UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DCD.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 29, 2019January 2, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from _____________ to ________
Commission File Number: 001-35373
FIESTA RESTAURANT GROUP, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 90-0712224 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 14800 Landmark Boulevard, Suite 500 | 75254 | |||||||
| Dallas | TX | (Zip Code) | ||||||
| (Address of principal executive office) | ||||||||
Registrant's telephone number, including area code: (972) (972) 702-9300
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol | Name on each exchange on which registered: | ||||||||||||
| Common Stock, par value $.01 per share | FRGI | NASDAQ Global Select Market | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒☐ No ☐☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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. (Check one):
| Large Accelerated Filer | ☐ | Accelerated Filer | ☒ | ||||||||
| Non-accelerated Filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | ☐ | ||||||||||
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒
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 March 4, 2022, Fiesta Restaurant Group, Inc. had 25,960,757 25,707,125 shares of its common stock, $.01 par value, outstanding. The aggregate market value of the common stock held by non-affiliates as of June 30, 2019, of Fiesta Restaurant Group, Inc. was $283,559,216.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for Fiesta Restaurant Group, Inc.'s 20202022 Annual Meeting of Stockholders, which is expected to be filed pursuant to Regulation 14A no later than 120 days after the conclusion of Fiesta Restaurant Group, Inc.'s fiscal year ended December 29, 2019,January 2, 2022, are incorporated by reference into Part III of this annual report.
FIESTA RESTAURANT GROUP, INC.
FORM 10-K
YEAR ENDED DECEMBER 29, 2019JANUARY 2, 2022
| Page | ||||||||
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PART I
Presentation of Information
Throughout this Annual Report on Form 10-K, we refer to Fiesta Restaurant Group, Inc. as "Fiesta Restaurant Group" or "Fiesta" and, together with its consolidated subsidiaries, as "we," "our" and "us" unless otherwise indicated or the context otherwise requires. Any reference to restaurants refers to company-owned restaurants unless otherwise indicated.
We own, operate and franchise twothe fast-casual restaurant brands,brand Pollo Tropical® and Taco Cabana®Tropical®, through our wholly-owned subsidiaries Pollo Operations, Inc. and its subsidiaries, and Pollo Franchise, Inc., (collectively "Pollo Tropical") and Taco Cabana, Inc. and its subsidiaries (collectively "Taco Cabana"). Our common stock is traded on The NASDAQ Global Select Market under the symbol "FRGI".
We use a 52- or 53-week fiscal year ending on the Sunday closest to December 31. The fiscal years ended January 1, 2017, December 31, 2017, December 30, 2018 and December 29, 2019 and January 2, 2022 each contained 52 weeks. The fiscal year ended January 3, 20162021 contained 53 weeks. The next fiscal year to contain 53 weeks will be the fiscal year ending January 3, 2021 will contain 53 weeks.2027.
Use of Non-GAAP Financial Measures
Consolidated Adjusted EBITDA (including Continuing Operations Consolidated Adjusted EBITDA and Continuing Operations Adjusted EBITDA) and margin and Restaurant-level Adjusted EBITDA and margin are non-GAAP financial measures. We use these non-GAAP financial measures in addition to net income and income from operations to assess our performance, and we believe it is important for investors to be able to evaluate us using the same measures used by management. We believe these measures are important indicators of our operational strength and the performance of our business. business and they provide a view of operations absent non-cash activity and items that are not related to the ongoing operation of our restaurants or affect comparability period over period.
These non-GAAP financial measures as calculated by us are not necessarily comparable to similarly titled measures reported by other companies and should not be considered as an alternative to net income (loss), earnings (loss) per share, cash flows from operating activities or other financial information determined under GAAP.
Restaurant-level Adjusted EBITDA is defined as Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-level Adjusted EBITDA margin is derived by dividing Restaurant-level Adjusted EBITDA by restaurant sales.
Management believes that such financial measures, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies.
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All such financial measures have important limitations as analytical tools. These limitations include the following:
See Item 6, "Selected7, "Management's Discussion and Analysis" under the heading titled "Management's Use of Non-GAAP Financial Data"Measures" for a quantitative reconciliation from net income (loss), which we believe is the most directly comparable GAAP financial performance measure to Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA.
Forward-Looking Statements
Matters discussed in this report and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, expressedexpress or implied, regarding our intention to repurchase shares from time to time under the share repurchase program and the source of funding of such repurchases, our anticipated growth, operating results, future earnings per share, plans, objectives and the impact of our initiatives, our investments in strategic initiatives for Pollo Tropical, such as improved customer experience initiatives, investments in our Plandigital and other businessrelated platforms and new unit expansion and remodeling and the impact of the COVID-19 pandemic and our initiatives designed to respond to the COVID-19 pandemic on future sales, margins, earnings and earnings,liquidity contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). These statements are often identified by the words "believe," "positioned," "estimate," "project," "plan," "goal," "target," "assumption," "continue," "intend," "expect," "future," "anticipate," and other similar expressions, whether in the negative or the affirmative, that are not statements of historical fact. These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict, and you should not place undue reliance on our forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this report and in our other public filings with the United States Securities and Exchange Commission ("SEC"). All forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this report or other periodic reports represent our estimates as of the date made and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
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ITEM 1. BUSINESS
Overview
Our Company
We own, operate and franchise twothe restaurant brands,brand Pollo Tropical® and Taco Cabana®, which recently celebratedhas over 30th and 40th anniversaries, respectively, years of operating history and a loyal customer bases.base. Our Pollo Tropical restaurants feature fire-grilled and crispy citrus marinated chicken and other freshly prepared tropical-inspired menu items, while our Taco Cabana restaurants specialize in Mexican-inspired food made fresh by hand.items. We believe that both brands offerthe brand offers a distinct and unique flavorsflavor with broad appeal at a compelling value, which differentiates themit in the competitive fast-casual and quick-service restaurant segments. Nearly allAll but one of our restaurants offer the convenience of drive-thru windows.
For the fiscal year ended December 29, 2019,January 2, 2022, average annual sales per restaurant was approximately $2.6 million for our Pollo Tropical restaurants and approximately $1.8 million for our Taco Cabana restaurants. As of December 29, 2019,January 2, 2022, we owned and operated 142138 Pollo Tropical restaurants, all of which are located in Florida and 164 Taco Cabana restaurants in Texas for a total of 306 restaurants.Florida. We franchise our Pollo Tropical restaurants primarily in international markets and, as of December 29, 2019,January 2, 2022, had 2524 franchised Pollo Tropical restaurants outside the contiguous United States. In addition, as of December 29, 2019,January 2, 2022, we had sixfive domestic non-traditional Pollo Tropical licensed locations on college campuses in Florida and one location in locations at a hospital and a sports and entertainment stadium in Florida. As of December 29, 2019, we had six Taco Cabana franchised restaurants in New Mexico and two domestic non-traditional Taco Cabana licensed locations on college campuses in Texas. For the fiscal year ended December 29, 2019,January 2, 2022, we generated consolidated revenues of $660.9$357.3 million, and comparable restaurant sales decreased 1.8% and 4.1%increased 16.0% for Pollo Tropical andTropical.
Sale of Taco Cabana
On July 1, 2021, we entered into a stock purchase agreement for the sale of all outstanding capital stock of Taco Cabana, respectively.Inc., the parent company of the Taco Cabana business, for a cash purchase price of $85.0 million, subject to reduction for (i) closing adjustments of approximately $4.6 million related to maintenance and repair work at the Taco Cabana restaurants and landscaping replacement as a result of Winter Storm Uri, and (ii) certain other working capital adjustments as set forth in the stock purchase agreement (the "Taco Cabana Divestiture"). The transaction was completed August 16, 2021, and the Company recognized a gain on the sale of Taco Cabana of $25.0 million during the year ended January 2, 2022, which is included within income from discontinued operations, net of tax, in the consolidated statements of operations. Additionally, we filed an insurance claim for winter storm damages in Texas that occurred in the first quarter of 2021 and retained the right to receive the insurance claim proceeds. We recognized $0.9 million of insurance proceeds within income (loss) from discontinued operations, net of tax, in the fourth quarter of 2021 based on a partial settlement reached with certain insurers. We expect to recognize additional proceeds when the claim is ultimately resolved. See Note 2 of the Notes to our Consolidated Financial Statements.
All revenues, costs and expenses and income taxes attributable to Taco Cabana, together with the gain on the sale of Taco Cabana and certain costs related to the transaction, have been aggregated within income (loss) from discontinued operations, net of tax, in the consolidated statements of operations for all periods presented. No amounts for shared general and administrative operating support expense were allocated to discontinued operations. Interest expenses, the amortization of premiums and debt issuance costs of our new and former senior credit facilities and the loss on extinguishment of debt under our new and former senior credit facilities are included within income (loss) from discontinued operations, net of tax.
COVID-19
The novel coronavirus (COVID-19) pandemic affected and is continuing to affect the restaurant industry and the economy. In response to decreasesCOVID-19 and in compliance with governmental restrictions, we closed the dining room seating areas in all restaurants, limiting service to take-out, drive-thru, and delivery operations beginning in mid-March 2020. We re-opened certain dining rooms with limited capacity and hours during certain times in the market pricesecond half of Fiesta's common stock and lower than expected profitability,2020. In 2021, we performed interim impairment testsre-opened substantially all remaining dining rooms with limited hours by the end of goodwill as of June 30, 2019 and September 29, 2019. February.
Based on current conditions, we do not expect sales trends to significantly deteriorate further as a direct result of COVID-19. However, labor shortages may negatively impact sales trends and there can be no assurance that sales trends will not deteriorate further. We have implemented measures to control costs to mitigate any negative impacts.
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Labor Challenges
Hours of operations were limited in 2021 due to labor shortages which are affecting our brand and the restaurant industry. We estimate that operating hours were reduced by approximately 2.8% as a result of labor shortages in the second half of 2021. Additionally, in 2021 we experienced increased overtime due to training and staffing shortages. In response to these interim impairment tests,labor shortages and competition for labor, we recorded non-cash impairment chargesimplemented special incentive pay for our hourly restaurant employees from May 2021 through August 2021, provided sign-on and referral bonuses, and made permanent increases to write downhourly wage rates in late August 2021. We implemented a phased approach to price increases aimed at mitigating these additional labor costs with a 3.7% increase in late August 2021 and a 5.2% increase in mid-December 2021. As a result of this phased approach to price increases, Restaurant-level Adjusted EBITDA margin improvement is trailing the valuewage rate increases, which is expected to result in improved Restaurant-level Adjusted EBITDA margins in future quarters compared to 2021. In addition, we believe that approximately $1.7 million of goodwillthe labor cost increases in the second half of 2021 for the Taco Cabana reporting unit totaling $67.9 million, ofovertime and staffing-related incentives are short term in nature. We have intensified our focus on accelerating labor optimization efforts to improve staffing efficiency, which $9.1 million was tax deductible, in 2019.
Our BrandsBrand
Our restaurants operate in the fast-casual and quick-service restaurant segments and feature fresh-made cooking, drive-thru service and catering.
Pollo Tropical. Our Pollo Tropical restaurants feature fresh chicken marinated in a proprietary blend of tropical fruit juices and spices, crispy or fire-grilled, boneless and bone-in. Other favorite menu items include Mojo Roast Pork and TropiChops® (a create your own bowl of fire-grilled or crispy chicken breast, or Crispy Pollo Bites™, roast pork or grilled vegetables served over white, brown or yellow rice, red or black beans, or mac and cheese, and topped with vegetables including tomatoes, kernel corn, peppers and sautéed onions), sandwiches, wraps and salads. Side dishes include rice, beans, french fries, plantains and balsamic tomatoes. The menu's emphasis is on freshness and quality. We also offer a wide selection of salsas, sauces, cilantro, onions and other items which allow our guests to further customize their orders. Dessert offerings include key lime pie, cuatro leches cake and flan, and cheesecake,as well as limited-time seasonal items, and beverages include fountain soft drinks, flavored brewed teas, and other bottled drinks. Most menu items are prepared daily in each of our restaurants, which feature open display cooking on large, open-flame grills. We offer both individual and family meal-sized portions which enable us to provide a home meal replacement for our guests and catering for parties and corporate events.events. We began selling proprietary alcoholic beverages including wine and beer at most Pollo Tropical locations in 2020 to increase off-premise sales.
Our Pollo Tropical restaurant dining areas are designed to create an inviting, festive and tropical atmosphere. We also provide our guests the option of take-out, including the ability to order online in advance, and nearly all but one of our restaurants provide the convenience of drive-thru windows. Delivery is available through third-party partnerships at all Pollo Tropical locations. Our Pollo Tropical restaurants are generally open for lunch, dinner, and late night seven days a week. As of
Pollo Tropical opened its first restaurant in 1988 in Miami, Florida. As of December 29, 2019,January 2, 2022, we owned and operated a total of 142138 Pollo Tropical restaurants, all located in Florida. We continue to reimage existing Pollo Tropical restaurants to update both the exterior and interior of the restaurants to the latest standard.
We are franchising and licensing our Pollo Tropical restaurants internationally and in non-traditional domestic locations. As of December 29, 2019,January 2, 2022, we had 2524 franchised Pollo Tropical restaurants located in Puerto Rico, Panama, Guyana, Ecuador, and the Bahamas, and sixthe U.S. Virgin Islands, five non-traditional licensed locations on college campuses in Florida, and one located in locations at a hospital and a sports and entertainment stadium in Florida.Florida. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets.
Taco Cabana. OurPrior to the sale, our Taco Cabana restaurants serveserved fresh, Mexican-inspired food that feature loaded tacos, steak and chicken fajitas, quesadillas, flautas, enchiladas, burritos, and customizable Cabana Bowls®. We also offer freshly made flour tortillas, shareable appetizers and our popular breakfast tacos and dozen taco boxes. Our self-service salsa bar includes a wide selection of freshly made salsas, sauces, sliced jalapeños, chopped cilantro, chopped onions and other items which allow our guests to further customize their orders. We also offer desserts such as sopapillas, peach empanadas and chocolate cake, as well as beverages including fountain soft drinks, our signature frozen margaritas, draft beer and sangria. Approximately 75 locations also serve an expanded alcohol program. Most menu items are freshly-prepared at each restaurant daily.
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Our Competitive Strengths
We believe our competitive strengths include the following key attributes:
Well Positioned and Differentiated in the Fast-Casual and Quick-Service Segments. As of December 29, 2019,January 2, 2022, we owned, operated and franchised 346169 fast-casual restaurants under our Pollo Tropical and Taco Cabana brandsbrand which havehas over 30 and 40 years respectively, of operating history. In addition, at $2.6 million and $1.8 million, respectively, for 2019, weWe believe Pollo Tropical and Taco Cabana havehas compelling average annual sales per restaurant within the fast-casual and quick-service segments. Wesegments at $2.6 million for 2021, and we believe our brands areit is well positioned in the industry due to our high quality, freshly-prepared food, value and differentiation of flavor profiles.
food being freshly-prepared and cooked to order. We have refinedcontinue to refine our menus, including some seasonal offerings at our Pollo Tropical and Taco Cabana restaurants, in order to provide variety to our guests, address changes in consumer preferences, and maintain a speed of service that appeals to our customers. We also selectively use promotions and limited time offers which are intended to reinforce our value proposition and to introduce new products. Additionally, we offer our guests the convenience of drive-thru service, online ordering, curbside pickup, and delivery through third-party delivery services in order to provide a viable option for home meal replacement and family meals.
Compelling Business Model. We enjoy significant brand recognition due to high market penetration of our restaurants in our core markets which provides operating, marketing and distribution efficiencies and convenience for our guests. Both of our brands havePollo Tropical has a strong brand affinity in our core markets as evidenced by fast-casual and quick-service segment-leading average annual sales volumes, as noted above. Pollo Tropical produces high restaurant-level operating margins and, with sales stabilization and growth and effective cost management, we anticipate Taco Cabana will produce higher restaurant-level operating margins in the future.
Growth Strategies
Our long-term strategy is focused on profitably building our base business, growing new distribution channels, including catering, delivery, licensed and franchisedfranchised locations, and development of new restaurants.
Our strategies for growth primarily include:
Increase Comparable Restaurant Sales. Comparable restaurant sales increased 16.0% in 2021 compared to 2020 and decreased 1.1% compared to 2019. Weexperienced a decrease in comparable restaurant sales in 2020, which we believe was attributable to the impact of the COVID-19 pandemic and labor challenges. These challenges continued into 2021. We believe our significant mix of dine-in sales prior to the pandemic had a negative impact on comparable restaurant sales. We also experienced a decrease in comparable restaurant sales in 2019 which we believe iswas attributable to a decline in comparable restaurant transactions due in part to challenging market and industry conditions, discounted pricing and, for Pollo Tropical, the negative impact of Hurricane Dorian, partially offset by menu price increases and the introduction of higher priced shareables in 2019. We simplified the Taco Cabana menu in the fourth quarter of 2019 to improve execution. The menu simplification efforts included removal of certain menu items and limited other items to certain dayparts. While the menu simplification improved guest satisfaction and reduced order cycle times, the reduced menu resulted in a greater than anticipated transaction decline. We intend to carefully re-introduce select items to the menu and expand dayparts in 2020 to increase sales while maintaining the operational improvements provided by the menu simplification. We experienced an increase in comparable restaurant sales in 2018 which we believe is attributable to the Plan, pricing, and the comparison to 2017 which included the negative impact related to Hurricanes Harvey and Irma (the "Hurricanes"), partially offset by market and industry conditions and, in the case of Taco Cabana, a transitioning guest base due to the repositioning of the brand with higher quality offerings at reasonable prices and the elimination of deep discounting. We experienced a decline in comparable restaurant sales in 2016 and 2017 which we believe was attributable to challenging market and industry conditions and opportunities for improvement at both brands that were addressed as part of the Plan. In addition, 2017 was further negatively impacted by reduced media over several consecutive months while we implemented key aspects of the Plan as well as the impact of the Hurricanes. We experienced an increase in comparable restaurant sales at each brand in 2011 through 2015 and we are focused on increasing comparable restaurant sales in the future by attracting new customers and increasing guest frequency through the following strategies:
•Focus on consistency of operations and food quality: We believe high quality food and hospitality, a comfortable ambience, and reasonable prices result in an enjoyable guest experience, which drives loyalty and guest frequency. We have improved systems, processes and equipment, implemented tighter management spans of control and enhanced our field leadership teams, and we continue to focus on improving systems and processes to ensure consistency of operations. In addition, supply chain and food preparation processes have been implemented to ensure high quality, freshness and consistency of our food, which we believe are critical components to the continued success of our brand. |
•New product innovation: Our menu is centered on freshly prepared, quality food offerings that we believe have both broad appeal and provide everyday value. Pollo Tropical has a team of product research and development professionals that enables us to continually refine our menu offerings and develop new products, several of which are validated by consumer research. Maintaining a strong product pipeline is critical to keeping our offerings compelling, and we intend to introduce innovative new menu items and enhancements to existing menu favorites throughout the year to drive further guest traffic, maximize guest frequency, and increase average check.
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•Focus on effective advertising to highlight our everyday value proposition: Pollo Tropical utilizes an integrated, multi-level marketing approach that includes periodic system-wide promotions, outdoor marketing including billboards, in-restaurant promotions, local trade area marketing, social media, digital and web-based marketing and other strategies, including the use of radio and television advertising and limited-time offer menu item and value promotions. In addition, we have email and app-based loyalty programs at Pollo Tropical (My Pollo™) and Taco Cabana (My TC™) in 2018 to further connect with our guests to build affinity and frequency. In 2020, we introduced a new state-of-the-art mobile app for Pollo Tropical. As a percentage of Pollo Tropical restaurant sales, Pollo Tropical's advertising expenditures were 3.2% in 2021, 2.7% in 2020 and 3.4% in 2019.
•Grow our off-premise sales with focus on digital platform: The inclusion of portable menu items, such as wraps, sandwiches, bowls and salads, as well as family meals, and an increased focus on catering and delivery will continue to be a key focus for Pollo Tropical as we look to capture more off-premise meal occasions which we believe may be significant. Off-premise meal consumption increased significantly during the COVID-19 pandemic and we believe that off-premise sales may continue to be significant following the pandemic. In 2019, 3.5%we invested in 2018our catering business by adding dedicated catering sales managers and 4.4%catering online ordering capabilities, we partnered with a third-party delivery partner to provide delivery services, and we created Rapid Pickup for online orders at Pollo Tropical. In 2020, we expanded our third-party delivery partnerships to include delivery through multiple delivery service providers. We engaged a third party to improve our mobile apps and enhance our digital connections and interactions to grow our digital business and create experiences that minimize friction within our digital platforms including creating a state-of-the-art mobile app. We also implemented curbside pickup functionality as an option with online ordering and began improving connectivity at our restaurants, upgrading portable tablets and enabling touchless payments. In 2021, we continued to invest in 2017. Asimproving our digital platform and improving the speed and ease of use for off-premise sales channels including an enhanced drive-thru experience, geofencing technology for curbside orders and infrastructure changes to improve the speed of order cycle time for drive-thru and delivery orders in the second half of 2021. In 2021, we also completed design and began the implementation of digital drive-thru technology, which is designed to grow traffic and drive-thru check averages by improving speed of service at peak times, increasing promotion visibility and upselling opportunities and increasing order accuracy.
•Continue our reimage program: We believe ensuring a percentagehigh-quality restaurant environment that complements our quality focus on food and hospitality will further drive incremental sales and profitability. We continue to implement restaurant enhancement initiatives to ensure safe, consistent and appealing experiences at our Pollo Tropical restaurants. During 2021, we developed an updated and more efficient restaurant design that reflects evolving post-COVID consumer behavior as well as consumer research. During 2021, we began testing the new design in remodels and refreshes. Three remodels and five refreshes were completed, with all but one completed late in the fourth quarter of Taco Cabana restaurant sales, Taco Cabana's advertising expenditures were 3.6%2021. We will continue to test and evaluate the new design in 2019, 3.4%additional remodels and refreshes in 2018 and 3.3% in 2017.
Non-Traditional License and International Franchise Development. We are updatinggenerally update our Pollo Tropical franchise disclosure documents each year to support potential franchise growth in the future. We are currently primarily focused on growing non-traditional domestic licensed locations on university campuses and non-traditional licensed locations in airports, events stadiums and highway rest stops, while modestly growing international locations with quality operators. In 2021, we opened our first licensed sports and entertainment location in a professional football stadium in Florida.
Improve Profitability and Optimize Our Infrastructure. We believe that our large restaurant base, skilled management team, operating systems, technology initiatives and training and development programs support our strategy of enhancing operating efficiencies while prudently growing our restaurant base. We continue to focus on maximizing cost efficiencies, including, among other things, implementing profit enhancement initiatives focused on food and labor costs, leveraging our purchasing power and enhancing our supply chain to optimize costs while delivering a high-quality guest experience with consistency. Our restaurant-level profitability at Pollo Tropical is very competitive within the restaurant industry segments in which we compete. We believe Taco Cabana will become more competitive within the restaurant industry segments in which we compete over time through growing comparable restaurant sales and traffic, other margin improvement initiatives, simplifying our operating platform and improved execution.
Develop New Restaurants. We believe that we have opportunities to develop additional Pollo Tropical and Taco Cabana restaurants in Florida and Texas, respectively,, as well as potential future expansion opportunities in other regions of the United States that match our site selection criteria. OurWe paused our new restaurant development plans for Pollo Tropical in 2020 and 2021 as a result of the COVID-19 pandemic.However, we intend to resume new restaurant development in the future. The development of new restaurants will be focused onincorporate what we have learned during the COVID-19 pandemic and our reimaging market research, both qualitative and quantitative. During 2021, we retained third-party consultants to assist in creating a small number of company-owned high return opportunities in core Florida marketsnew store design with a lower investment, optimized productivity and franchised non-traditional new units through third-party service partners. During 2020, we plan to complete brand repositioning and operating model refinements for Pollo Tropicalupdated design features that we believe better match evolving consumer preferences. We began testing and refining the new design in remodels and refreshes in 2021 and will enable future geographic expansion through both company-ownedcontinue these tests with additional remodels and franchised locations. We will open one new Taco Cabana restaurantrefreshes in 2020 (for which construction started in 2019), although our primary focus in 2020 will be on improving existing unit AUV's and margins and simplifying the operating model for Taco Cabana. We plan to re-evaluate future development efforts for Taco Cabana in 2021.2022.
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We target opening freestanding restaurants in order to provide drive-thru service which is an important convenience and sales component for our brands.brand. The location of our restaurants is a critical component of each restaurant's success. We evaluate potential new sites on many criteria including accessibility, visibility, costs, surrounding traffic patterns, competition and demographic characteristics. Our senior management team determines the acceptability of all new sites based upon site visits, analyses prepared by our real estate, financial and operations professionals, and third-party proprietary location research and analysis. Historically, this process has typically resulted in entering into a long-term lease for the land followed by construction of the building or the conversion of an existing building using cash generated from our operations or with borrowings under our senior credit facility.
While we have not yet entered into new unit lease agreements, we continue to evaluate opportunities for potential new sites.
The following table includes the recent historical initial interior cost (including equipment, seating, signage and other interior costs) ofto construct a typical new or converted freestandingfree-standing restaurant as well as the historical exterior cost (including building and site improvements).
The cost of building and equipping new restaurants can vary significantly and depends on a number of factors, including the local economic conditions, geographic considerations, the size of the restaurant, the characteristics of a particular site, and whether we are constructing a new building or converting an existing building. Accordingly, the cost of opening new restaurants in the future may differ substantially from the historical cost of restaurants previously opened.these estimates.
Competition
The restaurant industry is highly competitive with respect to price, service, location and food quality. In each of our markets, our restaurants compete with many national and regional quick service, fast casual, and in some cases casual dining restaurant chains, as well as locally owned restaurants. We also compete with delivered meal solutions, convenience stores, grocery stores and other restaurant retailers.
We believe that:
•Value perception;
are among the most important competitive factors in the fast-casual and quick-service restaurant segments and that our two conceptsPollo Tropical effectively competecompetes against those categories. Pollo Tropical's competitors include national and regional chicken-based concepts, as well as other concepts. Taco Cabana's competitors include other Mexican-inspired concepts as well as other concepts.
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Restaurant Operating Data
Selected Pollo Tropical restaurant operating data for our two restaurant concepts is as follows:
| Year Ended | ||||||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | ||||||||||||||||||
Average annual sales per company-owned restaurant (in thousands) (1) | $ | 2,576 | $ | 2,220 | $ | 2,576 | ||||||||||||||
| Average sales transaction | $ | 14.3 | $ | 12.83 | $ | 11.71 | ||||||||||||||
| Sales channel sales percentages: | ||||||||||||||||||||
| Drive-thru sales as a percentage of total sales | 57.8 | % | 61.1 | % | 46.8 | % | ||||||||||||||
| Dine-in & counter take-out sales as a percentage of total sales | 27.4 | % | 28.0 | % | 49.0 | % | ||||||||||||||
| Delivery sales as a percentage of total sales | 10.1 | % | 7.3 | % | 1.8 | % | ||||||||||||||
| Online sales as a percentage of total sales | 3.5 | % | 2.7 | % | 1.5 | % | ||||||||||||||
| Catering sales as a percentage of total sales | 1.2 | % | 0.9 | % | 0.9 | % | ||||||||||||||
| Day-part sales percentages: | ||||||||||||||||||||
| Lunch | 49.5 | % | 49.65 | % | 47.4 | % | ||||||||||||||
| Dinner and late night | 50.5 | % | 50.34 | % | 52.6 | % | ||||||||||||||
| Year Ended | ||||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | ||||||||||
| Pollo Tropical: | ||||||||||||
Average annual sales per company-owned restaurant (in thousands) (1) | $ | 2,576 | $ | 2,521 | $ | 2,331 | ||||||
| Average sales transaction | $ | 11.71 | $ | 11.63 | $ | 11.16 | ||||||
| Drive-through sales as a percentage of total sales | 46.8 | % | 47.6 | % | 47.9 | % | ||||||
| Day-part sales percentages: | ||||||||||||
| Lunch | 47.4 | % | 47.1 | % | 47.2 | % | ||||||
| Dinner and late night | 52.6 | % | 52.9 | % | 52.8 | % | ||||||
| Taco Cabana: | ||||||||||||
Average annual sales per company-owned restaurant (in thousands) (1) | $ | 1,812 | $ | 1,846 | $ | 1,760 | ||||||
| Average sales transaction | $ | 10.70 | $ | 10.47 | $ | 9.43 | ||||||
| Drive-through sales as a percentage of total sales | 55.1 | % | 55.7 | % | 56.4 | % | ||||||
| Day-part sales percentages: | ||||||||||||
| Breakfast | 23.6 | % | 23.4 | % | 23.5 | % | ||||||
| Lunch | 22.3 | % | 22.3 | % | 21.8 | % | ||||||
| Dinner | 24.9 | % | 24.9 | % | 24.7 | % | ||||||
| Late night (9pm to midnight) | 11.6 | % | 11.8 | % | 11.4 | % | ||||||
| Afternoon (2pm to 5pm) | 13.4 | % | 13.1 | % | 12.7 | % | ||||||
| Overnight (midnight to 6am) | 4.2 | % | 4.5 | % | 5.9 | % | ||||||
Seasonality
Our business is marginally seasonal due to regional weather conditions. Sales from our restaurants located in South Florida are generally higher during the winter months than during the summer months, while sales from our restaurants located in Texas, Central Florida and North Florida are generally higher during the summer months than the winter months. In addition, we have outdoor seating at many of our restaurants and the effects of adverse weather may impact the use of these areas and may negatively impact our restaurant sales.
Operations
Management Information Systems
Our management information systems provide us the ability to efficiently and effectively manage our restaurants and to ensure consistent application of operating controls at our restaurants.
In all corporate-owned restaurants, we use computerized management information systems, which we believe are scalable to support potential future growth plans. We use touch-screen point-of-sale (POS) systems, both fixed and mobile, designed specifically for the restaurant industry that facilitate accuracy and speed of order taking, are user-friendly, require limited cashier training, improve speed-of-service through the use of conversational order-taking techniques, and provide appropriate audit trails. We use credit card processing devices which utilize industry-leading Point-to-Point Encryption (P2PE) that protect our customer's credit card data. The POS systems are integrated with above-store enterprise applications that are designed to facilitate financial and management control of our restaurant operations. All products sold and related prices at our restaurants are programmed into the system from our central support office.
We provide in-store access to enterprise systems that assist in labor scheduling and food cost management, allow online ordering from distributors, and reduce managers' administrative time. Critical information from such systems is available in near real-time to our restaurant managers, who are expected to react quickly to trends or situations in their restaurant. Our district managers also receive near real-time information from all restaurants under their control and have access to key operating data on a remote basis. Management personnel at all levels, from the restaurant manager through senior management, utilize key restaurant performance indicators to manage our business.
These enterprise systems provide daily tracking and reporting of traffic counts, menu item sales, labor and food data including costs, and other key operating information for each restaurant. These systems also provide the ability to monitor labor
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utilization and sales trends on a real-time basis at each restaurant and provide analyses, reporting and tools to enable all levels of management to review a wide-rangewide range of financial, product mix and operational data.
In 2019,2021, we made a number of improvements to our digital platform, including the following:
•Developed and deployed a curbside delivery program to help alleviate congestion at the drive-thru and in dining rooms;
•Completed the design and began the implementation of digital drive-thru technology, which is expected to grow traffic and drive-thru check averages by improving speed of service peak times, increase promotion visibility and upselling opportunities and increase order accuracy; and
•Continued Pollo Tropical app enhancements to improve ease-of-use and maximize revenue per online transactions.
In order to maintain security and compliance, in 2021 we rolled out portable POS tablets with the ability to accepta new Advanced Endpoint Protection service, conducted ongoing cybersecurity training and mock ethical phishing campaign testing, and installed new, more secure paymentscredit card terminals at both brands to improve speed of service.our drive-thru windows. We also deployed cateringupgraded our in-store wireless infrastructure to all Taco Cabana locations, allowing customers to place catering orders online. We implementedenable better guest and employee experiences, especially for the drive-thru mobile POS systems, and upgraded older operating systems across a number of investments in technology to improve speed of service and accuracy including kitchen display systems with larger screens and improved cooking workflow technology. Catering software was deployed to all Pollo Tropical locations in 2018. In 2018, we also implemented a new human capital management platform, and in 2019 we expanded the platform to include our financial system.endpoints.
We expect to continue making substantialsignificant investments in technology that we believe will drive sales, and traffic, as well as improve margins.margins or upgrade infrastructure. In 2020,2022, we intend to focus technology investments on buildingthe ongoing rollout of our digital drive-thru platform, enhancements to our loyalty platform including a reusable sethigher level of interfacesloyalty integration and friction reduction across all channels, upgrading legacy POS workstations and continuing to proactively update infrastructure elements in the technology platform that can be used to quickly implement new customer-facing technologies for mobile sales channels, delivery, and customer relationship management.are nearing end of life.
Community Social Impact
We are committed to being a deeply responsible company in the communities where we do business. Our focus is on serving high quality food to our guests and contributing positively to the communities where our restaurants are located. This is integral to our business strategy. Our initiatives include:
•Our chicken is free of hormones and trans-fats and our shrimp is Best Aquaculture certified;
•Our chicken is sourced from suppliers dedicated to uphold responsible animal welfare practices;
•We continue to pursue finding more earth-friendly serving and packaging materials for our products including bags that are made from recycled material, are 100% recyclable and reusable and are Rainforest Alliance certified, paper drink cups that are Sustainable Forest Initiative certified and aluminum that contains postindustrial re-processed and post-consumer material;
•Military veterans are actively recruited to work at our restaurants;
•We have military appreciation days and we provide discounts to military and first responders;
•We assist, through our non-profit Fiesta Family Foundation, many of our employees who have personally suffered losses or other hardships;
•During the COVID-19 pandemic in 2020, Pollo Tropical provided approximately 113,000 free meals to school-aged children and approximately 22,000 free meals to first responders and healthcare professionals. Pollo Tropical also donated approximately $60 thousand in food donations to Miami Rescue Mission; and
•Immediately following the collapse of the Champlain Towers South in Surfside, Florida, Pollo Tropical was the first food provider on-site, distributing dinner to rescue workers the first night and continuing to deliver food on a weekly basis throughout the cleanup efforts. In 2019,addition to providing approximately 2,500 free meals to the rescue workers at the collapse site and to the Family Assistance Center at a nearby hotel, we also provided gift cards to displaced families from a nearby low-income condo building which was evacuated and shut down as a result of a safety audit immediately after the collapse.
•In 2021, we provided monetary and food donations or volunteered to the following organizations: 88 Blessings, American Red Cross, Baytown Youth Fair and Livestock Association, Boys and Girls Club of America, The Children's Hospital of San Antonio, Dallas Fire and Police Departments, Fundación Amigos Carlos Jimenez, Holocaust Museum Houston, Houston Children's Charity, Houston Fire and Police Departments, Houston SAAFEdepartments, Federal Bureau of Investigation Headquarters, Baptist Hospital - Miami, Lotus House, Junior League ofMiami-Dade Firefighters Benevolent Association, Miami Meals on Wheels, Methodist Hospital and Healthcare San Antonio,Dolphins Foundation, Miami Lighthouse for the Blind,Heat Charitable Fund, Miami Rescue Mission, National Kidney Foundation, Operation Stocking Stuffer, Parkland Buddy Sport, SAMMinistries, San Antonio Food Bank, Susan G. Komen, Voices for Children,the Motivational Edge, and World Central Kitchen.Victim Service Center - Orlando.
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•In 2018,2020, we provided monetary and food donations or volunteered to the following organizations: Susan G. Komen, BoysFire and Girls Club of America,Police departments, hospitals and COVID testing and vaccination sites throughout Florida, Big Brother Helping Hand, Farm Workers Association, Kidz Nation, L.O.V.E Our Youth Orlando, Miami Rescue Mission, Ronald McDonald House, Salvation Army, Sandra DeLucca Development Center, Juvenile Diabetes Research Foundation, Children's HospitalsSOS Kids - Coconut Creek, St. Jude's Shelter, Star of Texas, Houston Food Bank, Austin Central Texas Food Bank, El Pasoans Fighting for Hunger Food Bank, San Antonio Food Bank, San Antonio Haven for Hope, United Way, YMCA, and Madison on Marsh Nursing Home; we provided hundreds of hot meals to local police, FBI, first responders and local residents in need after the Parkland, Florida shooting tragedy; hundreds of hot meals were provided to first responders, victims, elderly residents and others in Texas and in Florida in the aftermath of the Hurricanes.Zebra Coalition.
As a result of these initiatives, we believe we deliver benefits to our stakeholders, including employees, business partners, customers, suppliers, stockholders, community members, and others.
Suppliers and Distributors
currently rely on sixtwo suppliers for chicken for our Pollo Tropical and Taco Cabana restaurants under agreements that expire on December 31, 2020.2022.
Quality Assurance
Pollo Tropical and Taco Cabana areis committed to obtaining quality ingredients and creating freshly-prepared food in a safe manner. In addition to operating in accordance with quality assurance and health standards mandated by federal, state and local governmental laws and regulations regarding minimum cooking times and temperatures, maximum time standards for holding prepared food, food handling guidelines and cleanliness, among other things, we have also developed our own internal quality control standards. We require our suppliers to adhere to our high quality control standards, and we regularly inspect their products and production and distribution facilities to ensure that they conform to those standards. In addition, we have implemented certain procedures to ensure that we serve safe, quality meals to our guests. As an example, we utilize the nationally-recognized ServSafe program to train our kitchen staff and managers on proper food handling and preparation techniques. In addition, we have hired a third partythird-party specialized service provider that conducts unscheduled food safety inspections of our restaurants, and restaurant managers conduct internal inspections for taste, quality, cleanliness and food safety on a regular basis. These third-party inspections are one of the metrics used in our restaurant-level incentive bonus programs.
In addition to food safety, our operational focus at each of our two concepts is closely monitored to achieve a high level of guest satisfaction via speed of service, order accuracy and quality of service. Our senior management and restaurant management staffs are principally responsible for ensuring compliance with our operating policies. We have uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the restaurants and employee conduct. In order to maintain compliance with these operating standards and specifications, we distribute to our restaurant operations management team detailed reports measuring compliance with various guest service standards and objectives, including feedback obtained directly from our guests. The guest feedback is monitored by an independent agency and by us and consists of evaluations of speed of service, quality of service, quality of our menu items and other operational objectives including the cleanliness of our restaurants. We also have in-house guest service representatives that manage guest feedback and inquiries.
Trademarks
We believe that our trademarks, service marks, trade dress, logos and other proprietary intellectual property are important to our success. We have registered the principal Pollo Tropical and Taco Cabana logos and designs with the U.S. Patent and Trademark Office on the Principal Register as a service mark for our restaurant services. We also have secured or have applied for state and federal registrations for several other advertising or promotional marks, including variations of the Pollo Tropical and Taco Cabana principal marks as well as those related to our core menu offerings. In connection with our current and potential international franchising activities, we have applied for or been granted registrations in foreign countries of the Pollo Tropical and Taco Cabana principal marks and several other marks.
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Other than the Pollo Tropical and Taco Cabana trademarks and the logo and trademark of Fiesta Restaurant Group (including Internet domain names and addresses) and proprietary rights relating to certain of our core menu offerings, we have no proprietary intellectual property.
Continued Commitment to Strong Governance
We declassified our board of directors so that beginning at our 2019 Annual Meeting of Stockholders, our entire board of directors stands for re-election for a one-year term. Additionally, in 2018, our board of directors adopted a mandatory maximum age of 75 for any director nominee.
