restricted Stock Units (RSUs), USD $)
4 Months Ended
Apr. 17, 2017
Omnibus Incentive Plan 2014 [Member] |
Restricted Stock Units (RSUs)
 
Restricted Stock Units, Nonvested, Number of Shares [Roll Forward]
 
Restricted stock units outstanding, beginning
83,411 
Restricted stock units granted
62,069 
Restricted stock units vested
(28,287)
Restricted stock units forfeited
(365)
Restricted stock units outstanding, ending
116,828 
Restricted Stock Units, Nonvested, Weighted Average Grant Date Fair Value [Abstract]
 
Weighted-average grant-date fair value, restricted stock units outstanding, beginning
$ 28.13 
Weighted-average grant-date fair value, restricted stock units, granted
$ 21.85 
Weighted-average grant-date fair value, restricted stock units, vested
$ 27.84 
Weighted-average grant-date fair value, restricted stock units, forfeited
$ 27.42 
Weighted-average grant-date fair value, restricted stock units outstanding, ending
$ 24.86 
Earnings Per Share - Schedule of Earnings Per Share, Basic and Diluted (Details) (USD $)
In Thousands, except Share data, unless otherwise specified
4 Months Ended
Apr. 17, 2017
Apr. 18, 2016
Earnings Per Share [Abstract]
 
 
Net income (loss)
$ 19 
$ 1,396 
Basic weighted average shares outstanding (in shares)
19,472,124 
19,395,815 
Diluted weighted average shares outstanding (in shares)
19,528,915 
19,568,815 
Basic EPS (USD per share)
$ 0.00 
$ 0.07 
Diluted EPS (USD per share)
$ 0.00 
$ 0.07 
Earnings Per Share - Narrative (Details)
4 Months Ended
Apr. 17, 2017
Apr. 18, 2016
Employee Stock Option
 
 
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Antidilutive securities excluded from computation of earnings per share (in shares)
607,105 
432,227 
Restricted Stock Units (RSUs)
 
 
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Antidilutive securities excluded from computation of earnings per share (in shares)
85,094 
417 
Income Taxes - Narrative (Details) (USD $)
In Thousands, unless otherwise specified
4 Months Ended
Apr. 17, 2017
Apr. 18, 2016
Income Tax Disclosure [Abstract]
 
 
Provision for income taxes
$ 354 
$ 345 
Effective tax rate
95.00% 
20.00% 
Subsequent Events Narrative (Details) (Subsequent Event [Member], Revolving Credit Facility [Member], Line of Credit [Member], Credit Facility 2015 [Member], USD $)
In Millions, unless otherwise specified
6 Months Ended
Jul. 10, 2017
Subsequent Event [Member] |
Revolving Credit Facility [Member] |
Line of Credit [Member] |
Credit Facility 2015 [Member]
 
Subsequent Event [Line Items]
 
Proceeds from Long-term Lines of Credit
$ 5.0