Government Regulation
Various federal, state and local laws affect our business, including various health, sanitation, fire and safety standards. Restaurants to be constructed or reimaged are subject to state and local building code and zoning requirements. In connection with the development and reimaging of our restaurants, we may incur costs to meet certain federal, state and local regulations, including regulations promulgated under the Americans with Disabilities Act.
We are subject to the federal Fair Labor Standards Act and various other federal and state laws governing employment matters. While we pay, on average, rates that are above the federal minimum wage, and where applicable, state minimum wage, increases in those minimum wages have in the past increased wage rates at our restaurants and in the future will affect our labor costs. We are also subject to provisions of the comprehensive federal health care reform law. We anticipate that a combination of labor management, cost reduction initiatives, technology and menu price increases can materially offset the potential increased costs associated with future regulations.
As of December 29, 2019,January 2, 2022, we employed approximately 10,4804,480 persons, of which approximately 210110 were corporate and administrative personnel and approximately 10,2704,370 were restaurant operations and other supervisory personnel. None of our employees are covered by collective bargaining agreements. We believeagreements and we consider that overall relations with our employees are good.favorable.
Culture, Values & Diversity, Equity & Inclusion
At Fiesta, we are in the business of inclusive hospitality. We strive to create diverse, respectful spaces where innovation can thrive, where being courageous is rewarded, and where treating each other like family is a core value.
These qualities have supported over 30 years of successful operations for our Pollo Tropical brand. We believe that the investments we are making in our employees, our restaurants, and our communities will contribute to our continued success in the restaurant business.
As of January 2, 2022, approximately 61% of our U.S.-based employee population identified as female and approximately 92% of our U.S based employee population is comprised of racial and ethnic minorities. In addition, approximately 33% of our executive officers are female and approximately 50% are racial and ethnic minorities.Furthermore, approximately 59% of the restaurant field management of our restaurant brands identified as female and more than approximately 81% of this group is comprised of racial and ethnic minorities.
As a truly diverse organization, we foster a culture of inclusion that helps to remove some of the barriers to workplace entry and professional development that diverse groups might face. We provide opportunities for career progression through the training and development investments we make. Many of our field managers started as hourly team members and have had the
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opportunity to move up and become managers and supervisors at the corporate level. We believe in developing and promoting from within and in 2021 promoted nearly 200 employees to management or leadership roles.
We are committed to enhancing equality in ongoing career advancement for women and minorities through targeted education and development programs. Relevant initiatives include:
•Ongoing assessment and management of our talent pipeline to support the career progression of high-potential women and minorities;
•Well defined Career Path Programs for hourly employees to advance to management;
•Cultural and Compliance training for all our employees; and
•Creating a Women's Forum.
Total Rewards
We believe rewarding our employees for their hard work and commitment starts with pay. We pay, on average, rates that are above the federal minimum wage. In addition to their fixed salary, restaurant and district managers are compensated with an incentive bonus, based upon the performance of the restaurants under their supervision. Additionally, in 2021 in response to emerging labor challenges, we examined our overall hourly compensation and benefits programs and adjusted our wages to reflect the broader market changes. We understand the importance of offering our employees benefits for all aspects of their lives and in 2021 added additional benefits in response to our employees' needs and consistent with this broader philosophy. Through our benefits program we hope to provide our employees with the stability they need to succeed not only in their careers, but in their personal lives as well. Benefits offered to all corporate employees, who work more than 24 hours per week include paid time-off programs including holiday, personal, vacation(adjusted in 2021 to accrue on monthly basis within 90 days of an associate's start date), family leave,commuter benefits, emergency child care, and volunteer time and retirement savings plan with company match.Additionally, all employees are eligible for assistance through our non-profit, Fiesta Family Foundation, which provides assistance to our employees who have personally suffered losses or other hardships.
Training and Development
We maintain a comprehensive training and development program for all our restaurant employees and provide both classroom and in-restaurant training for our salaried and hourly team members. Technology enhancements, expansion of leadership development curriculum and proven e-learning courses complement our Learning Management System platform to focus our team members on system-wide operating procedures by position, food preparation methods and guest service standards.
We have developed a comprehensive management training program, complemented by active coaching and dedicated field training manager supervision for all new managers. During the new manager onboarding process, we customize an intensive, self-paced ongoing development program designed to prepare each employee for the next level of management. The onboarding period also includes robust classroom training with an emphasis on skill and competency building.
Our Response to COVID-19
The COVID-19 pandemic continues to affect the restaurant industry and the economy. In response to COVID-19 and in compliance with governmental restrictions, we closed the dining room seating areas in all restaurants, limiting service to take-out, drive-thru, and delivery operations beginning in mid-March 2020. We re-opened certain dining rooms with limited capacity and hours during certain times in the second half of 2020. In 2021, we re-opened substantially all remaining dining rooms. In addition, to protect the health and safety of our employees and guests, we have continued to provide face coverings for all restaurant employees and purchased additional sanitation supplies and personal protective materials, as well as tamper evident packaging seals for all digital orders, and implemented improvements to our restaurants, such as tempered glass shields at the counter and enhanced sanitation protocols. Furthermore, we continued our policies of sponsored employer paid COVID-19 testing for employees, ensured that associates were aware of our Employee Assistance Program coverage with a focus on mental health support for employees and their families, provided employees with additional two hours of paid time off for each COVID-19 vaccine shot (total of 4 hours) and maintained a program for providing employees with the necessary tools and resources to educate themselves about the benefits of the COVID-19 vaccine to enable employees to make the best decision for themselves.
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Management Structure
We conduct substantially all of our operations, training, marketing, real estate, facilities and culinary research and development support functions from our Pollo Tropical division headquarters in Miami, Florida. Our executive management functions are primarily conducted from our offices in Dallas, Texas, and Miami, Florida. Our management team is led by Richard Stockinger, who serves as our President and Chief Executive Officer, Dirk Montgomery who serves as our Senior Vice President, Chief Financial Officer and Treasurer, Louis DiPietro who serves as our Senior Vice President, Chief Legal and People Officer and Corporate Secretary, Hope Diaz who serves as our Senior Vice President and Chief Marketing Officer, and Patricia Lopez Calleja who serves as our Senior Vice President of Strategic Initiatives and Chief Experience Officer.
Availability of Information
We file annual, quarterly and current reports and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
We make available free of charge through our internet website (www.frgi.com) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with the SEC. The referencereferences to our website address is aand the SEC's website address are textual referencereferences only, meaning that it doesthey do not constitute incorporation by reference of the information contained on the websitethose websites and should not be considered part of this document. In addition, at our website you may also obtain, free of charge, copies of our corporate governance materials, including the charters for the committees of our board of directors and copies of various corporate policies including our Code of Business Ethics and Conduct, Code of Ethics for Executives and our "Whistle Blower" policy.
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ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, as well as other information and data included in this Annual Report on Form 10-K. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties we face. Our business is also subject to general risks and uncertainties that affect many other companies, including overall economic and industry conditions. Additional risks and uncertainties not currently known to us or that we currently believe are not material also may impair our business, consolidated financial condition and results of operations.
Risks Related to the COVID-19 Pandemic
The novel coronavirus (COVID-19) pandemic has adversely affected, and could continue to adversely affect, our operations and results of operations.
The COVID-19 pandemic has had and is likely to continue to have a significant impact on our restaurant operations and overall business. During the pandemic's peak, we temporarily shifted to a "to-go" only operating model at many of our Pollo Tropical in Florida, suspending sit-down dining and serving our guests through take-out, drive-thru and delivery. We also implemented closures, modified hours or reductions in on-site staff, resulting in canceled shifts for some of our employees. COVID-19 has also adversely affected our ability to implement our growth plans, including delays in construction of new restaurants. In addition, to protect the health and safety of our employees and guests, we have provided and may continue to provide face coverings for all restaurant employees, purchased additional sanitation supplies and personal protective materials, as well as tamper evident packaging seals for all digital orders and implemented improvements to our restaurants, such as tempered glass shields at the counter, which have increased our operating costs and adversely affected our liquidity.
In addition, our operations have been and could continue to be disrupted by employees who are unable or unwilling to work, whether because of illness, quarantine, fear of contracting COVID-19 or caring for family members due to a COVID-19 illness. Restaurant closures, menu changes or modified hours of operation due to staffing shortages could materially adversely affect our business or results of operations, liquidity or financial condition. Additionally, the so-called "great resignation" trend that began in 2021, in which U.S. employees voluntarily resigned from their jobs in large numbers, has further strained our ability to keep our restaurants fully staffed and negatively impacted employee satisfaction.
The COVID-19 pandemic also has impacted and is likely to continue to impact our supply chain, which could negatively impact our business. These impacts could include but are not limited to disruptions in our ability to obtain ingredients, packaging and cleaning supplies due to labor shortages at our suppliers and service providers, transportation bottlenecks, or increases in raw material and commodity costs. If our suppliers do not fulfill their obligations to us, we could face shortages of food items or other supplies at our restaurants, and our results of operations and sales could be adversely impacted.
We cannot predict how resurgences of the COVID-19 virus and new variants will impact the overall economy or our guests' purchasing behaviors, so we cannot predict how long our results of operations and financial performance will be adversely impacted.
Risks Related to Human Capital
If we are not able to hire, train, reward and retain qualified restaurant employees and/or appropriately maintain our workforce, our growth plan and profitability could be adversely affected.
We rely on our restaurant team members to consistently provide high-quality food and positive experiences to our guests. Staffing in our restaurants requires us to plan effectively, which has become more complex due to the impacts of the COVID-19 pandemic and other factors limiting the available pool of applicants. The market for qualified talent has become even more competitive and we must provide increasingly competitive wages, benefits and workplace conditions to retain qualified employees. We have experienced and may continue to experience challenges in recruiting and retaining restaurant employees and in maintaining full restaurant staffing in various locations, which has resulted and may continue to result in longer wait times for guest orders, temporary closures of the digital make line and decreased employee satisfaction. A shortage of qualified candidates who meet all legal work authorization requirements, our failure to recruit and retain new restaurant employees in a timely manner or higher than expected turnover levels could affect our ability to open new restaurants, maintain or grow sales at existing restaurants or meet our labor cost objectives. In addition, failure to adequately monitor and proactively respond to employee dissatisfaction could lead to poor guest satisfaction, higher turnover, litigation and unionization efforts, which could negatively impact our results of operations.
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Increases in labor costs could adversely impact our operating results.
Given that labor is a primary component in the cost of operating our restaurants, our business has been and could continue to be adversely impacted by increased labor costs resulting from factors such as federal, state, or local laws related to prevailing wages or in other employee benefits costs (including costs associated with health insurance coverage or workers' compensation insurance) as well as higher wages and costs of other benefits necessary to attract, hire and retain employees at all levels in a highly competitive job market. Our ability to offset higher labor costs by increasing menu prices depends on the willingness of our guests to pay the higher prices and the perceived value of our meals relative to competitors. If competitive pressures or other factors prevent us from fully offsetting higher labor costs with increased menu prices, our profitability may decline which could adversely impact our operating results.
While our employees are not currently subject to a collective bargaining agreement, if a significant portion of our employees were to become unionized and covered by a collective bargaining agreement, our labor costs could increase. Potential changes in labor laws could increase the likelihood of some or all of our employees being subjected to greater organized labor influence, which could have an adverse effect on our business and operating results by imposing requirements that could potentially increase our costs.
Our failure to comply with various applicable federal and state employment and labor laws and regulations could have an adverse impact on our business.
Various federal and state labor laws govern the relationship with our employees and affect operating costs. These laws include employee classification as exempt/non-exempt for overtime and other purposes, minimum wage requirements, unemployment tax rates, workers' compensation rates, immigration status and other wage and benefit requirements. In addition, states in which we operate are considering or have already adopted new immigration laws or enforcement programs, and the U.S. Congress and Department of Homeland Security from time to time consider and may implement changes to federal immigration laws, regulations or enforcement programs as well. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. We currently participate in the E-Verify program, an Internet-based, free program run by the United States government to verify employment eligibility, in states in which participation is required. However, use of the E-Verify program does not guarantee that we will properly identify all applicants who are ineligible for employment. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized we could experience adverse publicity that negatively impacts our brand and may make it more difficult for us to hire and keep qualified employees. Termination of a significant number of employees who are found to be unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws.
Although we believe that compliance with these laws has not had a material adverse effect on our operations to date, we may experience material difficulties or failures with respect to compliance with such laws in the future. Complying with these laws and regulations subjects us to substantial expense and non-compliance could expose us to significant liabilities. For example, lawsuits have been filed against us alleging violations of federal and state laws regarding employee wages and payment of overtime, meal and rest breaks, employee classification, employee record-keeping and related practices with respect to our employees. We may incur legal costs to defend such lawsuits, and we could suffer losses from, these and similar cases, and the amount of such losses or costs could be significant.
In addition, the amount that we pay our restaurant employees will likely be impacted by minimum wage laws. To the extent implemented, federal, state, and local proposals that increase minimum wage requirements or mandates or impact other employee matters could, to the extent implemented, materially increase our labor and other costs. For example, the state of Florida recently approved a minimum wage increase effective in September of 2021 which will increase the minimum wage gradually over a period of five years. Our ability to respond to minimum wage increases by increasing menu prices depends on the willingness of our guests to pay higher prices and recognize our perceived value relative to competitors. Our distributors and suppliers could also be affected by higher minimum wage, benefit standards and compliance costs, which could result in higher costs for goods and services supplied to us.
Additionally, while our employees are not currently covered by any collective bargaining agreements, union organizers have engaged in efforts to organize our employees and those of other restaurant companies. If a significant portion of our employees were to become covered by collective bargaining agreements, our labor costs could increase, and it could negatively impact our culture and reduce our flexibility to attract and retain top performing employees. Labor unions have attempted, and likely will continue to attempt, to attract media attention to their organizing efforts in our restaurants, and their organizing
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efforts may include claims that we mistreat or undervalue our employees. Despite our efforts to provide more accurate information about our policies and practices, these messages may dissuade guests from patronizing our restaurants and could adversely impact our results of operations.
Risks Related to Our Business
The market in which we compete is highly competitive, and we may not be able to compete effectively.
The restaurant industry is highly competitive. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low- and medium-priced fare. We also compete with delivered meal solutions, convenience stores, grocery stores and other restaurant retailers.retailers, including "ghost" or dark kitchens, where meals are prepared at separate premises rather than at a restaurant. Competition from food delivery services has also increased in recent years, particularly during COVID-19.
Pollo Tropical's competitors include national and regional chicken-based concepts as well as other types of quick-service and fast-casual restaurants. Our Taco Cabana restaurants compete with Mexican concepts, including those in the quick-service, fast-casual and casual dining segments. Many of our competitors or potential competitors have greater financial and other resources than we do, which may allow them to react to changes in pricing, marketing, and trends in the restaurant industry more quickly or effectively than we can. Additionally, to remain competitive, we have increasingly offered selected food items and combination meals at discounted prices. These pricing and other marketing strategies have had, and in the future may have, a negative impact on our sales and earnings. If our marketing efforts are unsuccessful, or if our restaurants are unable to compete effectively, our operations and financial performance could be adversely impacted.
Factors applicable to the quick-service and fast-casual restaurant segments may adversely affect our results of operations, which may cause a decrease in earnings and revenues.
The quick-service and fast-casual restaurant segments are highly competitive and can be materially adversely affected by many factors, including:
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Our continued growth depends on our ability to open and operate new restaurants profitably, which in turn depends on our continued access to capital, and newly developed restaurants may not perform as we expect and there can be no assurance that our growth and development plans will be achieved.
While we have decreased the number of new restaurants which we plan to open in the near term, our continued growth still depends on our ability to develop additional Pollo Tropical and Taco Cabana restaurants. Development involves substantial risks, including the following:
Our long-term development plans will require additional management, operational and financial resources. For example, we will be required to recruit managers and other personnel for each new restaurant. We cannot ensure that we will be able to manage our expanding operations effectively and our failure to do so could adversely affect our results of operations.
In addition, to maintain our competitive positioning and improve our sales and overall performance, we continue to look at ways to improve our existing restaurants through remodels, upgrades and regular maintenance. If the costs associated with these activities are higher than projected, restaurants are closed for periods longer than anticipated or such remodels do not perform as forecasted, we may not realize an acceptable return on investment, which could have a negative effect on our results of operations.
In addition, our ability to open new restaurants and to grow, as well as our ability to meet other anticipated capital needs, may depend on our continued access to external financing, including borrowing under our senior secured revolving credit facility, which we refer to as the "senior credit facility." There can be no assurance that we will have access to the capital we need at acceptable terms or at all, which could materially adversely affect our business. In addition, our need to manage our indebtedness levels to ensure continued compliance with financial leverage ratio covenants under our new senior credit facility may reduce our ability to develop new restaurants.
Customer preferences and traffic could be adversely impacted by health concerns about certain food products, reports of food-borne illnesses or food safety issues, any of which could result in a decrease in demand for our products.
Customer preferences and traffic could be adversely impacted by health concerns or negative publicity about the consumption of particular food products, which could cause a decline in demand for those products and adversely impact our sales.
Instances or reports, whether verified or not, of food-safety issues, such as food-borne illnesses, food tampering, food contamination or mislabeling, either during growing, manufacturing, packaging, storing or preparation, have in the past severely injured the reputations of companies in the food processing, grocery and quick-service and fast-casual restaurant sectors and could affect us as well. Any report linking us to food-borne illnesses or food tampering, contamination, mislabeling or other food-safety issues could damage our brand value and severely hurt sales of our food products and possibly lead to product liability claims, litigation (including class actions) or damages.
These problems, other food-borne illnesses (such as norovirus or hepatitis A), and injuries caused by the presence of foreign material could require us to temporarily close our restaurants. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and a decrease in customer traffic to our restaurants. Furthermore, any instances of food contamination, whether or not at our restaurants, could subject us or our suppliers to a food recall pursuant to the United States Food and Drug Administration's recently enacted Food Safety Modernization Act.
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An increase in food costs, including those caused by the COVID-19 pandemic, could adversely affect our operating results.
Our profitability and operating margins are dependent in part on our ability to anticipate and react to changes in food costs. Changes in the cost or availability of certain food products could affect our ability to offer a broad menu and maintain competitive prices and could materially adversely affect our profitability and reputation. The type, variety, quality and cost of produce, beef, poultry, cheese and other commodities can be subject to change and to factors beyond our control, including weather, governmental regulation, availability, seasonality and seasonality,industry demand, each of which may affect our food costs or cause a disruption in our supply. While we have not experienced significant disruptions in our supply chain during 2021, costs for certain supplies and ingredients, such as packaging, chicken and freight, increased rapidly, which inflationary pressures could accelerate and/or spread to more commodities as the impacts of COVID-19 continue across the global supply chain. Although we utilize purchasing contracts to lock in the prices for a material portion of the food commodities used in our restaurants, some of the commodities used in our operations cannot be locked in for periods longer than one month. We do not use financial instruments to hedge our risk against market fluctuations in the price of commodities at this time. We may not be able to anticipate and react to changing food costs through our purchasing practices and menu price adjustments in the future, and failure to do so could negatively impact our revenues and results of operations.
We could also be adversely affected by price increases specific to ingredients we have chosen due to their specific quality profile or related criteria, the markets for which are generally smaller and more concentrated than the markets for other commodity food products.
If a significant disruption in service or supply by any of our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on our business.
Our restaurants depend on frequent deliveries of ingredients and other products. For both our Pollo Tropical and Taco Cabana restaurants, we have service agreements with our primary distributors of food and paper products. Performance Food Group, Inc., is our primary distributor of food and beverage products and supplies for both our Pollo Tropical and Taco Cabana restaurants under a distribution services agreement that expires on July 27, 2024. We also currently rely on sixtwo suppliers for chicken for our Pollo Tropical restaurants under agreements that expire on December 31, 2020.2022. There are many factors which could cause shortages or interruptions in the supply of our ingredients and products, including adverse weather, unanticipated demand, labor or distribution problems, food safety issues by our suppliers or distributors, cost, and the financial health of our suppliers. If we cannot replace or engage distributors or suppliers who meet our specifications in a short period of time, this could increase our expenses and cause shortages of food and other items at our restaurants, which could cause a restaurant to remove items from its menu. If such actions were to occur, customers could change their dining habits and affected restaurants could experience significant reductions in sales during the shortage or thereafter.
The success of our marketing programs and the impact of those of our competitors could have a material adverse effect on our results of operations and financial condition.
If our competitors increase spending on advertising and promotions, or our advertising and other marketing programs do not result in increased net sales or if the costs of advertising, media, or marketing increase greater than expected, or are less effective than our competitors, our profitability could be materially adversely affected.
Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse impact on our business.
There has been a marked increase in the use of social media platforms and similar devices which allow individuals access to a broad audience of consumers and others. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects, or business. The harm may be immediate without affording us an opportunity for redress or correction. The dissemination of information online could harm our business, prospects, financial condition, and results of operations, regardless of the information's accuracy.
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Many of our competitors are expanding their use of social media and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with guests and brand relevance. As part of our marketing efforts, going forward we expect to increasingly rely on social media platforms and search engine marketing to attract and retain guests. We will also increase our investment in other digital marketing initiatives that allow us to reach our guests across multiple digital channels and build their awareness of, engagement with, and loyalty to our brands. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues, increased employee engagement or brand recognition. In addition, a variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about us, exposure of personally identifiable information, fraud, or out-of-date information. The inappropriate use of social media vehicles by our guests or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.
We rely heavily on information technology systems across our operations, including point-of-sale processing in our restaurants, gift and loyalty cards, online business, and various other processes and transactions. Our ability to effectively manage our business and coordinate the preparation and sale of our products depends significantly on the reliability and capacity of these systems. We expect to expand our utilization of technology throughout our business and the failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could cause reduced efficiency of our operations, and significant capital investments could be required to remediate the problem.
A significant amount of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information of their guests has been stolen. We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our guests' credit or debit card information. Any such claim or proceeding, or any adverse publicity resulting from these allegations, may have a material adverse effect on us and our restaurants.
From time to time we have been, and likely will continue to be, the target of cyber and other security threats. We also collect and maintain personal information about our employees and customers as partmay in the future become subject to other legal proceedings or governmental investigations for purportedly fraudulent transactions arising out of somethe actual or alleged theft of our marketing and guest loyalty programs. The collection and use of suchconsumers' credit or debit card information is regulated at the federal and state levels, and the regulatory environment related to information security and privacy is increasingly demanding. We also rely increasingly on cloud computing and other technologies that result in third parties holding significant amounts of customeror if consumer or employee information is obtained by unauthorized persons or used inappropriately. Any such claim or proceeding, or any adverse publicity resulting from such an event, may have a material adverse effect on our behalf.business and we may incur significant remediation costs.
Such breaches also could result in a violation of applicable privacy and other laws, and subject us to private consumer, business partner, or securities litigation and governmental investigations and proceedings, any of which could result in our exposure to material civil or criminal liability. For example, many jurisdictions have adopted regulations which require companies to meet certain requirements regarding the handling of personal data and provide a private right of action for data breaches. These laws also typically require companies that process information on customers to make new disclosures to consumers about their data collection, use and sharing practices, allow consumers to opt out of certain data sharing with third parties and the right for consumers to request deletion of personal information. If we become subject to such laws in the markets in which we operate and we fail, or are perceived to have failed, to properly respond to security and information systemsbreaches of our outsourced third-party providers we use to store or process suchthird party's information are compromisedtechnology systems or if we or such third parties otherwise fail to comply with theseproperly respond to consumer requests under such laws, and regulations, we could face litigationexperience reputational damage, adverse publicity, loss of consumer confidence, reduced sales and profits, complications in executing our growth initiatives and regulatory and legal risk, including criminal penalties or civil liabilities.
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Compliance with current and future applicable privacy, cybersecurity and related laws can be costly and time-consuming. We make significant investments in technology, third-party services and internal personnel to develop and implement systems and processes that are designed to anticipate cyber-attacks and to prevent or minimize breaches of our information technology systems or data loss, but these security measures cannot provide assurance that we will be successful in preventing such breaches or data loss. In addition, media or other reports of existing or perceived security vulnerabilities in our systems or those of our third-party business partners or service providers can also adversely impact our brand and reputation and materially impact our business, even if no breach has been attempted or has occurred.
Our digital business, which we expect to grow as a percentage of sales, is subject to risks.
In 2020, we saw an increase in the impositionnumber of penalties,digital orders, which includes delivery and customer pickup. The growth in digital orders is, in part, attributable to more guests dining at home due to COVID-19, our expanded partnerships with multiple third-party delivery services and our investments in our overall digital strategies. Depending on which ordering platform a digital order is placed—our platform or the platform of a third-party delivery service—the delivery fee we collect from the guest may be less than the actual delivery cost, which has a negative impact on our profitability. While we have implemented a menu price increase to partially offset higher delivery costs, this higher menu prices may cause some guests to shift their purchases to other restaurants offered on the platform. As our digital business grows, we are increasingly reliant on third-party delivery companies, which maintain control over data regarding guests that use their platform and over the customer experience. If a third-party delivery company driver fails to make timely deliveries or fails to deliver the complete order, our guests may attribute the bad customer experience to our brands and could stop ordering from us. The ordering and payment platforms used by these third-parties, or our mobile app or online ordering system, could be interrupted by technological failures, user errors, cyber-attacks or other factors, which could adversely affectimpact sales through these channels and negatively impact our financial performance. Our reputation asoverall sales and reputation. The third-party delivery business is intensely competitive, with a brandnumber of players competing for market share, online traffic capital, and delivery drivers. If the third-party delivery companies we utilize cease or as an employer could alsocurtail operations, increase their fees, or give greater priority or promotions on their platforms to our competitors, our delivery business and our sales may be adversely affected,negatively impacted. The delivery business has been consolidating and may continue to consolidate, and fewer third-party delivery companies may give them more leverage in negotiating the terms and pricing of contracts, which could impairnegatively impact our sales or ability to attract and keep qualified employees.
profits from delivery orders.
Our business is regional, and we therefore face risks related to reliance on certain markets as well as risks for other unforeseen events.
As of December 29, 2019, January 2, 2022, all of our Company-owned Pollo Tropical restaurants were located in Florida and allFlorida. Furthermore, 68% of our Company-owned Taco CabanaPollo Tropical restaurants were located in Texas.three counties in Florida which represents a significant amount of the brand's sales and Restaurant-level Adjusted EBITDA. Therefore, events and conditions specific to these regions, including economic conditions, state and local government regulations, weather conditions or other conditions affecting Florida and Texas, and the tourism industry in Florida may have a material impact on the success of our restaurants in those locations.
Adverse weather conditions canhave impacted, and could in the future impact, guest traffic at our restaurants, cause the temporary underutilization of outdoor patio seating and, in more severe cases such as hurricanes, tornadoes or other natural disasters, cause temporary closures, sometimes for prolonged periods, which would negatively impact our restaurant sales. Changes in weather could result in construction delays, interruptions to the availability of utilities, and shortages or interruptions in the supply of food items and other supplies, which could increase our costs.costs and could adversely impact our business. Some climatologists predict that the long-term effects of climate change and global warming may result in more severe, volatile weather or extended droughts, which could increase the frequency and duration of weather impacts on our operations.
Economic downturns may adversely impact consumer spending patterns.
Our business is dependent to a significant extent on national, regional and local economic conditions, particularly those that affect our guests that frequently patronize our restaurants. In particular, where our business is subject to factors which could reduce our guests' disposable income is reduced (such as by job losses, credit constraints and higher housing, tax, utility, gas, consumer credit or other costs) or where the perceived wealth of guests has decreased (because of circumstances such as lower residential real estate values, lower investment values, increased foreclosure rates, increased tax rates, social unrest, or other economic disruptions)disruptions and governmental, political and budget concerns), our restaurants have in the past experienced, and may in the future experience, lower sales and guest traffic as guests choose lower-cost alternatives or choose alternatives to dining out. The resulting decrease in our guest traffic or average sales per transaction has had an adverse effect in the past, and could in the future have a material adverse effect, on our business. In addition, a new presidential and legislative administration recently took office and it is unknown what impact any changes made by this administration or policies implemented will have on the economy or restaurant spending.
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Our expansion into new markets may present increased risks due to a lack of market awareness of our brands.
We have encountered and may continue to encounter difficulties developing restaurants outside of our more mature core markets. For example, we closed all Pollo Tropical restaurants in Texas, Tennessee and Georgia over the last three years. We may be unable to find attractive locations or successfully market our products as we attempt to expand beyond our existing markets, as the competitive circumstances and consumer characteristics in these new areas may differ substantially from those in areas in which we currently operate. It may be more challenging for us to attract guests to our restaurants in areas where there is a limited or a lack of market awareness of the Pollo Tropical or Taco Cabana brand. Restaurants opened in new markets where we have not reached media efficiency may open at lower sales volumes than restaurants opened in more mature markets, and may have lower restaurant-level operating margins than more mature markets. Sales at restaurants opened in new markets that are not yet media efficient have taken and may continue to take longer to reach average restaurant sales volumes, if at all, thereby adversely affecting our operating results, including the recognition of future impairment charges. Opening new restaurants in areas in which potential guests may not be familiar with our restaurants may include costs related to the opening and marketing of those restaurants that are substantially greater than those incurred by our restaurants in other areas. Even though we may incur substantial additional costs with respect to these new restaurants, they may attract fewer guests than our more established restaurants in existing markets. We may also not open a sufficient number of restaurants in new markets to adequately leverage distribution, supervision and marketing costs. As a result of the foregoing, we cannot ensure that we will be able to successfully or profitably operate our new restaurants successfully or profitably outside our existing markets.
Changes in accounting standards or the recognition of impairment or other charges may adversely affect our future results of operations.
New accounting standards or changes in financial reporting requirements, accounting principles or practices, including with respect to our critical accounting estimates, could adversely affect our future results. We may also be affected by the nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment or other charges that reduce our earnings. In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. These estimates are highly subjective and can be significantly impacted by many factors such as global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. If our estimates or underlying assumptions change in the future, we may be required to record impairment charges. If we experience any such changes, they could have a significant adverse effect on our reported results for the affected periods.
Government regulation could adversely affect our financial condition and results of operations.
In connection with the operation of our business, we are subject to extensive federal, state, local, and foreign laws and regulations that are complex and vary from location to location, including those related to:
Our restaurants are licensed and subject to regulation under federal, state, local and foreign laws, including business, health, fire, sales of alcohol (with respect to our Taco Cabana restaurants) and safety codes. For example, we are subject to the U.S. Americans with Disabilities Act, or ADA, and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas.
In addition, new government initiatives or changes to existing laws, such as the adoption and implementation of national, state, or local government proposals relating to increases in minimum wage rates, may increase our costs of doing business and adversely affect our results of operations.
If one of our employees sells alcoholic beverages to an intoxicated patron or to a minor, we may be liable to third parties for the acts of the patron or incur significant fines or penalties.
We serve alcoholic beverages at our Taco Cabana restaurants and are subject to the "dram-shop" statutes of the jurisdictions in which we serve alcoholic beverages. "Dram-shop" statutes generally provide that serving alcohol to an intoxicated patron is a violation of the law. We discontinued the sale of alcoholic beverages at Pollo Tropical restaurants in early 2017.
In most jurisdictions, if one of our employees sells alcoholic beverages to an intoxicated patron we may be liable to third parties for the acts of the patron. We cannot guarantee that those patrons will not be served or that we will not be subject to
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liability for their acts. Our liquor liability insurance coverage may not be adequate to cover any potential liability and insurance may not
continue to be available on commercially acceptable terms or at all, or we may face increased deductibles on such insurance. A significant dram-shop claim or claims could have a material adverse effect on us as a result of the costs of defending against such claims;claims, paying deductibles and increased insurance premium amounts;amounts, implementing improved training and heightened control procedures for our employees;employees, and paying any damages or settlements on such claims.
Additionally, we are subject to statutes of the jurisdictions in which we serve alcoholic beverages which prohibit us from selling or serving alcohol to minor patrons. These statutes generally provide that serving or selling alcohol to minors is a violation of the law, and will result in fines and other penalties including the suspension or loss of our license to sell alcohol in the future. If we were to incur a significant number of sale to minor violations the fines or penalties could have a material adverse effect on us.
We may incur significant liability or reputational harm if claims are brought against us or against our franchisees.
We or our franchisees may be subject to complaints, regulatory proceedings or litigation from guests or other persons alleging food-related illness, injuries suffered on our premises or other food quality, health, or operational concerns, including environmental claims. In addition, in recent years a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging, among other things, violations of federal and state law regarding workplace and employment matters, discrimination, harassment, wrongful termination and wage, rest break, meal break and overtime compensation issues and, in the case of certain restaurants, alleging that they have failed to disclose the health risks associated with high-fat or high sodium foods and that their marketing practices have encouraged obesity. We may also be subject to litigation or other actions initiated by governmental authorities, our employees and our franchisees, among others, based upon these and other matters. Adverse publicity resulting from such allegations or occurrences or alleged discrimination or other operating issues stemming from one of our locations, a number of our locations or our franchisees could adversely affect our business, regardless of whether the allegations are true, or whether we are ultimately held liable. Any cases filed against us could materially adversely affect us if we lose such cases and have to pay substantial damages or if we settle such cases. In addition, any such cases may materially and adversely affect our operations by increasing our litigation costs and diverting our attention and resources to address such actions. In addition, if a claim is successful, our insurance coverage may not cover or be adequate to cover all liabilities or losses and we may not be able to continue to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all. If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover such loss, liability or loss of income, there could be a material adverse effect on our results of operations.
Our franchisees or licensees could take actions that harm our reputation.
As of December 29, 2019,January 2, 2022, a total of 4031 Pollo Tropical and Taco Cabana restaurants were owned and operated by our franchisees.franchisees and licensees. We do not exercise control of the day-to-day operations of our franchisees and licensees and the number of franchised or licensed restaurants may increase in the future. While we attempt to ensure that franchisee-owned and licensee-owned restaurants maintain the same high operating standards as our Company-owned restaurants, one or more of these franchisees or licensees may fail to meet these standards. Any shortcomings at our franchisee-owned and licensee-owned restaurants could be attributed to our company as a whole and could adversely affect our reputation and damage our brands.
Federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials could expose us to liabilities, which could adversely affect our results of operations.
We are subject to a variety of federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous substances or other regulated materials, release of pollutants into the air, soil and water, and the remediation of contaminated sites.
Failure to comply with environmental laws could result in the imposition of fines or penalties, restrictions on operations by governmental agencies or courts of law, as well as investigatory or remedial liabilities and claims for alleged personal injury or damages to property or natural resources. Some environmental laws impose strict, and under some circumstances joint and several, liability for costs of investigation and remediation of contaminated sites on current and prior owners or operators of the sites, as well as those entities that send regulated materials to the sites. We cannot ensure that we have been or will be at all times in
complete compliance with such laws, regulations and permits. Therefore, our costs of complying with current and future environmental, health and safety laws could adversely affect our results of operations.
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Major developments on trade relations could have a material adverse effect on our business.
The current political climate has introduced uncertainty with respect to trade policies, tariffs and government regulations impacting trade between the United States and other countries. We source several of our ingredients, paper products and other materials used within our business from suppliers outside of the United States, including Asia, Central America and Mexico.
Significant developments in trade relations, such as the imposition of tariffs on items imported by us, could increase our costs and materially and adversely affect our consolidated financial results.
We are subject to all of the risks associated with leasing property subject to long-term non-cancelable leases.
The leases for our restaurant locations generally have initial terms of 10 to 20 years, and typically provide for renewal options in five-year increments as well as for rent escalations. Generally, our leases are "net" leases, which require us to pay all of the costs of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases.
From time to time we have, and may in the future, close or relocate a restaurant if a current location becomes less profitable as a result of adverse economic conditions or other factors. If an existingthe closures continue for a long period of time, we may not be able to recover our investment due to the high rental rates. Because substantially all of our restaurants operate in leased facilities, we may incur significant lease termination expenses when we close or futurerelocate a restaurant and are often obligated to continue rent and other lease related payments after restaurant closure. We also may incur significant asset impairment and other charges in connection with closures and relocations. If the lease termination cost is not profitable, andsignificant, we may decide to close it, we may nonetheless be obligated to performkeep underperforming restaurants open. Ongoing lease obligations at closed or underperforming restaurant locations could decrease our monetary obligations under the applicable lease including, among other things, paying all amounts due for the balanceresults of the lease term.operations. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close restaurants in desirable locations.locations which could adversely affect our results of operations.
Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.
We own certain common law trademark rights and a number of federal and international trademark and service mark registrations, including the Pollo Tropical name and Taco Cabana names and logos,logo, and proprietary rights relating to certain of our core menu offerings. We believe that our trademarks, service marks, trade dress and other proprietary rights are important to our success and our competitive position. We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights. If our efforts to protect our intellectual property are inadequate or if any third party misappropriates or infringes on our intellectual property either in print or on the internet, the value of our brands may be harmed which could have a material adverse effect on our business. We are aware of restaurants in foreign jurisdictions using menu items, logos or branding that we believe are based on our intellectual property and our ability to prevent these restaurants from using these elements may be limited in jurisdictions in which we are not operating. This could have an adverse impact on our ability to expand into other jurisdictions in the future.
We are not aware of any assertions that our trademarks or menu offerings infringe upon the proprietary rights of third parties, but we cannot ensure that third parties will not claim infringement by us in the future. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items in the future or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.
Our new senior credit facility restricts our ability to engage in some business and financial transactions.
Our new senior credit facility restricts our ability in certain circumstances to, among other things:
•Incur additional debt;
•Pay dividends and make other distributions on, redeem or repurchase, capital stock;
•Make investments or other restricted payments;
•Enter into transactions with affiliates;
•Sell all, or substantially all, of our assets;
•Create liens on assets to secure debt; or
•Effect a consolidation or merger.
These covenants limit our operational flexibility and could prevent us from taking advantage of business opportunities as they arise, growing our business or competing effectively which could adversely impact our business. In addition, our new
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senior credit facility requires us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we cannot ensure that we will meet these tests.
Risks Related to Our Common Stock
We do not expect to pay any cash dividends for the foreseeable future, and our senior credit facility limits our ability to pay dividends to our stockholders.
We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. The absence of a dividend on our common stock may increase the volatility of the market price of our common stock or make it more likely that the market price of our common stock will decrease in the event of adverse economic conditions or adverse developments affecting our company. Our new senior credit facility limits, and the debt instruments that we and our subsidiaries may enter into in the future may limit, our ability to pay dividends to our stockholders.
If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.
The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We cannot ensure that these analysts will publish research or reports about us or that any analysts that do so will not discontinue publishing research or reports about us in the future. If one or more analysts who cover us downgrade our stock, our stock price could decline rapidly. If analysts do not publish reports about us or if one or more analyst ceases coverage of our stock, we could lose visibility in the market, which in turn could cause our stock price to decline.
Percentage ownership of our common stock may be diluted in the future.
Percentage ownership of our common stock may be diluted in the future because of equity awards that we expect will be granted to our directors, officers and employees. The Fiesta Restaurant Group, Inc. 20122021 Stock Incentive Plan (and any successor stock incentive plan that we may adopt) provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock options, and other equity-based awards to our directors, officers and other employees, advisors and consultants. In addition, in the future we may also issue common stock or other securities to raise additional capital. Any new shares issued would dilute our existing shareholders.
Proxy contests threatened or commenced against us could be disruptive and costly, and adversely affect our business, operation results and financial condition.
Stockholders may from time to time attempt to effect changes, engage in proxy solicitations or advance stockholder proposals. Responding to proxy contests and related actions by activist stockholders can be costly and time-consuming, disrupt our operations, and divert the attention of our management and employees away from their regular duties and the pursuit of our business strategies, which could materially and adversely affect our business, operating results and financial conditions. Perceived uncertainties as to our future direction as a result of proxy contests and related actions by activist stockholders may lead to the perception of a change in the direction of our business, instability or lack of continuity. This may affect our relationship with current or potential suppliers, vendors, and other third parties, and make it more difficult to attract and retain management employees and executives which could adversely affect our business, operating results and financial condition. Further, proxy contests and related actions by activist stockholders could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Provisions in our restated certificate of incorporation and amended and restated bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Delaware corporate law and our restated certificate of incorporation and amended and restated bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
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rights of our common stock and to discourage a takeover attempt;
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 29, 2019, we owned or leased the following operating restaurant properties:
| Owned | Leased (1) | Total (2) | ||||||
| Restaurants: | ||||||||
| Pollo Tropical | 6 | 136 | 142 | |||||
| Taco Cabana | 6 | 158 | 164 | |||||
| Total operating restaurants | 12 | 294 | 306 | |||||
Most leases require us to pay utility and water charges and real estate taxes. Certain leases also require contingent rentals based upon a percentage of gross sales of the particular restaurant that exceed specified minimums. In some of our mall locations, we are also required to pay certain other charges such as a pro-rata share of the mall's common area maintenance costs, insurance and security costs.
As of December 29, 2019,January 2, 2022, we had one restaurantno restaurants under development, 2938 closed restaurant properties subleased to third parties, 17three closed restaurant properties under contract for future sublease or assignment to third parties and four closed restaurant properties available for sublease, and four owned and closed restaurant properties, of which one has been leased to a third party and three were available for lease (two of which were also available for sale).sublease.
In addition to the restaurant locations, we lease approximately 21,000 square feet at 14800 Landmark Boulevard, Suite 500, Dallas, Texas which houses some of our executive offices and certain of our administrative functions. We also lease approximately 19,500 square feet at 7255 Corporate Center Drive, Miami, Florida, which househouses some of our executive offices and administrative operations for our Pollo Tropical restaurants. Additionally, we lease approximately 10,300 square feet of office space at 1077 Central Parkway South, Suite 600, San Antonio, Texas, which houses most of our administrative operations for our Taco Cabana restaurants. In addition, we lease an office facility located at 3220 Keller Springs Road, Suite 108, Carrollton, Texas, which is subleased to a third party and an office building at 8918 Tesoro Drive, Suite 200, San Antonio Texas, that is available for sublease.party.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various litigation matters incidental to the conduct of business. We do not believe that the outcome of any of these matters will have a material adverse effect on our business, results of operations or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on The NASDAQ Global Select Market under the symbol "FRGI". On February 21, 2020,March 4, 2022, shares of our common stock outstanding were held by 457432 holders of record. This excludes persons whose shares are held by a brokerage house or clearing agency.
Dividends
We did not pay any cash dividends during 20192021 or 2018.2020. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain the majority of available funds to fund the development and growth of our business or to use for other corporate related purposes such as the repayment of revolving credit borrowings under our senior credit facility.purposes. In addition, we are a holding company and conduct all of our operations through our direct and indirect subsidiaries. As a result, for us to pay dividends, we need to rely on dividends and distributions to us from our subsidiaries. Our new senior credit facility limits—limits, and debt instruments that we and our subsidiaries may enter into in the future may limit—limit, our ability to pay dividends to our stockholders.
Stock Performance Graph
The following performance graph compares our cumulative total stockholder return on our common stock with the cumulative total returns of The NASDAQ Composite Index and a peer group, The S&P Small Cap 600 Restaurant Index. We have elected to use the S&P Small Cap 600 Restaurant Index in compiling our stock performance graph because we believe that index represents a comparison to competitors with similar market capitalization as us. The graph and table below assume that $100 was invested on January 1, 2017, with dividends reinvested quarterly.
The trading price of our common stock on January 1, 2017, was $29.85 and the closing price of our common stock on December 31, 2021, the last trading day before our fiscal year end date of January 2, 2022, was $11.01.
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| Total Cumulative Shareholder Returns | |||||||||||||||||||||||||||||||||||
| 1/1/2017 | 12/31/2017 | 12/30/2018 | 12/29/2019 | 1/3/2021 | 1/2/2022 | ||||||||||||||||||||||||||||||
| Fiesta Restaurant Group, Inc. | $ | 100.00 | $ | 63.65 | $ | 51.06 | $ | 31.76 | $ | 38.19 | $ | 36.88 | |||||||||||||||||||||||
| NASDAQ Composite | 100.00 | 129.64 | 124.98 | 172.81 | 249.51 | 300.25 | |||||||||||||||||||||||||||||
| S&P Small Cap 600 Restaurants | 100.00 | 102.27 | 116.42 | 135.74 | 165.98 | 189.12 | |||||||||||||||||||||||||||||
Issuer Purchases of Equity Securities
During the years ended December 30, 2018, and December 29, 2019, our board of directors authorized the repurchase of an aggregate 3.0 million shares of our common stock through the following actions:
•1.5 million shares of common stock were authorized for repurchase on February 26, 2018;
•an An additional 0.5 million shares of common stock were authorized for repurchase on August 7, 2019; and
•an An additional 1.0 million shares of common stock were authorized for repurchase on November 5, 2019.
Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume, general market and economic conditions, and other corporate considerations. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by our board of directors.
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The following table sets forth information with respect to the Company's repurchases of common stock during the quarter ended December 29, 2019:January 2, 2022:
| Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| October 4, 2021 to November 7, 2021 | 153,918 | $ | 10.99 | 153,918 | 514,364 | |||||||||||||||||||||
| November 8, 2021 to December 5, 2021 | 156,691 | 10.41 | 156,691 | 357,673 | ||||||||||||||||||||||
| December 6, 2021 to January 2, 2022 | 205,465 | 10.22 | 205,465 | 152,208 | ||||||||||||||||||||||
| Total | 516,074 | $ | 10.51 | 516,074 | ||||||||||||||||||||||
| Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||
| September 30, 2019 to November 3, 2019 | — | $ | — | — | 1,823,105 | ||||||||
| November 4, 2019 to December 1, 2019 | 250,000 | 9.15 | 250,000 | 1,573,105 | |||||||||
| December 2, 2019 to December 29, 2019 | 66,600 | 9.49 | 66,600 | 1,506,505 | |||||||||
| Total | 316,600 | $ | 9.22 | 316,600 | |||||||||
(1) Shares purchased in open market transactions, including pursuant to a 10b5-1 plan. |
| Total Cumulative Shareholder Returns | |||||||||||||||||||||||
| 12/28/2014 | 1/3/2016 | 1/1/2017 | 12/31/2017 | 12/30/2018 | 12/29/2019 | ||||||||||||||||||
| Fiesta Restaurant Group, Inc. | $ | 100.00 | $ | 57.61 | $ | 51.18 | $ | 32.58 | $ | 26.13 | $ | 16.26 | |||||||||||
| NASDAQ Composite | 100.00 | 105.40 | 114.75 | 148.76 | 143.41 | 198.30 | |||||||||||||||||
| S&P Small Cap 600 Restaurants | 100.00 | 86.38 | 92.26 | 92.27 | 96.25 | 108.93 | |||||||||||||||||
ITEM 6. SELECTED FINANCIAL DATARESERVED
| (Dollars in thousands, except share and per share data) | Year Ended | ||||||||||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||||||||
| Statement of operations data: | |||||||||||||||||||
| Revenues: | |||||||||||||||||||
| Restaurant sales | $ | 658,263 | $ | 685,925 | $ | 666,584 | $ | 708,956 | $ | 684,584 | |||||||||
| Franchise royalty revenues and fees | 2,680 | 2,672 | 2,548 | 2,814 | 2,808 | ||||||||||||||
| Total revenues | 660,943 | 688,597 | 669,132 | 711,770 | 687,392 | ||||||||||||||
| Costs and expenses: | |||||||||||||||||||
| Cost of sales | 207,453 | 218,946 | 202,888 | 214,609 | 217,328 | ||||||||||||||
| Restaurant wages and related expenses (including stock-based compensation expense of $195, $90, $52, $142, and $156, respectively) | 179,178 | 188,131 | 184,742 | 185,305 | 174,222 | ||||||||||||||
Restaurant rent expense(1) | 47,805 | 36,034 | 36,936 | 37,493 | 33,103 | ||||||||||||||
Other restaurant operating expenses(1) | 91,897 | 100,828 | 98,927 | 96,457 | 87,285 | ||||||||||||||
| Advertising expense | 23,179 | 23,695 | 26,091 | 26,800 | 21,617 | ||||||||||||||
| General and administrative (including stock-based compensation expense of $2,649, $3,379, $3,493, $3,141, and $4,137, respectively) | 56,195 | 54,525 | 59,633 | 54,826 | 54,156 | ||||||||||||||
| Depreciation and amortization | 39,195 | 37,604 | 34,957 | 36,776 | 30,575 | ||||||||||||||
| Pre-opening costs | 972 | 1,716 | 2,118 | 5,511 | 4,567 | ||||||||||||||
Impairment and other lease charges(2) | 13,101 | 21,144 | 61,760 | 25,644 | 2,382 | ||||||||||||||
| Goodwill impairment | 67,909 | — | — | — | — | ||||||||||||||
Closed restaurant rent expense, net of sublease income(3) | 4,163 | — | — | — | — | ||||||||||||||
Other expense (income), net(4) | 1,041 | (3,007 | ) | 2,190 | 1,130 | (314 | ) | ||||||||||||
| Total operating expenses | 732,088 | 679,616 | 710,242 | 684,551 | 624,921 | ||||||||||||||
| Income (loss) from operations | (71,145 | ) | 8,981 | (41,110 | ) | 27,219 | 62,471 | ||||||||||||
| Interest expense | 3,872 | 3,966 | 2,877 | 2,171 | 1,889 | ||||||||||||||
| Income (loss) before income taxes | (75,017 | ) | 5,015 | (43,987 | ) | 25,048 | 60,582 | ||||||||||||
| Provision for (benefit from) income taxes | 9,369 | (2,772 | ) | (7,755 | ) | 8,336 | 22,046 | ||||||||||||
| Net income (loss) | $ | (84,386 | ) | $ | 7,787 | $ | (36,232 | ) | $ | 16,712 | $ | 38,536 | |||||||
| Per share data: | |||||||||||||||||||
| Earnings (loss) per common share—basic | $ | (3.18 | ) | $ | 0.29 | $ | (1.35 | ) | $ | 0.62 | $ | 1.44 | |||||||
| Earnings (loss) per common share—diluted | (3.18 | ) | 0.29 | (1.35 | ) | 0.62 | 1.44 | ||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||
| Weighted average common shares outstanding—basic | 26,500,356 | 26,890,577 | 26,821,471 | 26,682,227 | 26,515,029 | ||||||||||||||
| Weighted average common shares outstanding—diluted | 26,500,356 | 26,894,083 | 26,821,471 | 26,689,179 | 26,522,196 | ||||||||||||||
| Other financial data: | |||||||||||||||||||
| Net cash provided by operating activities | $ | 65,032 | $ | 53,803 | $ | 50,820 | $ | 80,679 | $ | 81,352 | |||||||||
| Net cash used for investing activities | (39,431 | ) | (52,124 | ) | (55,492 | ) | (81,160 | ) | (87,671 | ) | |||||||||
| Net cash provided by (used in) financing activities | (17,446 | ) | (20 | ) | 4,075 | (604 | ) | 6,513 | |||||||||||
| Total capital expenditures | (41,247 | ) | (57,850 | ) | (55,866 | ) | (82,365 | ) | (87,570 | ) | |||||||||
| Year Ended | |||||||||||||||||||
| (Dollars in thousands) | December 29, 2019 | December 30, 2018 | December 31, 2017 | January 1, 2017 | January 3, 2016 | ||||||||||||||
| Balance sheet data: | |||||||||||||||||||
| Total assets | $ | 568,641 | $ | 418,659 | $ | 423,313 | $ | 441,565 | $ | 415,645 | |||||||||
| Working capital | (24,337 | ) | (2,162 | ) | (18,796 | ) | (19,827 | ) | (15,067 | ) | |||||||||
| Long-term debt: | |||||||||||||||||||
| Revolving credit facility | 75,000 | 78,000 | 75,000 | 69,900 | 71,000 | ||||||||||||||
| Lease financing obligations | — | — | — | 1,664 | 1,663 | ||||||||||||||
| Finance and capital leases | 2,035 | 1,744 | 1,523 | 1,612 | 1,681 | ||||||||||||||
| Total long-term debt | $ | 77,035 | $ | 79,744 | $ | 76,523 | $ | 73,176 | $ | 74,344 | |||||||||
| Stockholders' equity | $ | 158,236 | $ | 240,059 | $ | 231,516 | $ | 264,175 | $ | 243,982 | |||||||||
| Operating statistics: | |||||||||||||||||||
| Consolidated: | |||||||||||||||||||
Restaurant-level Adjusted EBITDA(5) | $ | 108,946 | $ | 118,381 | $ | 117,462 | $ | 148,434 | $ | 151,185 | |||||||||
Restaurant-level Adjusted EBITDA margin(5) | 16.6 | % | 17.3 | % | 17.6 | % | 20.9 | % | 22.1 | % | |||||||||
Adjusted EBITDA(5) | 58,449 | 67,962 | 67,445 | 96,567 | 101,040 | ||||||||||||||
Adjusted EBITDA margin(5) | 8.8 | % | 9.9 | % | 10.1 | % | 13.6 | % | 14.7 | % | |||||||||
| Total company-owned restaurants (at end of period) | 306 | 301 | 312 | 343 | 317 | ||||||||||||||
| Pollo Tropical: | |||||||||||||||||||
| Company-owned restaurants (at end of period) | 142 | 139 | 146 | 177 | 155 | ||||||||||||||
| Average number of company-owned restaurants | 140.4 | 148.5 | 159.7 | 169.8 | 138.5 | ||||||||||||||
| Revenues: | |||||||||||||||||||
| Restaurant sales | $ | 361,693 | $ | 374,381 | $ | 372,328 | $ | 399,736 | $ | 364,544 | |||||||||
| Franchise royalty revenues and fees | 1,780 | 1,815 | 1,787 | 2,062 | 2,197 | ||||||||||||||
| Total revenues | 363,473 | 376,196 | 374,115 | 401,798 | 366,741 | ||||||||||||||
Average annual sales per company-owned restaurant(6) | 2,576 | 2,521 | 2,331 | 2,354 | 2,585 | ||||||||||||||
Restaurant-level Adjusted EBITDA(5) | 77,560 | 82,066 | 78,371 | 90,294 | 90,374 | ||||||||||||||
Restaurant-level Adjusted EBITDA margin(5) | 21.4 | % | 21.9 | % | 21.0 | % | 22.6 | % | 24.8 | % | |||||||||
Adjusted EBITDA(5) | 50,560 | 54,903 | 50,937 | 58,286 | 61,265 | ||||||||||||||
Adjusted EBITDA margin(5) | 13.9 | % | 14.6 | % | 13.6 | % | 14.5 | % | 16.7 | % | |||||||||
Change in comparable company-owned restaurant sales(7) | (1.8 | )% | 2.2 | % | (6.5 | )% | (1.6 | )% | 3.8 | % | |||||||||
| Year Ended | |||||||||||||||||||
| (Dollars in thousands) | December 29, 2019 | December 30, 2018 | December 31, 2017 | January 1, 2017 | January 3, 2016 | ||||||||||||||
| Taco Cabana: | |||||||||||||||||||
| Company-owned restaurants (at end of period) | 164 | 162 | 166 | 166 | 162 | ||||||||||||||
| Average number of company-owned restaurants | 163.7 | 168.8 | 167.2 | 163.3 | 163.9 | ||||||||||||||
| Revenues: | |||||||||||||||||||
| Restaurant sales | $ | 296,570 | $ | 311,544 | $ | 294,256 | $ | 309,220 | $ | 320,040 | |||||||||
| Franchise royalty revenues and fees | 900 | 857 | 761 | 752 | 611 | ||||||||||||||
| Total revenues | 297,470 | 312,401 | 295,017 | 309,972 | 320,651 | ||||||||||||||
Average annual sales per company-owned restaurant(6) | 1,812 | 1,846 | 1,760 | 1,894 | 1,920 | ||||||||||||||
Restaurant-level Adjusted EBITDA(5) | 31,386 | 36,315 | 39,091 | 58,140 | 60,811 | ||||||||||||||
Restaurant-level Adjusted EBITDA margin(5) | 10.6 | % | 11.7 | % | 13.3 | % | 18.8 | % | 19.0 | % | |||||||||
Adjusted EBITDA(5) | 7,889 | 13,059 | 16,508 | 38,281 | 39,775 | ||||||||||||||
Adjusted EBITDA margin(5) | 2.7 | % | 4.2 | % | 5.6 | % | 12.3 | % | 12.4 | % | |||||||||
Change in comparable company-owned restaurant sales(7) | (4.1 | )% | 4.5 | % | (7.3 | )% | (2.5 | )% | 4.4 | % | |||||||||
| Year Ended | |||||||||||||||||||
| (Dollars in thousands) | December 29, 2019 | December 30, 2018 | December 31, 2017 | January 1, 2017 | January 3, 2016 | ||||||||||||||
| Net income (loss) | $ | (84,386 | ) | $ | 7,787 | $ | (36,232 | ) | $ | 16,712 | $ | 38,536 | |||||||
| Provision for (benefit from) income taxes | 9,369 | (2,772 | ) | (7,755 | ) | 8,336 | 22,046 | ||||||||||||
| Income (loss) before taxes | (75,017 | ) | 5,015 | (43,987 | ) | 25,048 | 60,582 | ||||||||||||
| Add: | |||||||||||||||||||
| Non-general and administrative expense adjustments: | |||||||||||||||||||
| Depreciation and amortization | 39,195 | 37,604 | 34,957 | 36,776 | 30,575 | ||||||||||||||
| Impairment and other lease charges | 13,101 | 21,144 | 61,760 | 25,644 | 2,382 | ||||||||||||||
| Goodwill impairment | 67,909 | — | — | — | — | ||||||||||||||
| Interest expense | 3,872 | 3,966 | 2,877 | 2,171 | 1,889 | ||||||||||||||
| Closed restaurant rent expense, net of sublease income | 4,163 | — | — | — | — | ||||||||||||||
| Other expense (income), net | 1,041 | (3,007 | ) | 2,190 | 1,130 | (314 | ) | ||||||||||||
| Stock-based compensation expense in restaurant wages | 195 | 90 | 52 | 142 | 156 | ||||||||||||||
Unused pre-production costs in advertising expense(a) | — | — | 410 | — | — | ||||||||||||||
| Total non-general and administrative expense adjustments | 129,476 | 59,797 | 102,246 | 65,863 | 34,688 | ||||||||||||||
| General and administrative expense adjustments: | |||||||||||||||||||
| Stock-based compensation expense | 2,649 | 3,379 | 3,493 | 3,141 | 4,137 | ||||||||||||||
Terminated capital project(b) | — | — | 849 | — | — | ||||||||||||||
Board and shareholder matter costs(c) | — | (597 | ) | 3,049 | 1,580 | — | |||||||||||||
Restructuring costs and retention bonuses(d) | 964 | 545 | 2,420 | 86 | — | ||||||||||||||
Office restructuring and relocation costs(e) | — | — | (152 | ) | 539 | — | |||||||||||||
Legal settlements and related costs(f) | — | (177 | ) | (473 | ) | 310 | 1,633 | ||||||||||||
Digital and brand repositioning costs(g) | 377 | — | — | — | — | ||||||||||||||
| Total general and administrative expense adjustments | 3,990 | 3,150 | 9,186 | 5,656 | 5,770 | ||||||||||||||
| Consolidated Adjusted EBITDA | 58,449 | 67,962 | 67,445 | 96,567 | 101,040 | ||||||||||||||
| Add: | |||||||||||||||||||
| Pre-opening costs | 972 | 1,716 | 2,118 | 5,511 | 4,567 | ||||||||||||||
General and administrative(h) | 52,205 | 51,375 | 50,447 | 49,170 | 48,386 | ||||||||||||||
| Less: | |||||||||||||||||||
| Franchise royalty revenue and fees | 2,680 | 2,672 | 2,548 | 2,814 | 2,808 | ||||||||||||||
| Restaurant-level Adjusted EBITDA: | |||||||||||||||||||
| Pollo Tropical | $ | 77,560 | $ | 82,066 | $ | 78,371 | $ | 90,294 | $ | 90,374 | |||||||||
| Taco Cabana | 31,386 | 36,315 | 39,091 | 58,140 | 60,811 | ||||||||||||||
| Consolidated | 108,946 | 118,381 | 117,462 | 148,434 | 151,185 | ||||||||||||||
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of financial condition and results of operations ("MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes. Any reference to restaurants refers to company-owned restaurants unless otherwise indicated.
We use a 52–53 week52- or 53-week fiscal year ending on the Sunday closest to December 31. The fiscal years ended January 2, 2022 and December 29, 2019; December 30, 2018; and December 31, 2017,2019 each contained 52 weeks. The fiscal year ended January 3, 2021 contained 53 weeks. The next fiscal year to contain 53 weeks will be the fiscal year ending January 3, 2027.
Company Overview
We own, operate and franchise twothe restaurant brands,brand Pollo Tropical® and Taco Cabana®, which recently celebratedhas over 30th and 40th anniversaries, respectively, years of operating history and a loyal customer bases.base. Our Pollo Tropical restaurants feature fire-grilled and crispy citrus marinated chicken and other freshly prepared tropical-inspired menu items, while our Taco Cabana restaurants specialize in Mexican-inspired food made fresh by hand.items. We believe that both brands offerthe brand offers a distinct and unique flavorsflavor with broad appeal at a compelling value, which differentiates themit in the competitive fast-casual and quick-service restaurant segments. Nearly allAll but one of our restaurants offer the convenience of drive-thru windows. As of December 29, 2019, our restaurants included 142January 2, 2022, we had 138 Company-owned Pollo Tropical restaurants, all of which are located in Florida and 164 Taco Cabana restaurants in Texas for a total of 306 restaurants.Florida.
We franchise our Pollo Tropical restaurants primarily in international markets, and as of December 29, 2019,January 2, 2022, we had 2524 franchised Pollo Tropical restaurants located in Puerto Rico, Panama, Guyana, Ecuador, and the Bahamas and sixthe U.S Virgin Islands, five on college campuses in Florida and onelocations at a hospital and a sports and entertainment stadium in Florida. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets.
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On December 31, 2018,July 1, 2021, we adopted Financial Accounting Standard Board ("FASB") Accounting Standard Update ("ASU") 2016-02, Leases (Topic 842) ("ASC 842")entered into a stock purchase agreement for the sale of all outstanding capital stock of Taco Cabana, Inc., which requires lessee recognitionthe parent company of lease assetsthe Taco Cabana business, for a cash purchase price of $85.0 million, subject to reduction for (i) closing adjustments of approximately $4.6 million related to maintenance and lease liabilities onrepair work at the balance sheetTaco Cabana restaurants and disclosure of key information about leasing arrangements. The new lease accounting standard, ASC 842, had a significant impact on our results of operations because we had $18.6 million in sale leaseback gains that we no longer receive a benefit to rent expense from and we have a significant number of closed restaurants for which we had previous closed restaurant rent reserves and would not have recognized current period expense under the previous accounting standard.
right to receive the insurance claim proceeds. We recognized closed restaurant rent expense,$0.9 million of insurance proceeds within income (loss) from discontinued operations, net of sublease income, for the twelve months ended December 29, 2019, of approximately $3.3 million and $0.9 million for Pollo Tropical and Taco Cabana, respectively. However, we did not recognize lease charges for subsequent changes in assumptions related to the timing of future sublease income.
Proceeds from the sale were initially impaired in 2017,used to fully repay Fiesta's approximately $74.6 million of outstanding term loan borrowings under our new senior credit facility and adjustments to estimatespay divestiture transaction fees and a loan prepayment premium totaling approximately $4.2 million, comprised of future leasea loan prepayment fee of 3.0% of the principal repaid of $2.2 million and divestiture transaction fees of approximately $2.0 million.
All revenues, costs forand expenses and income taxes attributable to Taco Cabana, together with the gain on the sale of Taco Cabana and certain previously closed restaurants, and (ii) impairment charges of $1.9 millioncosts related to seven underperforming Pollo Tropicalthe transaction, have been aggregated within income (loss) from discontinued operations, net of tax, in the consolidated statements of operations for all periods presented. No amounts for shared general and Taco Cabana restaurants that we continuedadministrative operating support expense were allocated to operate.
COVID-19 Pandemic
The novel coronavirus (COVID-19) pandemic has affected and six Taco Cabanais continuing to affect the restaurant industry and the economy. In response to COVID-19 and in compliance with governmental restrictions, we closed the dining room seating areas in all restaurants, limiting service to take-out, drive-thru, and delivery operations beginning in mid-March 2020. We re-opened certain dining rooms with limited capacity and hours during certain times in the second half of 2020. In 2021, we re-opened substantially all remaining dining rooms with limited hours by the end of February.
Based on current conditions, we do not expect sales trends to significantly deteriorate further as a direct result of COVID-19. However, labor shortages may negatively impact sales trends and there can be no assurance that were closed in 2017, an office location that was closed in 2017, and two Pollo Tropical restaurants and five Taco Cabana restaurants that we continued to operate.
Labor Challenges
Hours of operations were limited in 2021 due to labor shortages which are affecting our brand and the restaurant industry. We estimate that operating hours were reduced by approximately 2.8% as a result of labor shortages in the second half of 2021. Additionally, in 2021 we experienced increased overtime due to training and staffing shortages. In response to these labor shortages and competition for labor, we implemented special incentive pay for our hourly restaurant employees from May 2021 through August 2021, provided sign-on and referral bonuses, and made permanent increases to hourly wage rates in late August 2021. We implemented a phased approach to price increases aimed at mitigating these additional labor costs with a 3.7% increase in late August 2021 and a 5.2% increase in mid-December 2021. As a result of this phased approach to price increases, Restaurant-level Adjusted EBITDA margin improvement, which is trailing the wage rate increases, is expected to result in improved Restaurant-level Adjusted EBITDA margins in future quarters compared to 2021. In addition, we believe that approximately $1.7 million of the labor cost increases in the second half of 2021 for overtime and staffing-related incentives are short term in nature. We have intensified our focus on all available positiveaccelerating labor optimization efforts to improve staffing efficiency, which we believe will increase both staff availability and negative evidence. In 2019, we established a valuation allowance against our deferred tax assets, which resulted in a $13.5 million charge to the provision for income taxes.margins.
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Executive Summary—Consolidated Operating Performance for the Year Ended December 29, 2019January 2, 2022
Our fiscal year 20192021 results include the following:
•We recognized net income of $10.4 million, or $0.40 per diluted share, in 2021 compared to a net loss of $(84.4) million in 2019, or $(3.18) per diluted share, compared to net income of $7.8$(10.2) million, or $0.29$(0.40) per diluted share in 2018,2020, due primarily to the impact of income from discontinued operations of $18.5 million in 2021 compared to a $67.9loss from discontinued operations of $(6.8) million goodwill impairment charge forin 2020 due primarily to the gain on the sale of Taco Cabana reporting unit, a $13.5 million valuation allowance on our deferred income tax assets, the adoption of ASC 842 discussed above, and higher depreciation and amortization andin 2021. Higher Pollo Tropical labor costs, advertising costs, general and administrative expenses, repair and maintenance costs and delivery fees in 2021 were partially offset by lower costincreased comparable restaurant sales at Pollo Tropical. The impact of sales, restaurant wagesincome from discontinued operations was also partially offset by an increase in unallocated general and related expensesadministrative costs and restaurant impairment and other lease charges in 2019. In addition, the impact of declinesthe extra week in 2020.
•We recognized a loss from continuing operations of $(8.1) million, or $(0.31) per diluted share, in 2021 compared to a loss from continuing operations of $(3.4) million, or $(0.13) per diluted share, in 2020 primarily as a result of the foregoing.
•Total revenues increased 13.3% in 2021 to $357.3 million from $315.4 million in 2020, driven primarily by an increase in comparable restaurant sales at both brands, includingPollo Tropical due in part to lapping the impact of Hurricane Dorian at Pollo Tropical, contributed to the decreaseCOVID-19 pandemic in net income in 2019 while net income in 2018 included the benefit of $3.5 million in insurance recoveries related to 2017 Hurricanes Harvey and Irma ("the Hurricanes"), total gains of $1.2 million on the sale of three restaurants and a $4.0 million incremental tax benefit which was primarily the result of changing the depreciation method for certain assets for federal income tax purposes in 2018.
•Continuing Operations Consolidated Adjusted EBITDA decreased $9.5$1.0 million (which includes the negative impact of a $3.3 million increase in rent expense as a result of adopting ASC 842) for the twelve monthsyear ended December 29, 2019,January 2, 2022 to $58.4$25.0 million compared to $68.0$26.0 million for the twelve monthsyear ended December 30, 2018,January 3, 2021, driven primarily by lower restaurant sales, including the impact of Hurricane Dorian, higher rent expense as a result of adopting ASC 842, higher delivery fees, and higherlabor costs, advertising costs, general and administrative expenses, (including executive searchrepair and maintenance costs and delivery fees, as well as the impact of $0.5 million),the extra week in 2020, partially offset by improvedhigher restaurant operating margins related to lower cost of sales and restaurant wages. We estimate that Hurricane Dorian, which resulted in temporary restaurant closures, negatively affected Pollo Tropical and Consolidated Adjusted EBITDA by approximately $0.6 million.sales. Continuing Operations Consolidated Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Continuing Operations Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Continuing Operations Consolidated Adjusted EBITDA, see "Management's Use of Non-GAAP Financial Measures."
Results of Operations
Unless otherwise noted, this discussion of operating results relates to our continuing operations.
The following table summarizes the changes in the number and mix of Pollo Tropical and Taco Cabana Company-owned and franchised restaurants in each fiscal year:
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Owned | Franchised | Total | Owned | Franchised | Total | Owned | Franchised | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Pollo Tropical: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning of year | 138 | 29 | 167 | 142 | 32 | 174 | 139 | 30 | 169 | ||||||||||||||||||||||||||||||||||||||||||||
| New | — | 2 | 2 | — | 2 | 2 | 3 | 2 | 5 | ||||||||||||||||||||||||||||||||||||||||||||
| Closed | — | — | — | (4) | (5) | (9) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| End of year | 138 | 31 | 169 | 138 | 29 | 167 | 142 | 32 | 174 | ||||||||||||||||||||||||||||||||||||||||||||
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| 2019 | 2018 | 2017 | ||||||||||||||||||||||||
| Owned | Franchised | Total | Owned | Franchised | Total | Owned | Franchised | Total | ||||||||||||||||||
| Pollo Tropical: | ||||||||||||||||||||||||||
| Beginning of year | 139 | 30 | 169 | 146 | 31 | 177 | 177 | 35 | 212 | |||||||||||||||||
| New | 3 | 2 | 5 | 7 | — | 7 | 9 | 3 | 12 | |||||||||||||||||
| Closed | — | — | — | (14 | ) | (1 | ) | (15 | ) | (40 | ) | (7 | ) | (47 | ) | |||||||||||
| End of year | 142 | 32 | 174 | 139 | 30 | 169 | 146 | 31 | 177 | |||||||||||||||||
| Taco Cabana: | ||||||||||||||||||||||||||
| Beginning of year | 162 | 8 | 170 | 166 | 7 | 173 | 166 | 7 | 173 | |||||||||||||||||
| New | 3 | — | 3 | 7 | 1 | 8 | 6 | — | 6 | |||||||||||||||||
| Closed | (1 | ) | — | (1 | ) | (11 | ) | — | (11 | ) | (6 | ) | — | (6 | ) | |||||||||||
| End of year | 164 | 8 | 172 | 162 | 8 | 170 | 166 | 7 | 173 | |||||||||||||||||
The following table sets forth, for the years ended January 2, 2022, January 3, 2021 and December 29, 2019; December 30, 2018; and December 31, 2017,2019, selected consolidated operating results as a percentage of consolidated restaurant sales and selected segment operating results as a percentage of applicable segment restaurant sales:
| Year Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended | January 2, 2022 | January 3, 2021 | December 29, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | December 29, 2019 | December 30, 2018 | December 31, 2017 | December 29, 2019 | December 30, 2018 | December 31, 2017 | Pollo Tropical | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pollo Tropical | Taco Cabana | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restaurant sales: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pollo Tropical | 54.95 | % | 54.58 | % | 55.86 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taco Cabana | 45.05 | % | 45.42 | % | 44.14 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated restaurant sales | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Costs and expenses: | Costs and expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 31.8 | % | 32.9 | % | 31.6 | % | 31.1 | % | 30.8 | % | 29.0 | % | 31.5 | % | 31.9 | % | 30.4 | % | Cost of sales | 30.5 | % | 31.9 | % | 31.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restaurant wages and related expenses | 23.5 | % | 23.2 | % | 23.8 | % | 31.8 | % | 32.5 | % | 32.7 | % | 27.2 | % | 27.4 | % | 27.7 | % | Restaurant wages and related expenses | 25.8 | % | 23.7 | % | 23.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restaurant rent expense | 6.1 | % | 4.7 | % | 5.1 | % | 8.7 | % | 6.0 | % | 6.1 | % | 7.3 | % | 5.3 | % | 5.5 | % | Restaurant rent expense | 6.6 | % | 7.2 | % | 6.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other restaurant operating expenses | 13.8 | % | 13.8 | % | 14.2 | % | 14.2 | % | 15.8 | % | 15.7 | % | 14.0 | % | 14.7 | % | 14.8 | % | Other restaurant operating expenses | 16.1 | % | 15.1 | % | 13.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Advertising expense | 3.4 | % | 3.5 | % | 4.4 | % | 3.6 | % | 3.4 | % | 3.3 | % | 3.5 | % | 3.5 | % | 3.9 | % | Advertising expense | 3.2 | % | 2.7 | % | 3.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-opening costs | 0.1 | % | 0.2 | % | 0.3 | % | 0.2 | % | 0.3 | % | 0.3 | % | 0.1 | % | 0.3 | % | 0.3 | % | Pre-opening costs | — | % | — | % | 0.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total revenues decreased 4.0%increased 13.3% to $660.9$357.3 million in 20192021 from $688.6$315.4 million in 2018,2020, while the 20182020 total revenues represent an increasea decrease of 2.9%13.2% from $669.1$363.5 million in 2017.2019. Restaurant sales also decreased 4.0%increased 13.2% to $658.3$355.5 million in 20192021 from $685.9$314.1 million in 2018,2020, while 20182020 restaurant sales represent an increasea decrease of 2.9%13.2% from $666.6$361.7 million in 2017.2019.
The following table presents the primary drivers of the increase or decrease in restaurant sales for both Pollo Tropical and Taco Cabana (in millions):
| 2021 vs. 2020 | 2020 vs. 2019 | ||||||||||
| Pollo Tropical: | |||||||||||
| Increase (decrease) in comparable restaurant sales | $ | 48.7 | $ | (51.7) | |||||||
| Decrease in sales related to closed restaurants, net of new restaurants and other | (1.5) | (1.7) | |||||||||
| Additional week in 2020 | (5.8) | 5.8 | |||||||||
| Total increase (decrease) | $ | 41.4 | $ | (47.6) | |||||||
| 2019 vs. 2018 | 2018 vs. 2017 | ||||||
| Pollo Tropical: | |||||||
| Increase (decrease) in comparable restaurant sales | $ | (6.3 | ) | $ | 7.6 | ||
| Decrease in sales related to closed restaurants, net of new restaurants | (6.4 | ) | (5.5 | ) | |||
| Total increase (decrease) | $ | (12.7 | ) | $ | 2.1 | ||
| Taco Cabana: | |||||||
| Increase (decrease) in comparable restaurant sales | $ | (12.0 | ) | $ | 12.7 | ||
| Increase (decrease) in sales related to closed restaurants, net of new restaurants | (3.0 | ) | 4.6 | ||||
| Total increase (decrease) | $ | (15.0 | ) | $ | 17.3 | ||
Restaurants are included in comparable restaurant sales after they have been open for 18 months. Restaurants are excluded from comparable restaurant sales for any fiscal month in which the restaurant was closed for more than five days. Comparable restaurant sales are compared to the same period in the prior year.For comparative purposes, the calculation of the changes in comparable restaurant sales is based on a 52-week fiscal year. Restaurant sales for the extra week in the fiscal year ended January 3, 2021 have been excluded for purposes of calculating the change in comparable company-owned restaurant sales. Comparable restaurant sales in 2017 for both brands2020 were negatively impacted by governmental restrictions, closed dining rooms, reductions in operating hours and reduced staffing as a result of COVID-19.We believe our significant mix of dine-in sales prior to the Hurricanes.pandemic had a negative impact on comparable restaurant sales.
Comparable restaurant sales decreased 1.8% and 4.1%increased 16.0% for Pollo Tropical and Taco Cabana restaurants respectively, in 2019.2021. Increases or decreases in comparable restaurant sales result primarily from an increase or decrease in comparable restaurant transactions and in average check. Changes in average check are primarily driven by changes in sales channel and sales mix, and to a lesser extent, menu price increases net of discounts and promotionspromotions.
An increase in the net impact of product/channel mix and pricing of 11.8% was coupled with an increase in comparable restaurant transactions of 4.2% in 2021 compared to 2020. The increase in product/channel mix and pricing was driven primarily by increases in delivery and drive-thru average check and sales mix.channel penetration, and menu price increases of 4.6%. Comparable restaurant sales in 2021 decreased 1.1% compared to 2019. We believe restaurant sales were negatively impacted by staffing challenges and reduced operating hours and sales channels due to labor shortages in 2021. Comparable restaurant sales in adequately staffed markets increased 18.7% in 2021 compared to 2020. Hurricane Dorian negatively impacted comparable restaurant sales in 2019.
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Franchise revenues remained flatincreased $0.5 million to $1.8 million in 20192021 compared to 2018. Franchise revenues increased by $0.1 million to $2.7 million in 2018 compared to 20172020 due to higher sales at franchised restaurants in 2018.2021 primarily as a result of the impact of COVID-19 in 2020. Franchise revenues decreased $0.5 million to $1.2 million in 2020 compared to 2019 due to lower sales at franchised restaurants as a result of the impact of COVID-19 in 2020.
Operating costs and expenses. Operating costs and expenses include cost of sales, restaurant wages and related expenses, other restaurant expenses and advertising expenses. Cost of sales consists of food, paper and beverage costs including packaging costs, less rebates and purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities, including chicken, and beef, are generally purchased under contracts for future periods of up to one year. While we have not experienced significant disruptions in our supply chain or food costs during 2021, costs for certain commodities are expected to increase in 2022.
Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related taxes and benefits are subject to inflation, including from factors such as labor supply and changing market conditions, as well as minimum wage increases and increasedchanges in costs for health insurance, workers' compensation insurance and state unemployment insurance.
Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are utilities, repairs and maintenance, general liability insurance, sanitation, supplies and credit card and delivery fees. In addition, for periods prior to December 31, 2018, other restaurant operating expenses include real estate taxes related to our leases characterized as operating leases.
Advertising expense includes all promotional expenses including television, radio, billboards and other sponsorships and promotional activities and agency fees.
Pre-opening costs include costs incurred prior to opening a restaurant, including restaurant employee wages and related expenses, travel expenditures, recruiting, training, promotional costs associated with the restaurant opening and rent, including any non-cash rent expense recognized during the construction period. Pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening.
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The following tables presenttable presents the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical and Taco Cabana.Tropical. All percentages are stated as a percentage of applicable segment restaurant sales.
| 2021 vs. 2020 | 2020 vs. 2019 | ||||||||||
| Pollo Tropical: | |||||||||||
| Cost of sales: | |||||||||||
| Menu price increases | (0.9) | % | (0.2) | % | |||||||
| Lower promotions and discounts | (0.5) | % | (0.2) | % | |||||||
| Sales mix | (0.3) | % | 0.8 | % | |||||||
| Higher commodity costs | 0.4 | % | 0.1 | % | |||||||
| Operating inefficiencies (efficiencies) | 0.1 | % | (1.0) | % | |||||||
| Lower rebates and discounts from suppliers | — | % | 0.3 | % | |||||||
Other(1) | (0.2) | % | 0.3 | % | |||||||
| Net increase (decrease) in cost of sales as a percentage of restaurant sales | (1.4) | % | 0.1 | % | |||||||
| Restaurant wages and related expenses: | |||||||||||
Higher (lower) labor costs due to higher wage rates and overtime partially offset by the impact of labor efficiencies(2) | 1.3 | % | (0.3) | % | |||||||
Higher labor costs including special incentive pay and sign-on bonuses(3) | 0.4 | % | 0.5 | % | |||||||
Higher incentive bonus(4) | 0.3 | % | — | % | |||||||
| Higher payroll taxes and workers' compensation costs | 0.3 | % | — | % | |||||||
| Lower medical benefits costs | (0.3) | % | — | % | |||||||
Other(1) | 0.1 | % | — | % | |||||||
| Net increase in restaurant wages and related expenses as a percentage of restaurant sales | 2.1 | % | 0.2 | % | |||||||
| Other operating expenses: | |||||||||||
| Higher delivery fee expense due to higher delivery channel sales | 0.7 | % | 1.5 | % | |||||||
| Higher (lower) repairs and maintenance costs | 0.6 | % | (0.3) | % | |||||||
| Impact of higher restaurant sales on utilities costs | (0.3) | % | — | % | |||||||
Other(1) | — | % | 0.1 | % | |||||||
| Net increase in other restaurant operating expenses as a percentage of restaurant sales | 1.0 | % | 1.3 | % | |||||||
| Advertising expense: | |||||||||||
| Increased (reduced) advertising | 0.5 | % | (0.7) | % | |||||||
| Net increase (decrease) in advertising expense as a percentage of restaurant sales | 0.5 | % | (0.7) | % | |||||||
| Pre-opening costs: | |||||||||||
| Decrease in number of restaurant openings | — | % | (0.1) | % | |||||||
| Net change in pre-opening costs as a percentage of restaurant sales | — | % | (0.1) | % | |||||||
(1) Other consists of any other driver with an impact of less than 20 basis points.
(2) Higher wage rates and overtime pay due in part to labor shortages in 2021. Lower labor costs in 2020 compared to 2019 resulted from labor efficiencies in 2020.
(3) Change in 2020 compared to 2019 primarily includes the impact of COVID-19 related special incentive pay and quarantine pay, which is partially offset (0.1%) by lower incentive bonus resulting from the special incentive pay.
(4) Primarily due to guaranteed bonus payments due to staffing challenges. Guaranteed bonus payments, which were lower in 2020, are included in other labor costs in 2020.
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| 2019 vs. 2018 | 2018 vs. 2017 | ||||
| Pollo Tropical: | |||||
Cost of sales(1): | |||||
| Menu offering improvement and impact of commodity costs | (1.5 | )% | 1.2 | % | |
| Operating (efficiencies) inefficiencies | (0.6 | )% | 0.3 | % | |
| Menu price increases | (0.5 | )% | (1.4 | )% | |
| Sales mix | 1.1 | % | 1.1 | % | |
| Higher promotions and discounts | 0.4 | % | — | % | |
| Other | — | % | 0.1 | % | |
| Net (decrease) increase in cost of sales as a percentage of restaurant sales | (1.1 | )% | 1.3 | % | |
| Restaurant wages and related expenses: | |||||
Higher labor costs for comparable restaurants(1)(2) | 0.7 | % | 0.3 | % | |
Lower labor costs due to restaurant closures, net of new restaurants(3) | (0.5 | )% | (0.8 | )% | |
| Other | 0.1 | % | (0.1 | )% | |
| Net increase (decrease) in restaurant wages and related expenses as a percentage of restaurant sales | 0.3 | % | (0.6 | )% | |
| Other operating expenses: | |||||
Real estate tax classification(4) | (1.0 | )% | — | % | |
| Contracted cleaning services | 0.5 | % | — | % | |
| Higher delivery fees | 0.4 | % | — | % | |
| Hurricane preparation and repair cost recovery | — | % | (0.2 | )% | |
Lower real estate taxes(3) | — | % | (0.1 | )% | |
| Other | 0.1 | % | (0.1 | )% | |
| Net change (decrease) in other restaurant operating expenses as a percentage of restaurant sales | — | % | (0.4 | )% | |
| Advertising expense: | |||||
Decreased advertising(5) | (0.1 | )% | (0.9 | )% | |
| Net decrease in advertising expense as a percentage of restaurant sales | (0.1 | )% | (0.9 | )% | |
| Pre-opening costs: | |||||
| Decrease in number of restaurant openings | (0.1 | )% | (0.1 | )% | |
| Net decrease in pre-opening costs as a percentage of restaurant sales | (0.1 | )% | (0.1 | )% | |
| 2019 vs. 2018 | 2018 vs. 2017 | ||||
| Taco Cabana: | |||||
Cost of sales(1): | |||||
| Menu offering improvement and higher commodity costs | 1.0 | % | 2.5 | % | |
| Higher (lower) promotions and discounts | 0.5 | % | (0.2 | )% | |
| Menu price increases | (0.6 | )% | (2.2 | )% | |
| Sales mix | (0.5 | )% | 0.8 | % | |
| Operating inefficiencies | — | % | 0.6 | % | |
| Lower rebates and discounts | — | % | 0.2 | % | |
| Other | (0.1 | )% | 0.1 | % | |
| Net increase in cost of sales as a percentage of restaurant sales | 0.3 | % | 1.8 | % | |
| Restaurant wages and related expenses: | |||||
| (Lower) higher incentive bonus costs | (0.4 | )% | 0.3 | % | |
Lower labor costs(2) | (0.2 | )% | — | % | |
Impact of higher sales at comparable restaurants(3) | — | % | (0.5 | )% | |
| Higher medical benefit costs | — | % | 0.1 | % | |
| Other | (0.1 | )% | (0.1 | )% | |
| Net decrease in restaurant wages and related expenses as a percentage of restaurant sales | (0.7 | )% | (0.2 | )% | |
| Other operating expenses: | |||||
Real estate tax classification(4) | (1.7 | )% | — | % | |
| Lower security costs | (0.2 | )% | — | % | |
| Lower utility costs | (0.1 | )% | (0.2 | )% | |
| Higher repairs and maintenance | 0.3 | % | — | % | |
| Higher delivery fees | 0.2 | % | — | % | |
| Lower insurance costs | — | % | (0.1 | )% | |
| Higher real estate taxes | — | % | 0.1 | % | |
Higher operating supplies(1) | — | % | 0.2 | % | |
| Other | (0.1 | )% | 0.1 | % | |
| Net (decrease) increase in other restaurant operating expenses as a percentage of restaurant sales | (1.6 | )% | 0.1 | % | |
| Advertising expense: | |||||
| Increased advertising | 0.2 | % | 0.1 | % | |
| Net increase in advertising expense as a percentage of restaurant sales | 0.2 | % | 0.1 | % | |
| Pre-opening costs: | |||||
| Decrease in number of restaurant openings | (0.1 | )% | — | % | |
| Net change in pre-opening costs as a percentage of restaurant sales | (0.1 | )% | — | % | |
General and administrative expenses increased to $56.2$45.5 million in 20192021 from $54.5$39.8 million in 2018,2020, and as a percentage of total revenues, were 8.5%12.7% in 2021 and 12.6% in 2020 due primarily to higher digital and brand repositioning costs, higher continuing mobile app development and maintenance costs and higher incentive and other support center costs including additional costs related to the sale of Taco Cabana, partially offset by higher total revenues. General and administrative expenses include corporate overhead costs allocated to Taco Cabana that are not included in discontinued operations. General and administrative expenses in 2021 also included $3.3 million related to digital and brand repositioning costs. General and administrative expense in 2020 included $0.7 million related to severance costs associated with positions eliminated in response to the COVID-19 pandemic, $0.4 million related to digital and brand repositioning costs, and $0.1 million related to search fees for senior executive positions.
General and administrative expenses decreased to $39.8 million in 2020 from $41.9 million in 2019, and 7.9%as a percentage of total revenues, were 12.6% in 20182020 and 11.5% in 2019 due primarily to the impact of lower total revenues on higher generalpartially offset by lower management support costs primarily as a result of headcount reductions in the second quarter of 2020, reduced travel and administrative expenses including investments in off-premise support in 2019.other cost savings initiatives. General and administrative expense in 2019 also included $1.0$0.9 million related to restructuring costs due to eliminated or relocated positions, $0.4$0.2 million related to digital and brand repositioning costs and $0.5 million related to search fees for senior executive positions. General and administrative expenses in 2018 included $0.5 million related to Plan restructuring costs and retention bonuses, $0.4 million related to discontinuing certain services, $1.0 million related to system implementation and project-oriented advisory services and $1.0 million related to severance costs and executive and board member searches, partially offset by the benefit of fee reductions and final insurance recoveries totaling $0.6 million related to 2017 shareholder activism matters and reductions to final settlement amounts related to a litigation matter of $0.2 million.
Adjusted EBITDA. Adjusted EBITDA which is the primary measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance and is defined as earnings attributable to the applicable segment before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, and other expense (income), net, and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants.
Adjusted EBITDA may not necessarily be comparable to other similarly titled captions of other companies due to differences in methods of calculationcalculation. Adjusted EBITDA for each of our segments includes an allocation of certain general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, development, and other administrative functions. Consolidated Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Adjusted EBITDA and Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see the heading entitledtitled "Management's Use of Non-GAAP Financial Measures."
Adjusted EBITDA for Pollo Tropical restaurants increased to $36.8 million, or 10.3% of total revenues, in 2021 from $36.5 million, or 11.6% of total revenues, in 2020 due primarily to the impact of higher restaurant sales and improved cost of sales margins, partially offset by higher labor costs, delivery fees, repair and maintenance costs, advertising and general and administrative costs, and the impact of the extra week in 2020. Continuing Operations Consolidated Adjusted EBITDA,a non-GAAP financial measure, decreased to $25.0 million in 2021 from $26.0 million in 2020. For a reconciliation from net income (loss) to Continuing Operations Consolidated Adjusted EBITDA, see the heading titled "Management's Use of Non-GAAP Financial Measures."
Adjusted EBITDA for Pollo Tropical restaurants decreased to $36.5 million, or 11.6% of total revenues, in 2020 from $50.6 million (which includes the negative impact of a $1.5 million increase in rent expense as a result of adopting ASC 842 and the estimated negative impact of Hurricane Dorian of $0.6 million), or 13.9% of total revenues, in 2019 from $54.9 million in 2018 due primarily to the impact of lower restaurant sales, including the impact of Hurricane Dorian,COVID-19, higher delivery fee expense, and higher rent expense, contracted cleaning services, delivery fees and general and administrative expenses,additional costs related to the COVID-19 pandemic, partially offset by lower cost of sales as a percentage of restaurant sales. Adjusted EBITDA for our Taco Cabana restaurants decreased to $7.9 million (which includes the negative impact of a $1.9 million increase in rentadvertising expense, as a result of adopting ASC 842) in 2019 from $13.1 million in 2018 due primarily to the impact of lower restaurant sales and higher rent expense, cost of saleslabor costs as a percentage of restaurant sales delivery fees,due to labor efficiencies, certain other operating expenses, and general and administrative expenses, partially offset by lower restaurant wages and related expenses asexpenses. In addition, we estimate the additional week of sales in our fiscal 2020 had a percentage of restaurant sales.
$1.7 million favorable impact on Adjusted EBITDA for Pollo Tropical restaurants increased to $54.9 million in 2018 from $50.9 million in 2017 due primarily to the impact2020.
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Restaurant-level Adjusted EBITDA. We also use Restaurant-level Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs and general and administrative expenses (including corporate-level general and administrative expenses).
Restaurant-level Adjusted EBITDA for Pollo Tropical was $63.1 million (17.7% of restaurant sales), $61.3 million (19.5% of restaurant sales) and $77.6 million (which includes the negative impact of a $1.5 million increase in rent expense as a result of adopting ASC 842 and the estimated negative impact of Hurricane Dorian of $0.6 million), $82.1 million, (21.4% of restaurant sales) in 2021, 2020 and $78.4 million in 2019, 2018, and 2017, respectively. Restaurant-level Adjusted EBITDA for Taco Cabana was $31.4 million (which includes the negative impact of a $1.9 million increase in rent expense as a result of adopting ASC 842), $36.3 million, and $39.1 million in 2019, 2018, and 2017, respectively. The changes in Restaurant-level Adjusted EBITDA were primarily due to the foregoing. In addition, we estimate the additional week of sales in our fiscal 2020 had a $2.0 million favorable impact on Restaurant-level Adjusted EBITDA for Pollo Tropical in 2020 compared to 2019 and an unfavorable impact in 2021 compared to 2020. For a reconciliation from Adjusted EBITDA to Restaurant-level Adjusted EBITDA, see the heading entitledtitled "Management's Use of Non-GAAP Financial Measures."
Depreciation and Amortization. Depreciation and amortization expense increaseddecreased to $39.2$20.6 million in 20192021 from $37.6$22.0 million in 20182020 due primarily to decreased depreciation as a result of increasedentering into sale-leaseback transactions for several owned restaurant locations and impairing closed restaurant assets, partially offset by an increase in depreciation related to ongoing reinvestment and enhancements to our restaurants. Depreciation and amortization expense decreased to $22.0 million in 2020 from $22.2 million in 2019 due primarily to decreased depreciation as a result of impairing closed restaurant assets, partially offset by an increase in depreciation related to new restaurant openings and ongoing reinvestment and enhancements to our restaurants, partially offset by a decrease in depreciation as a result of impairing closed restaurant assets. Depreciation and amortization expense increased to $37.6 million in 2018 from $35.0 million in 2017 primarily as a result of increased depreciation related to new restaurant openings and ongoing reinvestment and enhancements to our restaurants, partially offset by a decrease in depreciation as a result of impairing closed restaurant assets.restaurants.
Impairment and Other Lease Charges. Impairment and other lease charges decreased to $13.1$1.5 million in 20192021 from $21.1$8.0 million in 2018. 2020.
Impairment and other lease charges in 2021 include impairment charges of $2.1 million related primarily to the impairment of assets from five underperforming Pollo Tropical restaurants and impairment of equipment from previously closed restaurants, partially offset by net gains from lease terminations of $(0.6) million.
Impairment and other lease charges increased to $8.0 million in 2020 from less than $0.1 million in 2019. Impairment and other lease charges in 2020 include impairment charges of $7.3 million related primarily to the impairment of assets from three underperforming Pollo Tropical restaurants, two of which we closed in the third quarter of 2020, the write-down of saucing islands and self-service soda machines that are being removed from dining rooms as a result of COVID-19 and the write-down of assets held for sale to their fair value less costs to sell, and lease termination charges of $0.9 million for restaurant locations we decided not to develop, net of a gain from lease terminations of $(0.2) million.
Impairment and other lease charges in 2019 consisted of impairment charges for Pollo Tropical and Taco Cabana restaurants of $0.8 million and $13.2 million, respectively, and net lease charge recoveries for Pollo Tropical and Taco Cabana restaurants of $(0.8) million and $(0.1) million, respectively.million. Impairment charges in 2019 also included right-of-use assets and were related primarily to 19 Taco Cabana restaurants that were subsequently closed in January 2020, five of which were initially impaired in prior years, as well as previously closed Pollo Tropical restaurants, and other underperforming Taco Cabana restaurants that we continue to operate, while the net lease charge recoveries were related primarily to lease terminations for previously closed restaurants.
Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related trailing twelve-month cash flows are below a certain threshold. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets, exclusive of operating lease
payments, to their respective carrying values, excluding operating lease liabilities. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset group's carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, and for right-of-use lease assets, current market lease rent and discount rates, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material. Due to the uncertainty associated with the unprecedented nature of the COVID-19 pandemic and the impact it will continue to have on restaurant operations and future cash flows, it is reasonably possible that the estimates of future cash flows used in impairment assessments will change in the near term and the effect of the change could be material.
For oneseven Pollo Tropical restaurant and four Taco Cabana restaurants with combined carrying values (excluding right-of-use lease assets) of $2.2$4.9 million, and $0.9 million, respectively, projected cash flows are not substantially in excess of their carrying values. In addition, two Pollo Tropical restaurants and one Taco Cabana restaurant with combined carrying values (excluding right-of-use lease assets) of $3.4 million and $1.0 million, respectively, have initial sales volumes lower than expected, but do not have significant operating history to form a good basis for future projections. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material.
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Closed Restaurant Rent Expense, Net of Sublease Income. Closed restaurant rent expense, net of sublease income was $4.2$3.0 million in 2021 and consisted of closed restaurant rent and ancillary lease costs of $9.1 million net of sublease income of $(6.1) million.
Closed restaurant rent expense, net of sublease income was $4.3 million in 2020 and consisted of closed restaurant rent and ancillary lease costs of $9.2 million net of sublease income of $(4.9) million.
Closed restaurant rent expense, net of sublease income was $3.3 million in 2019 and consisted of closed restaurant rent and ancillary lease costs of $6.8 million and $1.4 million net of sublease income of $3.4 million and $0.5 million for Pollo Tropical and Taco Cabana, respectively. Prior to the adoption of ASC 842, we recorded closed restaurant reserves representing future minimum lease payments and ancillary costs from the date of the restaurant closure to the end of the remaining lease term net of estimated sublease recoveries when a restaurant closed and recorded subsequent changes in the assumptions related to the sublease income to expense in the period in which the assumptions changed. The subsequent rent payments were recorded as a reduction to the closed restaurant reserves, with no rent expense being recorded in the period. See "New Lease Accounting Standard" under "Events Affecting Our Results of Operations."$(3.4) million.
Other Expense (Income)(Income), Net. Other expense (income), net was $1.0$0.5 million in 20192021 and primarily consisted of $0.8costs for the removal, transfer and storage of equipment from closed restaurants. Other expense (income), net in 2020 primarily consisted of total gains of $(3.3) million on the sale-leaseback of five restaurant properties and the sale of three restaurant properties, partially offset by $0.5 million in costs for the removal, transfer and storage of equipment from closed restaurants and other closed restaurant costs and $0.7 million for the write-off of site development costs. Other expense (income), net in 2019 primarily consisted of $0.7 million in costs for the removal, transfer and storage of equipment from closed restaurants and $0.1 million for the write-off of site development costs. Other expense (income), net in 2018 consisted primarily of $(3.5) million in insurance recoveries related to the Hurricanes and total gains of $(1.2) million on the sale of three restaurant properties, partially offset by the write-off of site development costs of $0.6 million and severance costs related to the closure of restaurants and costs for the removal, transfer and storage of equipment from closed restaurants of $1.1 million. Other expense (income),net in 2017 consisted primarily of $2.1 million in costs for the removal of signs and equipment and equipment transfers and storage related to the closure of restaurants and severance for closed restaurant employees, and $0.5 million in food donated to charitable organizations, partially offset by $(0.4) million in additional proceeds received related to two Taco Cabana locations as a result of eminent domain proceedings, $(0.3) million in expected insurance proceeds related to a Taco Cabana restaurant that was temporarily closed due to a fire, and $(0.2) million in estimated insurance recoveries related to a Taco Cabana restaurant closed due to Hurricane Harvey damages.
Interest Expense. Interest expense decreased $(0.1)increased $0.1 million to $3.9$0.4 million in 20192021 from 2018 due primarily2020. Interest expense remained flat at $0.3 million in 2020 compared to lower interest rates and a lower borrowing level under2019. Interest charges related to our new senior credit facility in 2019. Interest expense increased $1.1 million to $4.0 million in 2018 from 2017 due primarily to higher interest rates and a higher borrowing level under ourformer amended senior credit facility are included in 2018.discontinued operations for all periods presented.
Provision for (Benefit from) Income Taxes. The effective tax rate was (12.5)(15.5)% for the year ended December 29, 2019,January 2, 2022, and (55.3)%67.5% for the year ended December 30, 2018.January 3, 2021. The changeprovision for income taxes for 2021 includes changes in the effective tax rate is primarily thevaluation allowance as a result of impairing non-deductible goodwilloriginating temporary differences during the year and establishing a valuation allowance on our deferred incomereserve for unrecognized tax assets in 2019 and changing the depreciation method for certain assets for federal income tax purposes to accelerate tax deductions in 2018 as well as the impact of lower pre-tax earnings (excluding non-deductible goodwill) in 2019.benefits.
The effective tax rate was 67.5% for 2018 of (55.3)% decreased as compared to an effective tax rate2020 and 120.3% for 2017 of 17.6%, due primarily2019. The benefit from income taxes for 2020 includes a benefit related to the change incarryback of net operating losses and reclassifying certain assets as qualified improvement property as permitted by the federal corporate income tax rate from 35.0% in 2017Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and other changes to 21.0% in 2018, changing the depreciation methodmethods for certain assets for federal income tax purposes to accelerate tax deductions in 2018 and revaluing our net deferred income tax assets as a result of the Tax Cuts and Jobs Act in 2017.
The CARES Act, which was signed into law on March 27, 2020, includes provisions that allow net operating losses arising in 2018, 2019, and 2020 to be carried back for up to five years and includes technical amendments that are retroactive to 2018 which permit certain assets to be classified as qualified improvement property and expensed immediately.
Income from Discontinued Operations, Net of Tax. All revenues, costs and expenses and income taxes attributable to Taco Cabana have been aggregated within income (loss) from discontinued operations, net of tax, in the consolidated statements of operations for federal incomeall periods presented. Income from discontinued operations, net of tax, purposeswas $18.5 million in 2021 compared to acceleratea loss from discontinued operations, net of tax, deductions. Changesof $(6.8) million and $(82.4) million in 2020 and 2019, respectively. Taco Cabana results of operations are included through August 15, 2021 for the year ended January 2, 2022 compared to a full year in 2020 due to the sale of Taco Cabana on August 16, 2021.
A gain of $25.0 million was recognized on the sale of Taco Cabana in 2021. See Note 2 of the Notes to our 2017 federal income tax return from the amounts recorded as of December 31, 2017 were primarily the result of changing the depreciable lives of assets for federal income tax purposes. These changes allowed us to record an incremental benefit of $4.0 million for 2018.Consolidated Financial Statements.
Net Income (Loss). As a result of the foregoing, we had net lossincome of $84.4$10.4 million in 20192021 compared to net income of $7.8 million in 2018, anda net loss of $36.2$(10.2) million and $(84.4) million in 2017.2020 and 2019, respectively.
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Liquidity and Capital Resources
Unless otherwise noted, this discussion of liquidity and capital resources relates to our combined operations.
We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. We are ableAlthough, as a result of our substantial cash balance, we did not have a working capital deficit at January 2, 2022, we have the ability to operate with a substantial working capital deficit (and we have historically operated with a working capital deficit) because:
Operating Activities. Net cash provided by operating activities for 2021, 2020, and 2019 2018, and 2017 was $65.0$14.1 million, $53.8$40.3 million and $50.8$65.0 million, respectively. The $11.2$26.2 million increasedecrease in net cash provided by operating activities in 20192021 compared to 20182020 was driven primarily by the receipttiming of payments, including the impact of the timing of payments related to Taco Cabana and vendor and landlord payment term renegotiations in 2020, and a tax refund, partially offsetdecrease in Adjusted EBITDA. The $24.8 million decrease in net cash provided by operating activities in 2020 compared to 2019 was driven primarily by a decrease in Adjusted EBITDA and the receipt of a tax refund in 2019, partially offset by the timing of payments. The $3.0 million increaseimpact of extended vendor payment terms in net cash provided by operating activities in 2018 compared to 20172020 was driven primarilypartially offset by the increasepayment of January 2021 rent in Adjusted EBITDA and timingfiscal 2020 as a result of payments and receipts including the receipt of insurance proceeds related to the Hurricanes.53rd week in fiscal 2020.
Investing Activities. Net cash provided by investing activities in 2021 and 2020 was $59.8 million and $8.4 million, respectively. Net cash used in investing activities in 2019 2018, and 2017 was $39.4 million, $52.1 million and $55.5 million, respectively.million. Capital expenditures are typically the largest component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling/reimaging, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems.
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The following table sets forth our capital expenditures from continuing operations for the periods presented (dollars in thousands):
| Pollo Tropical | Other | Continuing Operations | |||||||||||||||
| Year ended January 2, 2022: | |||||||||||||||||
| New restaurant development | $ | — | $ | — | $ | — | |||||||||||
| Restaurant remodeling | 1,097 | — | 1,097 | ||||||||||||||
Other restaurant capital expenditures(1) | 9,682 | — | 9,682 | ||||||||||||||
| Corporate and restaurant information systems | 1,645 | 602 | 2,247 | ||||||||||||||
| Total capital expenditures | $ | 12,424 | $ | 602 | $ | 13,026 | |||||||||||
| Number of new restaurant openings | — | — | |||||||||||||||
| Year ended January 3, 2021: | |||||||||||||||||
| New restaurant development | $ | 1,009 | $ | — | $ | 1,009 | |||||||||||
| Restaurant remodeling | 358 | — | 358 | ||||||||||||||
Other restaurant capital expenditures(1) | 6,542 | — | 6,542 | ||||||||||||||
| Corporate and restaurant information systems | 1,254 | 1,320 | 2,574 | ||||||||||||||
| Total capital expenditures | $ | 9,163 | $ | 1,320 | $ | 10,483 | |||||||||||
| Number of new restaurant openings | — | — | |||||||||||||||
| Year ended December 29, 2019: | |||||||||||||||||
| New restaurant development | $ | 7,325 | $ | — | $ | 7,325 | |||||||||||
| Restaurant remodeling | 1,654 | — | 1,654 | ||||||||||||||
Other restaurant capital expenditures(1) | 10,069 | — | 10,069 | ||||||||||||||
| Corporate and restaurant information systems | 2,873 | 1,201 | 4,074 | ||||||||||||||
| Total capital expenditures | $ | 21,921 | $ | 1,201 | $ | 23,122 | |||||||||||
| Number of new restaurant openings | 3 | 3 | |||||||||||||||
| Pollo Tropical | Taco Cabana | Other | Consolidated | ||||||||||||
| Year ended December 29, 2019: | |||||||||||||||
| New restaurant development | $ | 7,325 | $ | 4,065 | $ | — | $ | 11,390 | |||||||
| Restaurant remodeling | 1,654 | 919 | — | 2,573 | |||||||||||
Other restaurant capital expenditures(1) | 10,069 | 9,266 | — | 19,335 | |||||||||||
| Corporate and restaurant information systems | 2,873 | 3,773 | 1,303 | 7,949 | |||||||||||
| Total capital expenditures | $ | 21,921 | $ | 18,023 | $ | 1,303 | $ | 41,247 | |||||||
| Number of new restaurant openings | 3 | 3 | 6 | ||||||||||||
| Year ended December 30, 2018: | |||||||||||||||
| New restaurant development | $ | 12,340 | $ | 9,105 | $ | — | $ | 21,445 | |||||||
| Restaurant remodeling | 51 | 531 | — | 582 | |||||||||||
Other restaurant capital expenditures(1) | 12,157 | 15,307 | — | 27,464 | |||||||||||
| Corporate and restaurant information systems | 3,119 | 3,943 | 1,297 | 8,359 | |||||||||||
| Total capital expenditures | $ | 27,667 | $ | 28,886 | $ | 1,297 | $ | 57,850 | |||||||
| Number of new restaurant openings | 7 | 7 | 14 | ||||||||||||
| Year ended December 31, 2017: | |||||||||||||||
| New restaurant development | $ | 18,288 | $ | 8,439 | $ | — | $ | 26,727 | |||||||
| Restaurant remodeling | 2,919 | 101 | — | 3,020 | |||||||||||
Other restaurant capital expenditures(1) | 8,335 | 9,075 | — | 17,410 | |||||||||||
| Corporate and restaurant information systems | 2,244 | 3,166 | 3,299 | 8,709 | |||||||||||
| Total capital expenditures | $ | 31,786 | $ | 20,781 | $ | 3,299 | $ | 55,866 | |||||||
| Number of new restaurant openings | 9 | 6 | 15 | ||||||||||||
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The following table sets forth our capital expenditures from discontinued operations for the periods presented (dollars in thousands):
Cabana | |||||
| Year ended January 2, 2022: | |||||
| New restaurant | $ | — | |||
| Restaurant remodeling | 1,283 | ||||
Other restaurant capital expenditures(1) | 5,050 | ||||
| Corporate and | 169 | ||||
| Total capital expenditures | $ | 6,502 | |||
| Number of new restaurant openings | — | ||||
| Year ended January 3, 2021: | |||||
| New restaurant development | $ | 854 | |||
| Restaurant remodeling | 745 | ||||
Other restaurant capital expenditures(1) | 4,728 | ||||
| Corporate and restaurant information systems | 1,559 | ||||
| Total capital expenditures | $ | 7,886 | |||
| Number of new restaurant openings | 1 | ||||
| Year ended December 29, | |||||
| New restaurant development | $ | 4,065 | |||
| Restaurant remodeling | 919 | ||||
Other restaurant capital expenditures(1) | 9,266 | ||||
| Corporate and | 3,875 | ||||
| Total capital expenditures | $ | 18,125 | |||
| Number of new restaurant openings | 3 | ||||
(1)Excludes restaurant repair and maintenance expenses included in income (loss) from discontinued operations in our consolidated financial statements. For the years ended January 2, 2022, January 3, 2021 and December 29, 2019, total restaurant repair and maintenance expenses were approximately $5.5 million, $8.1 million, and $11.5 million, respectively.
Cash used inprovided by investing activities from continuing operations in 20192020 included net proceeds of $13.3 million from the sale-leaseback of five restaurant properties and $5.3 million from the sale of an additional three restaurant properties. In 2019, investing activities from continuing operations also included net proceeds of $1.8 million from the sale of one restaurant propertyproperty.
Cash provided by investing activities from discontinued operations in 2021 included net proceeds of $1.8 million.$74.9 million from the sale of Taco Cabana, $3.1 million from the sale-leaseback of two restaurant properties and $1.3 million from the sale of an additional restaurant property. Cash provided by investing activities from discontinued operations in 2020 included net proceeds of $4.0 million from the sale-leaseback of two restaurant properties and $4.3 million from the sale of an additional three restaurant properties.
Total capital expenditures in 20202022 are expected to be below 2019 total capital expenditures of $41.2between $25.0 million including $5.0 million to $7.0 million for the development of new restaurants.
Financing Activities. Net cash used in financing activities in 20192021 was $17.4$86.8 million and included term loan borrowing repayments under our new senior credit facility of $75.0 million, $9.4 million in payments to repurchase our common stock and a $2.2 million payment for a premium associated with extinguishment of the term loan under our new senior credit facility.
Net cash used in financing activities in 2020 included net revolving credit borrowing repayments under our former amended senior credit facility of $75.0 million, $3.0 million in payment of debt issuance costs associated with our former amended senior credit facility and new senior credit facility combined with $3.7 million in payments to repurchase our common stock, partially offset by proceeds of $73.5 million under our new senior credit facility.
Net cash used in financing activities in 2019 included $14.3 million in payments to repurchase our common stock combined with net revolving credit borrowing repayments under our senior credit facility of $3.0 million.
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New Senior Credit Facility. InOn November 2017,23, 2020, we terminated our former amended senior secured revolving credit facility, referred to as the "former senior credit facility," and entered into a new senior secured credit facility, ("which is referred to as the "new senior credit facility." The new senior credit facility was comprised of a term loan facility (the "term loan facility"). of $75.0 million and a revolving credit facility (the "revolving credit facility") of up to $10.0 million and matures on November 23, 2025. The new senior credit facility also provides for potential incremental term loan borrowing increases of up to $37.5 million in the aggregate, subject to, among other items, compliance with a minimum Total Leverage Ratio and other terms specified in the new senior credit facility. As required by the terms of the new senior credit facility, the proceeds from the sale of Taco Cabana were used to fully repay our outstanding term loan borrowings on August 16, 2021. The early repayment was subject to a 103% loan prepayment premium.
The new senior credit facility provides for aggregate revolvingthat we must maintain minimum Liquidity (as defined in the new senior credit borrowingsfacility) of up to $150$20.0 million (including up to $15.0 million available for letters of credit) and matures on November 30,(the "Liquidity Threshold") until January 3, 2022. The new senior credit facility also
provides for potential incremental increases of upthat we are not required to $50 million tobe in compliance with the revolving credit borrowings availableTotal Leverage Ratio under the new senior credit facility. On December 29, 2019, there were $75.0 millionfacility until the earlier of January 3, 2022, or the date in outstanding revolving credit borrowings under ourwhich Liquidity is less than the Liquidity Threshold. We will be permitted to exercise equity cure rights with respect to compliance with the Total Leverage Ratio subject to certain restrictions as set forth in the new senior credit facility.
Borrowings under the new senior credit facility bear interest at a rate per annum, rate, at our option, equal to either (all terms as defined in the new senior credit facility):
1) the Alternate Base Rate plus the applicable marginApplicable Margin of 0.75% to 1.50% based on our Adjusted Leverage Ratio (with6.75% with a marginminimum Base Rate of 1.25% as of December 29, 2019)2.00%, or
2) the LIBOR (or Benchmark Replacement) Rate plus the applicable marginApplicable Margin of 1.75% to 2.50% based on our Adjusted Leverage Ratio (with7.75%, with a marginminimum LIBOR (or Benchmark Replacement) Rate of 2.25% at December 29, 2019)1.00%.
In addition, the new senior credit facility requires us to pay (i) a commitment fee basedof 0.50% per annum on the applicable Commitment Fee ratedaily amount of 0.25% to 0.35%, based on our Adjusted Leverage Ratio, (with a rate of 0.30% at December 29, 2019) and the unused portion of the facility and (ii) a letter ofrevolving credit participation fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit.
The outstanding borrowings under the seniorrevolving credit facility are prepayable subject towithout penalty or premium (other than customary breakage costscosts). The outstanding borrowings under the term loan facility were voluntarily prepayable by us, and the term loan facility provided that each of the following required a mandatory prepayment of outstanding term loan borrowings by us as follows: (i) 100% of any cash Net Proceeds (as defined in the new senior credit facility) in excess of $2.0 million individually or in the aggregate over the term of the new senior credit facility agreement. Thein respect of any Casualty Event (as defined in the new senior credit facility) affecting collateral provided that we were permitted to reinvest such Net Proceeds in accordance with the new senior credit facility, requires(ii) 100% of any Net Proceeds of a Specified Equity Contribution (as defined in the new senior credit facility), (iii) 100% of any cash Net Proceeds from the issuance of debt issued by us to comply with customary affirmative, negative and financial covenants, including, without limitation, those limitingor our and our subsidiaries' ability to (i) incur indebtedness, (ii) incur liens, (iii) loan, advance, or make acquisitions andsubsidiaries other investments or other commitments to construct, acquire or developthan Permitted Debt (as defined in the new restaurants (subject to certain exceptions)senior credit facility), (iv) pay dividends, (v) redeem and repurchase equity interests (subject100% of any Net Proceeds from the Disposition (as defined in the new senior credit facility) of certain assets individually, or in the aggregate, in excess of $2.0 million in any fiscal year provided that we were permitted to certain exceptions), (vi) conduct asset and restaurant sales and other dispositions (subject to certain exceptions), (vii) conduct transactionsreinvest such Net Proceeds in accordance with affiliates and (viii) change our business. In addition, the new senior credit facility requires usand (v) beginning with the fiscal year ending January 2, 2022, an amount equal to maintain certain financial ratios, including minimum Fixed Charge Coverage and maximum Adjusted Leverage Ratios (all asthe Excess Cash Flow (as defined underin the new senior credit facility agreement).facility) in accordance with the new senior credit facility.
Our new senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of our indebtedness having an outstanding principal amount in excess of $5.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.
The new senior credit facility contains certain covenants, including, without limitation, those limiting our ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of our business in any material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends.
Our obligations under the new senior credit facility are secured by all of our and our subsidiaries' assets (including a pledge of all of the capital stock and equity interests of our subsidiaries).
Under the new senior credit facility, the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include, without limitation, payment default, covenant defaults, bankruptcy type defaults, defaults on other indebtedness, certain judgments or upon the occurrence of a change of control (as specified in the new senior credit facility).
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As of December 29, 2019,January 2, 2022, we were in compliance with the financial covenants under our new senior credit facility. After reserving $3.7At January 2, 2022, $10.0 million for letters of credit issued under the senior credit facility, $71.3 million remainedwas available for borrowing at December 29, 2019.under the revolving credit facility.
Former Senior Credit Facility and Former Amended Senior Credit Facility. . We hadOn July 10, 2020, we entered into the Second Amendment to Credit Agreement (as previously defined as the "former amended senior credit facility") among Fiesta and a syndicate of lenders that included adjustments to our covenants that were more reflective of current sales and profit trends. Pursuant to the former amended senior secured credit facility, providing for aggregatethe available revolving credit borrowings of upunder the former amended senior credit facility were reduced from $150.0 million to $150$95.0 million (including $15in a phased reduction beginning with a $30.0 million available for letters of credit), whichpermanent reduction that occurred on July 10, 2020. The former amended senior credit facility was terminated on November 30, 2017.23, 2020.
In 2018, our board of directors approved a share repurchase program for up to 1.5 million shares of our common stock. In 2019, our board of directors approved increases to the share repurchase program of an additional 1.5 million shares of our common stock. Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume, general market and economic conditions, and other corporate considerations.considerations. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by our board of directors.
Cash Requirements
Our significant cash requirements under our various contractual obligations and commitments as include:
• Operating Lease Obligations. See Note 8 of December 29, 2019 (in thousands):the Notes to our Consolidated Financial Statements for information on our operating and finance lease obligations and the amount and timing of future payments.
•Capital Expenditures. See Investing Activities subsection in this MD&A under the heading titled Liquidity and Capital Resources.
| Payments due by period | |||||||||||||||||||
| Contractual Obligations | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | ||||||||||||||
Credit facility debt obligations, including interest(1) | $ | 84,786 | $ | 3,403 | $ | 81,383 | $ | — | $ | — | |||||||||
Finance lease obligations, including interest(2) | 3,440 | 434 | 950 | 778 | 1,278 | ||||||||||||||
Operating lease obligations(3) | 441,785 | 42,479 | 79,106 | 68,223 | 251,977 | ||||||||||||||
Purchase obligations(4) | 7,802 | 3,019 | 4,783 | — | — | ||||||||||||||
| Total contractual obligations | $ | 537,813 | $ | 49,335 | $ | 166,222 | $ | 69,001 | $ | 253,255 | |||||||||
•Purchase Obligations. Purchase obligations include agreements to be filedpurchase goods or settled. We are also party to various service and supply contracts that generally extend approximately twelve months. These arrangements are primarily individual contracts for routine goods and services that are part of our normal operationslegally binding on us and are reflected in historical operating cash flow trends. These contractthat specify all significant terms. Our purchase obligations are generally short-termprimarily related to our Enterprise Resource planning systems for which an aggregate of $2.5 million is due in nature and can be canceled within a reasonable time period, at our option. We do not believe such arrangements will adversely affect our liquidity position.2022.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements. Prior to the adoption of ASC 842, off-balance sheet arrangements consisted of our operating leases, which are primarily for our restaurant properties and are now included in other current liabilities and operating lease liabilities on the consolidated balance sheet as of December 29, 2019.
Inflation
The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses and energy costs. Labor costs in our restaurants are impacted by a number of factors such as labor supply and changing market conditions, as well as changes in the federal and state hourly minimum wage rates as well as changes in payroll related taxes, including federal and state unemployment taxes. Labor supply across other industries also negatively impacts the costs of supplies, commodities, logistics, and utilities. We typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to fully offset such inflationary cost increases in the future.
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Critical Accounting PoliciesEstimates
Our consolidated financial statementsConsolidated Financial Statements and accompanying notesNotes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in the "BasisNote 1—Basis of Presentation" footnotePresentation in the Notes to our Consolidated Financial Statements. Critical accounting estimates are those that require application of management's most difficult, subjective, or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. These estimates involve a significant level of estimation uncertainty and are reasonably likely to have a material impact of the financial condition or results of operations.
Sales recognition at our restaurants is straightforward as customers pay for products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 3060 days. The earnings reporting process is covered by our system of internal controls and generally does not require significant management estimates
and judgments. However, critical accounting estimates and judgments, as noted below, are inherent in the assessment and recording of insurance liabilities, the valuation of goodwill for impairment, assessing impairment of long-lived assets, lease accounting matters and the valuation of deferred income tax assets. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions.
Insurance liabilities.Liabilities. We are insured for workers' compensation, general liability and medical insurance claims under policies where we pay all claims, subject to annual stop-loss limitations both for individual claims and for general liability, medical insurance and certain workers' compensation claims in the aggregate. At December 29, 2019,January 2, 2022, we had $11.7$9.5 million accrued for these insurance claims. At January 3, 2021, we had $10.4 million accrued for these insurance claims. We record insurance liabilities based on historical and industry trends, which are continually monitored, with the assistance of actuaries, and adjust accruals as warranted by changing circumstances. Since there are estimates and assumptions inherent in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on historical trends or the severity of the claims, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.liabilities and those adjustments could be material.
Evaluation of Goodwill. We must evaluate our recorded goodwill for impairment annually or more frequently when events and circumstances indicate that the carrying amount may be impaired. We have elected to conduct our annual impairment review of goodwill assets as of the last day of our fiscal year. We may first qualitatively assess goodwill impairment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This qualitative analysis is performed by examining key events and circumstances affecting fair value. If it is determined it is more likely than not that the reporting unit's fair value is not greater than its carrying amount, we perform a quantitative assessment. As discussed in Note 1 to our audited consolidated financial statements, weWe adopted ASU No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04") in the second quarter of 2019, which eliminates the requirement to calculate the implied fair value of goodwill if the fair value of a reporting unit is less than the carrying amount of the reporting unit. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. As of June 30, 2019, we determined that a triggering event had occurred due to a sustained decrease in the market price of our common stock and performed an interim quantitative impairment test. In addition, in response to a further decrease in the market price of our common stock and lower than expected profitability in the third quarter of 2019, we performed an interim quantitative impairment test as of September 29, 2019. We performed our interim impairment tests at June 30, 2019, and September 29, 2019, which indicated there was impairment as of those dates, in accordance with ASU 2017-04.
In performing thea quantitative assessment for impairment, we compare the net book valuesvalue of our reporting unitsunit to theirits estimated fair values.value. In determining the estimated fair valuesvalue of the reporting units,unit, we employ a combination of a discounted cash flow analysis based on management's best estimates of future cash flows and one or two market-based approaches. The results of these analyses are corroborated with other value indicators where available, such as comparable company earnings multiples. This evaluation of goodwill requires us to make estimates and assumptions to determine the fair value of our reporting unitsunit including projections regarding future operating results, anticipated growth rates, the weighted average cost of capital used to discount projected cash flows, and market multiples. For our Pollo Tropical reporting unit, the fair value exceeded the carrying value of the reporting unit by a substantial amount. For our Taco Cabana reporting unit, a lower profitability and growth outlook reduced the income-based and market-based approach fair value. As a result, the carrying value exceeded the fair value of the reporting unit, and we recognized impairment charges to write down the carrying value of our Taco Cabana reporting unit goodwill of $46.5 million in the second quarter of 2019 and $21.4 million in the third quarter of 2019, resulting in a full impairment of the Taco Cabana reporting unit.
We performed a qualitative assessment, which included examining key events and circumstances affecting fair value, for our annual impairment review as of December 29, 2019,January 2, 2022, and determined it was more likely than not that the Pollo Tropical reporting unit's fair value was greater than its carrying amount. As of December 29, 2019, our Taco Cabana reporting unit goodwill has no remaining carrying value andJanuary 2, 2022, our Pollo Tropical reporting unit goodwill has a carrying value of $56.3 million. See Note 45 of the Notes to our audited consolidated financial statements.Consolidated Financial Statements.
We estimate the fair value of the Pollo Tropical reporting unit significantly exceeds its carrying value as of January 2, 2022. The estimates and assumptions used to determine and assess fair value may differ from actual future events and if these estimates or related projections change significantly in the future, we may be required to record material impairment charges for goodwill assets. However, we estimate the fair value
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Impairment of Long-lived Assets. We assess the potential impairment of long-lived assets, principally property and equipment and operating lease right-of-use assets, whenever events or changes in circumstances indicate that the carrying value of the restaurant asset group may not be recoverable. In addition to considering management's plans, known regulatory/governmental actions and damage due to acts of God (hurricanes, tornadoes, etc.), we consider an event indicating that the carrying value may not be recoverable to have occurred related to a specific restaurant if the restaurant's cash flows for the last twelve months are less than
a minimum threshold or if consistent levels of cash flows for the remaining lease period are less than the carrying value of the restaurant's assets. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values. We have elected to exclude operating lease payments and liabilities from future cash flows and carrying values, respectively, in the comparison. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. Our estimates of future cash flows are highly subjective judgments based on internal projections and knowledge of our operations, historical performance and current trends in sales and restaurant operating costs. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions and, for right-of-use lease assets, current market lease rent and discount rates, which are subject to a high degree of judgment. If these estimates or assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.
For oneseven Pollo Tropical restaurant and four Taco Cabana restaurants with combined carrying values (excluding right-of-use lease assets) of $2.2$4.9 million, and $0.9 million, respectively, projected cash flows are not substantially in excess of their carrying values. In addition, two Pollo Tropical restaurants one Taco Cabana restaurant with combined carrying values (excluding right-of-use lease assets) of $3.4 million and $1.0 million, respectively, have initial sales volumes lower than expected, but do not have significant operating history to form a good basis for future projections. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material. See Note 6 of the Notes to our Consolidated Financial Statements.
Lease Accounting. As discussed in Note 7 to our audited consolidated financial statements, we adopted Accounting Standards Update ("ASU") 2016-02, Leases (ASC 842), the new lease accounting standard, as of as of December 31, 2018, using the modified retrospective method, with certain optional practical expedients including the transition practical expedient package, which among other things does not require reassessment of lease classification. Judgments made by management for our lease obligations include the determination of our incremental borrowing rate, the determination of standalone selling prices used to allocate the consideration in the contract, and the length of the lease term, which includes the determination of renewal options that are reasonably assured. The lease term can affect the classification of a lease as finance or operating for accounting purposes, the amount of the lease liability and corresponding right-of-use lease asset recognized, the term over which related leasehold improvements for each restaurant are amortized and any rent holidays and/or changes in rental amounts for recognizing rent expense over the term of the lease. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.
We use our estimated incremental borrowing rate in determining the present value of lease payments for purposes of determining lease classification and recording lease liabilities and lease assets on our consolidated balance sheet. Our incremental borrowing rate is determined based on a synthetic credit rating, determined using a valuation model, adjusted to reflect a secured credit rating and a developed spread curve, if applicable, applied to a risk-free rate yield curve. If the estimate of our incremental borrowing rate was changed, our operating lease assets and liabilities could differ materially. Changes in the determination of our incremental borrowing rate could also have an impact on the depreciation and interest expense recognized for finance leases. See Note 8 of the Notes to our Consolidated Financial Statements.
Valuation of Deferred Income Tax Assets. Deferred tax assets and liabilities, which represent temporary differences between the financial statement and tax basis of assets and liabilities, are measured using enacted tax rates expected to apply to the years in which those differences are expected to be recovered or settled. Deferred tax assets are recognized to the extent we believe these assets will more likely than not be realized. A valuation allowance is established to reduce the carrying amount of deferred tax assets if we believe it is more likely than not that a portion or all of the tax benefit from these deferred tax assets will not be realized. The realization of a deferred tax asset is dependent on the generation of sufficient taxable income in future periods, and the reversal of existing taxable temporary differences in the applicable periods. In evaluating the realizability of our net deferred tax assets, we perform an assessment of positive and negative evidence. The weight given to negative and positive evidence is commensurate only to the extent that such evidence can be objectively verified. Objective historical evidence is given greater weight than subjective evidence such as forecasts of future taxable income. We considered three years of cumulative operating income (loss) in evaluating the objective evidence that historical results provide. We considered the nature of the events that led to the charges that resulted in the loss before income taxes for the twelve months ended December 31, 2017, our earnings history exclusive of the charges that resulted from exiting new markets and our historical cash flows from operations. We also considered the negative evidence from the net loss for the twelve months ended December 29, 2019, which resulted from the material goodwill impairment charges recorded in the second and third quarters of 2019, the long-lived asset impairment charges recorded in the fourth quarter of 2019 primarily related to the 19 Taco Cabana locations that were subsequently closed in January 2020 and the decline in profitability in 2019, particularly in the fourth quarter. This objectiveObjective negative evidence limits our ability to consider other subjective evidence, such as our future earnings projections. Based on our evaluation of all available positive and negative evidence, and placing greater weight on the objective evidence, we determined that it is more likely than not that our deferred tax assets will not be fully realized in future periods. We recorded a $13.5$9.3 million valuation allowance to reduce our deferred tax assets in the fourth quarter of 2019, which increased our tax expense. Based on changes in our deferred tax assets and liabilities in 2020, adjustments to our valuation allowance totaling $0.4 million were recorded in 2020 resulting in a valuation allowance of $9.7 million as of January 3, 2021. Based on changes in our deferred tax assets and liabilities in 2021, adjustments to our valuation allowance totaling $0.2 million were recorded in 2021 resulting in a valuation
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allowance of $9.9 million as of January 2, 2022.If we generate sufficient taxable income in the future to fully utilize the tax benefits of the deferred tax assets on which a valuation allowance was recorded, a portion or all of the valuation allowance could be reversed, which would decrease our tax expense in the period or periods in which the valuation allowance is
reversed. We will continue to monitor and evaluate the positive and negative evidence considered in arriving at the above conclusion in order to assess whether such conclusion remains appropriate in future periods. Separate valuation allowances, not subject to the critical accounting estimates, for the income tax capital loss generated on the sale of Taco Cabana in 2021 and a foreign tax credit have been established as we do not expect to generate sufficient future taxable income related to those tax attributes. See Note 10 of the Notes to our Consolidated Financial Statements.
New Accounting Pronouncements
Management's Use of Non-GAAP Financial Measures
Consolidated Adjusted EBITDA (including Continuing Operations Consolidated Adjusted EBITDA and Continuing Operations Adjusted EBITDA) is a non-GAAP financial measure. We use Consolidated Adjusted EBITDA in addition to net income and income from operations to assess our performance, and we believe it is important for investors to be able to evaluate us using the same measures used by management. We believe this measure is an important indicator of our operational strength and the performance of our business.business and it provides a view of operations absent non-cash activity and items that are not related to the ongoing operation of our restaurants or affect comparability period over period. Consolidated Adjusted EBITDA as calculated by us is not necessarily comparable to similarly titled measures reported by other companies and should not be considered as an alternative to net income (loss), earnings (loss) per share, cash flows from operating activities or other financial information determined under GAAP.
We also use Restaurant-level Adjusted EBITDA as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Adjusted EBITDA for the applicable segment excluding franchise royalty revenues and fees, pre-opening costs, and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-level Adjusted EBITDA margin is derived by dividing Restaurant-level Adjusted EBITDA by restaurant sales. Restaurant-level Adjusted EBITDA is also a non-GAAP financial measure.
Management believes that Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies.
All such financial measures have important limitations as analytical tools. These limitations include the following:
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•Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and such financial information does not reflect the cash required to fund such replacements; and
A reconciliation from consolidated net income (loss) to Continuing Operations Consolidated Adjusted EBITDA follows (in thousands):. All amounts are from continuing operations unless otherwise indicated.
| Year Ended | ||||||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | ||||||||||||||||||
| Net income (loss) | $ | 10,370 | $ | (10,211) | $ | (84,386) | ||||||||||||||
| Loss (income) from discontinued operations | (18,455) | 6,825 | 82,391 | |||||||||||||||||
| Provision for (benefit from) income taxes | 1,083 | (7,044) | 11,830 | |||||||||||||||||
| Income (loss) before taxes | (7,002) | (10,430) | 9,835 | |||||||||||||||||
| Add: | ||||||||||||||||||||
| Non-general and administrative adjustments: | ||||||||||||||||||||
| Depreciation and amortization | 20,574 | 22,009 | 22,186 | |||||||||||||||||
| Impairment and other lease charges | 1,538 | 8,023 | 15 | |||||||||||||||||
| Interest expense | 374 | 292 | 325 | |||||||||||||||||
Closed restaurant rent expense, net of sublease income(1) | 2,999 | 4,331 | 3,260 | |||||||||||||||||
| Other expense (income), net | 478 | (2,098) | 862 | |||||||||||||||||
| Stock-based compensation expense | 53 | 73 | 70 | |||||||||||||||||
| Total non-general and administrative adjustments | 26,016 | 32,630 | 26,718 | |||||||||||||||||
| General and administrative adjustments: | ||||||||||||||||||||
| Stock-based compensation expense | 4,163 | 2,681 | 2,320 | |||||||||||||||||
Restructuring costs and retention bonuses(2) | 18 | 686 | 891 | |||||||||||||||||
Digital and brand repositioning costs(3) | 1,821 | 424 | 207 | |||||||||||||||||
| Total general and administrative adjustments | 6,002 | 3,791 | 3,418 | |||||||||||||||||
| Consolidated Adjusted EBITDA | $ | 25,016 | $ | 25,991 | $ | 39,971 | ||||||||||||||
| Total revenues | $ | 357,277 | $ | 315,358 | $ | 363,473 | ||||||||||||||
| Adjusted EBITDA as a percentage of total revenues | 7.0 | % | 8.2 | % | 11.0 | % | ||||||||||||||
(1) Closed restaurant rent, net of sublease income, for the years ended January 2, 2022, January 3, 2021 and December 29, 2019 primarily consists of closed restaurant lease costs of $9.1 million, $9.2 million and $6.8 million, respectively, partially offset by sublease income of $(6.1) million, $(4.9) million and $(3.4) million, respectively.
(2) Restructuring costs and retention bonuses for the year ended January 3, 2021, include severance costs related to eliminated positions related to terminations in response to the COVID-19 pandemic. Restructuring costs and retention bonuses for the year ended December 29, 2019, include severance costs related to eliminated positions.
(3) Digital and brand repositioning costs for the years ended January 2, 2022, January 3, 2021 and December 29, 2019 include consulting costs related to repositioning the brand and digital experience for our customers.
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| Year Ended | ||||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | ||||||||||
| Net income (loss) | $ | (84,386 | ) | $ | 7,787 | $ | (36,232 | ) | ||||
| Provision for (benefit from) income taxes | 9,369 | (2,772 | ) | (7,755 | ) | |||||||
| Income (loss) before taxes | (75,017 | ) | 5,015 | (43,987 | ) | |||||||
| Add: | ||||||||||||
| Non-general and administrative expense adjustments: | ||||||||||||
| Depreciation and amortization | 39,195 | 37,604 | 34,957 | |||||||||
| Impairment and other lease charges | 13,101 | 21,144 | 61,760 | |||||||||
Goodwill impairment(1) | 67,909 | — | — | |||||||||
| Interest expense | 3,872 | 3,966 | 2,877 | |||||||||
Closed restaurant rent expense, net of sublease income(2) | 4,163 | — | — | |||||||||
| Other expense (income), net | 1,041 | (3,007 | ) | 2,190 | ||||||||
| Stock-based compensation expense in restaurant wages | 195 | 90 | 52 | |||||||||
Unused pre-production costs in advertising expense(3) | — | — | 410 | |||||||||
| Total non-general and administrative expense adjustments | 129,476 | 59,797 | 102,246 | |||||||||
| General and administrative expense adjustments: | ||||||||||||
| Stock-based compensation expense | 2,649 | 3,379 | 3,493 | |||||||||
Terminated capital project(4) | — | — | 849 | |||||||||
Board and shareholder matter costs(5) | — | (597 | ) | 3,049 | ||||||||
Restructuring costs and retention bonuses(6) | 964 | 545 | 2,420 | |||||||||
Office restructuring and relocation costs(7) | — | — | (152 | ) | ||||||||
Legal settlements and related costs(8) | — | (177 | ) | (473 | ) | |||||||
Digital and brand repositioning costs(9) | 377 | — | — | |||||||||
| Total general and administrative expense adjustments | 3,990 | 3,150 | 9,186 | |||||||||
| Consolidated Adjusted EBITDA | $ | 58,449 | $ | 67,962 | $ | 67,445 | ||||||
A reconciliation from Adjusted EBITDA to Restaurant-level Adjusted EBITDA follows (in thousands):
| Year Ended | Pollo Tropical | Other | Continuing Operations | |||||||||||||||||
| January 2, 2022: | ||||||||||||||||||||
Adjusted EBITDA(1) | $ | 36,802 | $ | (11,786) | $ | 25,016 | ||||||||||||||
| Restaurant-level adjustments: | ||||||||||||||||||||
Add: Other general and administrative expense(2) | 28,041 | 11,481 | 39,522 | |||||||||||||||||
| Less: Franchise royalty revenue and fees | 1,785 | — | 1,785 | |||||||||||||||||
Restaurant-level Adjusted EBITDA(1) | $ | 63,058 | $ | (305) | $ | 62,753 | ||||||||||||||
| Restaurant sales | $ | 355,492 | $ | 355,492 | ||||||||||||||||
| Restaurant-level Adjusted EBITDA as a percentage of restaurant sales | 17.7 | % | 17.7 | % | ||||||||||||||||
| January 3, 2021: | ||||||||||||||||||||
Adjusted EBITDA(1) | $ | 36,517 | $ | (10,526) | $ | 25,991 | ||||||||||||||
| Restaurant-level adjustments: | ||||||||||||||||||||
Add: Other general and administrative expense(2) | 25,995 | 10,062 | 36,057 | |||||||||||||||||
| Less: Franchise royalty revenue and fees | 1,246 | — | 1,246 | |||||||||||||||||
Restaurant-level Adjusted EBITDA(1) | $ | 61,266 | $ | (464) | $ | 60,802 | ||||||||||||||
| Restaurant sales | $ | 314,112 | $ | 314,112 | ||||||||||||||||
| Restaurant-level Adjusted EBITDA as a percentage of restaurant sales | 19.5 | % | 19.4 | % | ||||||||||||||||
| December 29, 2019: | ||||||||||||||||||||
Adjusted EBITDA(1) | $ | 50,560 | $ | (10,589) | $ | 39,971 | ||||||||||||||
| Restaurant-level adjustments: | ||||||||||||||||||||
| Add: Pre-opening costs | 380 | — | 380 | |||||||||||||||||
Add: Other general and administrative expense(2) | 28,400 | 10,088 | 38,488 | |||||||||||||||||
| Less: Franchise royalty revenue and fees | 1,780 | — | 1,780 | |||||||||||||||||
Restaurant-level Adjusted EBITDA(1) | $ | 77,560 | $ | (501) | $ | 77,059 | ||||||||||||||
| Restaurant sales | $ | 361,693 | $ | 361,693 | ||||||||||||||||
| Restaurant-level Adjusted EBITDA as a percentage of restaurant sales | 21.4 | % | 21.3 | % | ||||||||||||||||
(1) Corporate overhead that was previously allocated to Taco Cabana is now included within "Other" because it is not a component of discontinued operations.
(2) Excludes general and administrative adjustments included in Adjusted EBITDA.
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| Twelve Months Ended | Pollo Tropical | Taco Cabana | ||||||
| December 29, 2019: | ||||||||
| Adjusted EBITDA | $ | 50,560 | $ | 7,889 | ||||
| Restaurant-level adjustments: | ||||||||
| Add: Pre-opening costs | 380 | 592 | ||||||
Add: Other general and administrative expense(1) | 28,400 | 23,805 | ||||||
| Less: Franchise royalty revenue and fees | 1,780 | 900 | ||||||
| Restaurant-level Adjusted EBITDA | $ | 77,560 | $ | 31,386 | ||||
| December 30, 2018: | ||||||||
| Adjusted EBITDA | $ | 54,903 | $ | 13,059 | ||||
| Restaurant-level adjustments: | ||||||||
| Add: Pre-opening costs | 933 | 783 | ||||||
Add: Other general and administrative expense(1) | 28,045 | 23,330 | ||||||
| Less: Franchise royalty revenue and fees | 1,815 | 857 | ||||||
| Restaurant-level Adjusted EBITDA | $ | 82,066 | $ | 36,315 | ||||
| December 31, 2017: | ||||||||
| Adjusted EBITDA | $ | 50,937 | $ | 16,508 | ||||
| Restaurant-level adjustments: | ||||||||
| Add: Pre-opening costs | 1,167 | 951 | ||||||
Add: Other general and administrative expense(1) | 28,054 | 22,393 | ||||||
| Less: Franchise royalty revenue and fees | 1,787 | 761 | ||||||
| Restaurant-level Adjusted EBITDA | $ | 78,371 | $ | 39,091 | ||||
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to market risk associated with fluctuations in interest rates, primarily limited to our new senior credit facility, under which we haddid not have any outstanding borrowings of $75.0 million as of December 29, 2019.January 2, 2022. Borrowings under theour new senior credit facility bear interest at a per annum rate, at our option, of either (all terms as defined in the senior credit facility):
1) the Alternate Base Rate plus the applicable marginApplicable Margin of 0.75% to 1.50% based on our Adjusted Leverage Ratio (with6.75% with a marginminimum Base Rate of 1.25% as of December 29, 2019)2.00%, or
2) the LIBOR (or Benchmark Replacement) Rate plus the applicable marginApplicable Margin of 1.75% to 2.50% based on our Adjusted Leverage Ratio (with7.75%, with a marginminimum LIBOR (or Benchmark Replacement) Rate of 2.25% at December 29, 2019)1.00%.
For variable rate debt instruments, market risk is defined as the potential change in earnings resulting from a hypothetical adverse change in interest rates. As of December 29, 2019,January 2, 2022, we had primarily elected to be charged interest on borrowings under our senior credit facility at the LIBOR Rate plus the applicable margin. We elected a one-month LIBOR Rate for $75.0 million of borrowings under the senior credit facility as of December 29, 2019. The weighted average interest rate applicable to these borrowings as of December 29, 2019 was 4.04%, which would result in interest expense in 2020 of $3.1 million assuming thatno outstanding borrowings, and interest rates remain unchanged duringthus minimal market risk. Future market risk will be limited to the year. A hypothetical increase of 100 basis points in the variable interest rate would increase interest expense in 2020 by $0.8 million.borrowings made on our revolving credit facility.
Commodity Price Risk
We purchase certain products which 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 many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements have been negotiated in advance to minimize price volatility. Where possible, we use these types of purchasing techniques to control costs as an alternative to using financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases that are significant and appear to be long-term in nature by adjusting our menu pricing. However, long-term increases in commodity prices may result in lower restaurant-level operating margins.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of Fiesta Restaurant Group, Inc. required by this Item are described in Item 15 of this Annual Report on Form 10-K and are presented beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures. We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our
management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 29, 2019.January 2, 2022.
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Changes in Internal Control over Financial Reporting.We completed the implementation of a new Enterprise Resource Planning ("ERP") system during the fourth quarter of 2019. As a result, we modified and removed certain existing controls as well as implemented new controls and procedures impacted by the implementation of the new ERP system. With the exception of those controls modified, removed, or implemented as a result of the new ERP system, no other changes No change occurred in our internal control over financial reporting during the fourth quarter of 20192021 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Overover Financial Reporting
Our senior management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.
Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has evaluated the effectiveness of its internal control over financial reporting as of December 29, 2019January 2, 2022 based on the criteria set forth in a report entitledtitled Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we have concluded that, as of December 29, 2019,January 2, 2022, our internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on the effectiveness of our internal control over financial reporting and their report is included herein.
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Fiesta Restaurant Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Fiesta Restaurant Group, Inc. and subsidiaries (the "Company") as of December 29, 2019,January 2, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2019,January 2, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 29, 2019,January 2, 2022, of the Company and our report dated February 26, 2020,March 9, 2022, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company's adoption of a new accounting standard.statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on internal controlInternal Control over Financial Reporting under Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Dallas, Texas
50
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
51
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 20202022 Annual Meeting of Stockholders.
We have adopted a written code of ethics applicable to our directors, officers and employees in accordance with the rules of The NASDAQ Stock Market and the SEC. We make our code of ethics available free of charge through our internet website, www.frgi.com. We will disclose on our website amendments to or waivers from our code of ethics in accordance with all applicable laws and regulations.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 20202022 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 20202022 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 20202022 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 20202022 Annual Meeting of Stockholders.
52
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements - Fiesta Restaurant Group, Inc. and Subsidiaries
| Page | |||||
| FIESTA RESTAURANT GROUP, INC. AND SUBSIDIARIES | |||||
F-1 | |||||
| Financial Statements: | |||||
F- | |||||
F- | |||||
F- | |||||
F- | |||||
F- | |||||
(a) (2) Financial Statement Schedules
Schedule | Description | Page | ||||||
| II | F- | |||||||
Schedules other than those listed are omitted for the reason that they are not required, not applicable, or the required information is shown in the financial statements or notes thereto.
(a) (3) Exhibits
| Exhibit No. | Description | |||||||
53
54
55
| 101.INS | Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
# Filed herewith.
+ Compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Fiesta Restaurant Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fiesta Restaurant Group, Inc. and subsidiaries (the "Company") as of December 29, 2019January 2, 2022 and December 30, 2018,January 3, 2021, the related consolidated statements of operations, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 29, 2019,January 2, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 29, 2019January 2, 2022 and December 30, 2018,January 3, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2019,January 2, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 29, 2019,January 2, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2020,March 9, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of Long-Lived Assets – Refer to Notes 1 and 6 to the financial statements
Critical Audit Matter Description
The Company assesses the potential impairment of long-lived assets, principally property and equipment and operating lease right-of-use assets, whenever events or changes in circumstances indicate that the carrying value of the restaurant asset group may not be fully recoverable. The Company reviews its long-lived assets, principally property and equipment and lease right-of-use assets, for impairment at the restaurant level. In addition to considering management's plans, known regulatory or governmental actions and damage due to acts of God (hurricanes, tornadoes, etc.), the Company considers a triggering event to have occurred related to a specific restaurant if the restaurant's cash flows, exclusive of operating lease payments, for the last twelve months are less than a minimum threshold or if consistent levels of cash flows for the remaining lease period are less than the carrying value of the restaurant's assets. If an indicator of impairment exists for any of its assets, an estimate of undiscounted future cash flows, exclusive of operating lease payments, over the life of the primary asset for each restaurant is compared to that long-lived asset group's carrying value, excluding operating lease liabilities. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. This process of assessing fair values requires the use of estimates and assumptions, including the Company's ability to sell or reuse the related assets and
F-1
market conditions and, for right-of-use lease assets, current market lease rent and discount rates, which are subject to a high degree of judgment. There is uncertainty in the projected undiscounted future cash flows used in the Company's impairment analysis. Property and equipment, net as of January 2, 2022 was $89.9 million and Operating lease right-of-use assets was $154.1 million. During the year ended January 2, 2022 the Company recorded impairment charges of $2.1 million.
Given the judgment used by the Company to evaluate whether there are impairment indicators for long-lived assets as well as judgment in determining the undiscounted future cash flows when an impairment indicator has been identified and the fair value of the asset, auditing management’s judgments regarding indicators of potential impairment, estimated future cash flows and the fair value of assets involved especially subjective audit judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures in connection with identification of impairment indicators, recoverability of asset groups, determination of fair value of assets, and impairment charges included the following, among others
•We tested the effectiveness of controls over the evaluation for impairment of long-lived assets
•We evaluated the impairment indicators considered by management and evaluated whether management had contemplated other potential factors that may be an indicator of impairment.
•We evaluated the reasonableness of management’s estimated future cash flows by comparing them to:
•Historical actual cash flows for the restaurant being evaluated
•Strategic business plans and actions planned by the Company to support estimated future revenue
•Chain and Fast Food Restaurants industry reports
•With the assistance of our fair value specialists, we evaluated current market lease rent and discount rate assumptions utilized in evaluating right-of-use assets for potential impairment.
/s/ Deloitte & Touche LLP
Dallas, Texas
We have served as the Company's auditor since 2011.
FIESTA RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| January 2, 2022 | January 3, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | 36,797 | $ | 49,778 | |||||||
| Restricted cash | 3,837 | 3,584 | |||||||||
| Accounts receivable | 6,223 | 4,933 | |||||||||
| Inventories | 2,524 | 2,101 | |||||||||
| Prepaid rent | 109 | 107 | |||||||||
| Income tax receivable | 3,846 | 9,399 | |||||||||
| Prepaid expenses and other current assets | 5,706 | 5,646 | |||||||||
| Current assets held for sale | — | 8,478 | |||||||||
| Total current assets | 59,042 | 84,026 | |||||||||
| Property and equipment, net | 89,884 | 97,867 | |||||||||
| Operating lease right-of-use assets | 154,127 | 164,665 | |||||||||
| Goodwill | 56,307 | 56,307 | |||||||||
| Other assets | 7,753 | 5,855 | |||||||||
| Non-current assets held for sale | — | 160,023 | |||||||||
| Total assets | $ | 367,113 | $ | 568,743 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 63 | $ | 816 | |||||||
| Accounts payable | 12,342 | 8,325 | |||||||||
| Accrued payroll, related taxes and benefits | 8,475 | 9,738 | |||||||||
| Accrued real estate taxes | 1,630 | 1,735 | |||||||||
| Other current liabilities | 18,032 | 17,070 | |||||||||
| Current liabilities held for sale | — | 27,225 | |||||||||
| Total current liabilities | 40,542 | 64,909 | |||||||||
| Long-term debt, net of current portion | 438 | 71,588 | |||||||||
| Operating lease liabilities | 163,270 | 174,116 | |||||||||
| Deferred tax liabilities | 229 | 2,269 | |||||||||
| Other non-current liabilities | 7,763 | 9,757 | |||||||||
| Non-current liabilities held for sale | — | 98,323 | |||||||||
| Total liabilities | 212,242 | 420,962 | |||||||||
| Commitments and contingencies | 0 | 0 | |||||||||
| Stockholders' equity: | |||||||||||
| Preferred stock, $0.01 par value; 20,000,000 shares authorized, no shares issued | — | — | |||||||||
| Common stock, $0.01 par value; 100,000,000 shares authorized, 28,445,812 and 28,278,320 shares issued, respectively, and 24,829,002 and 25,293,149 shares outstanding, respectively | 277 | 273 | |||||||||
| Additional paid-in capital | 182,686 | 176,614 | |||||||||
| Retained earnings (accumulated deficit) | 2,043 | (8,327) | |||||||||
| Treasury stock, at cost; 2,847,792 and 1,993,495 shares, respectively | (30,135) | (20,779) | |||||||||
| Total stockholders' equity | 154,871 | 147,781 | |||||||||
| Total liabilities and stockholders' equity | $ | 367,113 | $ | 568,743 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-2
| December 29, 2019 | December 30, 2018 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash | $ | 13,413 | $ | 5,258 | |||
| Accounts receivable | 7,933 | 8,505 | |||||
| Inventories | 3,394 | 2,842 | |||||
| Prepaid rent | 117 | 3,375 | |||||
| Income tax receivable | 3,821 | 17,857 | |||||
| Prepaid expenses and other current assets | 10,605 | 6,562 | |||||
| Total current assets | 39,283 | 44,399 | |||||
| Property and equipment, net | 211,944 | 231,328 | |||||
| Operating lease right-of-use assets | 251,272 | — | |||||
| Goodwill | 56,307 | 123,484 | |||||
| Deferred tax assets | — | 10,383 | |||||
| Other assets | 9,835 | 9,065 | |||||
| Total assets | $ | 568,641 | $ | 418,659 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
| Current liabilities: | |||||||
| Current portion of long-term debt | $ | 212 | $ | 108 | |||
| Accounts payable | 14,776 | 16,410 | |||||
| Accrued payroll, related taxes and benefits | 9,866 | 10,086 | |||||
| Accrued real estate taxes | 6,497 | 5,871 | |||||
| Other current liabilities | 32,269 | 14,086 | |||||
| Total current liabilities | 63,620 | 46,561 | |||||
| Long-term debt, net of current portion | 76,823 | 79,636 | |||||
| Deferred income—sale-leaseback of real estate | — | 19,899 | |||||
| Operating lease liabilities | 256,798 | — | |||||
| Deferred tax liabilities | 4,759 | — | |||||
| Other non-current liabilities | 8,405 | 32,504 | |||||
| Total liabilities | 410,405 | 178,600 | |||||
| Commitments and contingencies | |||||||
| Stockholders' equity: | |||||||
| Preferred stock, $0.01 par value; 20,000,000 shares authorized, no shares issued | — | — | |||||
| Common stock, $0.01 par value; 100,000,000 shares authorized, 27,461,697 and 27,259,212 shares issued, respectively, and 25,612,597 and 26,858,988 shares outstanding, respectively | 271 | 270 | |||||
| Additional paid-in capital | 173,132 | 170,290 | |||||
| Retained earnings | 1,884 | 72,268 | |||||
| Treasury stock, at cost; 1,493,495 and 112,358 shares, respectively | (17,051 | ) | (2,769 | ) | |||
| Total stockholders' equity | 158,236 | 240,059 | |||||
| Total liabilities and stockholders' equity | $ | 568,641 | $ | 418,659 | |||
FIESTA RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
| Year Ended | |||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | |||||||||||||||
| Revenues: | |||||||||||||||||
| Restaurant sales | $ | 355,492 | $ | 314,112 | $ | 361,693 | |||||||||||
| Franchise royalty revenues and fees | 1,785 | 1,246 | 1,780 | ||||||||||||||
| Total revenues | 357,277 | 315,358 | 363,473 | ||||||||||||||
| Costs and expenses: | |||||||||||||||||
| Cost of sales | 108,593 | 100,080 | 115,119 | ||||||||||||||
| Restaurant wages and related expenses (including stock-based compensation expense of $53, $73, and $70, respectively) | 91,669 | 74,328 | 84,909 | ||||||||||||||
| Restaurant rent expense | 23,592 | 22,773 | 22,050 | ||||||||||||||
| Other restaurant operating expenses | 57,430 | 47,823 | 50,274 | ||||||||||||||
| Advertising expense | 11,508 | 8,379 | 12,353 | ||||||||||||||
| General and administrative (including stock-based compensation expense of $4,163, $2,681, and $2,320, respectively) | 45,524 | 39,848 | 41,905 | ||||||||||||||
| Depreciation and amortization | 20,574 | 22,009 | 22,186 | ||||||||||||||
| Pre-opening costs | — | — | 380 | ||||||||||||||
| Impairment and other lease charges | 1,538 | 8,023 | 15 | ||||||||||||||
| Closed restaurant rent expense, net of sublease income | 2,999 | 4,331 | 3,260 | ||||||||||||||
| Other expense (income), net | 478 | (2,098) | 862 | ||||||||||||||
| Total operating expenses | 363,905 | 325,496 | 353,313 | ||||||||||||||
| Income (loss) from operations | (6,628) | (10,138) | 10,160 | ||||||||||||||
| Interest expense | 374 | 292 | 325 | ||||||||||||||
| Income (loss) from continuing operations before income taxes | (7,002) | (10,430) | 9,835 | ||||||||||||||
| Provision for (benefit from) income taxes | 1,083 | (7,044) | 11,830 | ||||||||||||||
| Loss from continuing operations | (8,085) | (3,386) | (1,995) | ||||||||||||||
| Income (loss) from discontinued operations, net of tax | 18,455 | (6,825) | (82,391) | ||||||||||||||
| Net income (loss) | $ | 10,370 | $ | (10,211) | $ | (84,386) | |||||||||||
| Earnings (loss) per common share: | |||||||||||||||||
| Continuing operations – basic | $ | (0.31) | $ | (0.13) | $ | (0.07) | |||||||||||
| Discontinued operations – basic | 0.71 | (0.27) | (3.11) | ||||||||||||||
| Basic | $ | 0.40 | $ | (0.40) | $ | (3.18) | |||||||||||
| Continuing operations – diluted | $ | (0.31) | $ | (0.13) | $ | (0.07) | |||||||||||
| Discontinued operations – diluted | 0.71 | (0.27) | (3.11) | ||||||||||||||
| Diluted | $ | 0.40 | $ | (0.40) | $ | (3.18) | |||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||
| Basic | 25,356,339 | 25,341,415 | 26,500,356 | ||||||||||||||
| Diluted | 25,356,339 | 25,341,415 | 26,500,356 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| Revenues: | |||||||||||
| Restaurant sales | $ | 658,263 | $ | 685,925 | $ | 666,584 | |||||
| Franchise royalty revenues and fees | 2,680 | 2,672 | 2,548 | ||||||||
| Total revenues | 660,943 | 688,597 | 669,132 | ||||||||
| Costs and expenses: | |||||||||||
| Cost of sales | 207,453 | 218,946 | 202,888 | ||||||||
| Restaurant wages and related expenses (including stock-based compensation expense of $195, $90, and $52, respectively) | 179,178 | 188,131 | 184,742 | ||||||||
| Restaurant rent expense | 47,805 | 36,034 | 36,936 | ||||||||
| Other restaurant operating expenses | 91,897 | 100,828 | 98,927 | ||||||||
| Advertising expense | 23,179 | 23,695 | 26,091 | ||||||||
| General and administrative (including stock-based compensation expense of $2,649, $3,379, and $3,493, respectively) | 56,195 | 54,525 | 59,633 | ||||||||
| Depreciation and amortization | 39,195 | 37,604 | 34,957 | ||||||||
| Pre-opening costs | 972 | 1,716 | 2,118 | ||||||||
| Impairment and other lease charges | 13,101 | 21,144 | 61,760 | ||||||||
| Goodwill impairment | 67,909 | — | — | ||||||||
| Closed restaurant rent expense, net of sublease income | 4,163 | — | — | ||||||||
| Other expense (income), net | 1,041 | (3,007 | ) | 2,190 | |||||||
| Total operating expenses | 732,088 | 679,616 | 710,242 | ||||||||
| Income (loss) from operations | (71,145 | ) | 8,981 | (41,110 | ) | ||||||
| Interest expense | 3,872 | 3,966 | 2,877 | ||||||||
| Income (loss) before income taxes | (75,017 | ) | 5,015 | (43,987 | ) | ||||||
| Provision for (benefit from) income taxes | 9,369 | (2,772 | ) | (7,755 | ) | ||||||
| Net income (loss) | $ | (84,386 | ) | $ | 7,787 | $ | (36,232 | ) | |||
| Earnings (loss) per common share: | |||||||||||
| Basic | $ | (3.18 | ) | $ | 0.29 | $ | (1.35 | ) | |||
| Diluted | (3.18 | ) | 0.29 | (1.35 | ) | ||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | 26,500,356 | 26,890,577 | 26,821,471 | ||||||||
| Diluted | 26,500,356 | 26,894,083 | 26,821,471 | ||||||||
FIESTA RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
| Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Treasury Stock | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 30, 2018 | 26,858,988 | $ | 270 | $ | 170,290 | $ | 72,268 | $ | (2,769) | $ | 240,059 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 2,844 | — | — | 2,844 | |||||||||||||||||||||||||||||
| Vesting of restricted shares | 134,746 | 1 | (2) | — | — | (1) | |||||||||||||||||||||||||||||
| Cumulative effect of adopting a new accounting standard | — | — | — | 14,002 | — | 14,002 | |||||||||||||||||||||||||||||
| Purchase of treasury stock | (1,381,137) | — | — | — | (14,282) | (14,282) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (84,386) | — | (84,386) | |||||||||||||||||||||||||||||
| Balance at December 29, 2019 | 25,612,597 | 271 | 173,132 | 1,884 | (17,051) | 158,236 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 3,484 | — | — | 3,484 | |||||||||||||||||||||||||||||
| Vesting of restricted shares | 180,552 | 2 | (2) | — | — | — | |||||||||||||||||||||||||||||
| Purchase of treasury stock | (500,000) | — | — | — | (3,728) | (3,728) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (10,211) | — | (10,211) | |||||||||||||||||||||||||||||
| Balance at January 3, 2021 | 25,293,149 | 273 | 176,614 | (8,327) | (20,779) | 147,781 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 6,076 | — | — | 6,076 | |||||||||||||||||||||||||||||
| Vesting of restricted shares | 390,150 | 4 | (4) | — | — | — | |||||||||||||||||||||||||||||
| Purchase of treasury stock | (854,297) | — | — | — | (9,356) | (9,356) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 10,370 | — | 10,370 | |||||||||||||||||||||||||||||
| Balance at January 2, 2022 | 24,829,002 | $ | 277 | $ | 182,686 | $ | 2,043 | $ | (30,135) | $ | 154,871 | ||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Total Stockholders' Equity | ||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||
| Balance at January 1, 2017 | 26,755,640 | $ | 267 | $ | 163,204 | $ | 100,704 | $ | — | $ | 264,175 | |||||||||||
| Stock-based compensation | — | — | 3,545 | — | — | 3,545 | ||||||||||||||||
| Vesting of restricted shares | 91,818 | 1 | — | — | — | 1 | ||||||||||||||||
| Cumulative effect of adopting a new accounting standard | — | — | 74 | (47 | ) | — | 27 | |||||||||||||||
| Net loss | — | — | — | (36,232 | ) | — | (36,232 | ) | ||||||||||||||
| Balance at December 31, 2017 | 26,847,458 | 268 | 166,823 | 64,425 | — | 231,516 | ||||||||||||||||
| Stock-based compensation | — | — | 3,469 | — | — | 3,469 | ||||||||||||||||
| Vesting of restricted shares | 123,888 | 2 | (2 | ) | — | — | — | |||||||||||||||
| Cumulative effect of adopting a new accounting standard | — | — | — | 56 | — | 56 | ||||||||||||||||
| Purchase of treasury stock | (112,358 | ) | — | — | — | (2,769 | ) | (2,769 | ) | |||||||||||||
| Net income | — | — | — | 7,787 | — | 7,787 | ||||||||||||||||
| Balance at December 30, 2018 | 26,858,988 | 270 | 170,290 | 72,268 | (2,769 | ) | 240,059 | |||||||||||||||
| Stock-based compensation | — | — | 2,844 | — | — | 2,844 | ||||||||||||||||
| Vesting of restricted shares | 134,746 | 1 | (2 | ) | — | — | (1 | ) | ||||||||||||||
| Cumulative effect of adopting a new accounting standard (Note 1) | — | — | — | 14,002 | — | 14,002 | ||||||||||||||||
| Purchase of treasury stock | (1,381,137 | ) | — | — | — | (14,282 | ) | (14,282 | ) | |||||||||||||
| Net loss | — | — | — | (84,386 | ) | — | (84,386 | ) | ||||||||||||||
| Balance at December 29, 2019 | 25,612,597 | $ | 271 | $ | 173,132 | $ | 1,884 | $ | (17,051 | ) | $ | 158,236 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
| Year Ended | |||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | |||||||||||||||
| Operating activities: | |||||||||||||||||
| Net income (loss) | $ | 10,370 | $ | (10,211) | $ | (84,386) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||||
| Gain on disposals of property and equipment, net | (124) | (3,267) | (6) | ||||||||||||||
| Stock-based compensation | 6,076 | 3,484 | 2,844 | ||||||||||||||
| Impairment and other lease charges (recoveries) | 1,670 | 9,139 | 13,101 | ||||||||||||||
| Goodwill impairment | — | — | 67,909 | ||||||||||||||
| Loss on extinguishment of debt | 5,307 | 1,241 | — | ||||||||||||||
| Gain on sale of Taco Cabana | (24,979) | — | — | ||||||||||||||
| Depreciation and amortization | 28,373 | 38,206 | 39,195 | ||||||||||||||
| Amortization of deferred financing costs | 526 | 437 | 270 | ||||||||||||||
| Deferred income taxes | (4,384) | (650) | 10,888 | ||||||||||||||
| Changes in other operating assets and liabilities: | |||||||||||||||||
| Accounts receivable | 525 | (951) | 640 | ||||||||||||||
| Prepaid expenses and other current assets | (454) | 340 | 364 | ||||||||||||||
| Operating lease right-of-use assets | 18,245 | 24,213 | 23,780 | ||||||||||||||
| Other non-current assets | (1,955) | 3,396 | (1,360) | ||||||||||||||
| Accounts payable | (1,301) | 1,309 | 504 | ||||||||||||||
| Accrued payroll, related taxes and benefits | (3,952) | 4,370 | (220) | ||||||||||||||
| Accrued real estate taxes | (1,861) | 103 | 626 | ||||||||||||||
| Other current liabilities | (1,633) | (3,396) | (2,618) | ||||||||||||||
| Operating lease liabilities | (18,290) | (23,264) | (19,765) | ||||||||||||||
| Other non-current liabilities | (3,633) | 2,166 | (162) | ||||||||||||||
| Income tax receivable/payable | 5,553 | (5,578) | 14,036 | ||||||||||||||
| Other | (23) | (815) | (608) | ||||||||||||||
| Net cash provided by operating activities | 14,056 | 40,272 | 65,032 | ||||||||||||||
| Investing activities: | |||||||||||||||||
| Capital expenditures: | |||||||||||||||||
| New restaurant development | — | (1,863) | (11,390) | ||||||||||||||
| Restaurant remodeling | (2,380) | (1,103) | (2,573) | ||||||||||||||
| Other restaurant capital expenditures | (14,732) | (11,270) | (19,335) | ||||||||||||||
| Corporate and restaurant information systems | (2,416) | (4,133) | (7,949) | ||||||||||||||
| Total capital expenditures | (19,528) | (18,369) | (41,247) | ||||||||||||||
| Proceeds received from sale of Taco Cabana | 74,910 | — | — | ||||||||||||||
| Proceeds from disposals of properties | 1,307 | 9,559 | 1,774 | ||||||||||||||
| Proceeds from sale-leaseback transactions | 3,083 | 17,222 | — | ||||||||||||||
| Proceeds from insurance recoveries | — | — | 42 | ||||||||||||||
| Net cash provided by (used in) investing activities | 59,772 | 8,412 | (39,431) | ||||||||||||||
| Financing activities: | |||||||||||||||||
| Borrowings on revolving credit facility | — | 154,143 | 32,000 | ||||||||||||||
| Repayments on revolving credit facility | — | (229,143) | (35,000) | ||||||||||||||
| Borrowings of unsecured debt | — | 15,000 | — | ||||||||||||||
| Repayments of unsecured debt | — | (15,000) | — | ||||||||||||||
| Borrowings of secured debt | — | 73,500 | — | ||||||||||||||
| Repayment of secured debt | (75,000) | — | — | ||||||||||||||
| Principal payments on finance leases | (219) | (237) | (164) | ||||||||||||||
| Financing costs associated with debt | — | (3,013) | — | ||||||||||||||
| Premium and other costs related to extinguishment of debt | (2,238) | — | — | ||||||||||||||
| Payments to purchase treasury stock | (9,356) | (3,728) | (14,282) | ||||||||||||||
| Net cash used in financing activities | (86,813) | (8,478) | (17,446) | ||||||||||||||
| Net change in cash and restricted cash | (12,985) | 40,206 | 8,155 | ||||||||||||||
| Cash and restricted cash, beginning of year | 53,362 | 13,089 | 4,940 | ||||||||||||||
| Cash and restricted cash of discontinued operations, beginning of year | 257 | 324 | 318 | ||||||||||||||
| Cash and restricted cash of discontinued operations, end of year | — | (257) | (324) | ||||||||||||||
| Cash and restricted cash, end of year | $ | 40,634 | $ | 53,362 | $ | 13,089 | |||||||||||
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| Operating activities: | |||||||||||
| Net income (loss) | $ | (84,386 | ) | $ | 7,787 | $ | (36,232 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Loss (gain) on disposals of property and equipment | (6 | ) | (757 | ) | 815 | ||||||
| Stock-based compensation | 2,844 | 3,469 | 3,545 | ||||||||
| Impairment and other lease charges | 13,101 | 21,144 | 61,760 | ||||||||
| Goodwill impairment | 67,909 | — | — | ||||||||
| Depreciation and amortization | 39,195 | 37,604 | 34,957 | ||||||||
| Amortization of deferred financing costs | 270 | 270 | 352 | ||||||||
| Amortization of deferred gains from sale-leaseback transactions | — | (3,564 | ) | (3,602 | ) | ||||||
| Deferred income taxes | 10,888 | 6,830 | (2,828 | ) | |||||||
| Changes in other operating assets and liabilities: | |||||||||||
| Accounts receivable | 640 | 805 | (1,171 | ) | |||||||
| Prepaid expenses and other current assets | 364 | 894 | (2,015 | ) | |||||||
| Operating lease right-of-use assets | 23,780 | — | — | ||||||||
| Other non-current assets | (1,360 | ) | (1,491 | ) | (552 | ) | |||||
| Accounts payable | 504 | (1,797 | ) | 1,046 | |||||||
| Accrued payroll, related taxes and benefits | (220 | ) | (1,690 | ) | (499 | ) | |||||
| Accrued real estate taxes | 626 | 11 | (311 | ) | |||||||
| Other current liabilities | (2,618 | ) | (10,583 | ) | (590 | ) | |||||
| Operating lease liabilities | (19,765 | ) | — | — | |||||||
| Other non-current liabilities | (162 | ) | 1,358 | 3,887 | |||||||
| Income tax receivable/payable | 14,036 | (6,523 | ) | (8,030 | ) | ||||||
| Other | (608 | ) | 36 | 288 | |||||||
| Net cash provided by operating activities | 65,032 | 53,803 | 50,820 | ||||||||
| Investing activities: | |||||||||||
| Capital expenditures: | |||||||||||
| New restaurant development | (11,390 | ) | (21,445 | ) | (26,727 | ) | |||||
| Restaurant remodeling | (2,573 | ) | (582 | ) | (3,020 | ) | |||||
| Other restaurant capital expenditures | (19,335 | ) | (27,464 | ) | (17,410 | ) | |||||
| Corporate and restaurant information systems | (7,949 | ) | (8,359 | ) | (8,709 | ) | |||||
| Total capital expenditures | (41,247 | ) | (57,850 | ) | (55,866 | ) | |||||
| Proceeds from disposals of properties | 1,774 | 4,743 | 374 | ||||||||
| Proceeds from insurance recoveries | 42 | 983 | — | ||||||||
| Net cash used in investing activities | (39,431 | ) | (52,124 | ) | (55,492 | ) | |||||
| Financing activities: | |||||||||||
| Borrowings on revolving credit facility | 32,000 | 26,000 | 91,000 | ||||||||
| Repayments on revolving credit facility | (35,000 | ) | (23,000 | ) | (85,900 | ) | |||||
| Principal payments on finance/capital leases | (164 | ) | (101 | ) | (88 | ) | |||||
| Financing costs associated with issuance of debt | — | (150 | ) | (937 | ) | ||||||
| Payments to purchase treasury stock | (14,282 | ) | (2,769 | ) | — | ||||||
| Net cash provided by (used in) financing activities | (17,446 | ) | (20 | ) | 4,075 | ||||||
| Net change in cash | 8,155 | 1,659 | (597 | ) | |||||||
| Cash, beginning of year | 5,258 | 3,599 | 4,196 | ||||||||
| Cash, end of year | $ | 13,413 | $ | 5,258 | $ | 3,599 | |||||
| Supplemental disclosures: | |||||||||||
| Interest paid on long-term debt (including capitalized interest of $247, $377 and $256, respectively) | $ | 4,395 | $ | 3,508 | $ | 2,363 | |||||
| Interest paid on lease financing obligations | — | — | 83 | ||||||||
| Accruals for capital expenditures | 4,097 | 6,191 | 8,409 | ||||||||
| Income tax payments (refunds), net | (15,557 | ) | (3,081 | ) | 3,103 | ||||||
| Finance/capital lease obligations incurred | 495 | 322 | — | ||||||||
| Non-cash reduction of lease financing obligations | — | — | 1,664 | ||||||||
| Non-cash reduction of assets under lease financing obligations | — | — | 1,193 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Basis of Presentation
Business Description. Fiesta Restaurant Group, Inc. ("Fiesta Restaurant Group" or "Fiesta") owns, operates and franchises 2 fast-casual restaurant brandsPollo Tropical restaurants through its wholly-owned subsidiaries Pollo Operations, Inc., and its subsidiaries, and Pollo Franchise, Inc., (collectively "Pollo Tropical"). Fiesta owned, operated and franchised Taco Cabana restaurants through its wholly-owned subsidiary, Taco Cabana, Inc. and its subsidiaries (collectively "Taco Cabana"). through August 15, 2021. Unless the context otherwise requires, Fiesta and its subsidiaries Pollo Tropical and Taco Cabana, are collectively referred to as the "Company." At December 29, 2019,January 2, 2022, the Company owned and operated 142138 Pollo Tropical® restaurants and 164 Taco Cabana® restaurants. All of the Company-owned Pollo Tropical restaurants are located in Florida and all of the Company-owned Taco Cabana restaurants are located in Texas. At December 29, 2019, Fiesta franchised a total of 3231 Pollo Tropical restaurants and 8 Taco Cabana restaurants. The franchised Pollo Tropical restaurants include 17 in Puerto Rico, 42 in Panama, 21 in Guyana, 12 in Ecuador, 1 in the Bahamas, 1 in the U.S. Virgin Islands, and 6 on college campuses and 1 at a hospital in Florida. The franchised Taco Cabana restaurants include 6 in New Mexico and 25 on college campuses in Texas.Florida, and locations at 1 hospital and 1 sports and entertainment stadium in Florida.
Discontinued Operations. On July 1, 2021, the Company entered into a stock purchase agreement for the sale of Taco Cabana, Inc. and its subsidiaries (collectively "Taco Cabana"). On August 16, 2021, the Company completed the sale of Taco Cabana. The Company has classified the revenues, costs and expenses and income taxes attributable to the Taco Cabana business segment, together with certain costs related to the transaction, within income (loss) from discontinued operations, net of tax, on the consolidated statements of operations for all periods presented. See Note 2—Dispositions. Unless otherwise noted, amounts and disclosures throughout these notes to the consolidated financial statements relate to the Company's continuing operations.
Basis of Consolidation. The consolidated financial statements presented herein reflect the consolidated financial position, results of operations and cash flows of Fiesta and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Fiscal Year. The Company uses a 52–53 week fiscal year ending on the Sunday closest to December 31. The fiscal years ended January 2, 2022 and December 29, 2019; December 30, 2018; and December 31, 2017,2019, each contained 52 weeks. The fiscal year ended January 3, 2021 contained 53 weeks.
Use of Estimates. The preparation of the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements. Estimates also affect the reported amounts of expenses during the reporting periods. Significant items subject to such estimates and assumptions include: insurance liabilities, evaluation for impairment of goodwill and long-lived assets, lease accounting matters, and deferred income tax assets. Actual results could differ from those estimates. Due to the uncertainty associated with the unprecedented nature of the COVID-19 pandemic and the impact it will have on the Company's operations and future cash flows, it is reasonably possible that the estimates of future cash flows used in impairment assessments will change in the near term and the effect of the change could be material.
Concentrations of Risk. Food and supplies are ordered from approved suppliers and are shipped to the restaurants via distributors. Performance Food Group, Inc. is the primary distributor of food and beverage products and supplies for both Pollo Tropical and Taco Cabana.Tropical. In the twelve monthsyears ended December 29, 2019,January 2, 2022 and December 30, 2018,January 3, 2021, Performance Food Group, Inc. accounted for approximately 85%96% and 74%98%, respectively, of the food and supplies delivered to restaurants. The Company's limited distributor relationships could have an adverse effect on the Company's operations.
Cash and Cash Equivalents.Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Restricted Cash. The Company's restricted cash is comprised of certain cash balances that are reserved as cash collateral for the Company's existing letters of credit.
Inventories. Inventories, primarily consisting of food and paper, are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment. The Company capitalizes all direct costs incurred to construct and substantially improve its restaurants. These costs are depreciated and charged to expense based upon their property classification when placed in service. Property and equipment is recorded at cost. Application development stage costs for significant internally developed software
F-6
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
projects are capitalized and amortized. Repairs and maintenance activities are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the following estimated useful lives:
| Buildings and improvements | 5 | to | 30 years | ||||||||
| Equipment | 3 | to | 7 years | ||||||||
| Computer hardware and software | 3 | to | 7 years | ||||||||
| Assets subject to finance lease | Shorter of useful life or lease term | ||||||||||
Leasehold improvements, including new buildings constructed on leased land, are depreciated over the shorter of their estimated useful lives or the underlying lease term. In circumstances where an economic penalty would be presumed by the non-exercise of one or more renewal options under the lease, the Company includes those renewal option periods when determining the lease term for depreciation purposes. For significant leasehold improvements made during the latter part of the lease term, the Company amortizes those improvements over the shorter of their useful life or an extended lease term. The extended lease term would consider the exercise of renewal options if the value of the improvements would imply that an economic penalty would be incurred
without the renewal of the option. For significant leasehold improvements made during the latter part of the lease term prior to the adoption of Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASC 842"), this extended term may differ from the lease term used to determine lease assets and liabilities. Building costs incurred for new restaurants on leased land are depreciated over the lease term, which is generally a 20-year period.
Cloud-Based Computing Arrangements. The Company defers and amortizes application development stage costs for cloud-based computing arrangements over the life of the related service (subscription) agreement.
Goodwill. Goodwill represents the excess purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets acquired by Carrols Restaurant Group, Inc. ("Carrols"), Fiesta's former parent company, from the acquisition of Pollo Tropical in 1998 and Taco Cabana in 2000.1998. Goodwill is not amortized but is assessed for impairment at least annually as of the last day of the fiscal year or more frequently if impairment indicators exist. See Note 5—Goodwill.
Long-Lived Assets. The Company assesses the recoverability of property and equipment and definite-lived intangible assets, including right-of-use ("ROU") lease assets, by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. Impairment is reviewed whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. See Note 5—6—Impairment of Long-LivedLong-Lived Assets.
Deferred Financing Costs. Financing costs incurred and the original issue discount recognized in obtaining revolving credit facilities are capitalized and included within other assets on the consolidated balance sheets and are amortized over the life of the related obligationcredit facility as interest expense on a straight-line basis. Financing costs incurred and original issue discount recognized in obtaining long-term debt are capitalized and amortized over the term of the associated debt agreement as interest expense using the effective interest method. These financing costs and the original issue discount are presented as a reduction from the carrying amount of the related long-term debt balance on the consolidated balance sheets.
Leases. The Company assesses whether an agreement contains a lease at inception. Subsequent to the adoption of ASC 842, allAll leases are reviewed for finance or operatingoperating classification once control is obtained. The majority of the Company's leases are operating leases. Operating leases are included within operating lease right-of-useROU assets, other current liabilities, and operating lease liabilities inon the consolidated balance sheets. Finance leases are included within property and equipment, net, current portion of long-term debt, and long-term debt, net of current portion, inon the consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any lease payments made in advance and is reduced by lease incentives received. As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate at commencement date in determining the present value of lease payments. Lease terms include options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company assumes options are reasonably certain to be exercised when such options are required to achieve a minimum 20-year lease term for new restaurant properties and subsequent to the adoption of ASC 842, when it incurs significant leasehold improvement costs near the end of a lease term. The Company uses judgment and available data to allocate consideration in a contract when it leases land and a building. The Company also uses judgment in determining its incremental borrowing rate, which includes selecting a yield curve based on a synthetic credit rating determined using a valuation model. Lease expense for lease payments is recognized on a straight-line basis over the lease term unless the related ROU asset has been adjusted for an impairment charge.
F-7
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
The Company has real estate lease agreements with lease and non-lease components, which are accounted for as a single lease component. See Note 7—8—Leases.
The Company separately presents rent expense related to its closed restaurant locations and any sublease income related to these closed restaurant locations within closed restaurant rent expense, net of sublease income in the consolidated statement of operations.
The Company recorded an initial adjustment, on a consolidated basis, to the opening balance of retained earnings of $14.0 million associated with previously deferred gains on sale-leaseback transactions and impairment of operating lease right-of-use assets as of the date of adoption. This adjustment consisted of $18.6 million in deferred gains on sale-leaseback transactions, net of a related deferred tax asset of $4.3 million and $0.2 million in impairment charges, net of tax. Gains or losses (adjusted for any off-market terms) from sale-leaseback transactions are recognized immediately.
Income Taxes. Deferred income tax assets and liabilities are based on the difference between the financial statement and tax bases of assets and liabilities as measured by the tax rates that are anticipated to be in effect when those differences reverse. The deferred tax provision generally represents the net change in deferred tax assets and liabilities during the period. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts for which realization is more likely than not. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
Advertising Costs. All advertising costs are expensed as incurred.
Cost of Sales. The Company includes the cost of food, beverage and paper, net of any discounts, in cost of sales. Cost of sales excludes depreciation and amortization expense, which are presented separately on the consolidated statement of operations.
Pre-opening Costs. The Company's pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening and generally include restaurant employee wages and related expenses, travel expenditures, recruiting, training,
promotional costs associated with the restaurant opening and rent, including any non-cash rent expense recognized during the construction period.
Insurance. The Company is insured for workers' compensation, general liability and medical insurance claims under policies where it pays all claims, subject to stop-loss limitations both for individual claims and for general liability, medical insurance and certain workers' compensation claims in the aggregate. Losses are accrued based upon estimates of the aggregate liability for claims based on the Company's experience and certain actuarial methods used to measure such estimates. The Company does not discount any of its self-insurance obligations.
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date under current market conditions. In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect management's own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:
•Current Assets and Liabilities. The carrying values reported on the consolidated balance sheets of cash and restricted cash, accounts receivable and accounts payable approximate fair value because of the short maturity of those financial instruments. •Term Loan Borrowings. The fair value of outstanding term loan borrowings under the Company's new senior credit facility, which is considered Level 2, is based on current LIBOR rates. The fair value of the Company's new senior credit facility was approximately $74.4 million at January 3, 2021. The carrying value of Company's new senior credit facility was $71.5 million at January 3, 2021. There were no outstanding term loan borrowings as of January 2, 2022 as the Company fully repaid the outstanding term loan borrowings on August 16, 2021. |
See Note 56 for discussion of the fair value measurement of non-financial assets.
F-8
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
Revenue Recognition. Revenue is recognized upon transfer of promised products or services to customers in an amount that reflects the consideration the Company received in exchange for those products or services. Revenues from the Company's owned and operated restaurants are recognized when payment is tendered at the time of sale. Franchise royalty revenues are based on a percent of gross sales and are recorded as income when earned. Initial franchise fees and area development fees associated with new franchise agreements are not distinct from the continuing rights and services offered by the Company during the term of the related franchise agreements and are recognized as income over the term of the related franchise agreements. A portion of the initial franchise fee is allocated to training services and is recognized as revenue when the Company completes the training services. Prior to adopting Accounting Standards Codification Topic 606 ("Topic 606"), the Company recognized initial franchise fees as revenue in the period that a franchised location opened for business. See Note 11—Business Segment Information.
Gift cardsCards. The Company sells gift cards to its customers in its restaurants and through select third parties. The Company recognizes revenue from gift cards upon redemption by the customer. For unredeemed gift cards that the Company expects to be entitled to breakage, the Company recognizes expected breakage as revenue in proportion to the pattern of redemption by the customers. The gift cards have no stated expiration dates. Revenues from unredeemed gift cards and gift card liabilities, which are recorded in other current liabilities, are not material to the Company's financial statements. Prior
Loyalty Program. The Company's loyalty program for Pollo Tropical (My Pollo™) allows eligible customers who enroll in the program to adopting Topic 606,earn points for every dollar spent. After accumulating a certain number of points, the customer earns a reward that can be used for future purchases at Pollo Tropical. Earned rewards expire 90 days after they are issued. Earned points that have not been converted to rewards do not currently expire.
The Company defers revenue associated with the estimated standalone selling price of points earned by customers as each point is earned, net of points the Company diddoes not recognizeexpect to be redeemed. The estimated standalone selling price of each point earned is based on the estimated value of the reward which is expected to be redeemed.
Loyalty revenue is recognized when a customer redeems an earned reward. For unredeemed rewards that the Company expects to be entitled to breakage, the Company recognizes expected breakage as revenue in proportion to the pattern of redemption of the rewards by the customers. The costs associated with rewards are recorded when they are redeemed and are included within cost of sales on its gift cards.the consolidated statements of operations. Deferred revenue associated with the rewards is included within other current liabilities on the consolidated balance sheets.
Guidance Adopted in 2019.2021. In February 2016, and in subsequent updates,December 2019, the Financial Accounting Standards Board ("FASB") issued ASC 842, which requires lessee recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The Company adopted this new accounting standard and all the related amendments as of December 31, 2018 using the modified retrospective method, with certain optional practical expedients including the transition practical expedient package, which among other things does not require reassessment of lease classification. The Company elected the transition method that allows it to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The comparative period information has not been restated and continues to be reported under the accounting standard in effect for that period.
In July 2021, the FASB issued ASU No. 2021-05 Leases (Topic 842): Lessors – Certain Leases with Variable Lease Payments, which contains amendments that require lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: (1) The lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in paragraphs 842-10-25-2 through 25-3, and (2) the lessor would have otherwise recognized a day-one loss. As of January 2, 2022, the Company does not act as the lessor of any lease contracts with variable lease payments that meet the criteria noted above. The Company does not expect the ASU to have a significant impact on its financial statements.
F-9
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
The Company filed an insurance claim for winter storm damages in Texas that occurred in the first quarter of 2021 and retained the right to receive the insurance claim proceeds. The Company recognized $0.9 million of insurance proceeds within income (loss) from discontinued operations, net of tax, in the fourth quarter of 2021 based on a partial settlement reached with certain insurers. The Company expects to recognize any additional proceeds when the claim is ultimately resolved.
The assets and liabilities of Taco Cabana that were sold are classified as current assets held for sale, non-current assets held for sale, current liabilities held for sale and non-current liabilities held for sale, respectively, in the consolidated balance sheet as of January 3, 2021.
All revenues, costs and expenses and income taxes attributable to Taco Cabana, together with certain costs related to the transaction, have been aggregated within income (loss) from discontinued operations, net of tax, in the consolidated statements of operations for all periods presented. No amounts for shared general and administrative operating support expense were allocated to discontinued operations. Depreciation and amortization related to Taco Cabana property and equipment and lease ROU assets was not recorded after June 30, 2021 when Taco Cabana was classified as held for sale. As required by the terms of the senior credit facility, the proceeds from the sale were used to fully repay Fiesta's outstanding term loan borrowings on August 16, 2021. The early repayment was subject to a 103% loan prepayment premium. Interest expense and amortization of discount and debt issuance costs related to the term loan portion of the senior credit facility are included within income (loss) from discontinued operations, net of tax.
Upon completion of the sale of Taco Cabana, the Company began providing certain services to Taco Cabana subject to a transition services agreement which expired on December 13, 2021. The Company recognized $0.5 million in income under the transition services agreement for the year ended January 2, 2022, which was recorded as a reduction to general and administrative expense. The Company retained certain closed Taco Cabana restaurant leases, including the associated operating lease right-of-use assets and operating lease liabilities. The Company also retained liability for Taco Cabana's accrued worker's compensation and general liability claims for periods prior to the sale. These liabilities are recognized in other current liabilities and other non-current liabilities in the consolidated balance sheets. As there are estimates and assumptions inherent in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on historical trends or the severity of the claims, differences between actual future events and prior estimates and assumptions will result in adjustments to these liabilities.
F-10
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
A summary of assets and liabilities of the discontinued operations is as follows:
| January 3, 2021 | |||||||||||
| Carrying amount of major classes of assets included as part of discontinued operations: | |||||||||||
| Accounts receivable | $ | 3,951 | |||||||||
| Inventories | 2,104 | ||||||||||
| Prepaid expenses and other current assets | 2,423 | ||||||||||
| Total current assets of the disposal group classified as held for sale | 8,478 | ||||||||||
| Property and equipment, net | 63,214 | ||||||||||
| Operating lease right-of-use assets | 96,639 | ||||||||||
| Other assets | 170 | ||||||||||
| Total non-current assets of the disposal group classified as held for sale | 160,023 | ||||||||||
| Total assets of the disposal group classified as held for sale | $ | 168,501 | |||||||||
| Carrying amount of major classes of liabilities included as part of discontinued operations: | |||||||||||
| Current portion of long-term debt | $ | 199 | |||||||||
| Accounts payable | 5,014 | ||||||||||
| Accrued liabilities | 9,363 | ||||||||||
| Other current liabilities | 12,649 | ||||||||||
| Total current liabilities of the disposal group classified as held for sale | 27,225 | ||||||||||
| Long-term debt, net of current portion | 740 | ||||||||||
| Operating lease liabilities | 93,970 | ||||||||||
| Deferred tax liabilities | 1,840 | ||||||||||
| Other non-current liabilities | 1,773 | ||||||||||
| Total non-current liabilities of the disposal group classified as held for sale | 98,323 | ||||||||||
| Total liabilities of the disposal group classified as held for sale | $ | 125,548 | |||||||||
F-11
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
A summary of the results of the discontinued operations is as follows:
| Year Ended | |||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | |||||||||||||||
| Major classes of line items constituting pretax loss of discontinued operations: | |||||||||||||||||
| Revenues: | |||||||||||||||||
| Total revenues | $ | 152,339 | $ | 239,445 | $ | 297,470 | |||||||||||
| Costs and expenses: | |||||||||||||||||
| Cost of sales | 43,480 | 70,433 | 92,334 | ||||||||||||||
| Restaurant wages and related expenses (including stock-based compensation expense of $172, $127, and $125, respectively) | 48,399 | 74,817 | 94,269 | ||||||||||||||
| Restaurant rent expense | 12,995 | 22,588 | 25,755 | ||||||||||||||
| Other restaurant operating expenses | 24,814 | 34,357 | 41,623 | ||||||||||||||
| General and administrative (including stock-based compensation expense of $1,688, $603, and $329, respectively) | 11,442 | 13,229 | 14,290 | ||||||||||||||
| Depreciation and amortization | 7,799 | 16,197 | 17,009 | ||||||||||||||
| Pre-opening costs | — | 69 | 592 | ||||||||||||||
| Goodwill impairment | — | — | 67,909 | ||||||||||||||
| Other income and expense items that are not major | 3,935 | 10,133 | 24,994 | ||||||||||||||
| Total operating expenses | 152,864 | 241,823 | 378,775 | ||||||||||||||
| Income (loss) from operations | (525) | (2,378) | (81,305) | ||||||||||||||
| Interest expense | 4,678 | 4,464 | 3,547 | ||||||||||||||
| Gain on sale of Taco Cabana | (24,979) | — | — | ||||||||||||||
| Loss on extinguishment of debt | 5,307 | 1,241 | — | ||||||||||||||
| Income (loss) from discontinued operations before income taxes | 14,469 | (8,083) | (84,852) | ||||||||||||||
| Provision for (benefit from) income taxes | (3,986) | (1,258) | (2,461) | ||||||||||||||
| Income (loss) from discontinued operations, net of tax | $ | 18,455 | $ | (6,825) | $ | (82,391) | |||||||||||
F-12
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
A summary of significant investing activity and non-cash operating, investing, and financing activity of the discontinued operations from the consolidated statements of cash flows is as follows:
| Year Ended | |||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | |||||||||||||||
| Non-cash operating activities: | |||||||||||||||||
| Loss (gain) on disposals of property and equipment, net | $ | (217) | $ | (551) | $ | 21 | |||||||||||
| Stock-based compensation | 1,860 | 730 | 454 | ||||||||||||||
| Impairment and other lease charges | 132 | 1,116 | 13,086 | ||||||||||||||
| Goodwill impairment | — | — | 67,909 | ||||||||||||||
| Loss on extinguishment of debt | 5,307 | 1,241 | — | ||||||||||||||
| Gain on sale of Taco Cabana | (24,979) | — | — | ||||||||||||||
| Depreciation and amortization | 7,799 | 16,197 | 17,009 | ||||||||||||||
| Investing activities: | |||||||||||||||||
| Capital expenditures: | |||||||||||||||||
| New restaurant development | $ | — | $ | (854) | $ | (4,065) | |||||||||||
| Restaurant remodeling | (1,283) | (745) | (919) | ||||||||||||||
| Other restaurant capital expenditures | (5,050) | (4,728) | (9,266) | ||||||||||||||
| Corporate and restaurant information systems | (169) | (1,559) | (3,875) | ||||||||||||||
| Total capital expenditures | (6,502) | (7,886) | (18,125) | ||||||||||||||
| Proceeds from sale of Taco Cabana | 74,910 | — | — | ||||||||||||||
| Proceeds from disposals of properties | 1,307 | 4,305 | — | ||||||||||||||
| Proceeds from sale-leaseback transactions | 3,083 | 3,966 | — | ||||||||||||||
| Net cash provided by (used in) investing activities – discontinued operations | $ | 72,798 | $ | 385 | $ | (18,125) | |||||||||||
| Supplemental cash flow disclosures: | |||||||||||||||||
| Interest paid on long-term debt (including capitalized interest of $0, $57, and $247, respectively) | $ | 4,338 | $ | 4,001 | $ | 4,198 | |||||||||||
| Supplemental cash flow disclosures of non-cash investing and financing activities: | |||||||||||||||||
| Accruals for capital expenditures | $ | — | $ | 1,027 | $ | 1,510 | |||||||||||
| Accruals for financing costs associated with debt amendment | — | 277 | — | ||||||||||||||
| Right-of-use assets obtained in exchange for lease liabilities: | |||||||||||||||||
| Operating lease ROU assets | 5,156 | 18,466 | 6,456 | ||||||||||||||
| Finance lease ROU assets | — | 33 | 304 | ||||||||||||||
| Right-of-use assets and lease liabilities reduced for terminated leases: | |||||||||||||||||
| Operating lease ROU assets | 2,695 | 953 | 794 | ||||||||||||||
| Operating lease liabilities | 3,443 | 1,217 | 1,054 | ||||||||||||||
| Operating lease right-of-use assets obtained and lease liabilities incurred as a result of adoption of ASC 842: | |||||||||||||||||
| Operating lease ROU assets | — | — | 112,905 | ||||||||||||||
| Operating lease liabilities | — | — | 122,441 | ||||||||||||||
F-13
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets, consist of the following:
| January 2, 2022 | January 3, 2021 | ||||||||||
| Prepaid contract expenses | $ | 4,462 | $ | 4,138 | |||||||
| Other | 1,244 | 1,508 | |||||||||
| $ | 5,706 | $ | 5,646 | ||||||||
| December 29, 2019 | December 30, 2018 | ||||||
| Prepaid contract expenses | $ | 4,410 | $ | 4,232 | |||
Assets held for sale(1) | 4,110 | — | |||||
| Other | 2,085 | 2,330 | |||||
| $ | 10,605 | $ | 6,562 | ||||
Property and equipment consisted of the following:
| January 2, 2022 | January 3, 2021 | ||||||||||
| Land and land improvements | $ | — | $ | 1,264 | |||||||
Leasehold improvements (1) | 132,641 | 128,918 | |||||||||
| Equipment | 117,652 | 118,988 | |||||||||
| Assets subject to finance leases | 850 | 1,159 | |||||||||
| 251,143 | 250,329 | ||||||||||
| Less accumulated depreciation and amortization | (161,259) | (152,462) | |||||||||
| $ | 89,884 | $ | 97,867 | ||||||||
| December 29, 2019 | December 30, 2018 | ||||||
| Land and land improvements | $ | 21,051 | $ | 20,428 | |||
| Owned buildings | 13,978 | 15,205 | |||||
Leasehold improvements (1) | 212,413 | 207,206 | |||||
| Equipment | 219,610 | 214,674 | |||||
| Assets subject to capital/finance leases | 2,713 | 1,905 | |||||
| 469,765 | 459,418 | ||||||
| Less accumulated depreciation and amortization | (257,821 | ) | (228,090 | ) | |||
| $ | 211,944 | $ | 231,328 | ||||
Assets subject to capital/finance leases primarily pertain to buildings leased for certain restaurant locations and fleet vehicles, and had accumulated amortization at December 29, 2019,January 2, 2022 and December 30, 2018,January 3, 2021 of $1.3$0.6 million and $1.1$0.5 million, respectively.
During the year ended January 3, 2021, the Company sold 8 properties, including 5 properties as a part of sale-leaseback transactions. The net proceeds of the sales were $18.5 million and resulted in a net gain of $(3.3) million, which is included within other expense (income), net, on the consolidated statement of operations.
Depreciation and amortizationamortization expense for all property and equipment for the years ended January 2, 2022, January 3, 2021 and December 29, 2019; December 30, 2018; and December 31, 2017,2019 was $39.2$20.6 million, $37.6$22.0 million and $35.0$22.2 million, respectively.
The Company is required to review goodwill for impairment annually or more frequently when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment as of the last day of the fiscal year and has determined its reporting unitsunit to be its operating segments,segment, Pollo Tropical and Taco Cabana.Tropical.
There were 0no changes in goodwill or goodwill impairment losses recorded for the Pollo Tropical reporting unit during the years ended December 30, 2018,January 2, 2022, January 3, 2021 and December 31, 2017.
As of June 30, 2019 and September 29, 2019, the Company determined that a triggering eventevents had occurred due to a sustained decreasedecreases in the market price of the Company's common stock. In response to the triggering event,events, the Company performed a quantitative impairment test
tests for both the Pollo Tropical and Taco Cabana reporting units. Fair value for each reporting unit was determined using a combination of the income-based approach and two market-based approaches.unit. Based on the impairment test analysis,analyses, the fair value of the Pollo Tropical reporting unit substantially exceeded its carrying amount, whileamount. In 2019, the carrying amount for the Taco Cabana reporting unit exceeded its estimated fair value, which indicated an impairment of the Taco Cabana reporting unit. Lower than expected profitability and a lower profitability and growth outlook for the Taco Cabana reporting unit reduced its income-based and market-based approach fair value. The Company early adopted ASU 2017-04, which eliminates Step 2 from the goodwill impairment test and requires recognition of an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, limited to the carrying value of the reporting unit's goodwill. In the second quarter
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in response to a further decrease in the market price of the Company's common stock and lower than expected profitability in the third quarter of 2019, the Company performed a quantitative impairment test for both the Pollo Tropical and Taco Cabana reporting units as of September 29, 2019. Based on the impairment test analysis, which utilized the same approach used in the second quarter of 2019, the fair value of the Pollo Tropical reporting unit continued to substantially exceed its carrying amount, while the carrying amount for the Taco Cabana reporting unit exceeded its estimated fair value. In the third quarter of 2019, the Company recorded an impairment charge on the goodwill of its Taco Cabana reporting unit of $21.4 million, of which $9.1 million was deductible for tax purposes and resulted in an income tax benefit of $2.1 million. The excess of the Taco Cabana reporting unit's carrying value over its fair value was greater than the balance of the reporting unit's goodwill, resulting in a full impairment of the Taco Cabana reporting unit's goodwill.thousands, except per share data)
The Company's annual goodwill impairment assessmentassessments as of January 2, 2022, January 3, 2021 and December 29, 2019 waswere performed using a qualitative assessment, which included examining key events and circumstances affecting fair value and indicated that it is more likely than not that the Pollo Tropical reporting unit's fair value is greater than its carrying value. There were no changes in goodwill or goodwill impairment losses for the Pollo Tropical reporting unit recorded during the year ended December 29,2019.
A summary of changes in goodwill during the twelve monthsyears ended January 2, 2022, January 3, 2021 and December 29, 2019 is as follows:
| January 2, 2022 | January 3, 2021 | December 29, 2019 | |||||||||||||||
| Goodwill, gross | $ | 56,307 | $ | 56,307 | $ | 56,307 | |||||||||||
| Accumulated impairment losses | — | — | — | ||||||||||||||
| Goodwill | $ | 56,307 | $ | 56,307 | $ | 56,307 | |||||||||||
| Pollo Tropical | Taco Cabana | Total | |||||||||
| Balance, December 30, 2018 | $ | 56,307 | $ | 67,177 | $ | 123,484 | |||||
Impairment charges(1)(2) | — | (67,177 | ) | (67,177 | ) | ||||||
| Balance, December 29, 2019 | $ | 56,307 | $ | — | $ | 56,307 | |||||
The Company reviews its long-lived assets, principally property and equipment and lease ROU assets, for impairment at the restaurant level. The Company has elected to exclude operating lease payments and liabilities from future cash flows and carrying values, respectively, in its impairment review. In addition to considering management's plans, known regulatory or governmental actions and damage due to acts of God (hurricanes, tornadoes, etc.), the Company considers a triggering event to have occurred related to a specific restaurant if the restaurant's cash flows, exclusive of operating lease payments, for the last twelve months are less than a minimum threshold or if consistent levels of cash flows for the remaining lease period are less than the carrying value of the restaurant's assets. If an indicator of impairment exists for any of its assets, an estimate of undiscounted future cash flows, exclusive of operating lease payments, over the life of the primary asset for each restaurant is compared to that long-lived asset group's carrying value, excluding operating lease liabilities. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. There is uncertainty in the projected undiscounted future cash flows used in the Company's impairment review analysis. If actual performance does not achieve the projections, the Company may recognize impairment charges in future periods, and such charges could be material. Prior
A summary of impairment of long-lived assets, which also includes right-of-use asset impairment, and other lease charges (recoveries) is as follows:
| Year Ended | |||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | |||||||||||||||
| Impairment of long-lived assets | $ | 2,095 | $ | 7,318 | $ | 775 | |||||||||||
| Other lease charges (recoveries) | (557) | 705 | (760) | ||||||||||||||
| $ | 1,538 | $ | 8,023 | $ | 15 | ||||||||||||
The Company closed 1 Pollo Tropical restaurant as a result of a lease termination, 1 Pollo Tropical restaurant as the result of the sale of a property and 2 Pollo Tropical restaurants as a result of a limited restaurant portfolio review in 2020.
Impairment charges in 2021 were related primarily to 5 underperforming Pollo Tropical restaurants for which continued sales declines coupled with the adoptionimpact of ASC 842 on December 31, 2018,expected sales declines resulted in a decrease in the estimated future cash flows and impairment of equipment from previously closed restaurants. Other lease charges include gains from lease terminations of $(0.6) million.
Impairment charges in 2020 were related primarily to 3 underperforming Pollo Tropical restaurants, 2 of which were closed in the third quarter of 2020, for closedwhich continued sales declines coupled with the impact of expected sales declines resulted in a decrease in the estimated future cash flows. Additionally, impairment charges consisted of the write-down of saucing islands and self-service soda machines that were removed from Pollo Tropical dining rooms as a result of COVID-19 and the write-down of assets held for sale to their fair value less costs to sell. Other lease charges in 2020 related primarily to lease termination charges of $0.9 million for Pollo Tropical restaurant locations the Company reviewed the future minimumdecided not to develop, net of a gain from lease payments and related ancillary costs from
F-15
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| Pollo Tropical | $ | 15 | $ | 13,587 | $ | 57,947 | |||||
| Taco Cabana | 13,086 | 7,557 | 3,813 | ||||||||
| $ | 13,101 | $ | 21,144 | $ | 61,760 | ||||||
The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions, the Company's history of using these assets in the operation of its business and the Company's expectation of how a market participant would value the assets. In addition, for those restaurants reviewed for impairment where the Company owns the land and building, the Company utilized third-party information such as a broker quoted value to determine the fair value of the property. The Company also utilized discounted future cash flows to determine the fair value of assets for certain leased restaurants with positive discounted projected future cash flows. The Company utilized current market lease rent and discount rates to determine the fair value of right-of-use lease assets. These fair value asset measurements rely on significant
unobservable inputs and are considered Level 3 in the fair value hierarchy. The Level 3 assets measured at fair value associated with impairment charges recorded during the twelve monthsyears ended December 29, 2019,January 2, 2022 and December 30, 2018,January 3, 2021 totaled $5.8$0.4 million and $8.0$2.2 million, respectively.
Other current liabilities consist of the following:
| December 29, 2019 | December 30, 2018 | ||||||
| Operating lease liabilities | $ | 22,338 | $ | — | |||
| Accrued workers' compensation and general liability claims | 4,354 | 4,886 | |||||
| Sales and property taxes | 1,889 | 1,958 | |||||
| Accrued occupancy costs | 891 | 4,554 | |||||
| Other | 2,797 | 2,688 | |||||
| $ | 32,269 | $ | 14,086 | ||||
| January 2, 2022 | January 3, 2021 | ||||||||||
| Operating lease liabilities | $ | 10,381 | $ | 9,715 | |||||||
| Accrued workers' compensation and general liability claims | 3,083 | 3,619 | |||||||||
| Sales and property taxes | 921 | 1,209 | |||||||||
| Accrued occupancy costs | 227 | 269 | |||||||||
| Other | 3,420 | 2,258 | |||||||||
| $ | 18,032 | $ | 17,070 | ||||||||
Other non-current liabilities consist of the following:
| December 29, 2019 | December 30, 2018 | ||||||
| Accrued occupancy costs | $ | 78 | $ | 21,534 | |||
| Accrued workers' compensation and general liability claims | 7,348 | 6,808 | |||||
| Deferred compensation | 424 | 867 | |||||
| Other | 555 | 3,295 | |||||
| $ | 8,405 | $ | 32,504 | ||||
| January 2, 2022 | January 3, 2021 | ||||||||||
| Accrued workers' compensation and general liability claims | 6,432 | 6,791 | |||||||||
Accrued payroll taxes(1) | — | 1,318 | |||||||||
| Deferred compensation | 320 | 491 | |||||||||
| Other | 1,011 | 1,157 | |||||||||
| $ | 7,763 | $ | 9,757 | ||||||||
The following table presents the activity in the closed restaurant reserve, of which $0.1 million and $4.4 million areis included in non-current liabilities at December 29, 2019 and December 30, 2018, respectively, with the remainder inwithin other current liabilities.liabilities on the consolidated balance sheets at January 2, 2022 and January 3, 2021.
| Year Ended | |||||||||||
| January 2, 2022 | January 3, 2021 | ||||||||||
| Balance, beginning of period | $ | 163 | $ | 528 | |||||||
| Payments, net | (23) | (178) | |||||||||
| Other adjustments | (49) | (187) | |||||||||
| Balance, end of period | $ | 91 | $ | 163 | |||||||
| Year Ended | |||||||
| December 29, 2019 | December 30, 2018 | ||||||
| Balance, beginning of period | $ | 8,819 | $ | 12,994 | |||
| Provisions for restaurant closures | — | 2,228 | |||||
| Additional lease charges (recoveries), net | — | (152 | ) | ||||
| Payments, net | (1,405 | ) | (6,778 | ) | |||
Other adjustments(1) | (6,662 | ) | 527 | ||||
| Balance, end of period | $ | 752 | $ | 8,819 | |||
F-16
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
The Company utilizes land and buildings in its operations under various operating and finance lease agreements. The Company does not consider any one of these individual leases material to the Company's operations. Initial lease terms are generally for 20 years and, in many cases, provide for renewal options and in most cases rent escalations. As of December 29, 2019,January 2, 2022, the Company's leases havehave remaining lease terms of 0.30.2 years to 21.819.0 years. Some of the Company's leases include options to extend the lease for up to 4030 additional years. Certain leases require contingent rent, determined as a percentage of sales as defined by the terms of the applicable lease agreement. For most locations, the Company is obligated for occupancy related costs including payment of property taxes, insurance and utilities. Variable lease payments included in rent expense consist of such contingent rent, certain rent payments based on changes in an index and certain occupancy related costs, such as variable common area maintenance expense and property taxes. The Company is not subject to residual value guarantees under any of the lease agreements. Many of the Company's real estate leases contain usage restrictions, but its leases do not contain financial covenants and restrictions.
During fiscal 2020, the Company completed 5 sale-leaseback transactions with third parties. The sale-leaseback transactions do not provide for any continuing involvement by the Company other than normal leases where the Company intends to use the property during the lease term. The net proceeds of the sales were $13.3 million which resulted in a net gain of $2.7 million which is included within other expense (income), net, on the consolidated statement of operations. The leases have initial terms of 20 years plus renewal options and have been accounted for as operating leases.
Lease expense consisted of the following:
| Twelve Months Ended | ||||
| December 29, 2019 | ||||
| Operating lease cost | $ | 45,414 | ||
| Finance lease costs: | ||||
| Amortization of right-of-use assets | $ | 202 | ||
| Interest on lease liabilities | 226 | |||
| Total finance lease costs | $ | 428 | ||
| Variable lease costs | 12,050 | |||
| Sublease income | (4,037 | ) | ||
| Total lease costs | $ | 53,855 | ||
| Year Ended | ||||||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | ||||||||||||||||||
| Operating lease cost | $ | 26,375 | $ | 26,026 | $ | 23,803 | ||||||||||||||
| Finance lease costs: | ||||||||||||||||||||
| Amortization of right-of-use assets | $ | 102 | $ | 98 | 67 | |||||||||||||||
| Interest on lease liabilities | 120 | 136 | 137 | |||||||||||||||||
| Total finance lease costs | $ | 222 | $ | 234 | $ | 204 | ||||||||||||||
| Variable lease costs | $ | 7,320 | $ | 6,999 | 6,074 | |||||||||||||||
| Sublease income | (6,092) | (4,853) | (3,499) | |||||||||||||||||
| Total lease costs | $ | 27,825 | $ | 28,406 | $ | 26,582 | ||||||||||||||
F-17
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
Supplemental balance sheet information related to leases is as follows:
| January 2, 2022 | January 3, 2021 | ||||||||||
| Operating Leases | |||||||||||
| Operating lease right-of-use assets | $ | 154,127 | $ | 164,665 | |||||||
| Other current liabilities | $ | 10,381 | $ | 9,715 | |||||||
| Operating lease liabilities | 163,270 | 174,116 | |||||||||
| Total operating lease liabilities | $ | 173,651 | $ | 183,831 | |||||||
| Finance Leases | |||||||||||
| Property and equipment, gross | $ | 850 | $ | 1,159 | |||||||
| Accumulated amortization | (551) | (496) | |||||||||
| Property and equipment, net | $ | 299 | $ | 663 | |||||||
| Current portion of long-term debt | $ | 63 | $ | 66 | |||||||
| Long-term debt, net of current portion | 438 | 853 | |||||||||
| Total finance lease liabilities | $ | 501 | $ | 919 | |||||||
| December 29, 2019 | |||
| Operating Leases | |||
| Operating lease right-of-use assets | $ | 251,272 | |
| Other current liabilities | $ | 22,338 | |
| Operating lease liabilities | 256,798 | ||
| Total operating lease liabilities | $ | 279,136 | |
| Finance Leases | |||
| Property and equipment, gross | $ | 2,713 | |
| Accumulated amortization | (1,323 | ) | |
| Property and equipment, net | $ | 1,390 | |
| Current portion of long-term debt | $ | 212 | |
| Long-term debt, net of current portion | 1,823 | ||
| Total finance lease liabilities | $ | 2,035 | |
| Weighted Average Remaining Lease Term (in Years) | |||||||||||
| Operating leases | 12.1 | 12.0 | |||||||||
| Finance leases | 6.4 | 9.0 | |||||||||
| Weighted Average Discount Rate | |||||||||||
| Operating leases | 7.71 | % | 7.71 | % | |||||||
| Finance leases | 18.73 | % | 14.62 | % | |||||||
F-18
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
Supplemental cash flow information related to leases is as follows:
| Twelve Months Ended | |||
| December 29, 2019 | |||
| Cash paid for amounts included in the measurement of lease liabilities: | |||
| Operating cash flows for operating leases | $ | 41,216 | |
| Operating cash flows for finance leases | 226 | ||
| Financing cash flows for finance leases | 164 | ||
| Right-of-use assets obtained in exchange for lease liabilities: | |||
| Operating lease ROU assets | 12,654 | ||
| Finance lease ROU assets | 495 | ||
| Right-of-use assets and lease liabilities reduced for terminated leases: | |||
| Operating lease ROU assets | 4,372 | ||
| Operating lease liabilities | 5,126 | ||
| Operating lease right-of-use assets obtained and liabilities incurred as a result of adoption of ASC 842: | |||
| Operating lease ROU assets | 267,743 | ||
| Operating lease liabilities | 291,373 | ||
| Year Ended | |||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | |||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||
| Operating cash flows for operating leases | $ | 25,333 | $ | 26,078 | $ | 20,802 | |||||||||||
| Operating cash flows for finance leases | 120 | 136 | 137 | ||||||||||||||
| Financing cash flows for finance leases | 80 | 60 | 26 | ||||||||||||||
| Right-of-use assets obtained in exchange for lease liabilities: | |||||||||||||||||
| Operating lease ROU assets | 4,975 | 19,150 | 6,198 | ||||||||||||||
| Finance lease ROU assets | — | — | 191 | ||||||||||||||
| Right-of-use assets and lease liabilities reduced for terminated leases: | |||||||||||||||||
| Operating lease ROU assets | 2,761 | 1,773 | 3,578 | ||||||||||||||
| Operating lease liabilities | 3,451 | 1,971 | 4,072 | ||||||||||||||
| Operating lease right-of-use assets obtained and liabilities incurred as a result of adoption of ASC 842: | |||||||||||||||||
| Operating lease ROU assets | — | — | 154,838 | ||||||||||||||
| Operating lease liabilities | — | — | 168,932 | ||||||||||||||
Maturities of lease liabilities were as follows:
| Operating Leases | Finance Leases | ||||||
| 2020 | $ | 42,479 | $ | 434 | |||
| 2021 | 40,189 | 475 | |||||
| 2022 | 38,917 | 475 | |||||
| 2023 | 35,742 | 428 | |||||
| 2024 | 32,481 | 350 | |||||
| Thereafter | 251,977 | 1,278 | |||||
| Total lease payments | 441,785 | 3,440 | |||||
| Less amount representing interest | (162,649 | ) | (1,405 | ) | |||
| Total discounted lease liabilities | 279,136 | 2,035 | |||||
| Less current portion | (22,338 | ) | (212 | ) | |||
| Long-term portion of lease liabilities | $ | 256,798 | $ | 1,823 | |||
| Operating Leases | Finance Leases | ||||||||||
| 2022 | $ | 23,224 | $ | 150 | |||||||
| 2023 | 24,228 | 152 | |||||||||
| 2024 | 22,946 | 113 | |||||||||
| 2025 | 22,209 | 117 | |||||||||
| 2026 | 21,252 | 117 | |||||||||
| Thereafter | 160,469 | 244 | |||||||||
| Total lease payments | 274,328 | 893 | |||||||||
| Less amount representing interest | (100,677) | (392) | |||||||||
| Total discounted lease liabilities | 173,651 | 501 | |||||||||
| Less current portion | (10,381) | (63) | |||||||||
| Long-term portion of lease liabilities | $ | 163,270 | $ | 438 | |||||||
F-19
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
| Operating | Capital | ||||||
| 2019 | $ | 44,427 | $ | 323 | |||
| 2020 | 44,144 | 327 | |||||
| 2021 | 41,396 | 342 | |||||
| 2022 | 40,215 | 342 | |||||
| 2023 | 36,587 | 349 | |||||
| Thereafter | 264,704 | 1,646 | |||||
Total minimum lease payments(1) | $ | 471,473 | 3,329 | ||||
| Less amount representing interest | (1,585 | ) | |||||
| Total obligations under capital leases | 1,744 | ||||||
| Less current portion | (108 | ) | |||||
| Long-term debt under capital leases | $ | 1,636 | |||||
The Company subleases land and buildings related to closed restaurant locations and a closed office location under various operating sublease agreements. Initial sublease terms are generally for the period of time remaining on the head lease term and, in some cases, subleases provide for renewal options and in most cases rent escalations. As of December 29, 2019,January 2, 2022, the Company's subleases have remaining sublease terms of 2.3of 0.3 years to 19.415.5 years. Some of the Company's subleases include options to extend the lease for up to 25 years. Variable leaselease payments included in sublease income consist of certain occupancy related costs, such as variable common area maintenance expense and property taxes where the Company makes the real estate payment and is reimbursed by the lessee. The sublease agreements do not include residual value guarantees. Consistent with the Company's real estate leases, many of the subleases contain usage restrictions, but its subleases do not contain financial covenants and restrictions.
The undiscounted cash flows to be received under operating subleases were as follows:
| Operating Leases | |||||
| 2022 | $ | 5,427 | |||
| 2023 | 6,239 | ||||
| 2024 | 6,377 | ||||
| 2025 | 6,528 | ||||
| 2026 | 6,709 | ||||
| Thereafter | 45,922 | ||||
| Total | $ | 77,202 | |||
| Operating Leases | |||
| 2020 | $ | 4,651 | |
| 2021 | 4,878 | ||
| 2022 | 4,833 | ||
| 2023 | 4,828 | ||
| 2024 | 4,884 | ||
| Thereafter | 45,031 | ||
| Total | $ | 69,105 | |
9. Long-Term Debt
Long-term debt at January 2, 2022 and January 3, 2021 consisted of the following:
| January 2, 2022 | January 3, 2021 | ||||||||||
| Term loan facility | $ | — | $ | 75,000 | |||||||
| Revolving credit facility | — | — | |||||||||
| Finance leases | 501 | 919 | |||||||||
| 501 | 75,919 | ||||||||||
| Less: current portion of long-term debt | (63) | (816) | |||||||||
| Less: unamortized discount and debt issuance costs | — | (3,515) | |||||||||
| $ | 438 | $ | 71,588 | ||||||||
New Senior Credit Facility. On November 23, 2020, the Company terminated its former senior secured revolving credit facility, referred to as the "former senior credit facility," and entered into a new senior secured credit facility among the Company and the lenders, which is referred to as the "new senior credit facility." The new senior credit facility is comprised of a term loan facility (the "term loan facility") of $75.0 million and a revolving credit facility (the "revolving credit facility") of up to $10.0 million and matures on November 23, 2025. The new senior credit facility also provides for potential incremental term loan borrowing increases of up to $37.5 million in the aggregate, subject to, among other items, compliance with a minimum Total Leverage Ratio and other terms specified in the new senior credit facility. As required by the terms of the new senior credit facility, the proceeds from the sale of Taco Cabana were used to fully repay the outstanding term loan borrowings on August 16, 2021. The early repayment was subject to a 103% loan prepayment premium. On January 2, 2022, there were no borrowings under the revolving credit facility.
The new senior credit facility provides that the Company must maintain minimum Liquidity (as defined in the new senior credit facility) of $20.0 million (the "Liquidity Threshold") until January 3, 2022. The new senior credit facility also provides that the Company is not required to be in compliance with the Total Leverage Ratio under the new senior credit facility until January 3, 2022 or the date in which Liquidity is less than the Liquidity Threshold. The Company will be permitted to exercise equity cure rights with respect to compliance with the Total Leverage Ratio subject to certain restrictions as set forth in the new senior credit facility.
F-20
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
| Year Ended | |||||||
| December 30, 2018 | December 31, 2017 | ||||||
| Minimum rent on real property, excluding rent included in pre-opening costs | $ | 35,881 | $ | 36,760 | |||
| Additional rent based on percentage of sales | 153 | 176 | |||||
| Restaurant rent expense | 36,034 | 36,936 | |||||
| Rent included in pre-opening costs | 861 | 856 | |||||
| Administrative and equipment rent | 850 | 988 | |||||
| $ | 37,745 | $ | 38,780 | ||||
| December 29, 2019 | December 30, 2018 | ||||||
| Revolving credit facility | $ | 75,000 | $ | 78,000 | |||
| Finance/capital leases | 2,035 | 1,744 | |||||
| 77,035 | 79,744 | ||||||
| Less: current portion of long-term debt | (212 | ) | (108 | ) | |||
| $ | 76,823 | $ | 79,636 | ||||
Borrowings under the new senior credit facility bear interest at a rate per annum, rate, at the Company's option, equal to either (all terms as defined in the new senior credit facility agreement)facility):
1) the Base Rate plus the Applicable Margin of 6.75% with a minimum Base Rate of 2.00%, or
2) the LIBOR (or Benchmark Replacement) Rate plus the Applicable Margin of 7.75%, with a minimum LIBOR (or Benchmark Replacement) Rate of 1.00%.
In addition, the new senior credit facility requires the Company to pay (i) a commitment fee basedof 0.50% per annum on the applicable Commitment Fee ratedaily amount of 0.25% to 0.35%, based on the Company's Adjusted Leverage Ratio, (with a rate of 0.30% at December 29, 2019) and the unused portion of the facility and (ii) a letter ofrevolving credit participation fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit.
The outstanding borrowings under the Company's seniorrevolving credit facility are prepayable subject towithout penalty or premium (other than customary breakage costs ascosts). The outstanding borrowings under the term loan facility were voluntarily prepayable by the Company, and the new senior credit facility required that proceeds received when certain prepayment events (as defined in the new senior credit facility agreement. Thefacility) occurred must be used to reduce the outstanding revolver and term loan borrowings under the new senior credit facility. Voluntary and mandatory prepayments of the term loan facility requires the Company to comply with customary affirmative, negative and financial covenants, including, without limitation, those limiting the Company's and its subsidiaries' ability to (i) incur indebtedness, (ii) incur liens, (iii) loan, advance, or make acquisitions and other investments or other commitments to construct, acquire or develop new restaurants (subject to certain exceptions), (iv) pay dividends, (v) redeem and repurchase equity interests
The Company's new senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of the Company's indebtedness having an outstanding principal amount in excess of $5$5.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.
The new senior credit facility contains certain covenants, including, without limitation, those limiting the Company's ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in any material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends.
The Company's obligations under the new senior credit facility are secured by all of the Company's and its subsidiaries' assets (including a pledge of all of the capital stock and equity interests of our subsidiaries).
Under the new senior credit facility, the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include, without limitation, payment default, covenant defaults, bankruptcy type defaults, defaults on other indebtedness, certain judgments or upon the occurrence of a change of control (as specified in the new senior credit facility).
As of December 29, 2019,January 2, 2022, the Company was in compliance with the financial covenants under its new senior credit facility. After reserving $3.7 million for letters of credit, $71.3At January 2, 2022, $10.0 million was available for borrowing under the seniorrevolving credit facility at December 29, 2019.facility.
At December 29, 2019,January 2, 2022, there were no principal payments required on borrowings under the new senior credit facility were $75.0 million in 2022. The weighted average interest rate onover each of the borrowings under the senior credit facility was 4.04% and 4.59% at December 29, 2019, and December 30, 2018, respectively. next five years.
Interest expense on the Company's long-term debt excluding lease financing obligations, was $4.9 million, $4.7 million and $3.7 million, $3.9of which $4.7 million, $4.5 million and $2.7$3.5 million was included in income (loss) from discontinued operations, for the years ended January 2, 2022, January 3, 2021 and December 29, 2019; December2019, respectively.
Former Amended Senior Credit Facility. On July 10, 2020, the Company entered into the Second Amendment to Credit Agreement (the former credit agreement as amended, the "former amended senior credit facility") among the Company and a syndicate of lenders. The former amended senior credit facility was scheduled to mature on November 30, 2018;2022. The former amended senior credit facility included adjustments to the Adjusted Leverage Ratio and December 31, 2017, respectively.
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| Current: | |||||||||||
| Federal | $ | (2,347 | ) | $ | (10,378 | ) | $ | (5,718 | ) | ||
| Foreign | 336 | 355 | 346 | ||||||||
| State | 492 | 421 | 445 | ||||||||
| (1,519 | ) | (9,602 | ) | (4,927 | ) | ||||||
| Deferred: | |||||||||||
| Federal | (2,132 | ) | 6,591 | (1,059 | ) | ||||||
| State | (425 | ) | 297 | (1,649 | ) | ||||||
| (2,557 | ) | 6,888 | (2,708 | ) | |||||||
| Valuation allowance | 13,445 | (58 | ) | (120 | ) | ||||||
| $ | 9,369 | $ | (2,772 | ) | $ | (7,755 | ) | ||||
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
The former amended senior credit facility provided that the Company was not required to be in compliance with the Adjusted Leverage Ratio and Fixed Charge Coverage Ratio under the former amended senior credit facility from July 10, 2020 through April 3, 2021. The former amended senior credit facility also provided that the Company maintain minimum liquidity (as defined and provided in the former amended senior credit facility, generally unrestricted cash plus available borrowings under the former amended senior credit facility).
Borrowings under the former amended senior credit facility bore interest at a rate per annum, at the Company's option, equal to either (all terms as defined in the former amended senior credit facility):
1) the Alternate Base Rate plus the Applicable Rate of 4.00% with a minimum Alternate Base Rate of 2.00%, or
2) the Adjusted LIBOR Rate plus the Applicable Rate of 5.00% with a minimum Adjusted LIBOR Rate of 1.00%.
In addition, the former amended senior credit facility required the Company to pay (i) a commitment fee of 0.50% per annum on the daily amount of the unused portion of the facility and (ii) a letter of credit participation fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit.
Former Senior Credit Facility. The former senior credit facility was entered into in November 2017, provided for aggregate revolving credit borrowings of up to $150.0 million (including up to $15.0 million available for letters of credit) and was scheduled to mature on November 30, 2022. The former senior credit facility also provided for potential incremental increases of up to $50.0 million to the revolving credit borrowings available under the former senior credit facility. The former senior secured credit facility was amended on July 10, 2020 before being terminated on November 23, 2020 and replaced with the new senior credit facility discussed above.
Borrowings under the former senior credit facility bore interest at a per annum rate, at the Company's option, equal to either (all terms as defined in the former senior credit facility agreement):
1) the Alternate Base Rate plus the applicable margin of 0.75% to 1.50% based on the Company's Adjusted Leverage Ratio, or
2) the LIBOR Rate plus the applicable margin of 1.75% to 2.50% based on the Company's Adjusted Leverage Ratio.
In addition, the former senior credit facility required the Company to pay (i) a commitment fee based on the applicable Commitment Fee rate of 0.25% to 0.35%, based on the Company's Adjusted Leverage Ratio and the unused portion of the facility and (ii) a letter of credit participation fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit.
For the years ended January 2, 2022 and January 3, 2021, the Company recognized a loss on extinguishment of debt totaling $5.3 million and $1.2 million, respectively, for unamortized deferred financing costs related to the capacity reduction and termination of the term loan under its new senior credit facility and its former senior credit facility, which is included in income (loss) from discontinued operations for the years ended January 2, 2022 and January 3, 2021.
F-22
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
10. Income Taxes
The Company's income tax provision (benefit) was comprised of the following:
| Year Ended | |||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 1,365 | $ | (8,092) | $ | (1,581) | |||||||||||
| Foreign | 362 | 278 | 336 | ||||||||||||||
| State | (42) | 137 | 19 | ||||||||||||||
| 1,685 | (7,677) | (1,226) | |||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (318) | 2,259 | 2,617 | ||||||||||||||
| State | (2,275) | (582) | 767 | ||||||||||||||
| Valuation allowance | 1,991 | (1,044) | 9,672 | ||||||||||||||
| (602) | 633 | 13,056 | |||||||||||||||
| $ | 1,083 | $ | (7,044) | $ | 11,830 | ||||||||||||
Deferred income taxes reflect the effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred income tax assets and liabilities at December 29, 2019,January 2, 2022 and December 30, 2018,January 3, 2021 were as follows:
| December 29, 2019 | December 30, 2018 | |||||||
| Deferred income tax assets: | ||||||||
| Accrued vacation benefits | $ | 875 | $ | 1,017 | ||||
| Incentive compensation | 1,024 | 959 | ||||||
| Other accruals | 2,804 | 2,976 | ||||||
| Deferred income on sale-leaseback of real estate | — | 4,591 | ||||||
| Operating lease liabilities | 65,251 | — | ||||||
| Occupancy costs | 175 | 6,038 | ||||||
| Tax credit carryforwards | 1,949 | 1,534 | ||||||
| Federal net operating loss | 2,770 | 1,040 | ||||||
| Other | 973 | 839 | ||||||
| Gross deferred income tax assets | 75,821 | 18,994 | ||||||
| Deferred income tax liabilities: | ||||||||
| Right-of-use operating lease assets | (58,524 | ) | — | |||||
| Property and equipment depreciation | (6,509 | ) | (5,438 | ) | ||||
| Amortization of other intangibles, net | (34 | ) | (2,121 | ) | ||||
| Cloud-based software deferred costs | (990 | ) | — | |||||
| Other | (400 | ) | (374 | ) | ||||
| Gross deferred income tax liabilities | (66,457 | ) | (7,933 | ) | ||||
| Less: Valuation allowance | (14,123 | ) | (678 | ) | ||||
| Net deferred income tax assets | $ | (4,759 | ) | $ | 10,383 | |||
| January 2, 2022 | January 3, 2021 | |||||||||||||
| Deferred income tax assets: | ||||||||||||||
| Accrued vacation benefits | $ | 544 | $ | 471 | ||||||||||
| Incentive compensation | 1,206 | 1,266 | ||||||||||||
| Other accruals | 2,115 | 2,124 | ||||||||||||
| Capital loss carryfoward | 9,023 | — | ||||||||||||
| Operating lease liabilities | 43,825 | 46,462 | ||||||||||||
| Occupancy costs | 31 | 41�� | ||||||||||||
| Tax credit carryforwards | 1,204 | 1,105 | ||||||||||||
| Federal net operating loss | 872 | — | ||||||||||||
| Other | 1,430 | 2,024 | ||||||||||||
| Gross deferred income tax assets | 60,250 | 53,493 | ||||||||||||
| Deferred income tax liabilities: | ||||||||||||||
| Right-of-use operating lease assets | (38,418) | (41,038) | ||||||||||||
| Property and equipment depreciation | (167) | (3,115) | ||||||||||||
| Amortization of other intangibles, net | (52) | (52) | ||||||||||||
| Cloud-based software deferred costs | (1,127) | (1,159) | ||||||||||||
| Other | (287) | (237) | ||||||||||||
| Gross deferred income tax liabilities | (40,051) | (45,601) | ||||||||||||
| Less: Valuation allowance | (20,428) | (10,161) | ||||||||||||
| Net deferred income tax liabilities | $ | (229) | $ | (2,269) | ||||||||||
The Company establishes a valuation allowance to reduce the carrying amount of deferred income tax assets when it is more likely than not that it will not realize some portion or all of the tax benefit of its deferred tax assets. The Company evaluates whether its deferred income tax assets are probable of realization on a quarterly basis. In performing this analysis, the Company considers all available positive and negative evidence including historical operating results, the estimated timing of
F-23
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
future reversals of existing taxable temporary differences and, when appropriate, estimated future taxable income exclusive of reversing temporary differences and carryforwards.carryforwards. In the fourth quarter of 2019, the Company determined that it iswas more likely than not that its deferred tax assets willwould not be fully realized in future periods and established a valuation allowance of $10.3$6.2 million against federal deferred tax assets and $3.2$3.1 million against state deferred tax assets. At December 29, 2019,January 2, 2022 and January 3, 2021, the Company had a valuation allowance of $14.1$20.4 million and $10.2 million, respectively, against deferred income tax assets where it was determined to be more likely than not that the deferred income tax assets will not be realized through the reversal of existing deferred tax liabilities. At December 30, 2018, the Company had a valuation allowance of $0.7 million against net deferred income tax assets due to foreign income tax credit carryforwards where it was determined to be more likely than not that the deferred income tax asset amounts would not be realized. The valuation allowance increased $13.4$10.3 million in 20192021, of which $1.2 million is recorded in continuing operations related to changes in the Company's deferred tax assets and liabilities and $9.0 million is recorded in discontinued operations primarily related to the capital loss carryforward resulting from the sale of Taco Cabana that the Company does not expect to realize. The valuation allowance increased $0.3 million in 2020 as a result of establishing a valuation allowancechanges in the fourth quarter of 2019,Company's deferred tax assets and decreased $0.1liabilities. The Company's income tax provision (benefit) also includes $0.7 million in 2018 primarily due to expired foreign income2021 and a $(0.7) million benefit in 2020 resulting from changes in tax credits.laws and rates and changes in judgement about the realization of deferred tax assets. The Company's ability to utilize deferred income tax assets and estimate future taxabletaxable income for federal and state purposes can significantly change based on future events and operating results.
The Company's effective tax rate was (12.5)(15.5)%, (55.3)%67.5%, and 17.6%120.3% for the years ended January 2, 2022, January 3, 2021 and December 29, 2019; December 30, 2018; and December 31, 2017,2019, respectively. A reconciliation of the statutory federal income tax provision (benefit) to the effective tax provision (benefit) was as follows:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| Statutory federal income tax provision (benefit) | $ | (15,753 | ) | $ | 1,053 | $ | (15,394 | ) | |||
| State income taxes, net of federal benefit | 49 | 552 | (734 | ) | |||||||
| Change in valuation allowance | 13,445 | (58 | ) | (120 | ) | ||||||
| Change in federal income tax rate and tax methods | (716 | ) | (3,977 | ) | 8,952 | ||||||
| Net share-based compensation-tax benefit deficiencies | 235 | 178 | 228 | ||||||||
| Non-deductible goodwill | 12,357 | — | — | ||||||||
| Non-deductible expenses | 214 | 53 | 84 | ||||||||
| Foreign taxes | 336 | 355 | 346 | ||||||||
| Employment tax credits | (381 | ) | (897 | ) | (914 | ) | |||||
| Foreign tax credits/deductions | (71 | ) | (75 | ) | (121 | ) | |||||
| Other | (346 | ) | 44 | (82 | ) | ||||||
| $ | 9,369 | $ | (2,772 | ) | $ | (7,755 | ) | ||||
| Year Ended | |||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | |||||||||||||||
| Statutory federal income tax provision (benefit) | $ | (1,471) | $ | (2,190) | $ | 2,065 | |||||||||||
| State income taxes, net of federal benefit | (617) | (351) | 621 | ||||||||||||||
| Change in valuation allowance | 1,991 | (1,044) | 9,672 | ||||||||||||||
| Change in federal income tax rate and tax methods | — | (3,846) | (716) | ||||||||||||||
| Change in state income tax rate | (1,092) | — | — | ||||||||||||||
| Net share-based compensation-tax benefit deficiencies | 70 | 276 | 201 | ||||||||||||||
| Unrecognized tax benefits | 731 | — | — | ||||||||||||||
| Loss on transfer of assets | 1,012 | — | — | ||||||||||||||
| Non-deductible expenses | 113 | 122 | 124 | ||||||||||||||
| Foreign taxes | 362 | 278 | 336 | ||||||||||||||
| Employment tax credits | 63 | (158) | (176) | ||||||||||||||
| Foreign tax credits/deductions | (338) | (241) | (71) | ||||||||||||||
| Other | 259 | 110 | (226) | ||||||||||||||
| $ | 1,083 | $ | (7,044) | $ | 11,830 | ||||||||||||
Tax Law Changes. On December 22, 2017,March 27, 2020, the Tax CutsCARES Act was signed into law. The CARES Act includes provisions that allow net operating losses in 2018, 2019 and Jobs2020 to be carried back for up to five years and eliminates the 80% taxable income limitation on net operating loss deductions for 2018 through 2020. The CARES Act (the "Act"),also includes technical amendments that are retroactive to 2018 which includespermit certain assets to be classified as qualified improvement property and expensed immediately. These changes allowed the Company to record an incremental benefit of $3.8 million, which represents the impact of carrying net operating losses from 2018 and 2019 back to years with a provision that reduced thehigher federal corporate income tax rate from 35.0%as well as reclassifying certain assets as qualified improvement property and other changes to 21.0% effective January 1, 2018, was signed into law. In accordance with generally accepted accounting principles, the enactment of this new tax legislation required the Company to revalue its net deferred income taxdepreciation methods for certain assets at the new corporate statutory rate of 21.0% as of the enactment date, which resulted in an adjustment to its deferred income taxes of $9.0 million with a corresponding increase to the provision for income taxes as a discrete item during the fourth quarter of 2017. In 2018,made in conjunction with a cost segregation study conducted prior to filing its 2017the Company's 2019 federal income tax return the Company changed the depreciation method for certain assets for federal income tax purposes to accelerate tax deductions. Changes in the Company's 2017 federal income tax return from the amounts recorded as of December 31, 2017 were primarily the result of changing the depreciable lives of assets for federal income tax purposes. These changes allowed the Company to record an incremental benefit of $4.0 million during the twelve months ended December 30, 2018.2020.
F-24
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in income tax expense. As of December 29, 2019, and December 30, 2018, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.thousands, except per share data)
Unrecognized Tax Benefits. The Company is currently under examination by the Internal Revenue Service for the tax years 2015–2017.2017 and 2019. It is not currently under examination by any other taxing jurisdictions. The tax years 2015–20192013–2020 remain open to examination by the taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.
| Year Ended | |||||||||||||||||
| January 2, 2022 | |||||||||||||||||
| Balance, beginning of period | $ | — | |||||||||||||||
| Increases related to tax positions taken during the current year | — | ||||||||||||||||
| Increases related to tax positions taken during the prior year | 1,958 | ||||||||||||||||
| Decreases related to settlements with taxing authorities | — | ||||||||||||||||
| Decreases related to lapse of applicable statute of limitations | — | ||||||||||||||||
| Balance, end of period | $ | 1,958 | |||||||||||||||
As of January 2, 2022, the total amount of unrecognized tax benefits that, if recognized, would reduce the effective tax rate, is $1.7 million after considering the federal impact of state income taxes.
Purchase of Treasury Stock
In 2018, the Company's board of directors approved a share repurchase program for up to 1,500,000 shares of the Company's common stock. In 2019, the Company's board of directors approved increases to the share repurchase program of an additional 1,500,000 shares of the Company's common stock for an aggregate approval of 3,000,000 shares of the Company's common stock. Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by the Company's board of directors. The Company repurchased 1,381,137 shares and 112,358854,297 shares of its common stock under the program in open market transactionsvalued at approximately $9.4 million and 500,000 shares of common stock valued at approximately $3.7 million during the twelve monthsyears ended December 29, 2019,January 2, 2022 and December 30, 2018, for $14.3 million and $2.8 million,January 3, 2021, respectively. The repurchased shares are held as treasury stock at cost.
F-25
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
Stock-Based Compensation
During the years ended January 2, 2022, January 3, 2021 and December 29, 2019; December 30, 2018; and December 31, 2017,2019, the Company granted certain employees, and in 2019 and 2018 a consultant, in the aggregate 243,948; 161,791;153,998, 422,446 and 182,522243,948 non-vested restricted shares, respectively, under the Fiesta2012 Plan. Shares granted to employees during the years ended January 2, 2022, January 3, 2021 and December 29, 2019; December 30, 2018; and December 31, 2017,2019 vest and become non-forfeitable over a four-year vesting period. The shares granted to the consultant vest over a three-year vesting period. Additionally, during the year ended January 3, 2021, the Company granted certain employees 366,445 non-vested restricted shares that fully vest and become non-forfeitable after two years. The weighted average fair value at the grant date for restricted non-vested shares issued during the years ended January 2, 2022, January 3, 2021 and December 29, 2019; December 30, 2018; and December 31, 2017,2019 was $13.06$17.43 per share, $18.70$9.33 per share and $20.75$13.06 per share, respectively.
During the years ended January 2, 2022, January 3, 2021 and December 29, 2019; December 30, 2018; and December 31, 2017,2019, the Company granted non-employee directors 43,054; 31,146;37,874, 79,260 and 38,59643,054 non-vested restricted shares, respectively, under the Fiesta Plan. The weighted average fair value at the grant date for restricted non-vested shares issued to directors during the twelve monthsyears ended January 2, 2022, January 3, 2021 and December 29, 2019; December 30, 2018; and December 31, 2017,2019 was $12.66$14.39 per share, $20.71$8.16 per share and $21.25$12.66 per share, respectively. These shares vest and become non-forfeitable over a one-year vesting period, or for certain grants to new directors, over a five-year vesting period.
During the year ended December 31, 2017,January 2, 2022, the Company also granted certain employees 11,745a total of 64,089 restricted stock units under the Fiesta Plan. Certain2012 Plan subject to performance conditions, of thewhich 4,619 restricted stock units vest and become non-forfeitable over a four-year vesting period and certain of therelated to discontinued operations. The restricted stock units vest and become non-forfeitable at the end of a four-yearthree-year vesting period. The weighted average fair value at grant date for the restricted stock units issued to employees during the year ended December 31, 2017, was $20.75 per share.
During the year ended and December 29, 2019, the Company granted a certain executive 15,348 restricted stock units which vest in 2 tranches over a two-year vesting period subject to continued service and attainment of specified share price of the Company's common stock. Each tranche vests by the end of a one-year period if the specified target stock price condition for that year is met. If the specified target stock price condition for the first tranche is not met for the year, the cumulative unearned units will be rolled over to the subsequent tranche. The number of shares into which these restricted stock units convert ranges from 0no shares, if the service and market performance conditions are not met, to 15,348 shares, if the service and market performance conditions are met in the last vesting period. The weighted average fair value at grant date for the restricted stock units granted in the year ended December 29, 2019 was $1.76 per share. The specified share price was not attained and these shares, as well as all other restricted stock units subject to attainment of a specified share price granted in 2018 and 2017, were forfeited in 2021.
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable requisite service period of the award (the vesting period) using the straight-line method, or for restricted stock units subject to market performance conditions using the accelerated method. Stock-based compensation expense from continuing operations for the years ended January 2, 2022, January 3, 2021 and December 29, 2019; December 30, 2018;2019 was $4.2 million, $2.8 million and $2.4 million, respectively. Stock-based compensation expense from discontinued operations for the years ended January 2, 2022, January 3, 2021 and December 31, 2017,29, 2019 was $2.8$1.9 million, $3.5$0.7 million and $3.5$0.5 million, respectively. As of December 29, 2019,January 2, 2022, the total unrecognized stock-based compensation expense related to non-vested shares and restricted stock units was approximately $4.0$5.8 million. At December 29, 2019,January 2, 2022, the remaining weighted average vesting period for non-vested restricted shares was 2.41.6 years and restricted stock units was 0.72.2 years.
F-26
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
A summary of all non-vested restricted shares and restricted stock units activity for the year ended December 29, 2019,January 2, 2022 is as follows:
| Non-Vested Shares | Restricted Stock Units | ||||||||||||
| Shares | Weighted Average Grant Date Fair Value | Units | Weighted Average Grant Date Fair Value | ||||||||||
| Outstanding at December 30, 2018 | 287,866 | $ | 20.70 | 231,112 | $ | 12.44 | |||||||
| Granted | 287,002 | 13.00 | 15,348 | 1.76 | |||||||||
| Vested/Released | (131,185 | ) | 20.30 | (3,516 | ) | 62.05 | |||||||
| Forfeited | (88,078 | ) | 17.02 | (66,582 | ) | 15.34 | |||||||
| Outstanding at December 29, 2019 | 355,605 | $ | 15.47 | 176,362 | $ | 9.42 | |||||||
| Non-Vested Shares | Restricted Stock Units | ||||||||||||||||||||||
| Shares | Weighted Average Grant Date Fair Value | Units | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
| Outstanding at January 3, 2021 | 991,676 | $ | 10.26 | 150,585 | $ | 9.49 | |||||||||||||||||
| Granted | 191,872 | 16.83 | 64,089 | 17.43 | |||||||||||||||||||
| Vested/Released | (388,120) | 11.48 | (2,030) | 20.75 | |||||||||||||||||||
| Forfeited | (26,410) | 12.92 | (148,469) | 9.32 | |||||||||||||||||||
| Outstanding at January 2, 2022 | 769,018 | $ | 11.19 | 64,175 | $ | 17.45 | |||||||||||||||||
The fair value of the non-vested restricted shares and all other restricted stock units is based on the closing price on the date of grant. The fair value of the restricted stock units subject to market conditions was estimated using the Monte Carlo simulation method. The assumptions used to value grant restricted stock units subject to market conditions are detailed below:
| 2019 | 2018 | 2017 | ||||||||||||||
| Non-CEO Grant | Non-CEO Grant | Non-CEO Grant | CEO Grant | |||||||||||||
| Grant date stock price | $ | 14.66 | $ | 18.70 | $ | 17.60 | $ | 22.55 | ||||||||
| Fair value at grant date | $ | 1.76 | $ | 6.96 | $ | 9.31 | $ | 12.90 | ||||||||
| Risk free interest rate | 2.53 | % | 2.40 | % | 1.51 | % | 1.52 | % | ||||||||
| Expected term (in years) | 2 | 3 | 2.5 | 3.8 | ||||||||||||
| Dividend yield | — | % | — | % | — | % | — | % | ||||||||
| Expected volatility | 43.18 | % | 41.49 | % | 41.72 | % | 39.06 | % | ||||||||
| 2019 | ||||||||||||||||||||||||||
| Grant date stock price | $ | 14.66 | ||||||||||||||||||||||||
| Fair value at grant date | $ | 1.76 | ||||||||||||||||||||||||
| Risk free interest rate | 2.53 | % | ||||||||||||||||||||||||
| Expected term (in years) | 2 | |||||||||||||||||||||||||
| Dividend yield | — | % | ||||||||||||||||||||||||
| Expected volatility | 43.18 | % | ||||||||||||||||||||||||
The fair value of the shares vested and released during the years ended January 2, 2022, January 3, 2021 and December 29, 2019; December 30, 2018; and December 31, 2017,2019 was $1.8$5.4 million, $2.5$1.2 million and $2.1$1.8 million, respectively.
The "Other" column includes corporate-related items not allocated to reportable segments and consists primarily of corporate-owned property and equipment, lease assets, miscellaneous prepaid costs, capitalized costs associated with the issuance of indebtedness, corporate cash accounts and a current income tax receivable. The "Other" column also includes corporate costs that were previously allocated to Taco Cabana and are not included in discontinued operations.
F-27
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
| Year Ended | Pollo Tropical | Taco Cabana | Other | Consolidated | ||||||||||||
| December 29, 2019: | ||||||||||||||||
| Restaurant sales | $ | 361,693 | $ | 296,570 | $ | — | $ | 658,263 | ||||||||
| Franchise revenue | 1,780 | 900 | — | 2,680 | ||||||||||||
| Cost of sales | 115,119 | 92,334 | — | 207,453 | ||||||||||||
Restaurant wages and related expenses(1) | 84,909 | 94,269 | — | 179,178 | ||||||||||||
| Restaurant rent expense | 22,050 | 25,755 | — | 47,805 | ||||||||||||
| Other restaurant operating expenses | 49,768 | 42,129 | — | 91,897 | ||||||||||||
| Advertising expense | 12,358 | 10,821 | — | 23,179 | ||||||||||||
General and administrative expense(2) | 31,023 | 25,172 | — | 56,195 | ||||||||||||
| Adjusted EBITDA | 50,560 | 7,889 | — | 58,449 | ||||||||||||
| Depreciation and amortization | 21,476 | 17,719 | — | 39,195 | ||||||||||||
| Capital expenditures | 21,921 | 18,023 | 1,303 | 41,247 | ||||||||||||
| December 30, 2018: | ||||||||||||||||
| Restaurant sales | $ | 374,381 | $ | 311,544 | $ | — | $ | 685,925 | ||||||||
| Franchise revenue | 1,815 | 857 | — | 2,672 | ||||||||||||
| Cost of sales | 123,042 | 95,904 | — | 218,946 | ||||||||||||
Restaurant wages and related expenses(1) | 87,025 | 101,106 | — | 188,131 | ||||||||||||
| Restaurant rent expense | 17,457 | 18,577 | — | 36,034 | ||||||||||||
| Other restaurant operating expenses | 51,757 | 49,071 | — | 100,828 | ||||||||||||
| Advertising expense | 13,068 | 10,627 | — | 23,695 | ||||||||||||
General and administrative expense(2) | 29,621 | 24,904 | — | 54,525 | ||||||||||||
| Adjusted EBITDA | 54,903 | 13,059 | — | 67,962 | ||||||||||||
| Depreciation and amortization | 21,372 | 16,232 | — | 37,604 | ||||||||||||
| Capital expenditures | 27,667 | 28,886 | 1,297 | 57,850 | ||||||||||||
| December 31, 2017: | ||||||||||||||||
| Restaurant sales | $ | 372,328 | $ | 294,256 | $ | — | $ | 666,584 | ||||||||
| Franchise revenue | 1,787 | 761 | — | 2,548 | ||||||||||||
| Cost of sales | 117,493 | 85,395 | — | 202,888 | ||||||||||||
Restaurant wages and related expenses(1) | 88,587 | 96,155 | — | 184,742 | ||||||||||||
| Restaurant rent expense | 18,949 | 17,987 | — | 36,936 | ||||||||||||
| Other restaurant operating expenses | 52,848 | 46,079 | — | 98,927 | ||||||||||||
| Advertising expense | 16,397 | 9,694 | — | 26,091 | ||||||||||||
General and administrative expense(2) | 33,025 | 26,608 | — | 59,633 | ||||||||||||
| Adjusted EBITDA | 50,937 | 16,508 | — | 67,445 | ||||||||||||
| Depreciation and amortization | 21,758 | 13,199 | — | 34,957 | ||||||||||||
| Capital expenditures | 31,786 | 20,781 | 3,299 | 55,866 | ||||||||||||
| Identifiable Assets: | ||||||||||||||||
| December 29, 2019 | $ | 340,012 | $ | 195,883 | $ | 32,746 | $ | 568,641 | ||||||||
| December 30, 2018 | 207,435 | 174,681 | 36,543 | 418,659 | ||||||||||||
| December 31, 2017 | 227,194 | 167,237 | 28,882 | 423,313 | ||||||||||||
| Year Ended | Pollo Tropical | Other | Continuing Operations | |||||||||||||||||
| January 2, 2022: | ||||||||||||||||||||
| Restaurant sales | $ | 355,492 | $ | — | $ | 355,492 | ||||||||||||||
| Franchise revenue | 1,785 | — | 1,785 | |||||||||||||||||
| Cost of sales | 108,593 | — | 108,593 | |||||||||||||||||
Restaurant wages and related expenses(1) | 91,669 | — | 91,669 | |||||||||||||||||
| Restaurant rent expense | 23,592 | — | 23,592 | |||||||||||||||||
| Other restaurant operating expenses | 57,125 | 305 | 57,430 | |||||||||||||||||
| Advertising expense | 11,508 | — | 11,508 | |||||||||||||||||
General and administrative expense(2) | 33,157 | 12,367 | 45,524 | |||||||||||||||||
| Adjusted EBITDA | 36,802 | (11,786) | 25,016 | |||||||||||||||||
| Depreciation and amortization | 19,962 | 612 | 20,574 | |||||||||||||||||
| Capital expenditures | 12,424 | 602 | 13,026 | |||||||||||||||||
| January 3, 2021: | ||||||||||||||||||||
| Restaurant sales | $ | 314,112 | $ | — | $ | 314,112 | ||||||||||||||
| Franchise revenue | 1,246 | — | 1,246 | |||||||||||||||||
| Cost of sales | 100,080 | — | 100,080 | |||||||||||||||||
Restaurant wages and related expenses(1) | 74,328 | — | 74,328 | |||||||||||||||||
| Restaurant rent expense | 22,773 | — | 22,773 | |||||||||||||||||
| Other restaurant operating expenses | 47,354 | 469 | 47,823 | |||||||||||||||||
| Advertising expense | 8,384 | (5) | 8,379 | |||||||||||||||||
General and administrative expense(2) | 28,622 | 11,226 | 39,848 | |||||||||||||||||
| Adjusted EBITDA | 36,517 | (10,526) | 25,991 | |||||||||||||||||
| Depreciation and amortization | 21,112 | 897 | 22,009 | |||||||||||||||||
| Capital expenditures | 9,163 | 1,320 | 10,483 | |||||||||||||||||
| December 29, 2019: | ||||||||||||||||||||
| Restaurant sales | $ | 361,693 | $ | — | $ | 361,693 | ||||||||||||||
| Franchise revenue | 1,780 | — | 1,780 | |||||||||||||||||
| Cost of sales | 115,119 | — | 115,119 | |||||||||||||||||
Restaurant wages and related expenses(1) | 84,909 | — | 84,909 | |||||||||||||||||
| Restaurant rent expense | 22,050 | — | 22,050 | |||||||||||||||||
| Other restaurant operating expenses | 49,768 | 506 | 50,274 | |||||||||||||||||
| Advertising expense | 12,358 | (5) | 12,353 | |||||||||||||||||
General and administrative expense(2) | 31,023 | 10,882 | 41,905 | |||||||||||||||||
| Adjusted EBITDA | 50,560 | (10,589) | 39,971 | |||||||||||||||||
| Depreciation and amortization | 21,476 | 710 | 22,186 | |||||||||||||||||
| Capital expenditures | 21,921 | 1,201 | 23,122 | |||||||||||||||||
| Identifiable Assets: | ||||||||||||||||||||
| January 2, 2022 | $ | 310,972 | $ | 56,141 | $ | 367,113 | ||||||||||||||
| January 3, 2021 | 311,905 | 88,337 | 400,242 | |||||||||||||||||
(1) Includes stock-based compensation expense of $53, $73 and $70 for the years ended January 2, 2022, January 3, 2021 and December 29, 2019, respectively.
(2) Includes stock-based compensation expense of $4,163, $2,681 and $2,320 for the years ended January 2, 2022, January 3, 2021 and December 29, 2019, respectively.
F-28
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
A reconciliation of consolidated net income (loss) to Adjusted EBITDA follows:
| Year Ended | Pollo Tropical | Taco Cabana | Consolidated | |||||||||
| December 29, 2019: | ||||||||||||
| Net loss | $ | (84,386 | ) | |||||||||
| Provision for income taxes | 9,369 | |||||||||||
| Income (loss) before taxes | $ | 20,300 | $ | (95,317 | ) | $ | (75,017 | ) | ||||
| Add: | ||||||||||||
| Non-general and administrative expense adjustments: | ||||||||||||
| Depreciation and amortization | 21,476 | 17,719 | 39,195 | |||||||||
| Impairment and other lease charges | 15 | 13,086 | 13,101 | |||||||||
| Goodwill impairment | — | 67,909 | 67,909 | |||||||||
| Interest expense | 1,953 | 1,919 | 3,872 | |||||||||
| Closed restaurant rent expense, net of sublease income | 3,260 | 903 | 4,163 | |||||||||
| Other expense (income), net | 862 | 179 | 1,041 | |||||||||
| Stock-based compensation expense in restaurant wages | 70 | 125 | 195 | |||||||||
| Total non-general and administrative expense adjustments | 27,636 | 101,840 | 129,476 | |||||||||
| General and administrative expense adjustments: | ||||||||||||
| Stock-based compensation expense | 1,590 | 1,059 | 2,649 | |||||||||
| Restructuring costs and retention bonuses | 827 | 137 | 964 | |||||||||
| Digital and brand repositioning costs | 207 | 170 | 377 | |||||||||
| Total general and administrative expense adjustments | 2,624 | 1,366 | 3,990 | |||||||||
| Adjusted EBITDA | $ | 50,560 | $ | 7,889 | $ | 58,449 | ||||||
| December 30, 2018: | ||||||||||||
| Net income | $ | 7,787 | ||||||||||
| Benefit from income taxes | (2,772 | ) | ||||||||||
| Income (loss) before taxes | $ | 17,639 | $ | (12,624 | ) | $ | 5,015 | |||||
| Add: | ||||||||||||
| Non-general and administrative expense adjustments: | ||||||||||||
| Depreciation and amortization | 21,372 | 16,232 | 37,604 | |||||||||
| Impairment and other lease charges | 13,587 | 7,557 | 21,144 | |||||||||
| Interest expense | 1,920 | 2,046 | 3,966 | |||||||||
| Other expense (income), net | (1,225 | ) | (1,782 | ) | (3,007 | ) | ||||||
| Stock-based compensation expense in restaurant wages | 34 | 56 | 90 | |||||||||
| Total non-general and administrative expense adjustments | 35,688 | 24,109 | 59,797 | |||||||||
| General and administrative expense adjustments: | ||||||||||||
| Stock-based compensation expense | 1,885 | 1,494 | 3,379 | |||||||||
| Board and shareholder matter costs | (328 | ) | (269 | ) | (597 | ) | ||||||
| Restructuring costs and retention bonuses | 196 | 349 | 545 | |||||||||
| Legal settlements and related costs | (177 | ) | — | (177 | ) | |||||||
| Total general and administrative expense adjustments | 1,576 | 1,574 | 3,150 | |||||||||
| Adjusted EBITDA | $ | 54,903 | $ | 13,059 | $ | 67,962 | ||||||
| Year Ended | Pollo Tropical | Other | Continuing Operations | |||||||||||||||||
| January 2, 2022: | ||||||||||||||||||||
| Net income | $ | 10,370 | ||||||||||||||||||
| Income from discontinued operations, net of tax | (18,455) | |||||||||||||||||||
| Provision for income taxes | 1,083 | |||||||||||||||||||
| Income (loss) before taxes | $ | 5,261 | $ | (12,263) | $ | (7,002) | ||||||||||||||
| Add: | ||||||||||||||||||||
| Non-general and administrative adjustments: | ||||||||||||||||||||
| Depreciation and amortization | 19,962 | 612 | 20,574 | |||||||||||||||||
| Impairment and other lease charges | 1,570 | (32) | 1,538 | |||||||||||||||||
| Interest expense | 2,532 | (2,158) | 374 | |||||||||||||||||
| Closed restaurant rent expense, net of sublease income | 1,946 | 1,053 | 2,999 | |||||||||||||||||
| Other expense (income), net | 362 | 116 | 478 | |||||||||||||||||
| Stock-based compensation expense | 53 | — | 53 | |||||||||||||||||
| Total non-general and administrative adjustments | 26,425 | (409) | 26,016 | |||||||||||||||||
| General and administrative adjustments: | ||||||||||||||||||||
| Stock-based compensation expense | 2,540 | 1,623 | 4,163 | |||||||||||||||||
| Restructuring costs and retention bonuses | 78 | (60) | 18 | |||||||||||||||||
| Digital and brand repositioning costs | 1,821 | — | 1,821 | |||||||||||||||||
| Transaction costs | 677 | (677) | — | |||||||||||||||||
| Total general and administrative adjustments | 5,116 | 886 | 6,002 | |||||||||||||||||
| Adjusted EBITDA | $ | 36,802 | $ | (11,786) | $ | 25,016 | ||||||||||||||
| January 3, 2021: | ||||||||||||||||||||
| Net loss | $ | (10,211) | ||||||||||||||||||
| Loss from discontinued operations, net of tax | 6,825 | |||||||||||||||||||
| Benefit from income taxes | (7,044) | |||||||||||||||||||
| Income (loss) before taxes | $ | 2,557 | $ | (12,987) | $ | (10,430) | ||||||||||||||
| Add: | ||||||||||||||||||||
| Non-general and administrative adjustments: | ||||||||||||||||||||
| Depreciation and amortization | 21,112 | 897 | 22,009 | |||||||||||||||||
| Impairment and other lease charges | 8,023 | — | 8,023 | |||||||||||||||||
| Interest expense | 2,405 | (2,113) | 292 | |||||||||||||||||
| Closed restaurant rent expense, net of sublease income | 2,093 | 2,238 | 4,331 | |||||||||||||||||
| Other expense (income), net | (2,373) | 275 | (2,098) | |||||||||||||||||
| Stock-based compensation expense | 73 | — | 73 | |||||||||||||||||
| Total non-general and administrative adjustments | 31,333 | 1,297 | 32,630 | |||||||||||||||||
| General and administrative adjustments: | ||||||||||||||||||||
| Stock-based compensation expense | 1,652 | 1,029 | 2,681 | |||||||||||||||||
| Restructuring costs and retention bonuses | 551 | 135 | 686 | |||||||||||||||||
| Digital and brand repositioning costs | 424 | — | 424 | |||||||||||||||||
| Total general and administrative adjustments | 2,627 | 1,164 | 3,791 | |||||||||||||||||
| Adjusted EBITDA | $ | 36,517 | $ | (10,526) | $ | 25,991 | ||||||||||||||
F-29
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
| Year Ended | Pollo Tropical | Other | Continuing Operations | |||||||||||||||||
| December 29, 2019: | ||||||||||||||||||||
| Net loss | $ | (84,386) | ||||||||||||||||||
| Loss from discontinued operations, net of tax | 82,391 | |||||||||||||||||||
| Provision for income taxes | 11,830 | |||||||||||||||||||
| Income (loss) before taxes | $ | 20,300 | $ | (10,465) | $ | 9,835 | ||||||||||||||
| Add: | ||||||||||||||||||||
| Non-general and administrative adjustments: | ||||||||||||||||||||
| Depreciation and amortization | 21,476 | 710 | 22,186 | |||||||||||||||||
| Impairment and other lease charges | 15 | — | 15 | |||||||||||||||||
| Interest expense | 1,953 | (1,628) | 325 | |||||||||||||||||
| Closed restaurant rent expense, net of sublease income | 3,260 | — | 3,260 | |||||||||||||||||
| Other expense (income), net | 862 | — | 862 | |||||||||||||||||
| Stock-based compensation expense | 70 | — | 70 | |||||||||||||||||
| Total non-general and administrative adjustments | 27,636 | (918) | 26,718 | |||||||||||||||||
| General and administrative adjustments: | ||||||||||||||||||||
| Stock-based compensation expense | 1,590 | 730 | 2,320 | |||||||||||||||||
| Restructuring costs and retention bonuses | 827 | 64 | 891 | |||||||||||||||||
| Digital and brand repositioning costs | 207 | — | 207 | |||||||||||||||||
| Total general and administrative adjustments | 2,624 | 794 | 3,418 | |||||||||||||||||
| Adjusted EBITDA | $ | 50,560 | $ | (10,589) | $ | 39,971 | ||||||||||||||
| Year Ended: | Pollo Tropical | Taco Cabana | Consolidated | |||||||||
| December 31, 2017: | ||||||||||||
| Net loss | $ | (36,232 | ) | |||||||||
| Benefit from income taxes | (7,755 | ) | ||||||||||
| Loss before taxes | $ | (37,831 | ) | $ | (6,156 | ) | $ | (43,987 | ) | |||
| Add: | ||||||||||||
| Non-general and administrative expense adjustments: | ||||||||||||
| Depreciation and amortization | 21,758 | 13,199 | 34,957 | |||||||||
| Impairment and other lease charges | 57,947 | 3,813 | 61,760 | |||||||||
| Interest expense | 1,348 | 1,529 | 2,877 | |||||||||
| Other expense (income), net | 2,427 | (237 | ) | 2,190 | ||||||||
| Stock-based compensation expense in restaurant wages | (4 | ) | 56 | 52 | ||||||||
| Unused pre-production costs in advertising expense | 322 | 88 | 410 | |||||||||
| Total non-general and administrative expense adjustments | 83,798 | 18,448 | 102,246 | |||||||||
| General and administrative expense adjustments: | ||||||||||||
| Stock-based compensation expense | 1,983 | 1,510 | 3,493 | |||||||||
| Terminated capital project | 484 | 365 | 849 | |||||||||
| Board and shareholder matter costs | 1,738 | 1,311 | 3,049 | |||||||||
| Restructuring costs and retention bonuses | 1,390 | 1,030 | 2,420 | |||||||||
| Office restructuring and relocation costs | (152 | ) | — | (152 | ) | |||||||
| Legal settlements and related costs | (473 | ) | — | (473 | ) | |||||||
| Total general and administrative expense adjustments | 4,970 | 4,216 | 9,186 | |||||||||
| Adjusted EBITDA | $ | 50,937 | $ | 16,508 | $ | 67,445 | ||||||
Basic earnings (loss) per share ("EPS") is computed by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during each period. Non-vested restricted shares contain a non-forfeitable right to receive dividends on a one-to-one per share ratio to common shares and are thus considered participating securities. The impact of the participating securities is included in the computation of basic EPS pursuant to the two-class method. The two-class method of computing EPS is an earnings allocation formula that determines earnings attributable to common shares and participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. EPS is computed by dividing undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and non-vested restricted shares based on the weighted average shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if the restricted stock units were to be converted into common shares. Restricted stock units with performance conditions are only included in the diluted EPS calculation to the extent that performance conditions have been met at the measurement date. Diluted EPS is computed by adjusting the basic weighted average number of common shares by the dilutive effect of the restricted stock units, determined using the treasury stock method.
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
The computation of basic and diluted EPS is as follows:
| Year Ended | ||||||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | ||||||||||||||||||
| Basic and diluted EPS: | ||||||||||||||||||||
| Loss from continuing operations | $ | (8,085) | $ | (3,386) | $ | (1,995) | ||||||||||||||
| Income (loss) from discontinued operations | 18,455 | (6,825) | (82,391) | |||||||||||||||||
| Net income (loss) | $ | 10,370 | $ | (10,211) | $ | (84,386) | ||||||||||||||
| Less: income allocated to participating securities | 345 | — | — | |||||||||||||||||
| Net income (loss) available to common stockholders | $ | 10,025 | $ | (10,211) | $ | (84,386) | ||||||||||||||
| Weighted average common shares—basic | 25,356,339 | 25,341,415 | 26,500,356 | |||||||||||||||||
| Restricted stock units | — | — | — | |||||||||||||||||
| Weighted average common shares—diluted | 25,356,339 | 25,341,415 | 26,500,356 | |||||||||||||||||
| Earnings (loss) from continuing operations per common share—basic | $ | (0.31) | $ | (0.13) | $ | (0.07) | ||||||||||||||
| Earnings (loss) from discontinued operations per common share—basic | 0.71 | (0.27) | (3.11) | |||||||||||||||||
| Earnings (loss) per common share—basic | $ | 0.40 | $ | (0.40) | $ | (3.18) | ||||||||||||||
| Earnings (loss) from continuing operations per common share—diluted | $ | (0.31) | $ | (0.13) | $ | (0.07) | ||||||||||||||
| Earnings (loss) from discontinued operations per common share—diluted | 0.71 | (0.27) | (3.11) | |||||||||||||||||
| Earnings (loss) per common share—diluted | $ | 0.40 | $ | (0.40) | $ | (3.18) | ||||||||||||||
| Year Ended | ||||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | ||||||||||
| Basic and diluted EPS: | ||||||||||||
| Net income (loss) | $ | (84,386 | ) | $ | 7,787 | $ | (36,232 | ) | ||||
| Less: income allocated to participating securities | — | 85 | — | |||||||||
| Net income (loss) available to common stockholders | $ | (84,386 | ) | $ | 7,702 | $ | (36,232 | ) | ||||
| Weighted average common shares—basic | 26,500,356 | 26,890,577 | 26,821,471 | |||||||||
| Restricted stock units | — | 3,506 | — | |||||||||
| Weighted average common shares—diluted | 26,500,356 | 26,894,083 | 26,821,471 | |||||||||
| Earnings (loss) per common share—basic | $ | (3.18 | ) | $ | 0.29 | $ | (1.35 | ) | ||||
| Earnings (loss) per common share—diluted | $ | (3.18 | ) | $ | 0.29 | $ | (1.35 | ) | ||||
F-31
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
15. Supplemental Cash Flow Information
The following table details supplemental cash flow information and disclosures of non-cash investing and financing activities:
| Year Ended | |||||||||||||||||
| January 2, 2022 | January 3, 2021 | December 29, 2019 | |||||||||||||||
| Supplemental cash flow disclosures: | |||||||||||||||||
| Interest paid on long-term debt | $ | 220 | $ | 309 | $ | 197 | |||||||||||
| Income tax payments (refunds), net | (6,180) | (2,073) | (15,557) | ||||||||||||||
| Supplemental cash flow disclosures of non-cash investing and financing activities: | |||||||||||||||||
| Accruals for capital expenditures | $ | 2,860 | $ | 325 | $ | 2,587 | |||||||||||
| Cash and restricted cash reconciliation: | |||||||||||||||||
| Cash | $ | 36,797 | $ | 49,778 | $ | 13,089 | |||||||||||
| Restricted cash | 3,837 | 3,584 | — | ||||||||||||||
| Cash and restricted cash, end of year | $ | 40,634 | 53,362 | $ | 13,089 | ||||||||||||
16. Commitments and Contingencies
Lease Assignments. Taco Cabana hasPollo Tropical assigned 2 leases to variousthird parties on properties where it no longer operates restaurants with lease terms expiring on various dates through 2029. Thein 2033 and 2036. Although the assignees are responsible for making the payments required by the leases. The Company is a guarantor under one ofleases, the leases, and it remains secondarily liable as a surety with respect to one of the leases. Pollo Tropical assigned 1 lease to a third party on a property where it no longer operates with a lease term expiring in 2033. The assignee is responsible for making the payments required by the lease. The Company is a guarantor under the lease.leases.
The maximum potential liability for future rental payments that the Company could be required to make under these leases at December 29, 2019,January 2, 2022, was $3.2$4.7 million. The Company could also be obligated to pay property taxes and other lease relatedlease-related costs. The obligations under these leases will generally continue to decrease over time as the operating leases expire. The Company does not believe it is probable that it will be ultimately responsible for the obligations under these leases.
Indemnity of Lease Guarantees. As discussed in Note 2—Dispositions, Taco Cabana, Inc., a former wholly-owned subsidiary of the Company, was sold in the third quarter of 2021 to YTC Enterprises through a stock purchase agreement. The Company's previous owners, Carrols Restaurant Group, Inc. ("Carrols") remains a guarantor under 12 Taco Cabana restaurant property leases with lease terms expiring on various dates through 2030, all of which are still operating as of January 2, 2022. The Company has indemnified Carrols for all obligations under the guarantees per the terms of the Separation and Distribution Agreement entered into in connection with the spin-off of Fiesta. The Company remains liable for all obligations under the terms of the leases in the event YTC Enterprises fails to pay any sums due under the lease, subject to indemnification provisions under the stock purchase agreement.
The maximum potential amount of future undiscounted rental payments the Company could be required to make under these leases at January 2, 2022 was $8.9 million. The obligations under these leases will generally continue to decrease over time as these operating leases expire, except for any execution of renewal options that exist under the original leases. No payments related to these guarantees have been made by the Company to date and none are expected to be required to be made in the future. YTC Enterprises has indemnified the Company for all such obligations and the Company does not believe it is probable it will be required to perform under any of the guarantees or direct obligations.
Legal Matters. The Company is a party to various legal proceedings incidental to the conduct of business. The Company does not believe that the outcome of any of these matters will have a material effect on its consolidated financial statements. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.
FIESTA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
17. Retirement Plans
Fiesta offers certain of the Company's salaried employees the option to participate in the Fiesta Corporation Retirement Savings Plan (the "Retirement Plan"). The Retirement Plan includes a savings option pursuant to section 401(k) of the Internal Revenue Code in addition to a post-tax savings option. Fiesta may elect to contribute to the Retirement Plan on an annual basis. Contributions made by Fiesta to the Retirement Plan for the Company's employees are made after the end of each plan year. For 2019, 20182021 and 2017,2019, Fiesta's discretionary annual contribution is equal to 50% of the employee's contribution up to the first 6% of eligible compensation for a maximum Fiesta contribution of 3% of eligible compensation per participating employee. Under the Retirement Plan, Fiesta contributions prior to and after 2020 begin to vest after 1one year and fully vest after 5five years of service. A year of service is defined as a plan year during which an employee completes at least 1,000 hours of service. For 2020, Fiesta's discretionary contribution is equal to 100% of the first 3% of eligible compensation plus 50% of the next 2% of eligible compensation through the second quarter of 2020. On July 1, 2020, the Company suspended its employer matching contribution through the end of the year as a result of the COVID-19 Pandemic. Fiesta contributions for 2020 vested immediately. Participating employees may contribute up to 50% of their salary annually to either of the savings options, subject to other limitations. The employees have various investment options available under a trust established by the Retirement Plan. Retirement Plan employer matching expense for the years ended January 2, 2022, January 3, 2021 and December 29, 2019; December 30, 2018; and December 31, 2017,2019 was $0.4$0.2 million, $0.5$0.2 million and $0.4$0.3 million, respectively.
Fiesta also has a Deferred Compensation Plan which permits employees not eligible to participate in the Retirement Plan because they have been excluded as "highly compensated" employees (as so defined in the Retirement Plan) to voluntarily defer portions of their base salary and annual bonus. All amounts deferred by the participants earn interest at 8% per annum. There is no Company matching on any portion of the funds. At December 29, 2019,January 2, 2022, and December 30, 2018,January 3, 2021, a total of $0.4$0.3 million and $0.9$0.5 million, respectively, was deferred by the Company's employees under the Deferred Compensation Plan, including accrued interest.
F-33
| Year Ended December 29, 2019 | |||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Revenue | $ | 165,852 | $ | 171,381 | $ | 164,248 | $ | 159,462 | |||||||
Income (loss) from operations(1) | 4,469 | (41,850 | ) | (24,305 | ) | (9,459 | ) | ||||||||
Net income (loss)(2) | 2,289 | (43,440 | ) | (22,182 | ) | (21,053 | ) | ||||||||
| Earnings (loss) per common share—basic | $ | 0.08 | $ | (1.62 | ) | $ | (0.84 | ) | $ | (0.82 | ) | ||||
| Earnings (loss) per common share—diluted | 0.08 | (1.62 | ) | (0.84 | ) | (0.82 | ) | ||||||||
| Year Ended December 30, 2018 | |||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Revenue | $ | 169,484 | $ | 176,827 | $ | 174,648 | $ | 167,638 | |||||||
Income (loss) from operations(1) | 6,878 | 13,500 | (1,921 | ) | (9,476 | ) | |||||||||
Net income (loss)(3) | 4,184 | 9,493 | 2,047 | (7,937 | ) | ||||||||||
| Earnings (loss) per common share—basic | $ | 0.15 | $ | 0.35 | $ | 0.08 | $ | (0.30 | ) | ||||||
| Earnings (loss) per common share—diluted | 0.15 | 0.35 | 0.08 | (0.30 | ) | ||||||||||
FIESTA RESTAURANT GROUP, INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
| Column B | Column C | Column D | Column E | |||||||||||||||||
| Description | Balance at beginning of period | Charged to costs and expenses | Charged to other accounts | Deduction | Balance at end of period | |||||||||||||||
| Year ended December 29, 2019: | ||||||||||||||||||||
| Deferred income tax valuation allowance | $ | 678 | $ | 13,445 | $ | — | $ | — | $ | 14,123 | ||||||||||
| Year ended December 30, 2018: | ||||||||||||||||||||
| Deferred income tax valuation allowance | 736 | (58 | ) | — | — | 678 | ||||||||||||||
| Year ended December 31, 2017: | ||||||||||||||||||||
| Deferred income tax valuation allowance | 856 | (120 | ) | — | — | 736 | ||||||||||||||
Amounts and disclosures within this schedule relate to the Company's continuing operations.
| Column B | Column C | Column D | Column E | |||||||||||||||||||||||||||||
| Description | Balance at beginning of period | Charged to costs and expenses | Charged to other accounts | Deduction | Balance at end of period | |||||||||||||||||||||||||||
| Year ended January 2, 2022: | ||||||||||||||||||||||||||||||||
| Deferred income tax valuation allowance | $ | 10,161 | $ | 10,267 | $ | — | $ | — | $ | 20,428 | ||||||||||||||||||||||
| Year ended January 3, 2021: | ||||||||||||||||||||||||||||||||
| Deferred income tax valuation allowance | 9,902 | 259 | — | — | 10,161 | |||||||||||||||||||||||||||
| Year ended December 29, 2019: | ||||||||||||||||||||||||||||||||
| Deferred income tax valuation allowance | 678 | 9,224 | — | — | 9,902 | |||||||||||||||||||||||||||
F-34
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 26th9th day of February 2020.
March 2022.
| FIESTA RESTAURANT GROUP, INC. | ||||||||
| Date: | ||||||||
/S/ RICHARD C. STOCKINGER | ||||||||
| (Signature) | ||||||||
Richard C. Stockinger Chief Executive Officer | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
/s/ STACEY RAUCH | Director and Chairman of the Board of Directors | |||||||||||||
| Stacey Rauch | ||||||||||||||
/s/ RICHARD C. STOCKINGER | Chief Executive Officer, President and Director | |||||||||||||
| Richard C. Stockinger | ||||||||||||||
/s/ DIRK MONTGOMERY | Senior Vice President, Chief Financial Officer, and Treasurer | |||||||||||||
| Dirk Montgomery | ||||||||||||||
/s/ CHERI KINDER | Vice President, Corporate Controller, and Chief Accounting Officer | |||||||||||||
| Cheri Kinder | ||||||||||||||
/s/ NICHOLAS DARAVIRAS | Director | |||||||||||||
| Nicholas Daraviras | ||||||||||||||
/s/ STEPHEN P. ELKER | Director | |||||||||||||
| Stephen P. Elker | ||||||||||||||
| /s/ NICHOLAS P. SHEPHERD | Director | |||||||||||||
| Nicholas P. Shepherd | ||||||||||||||
/s/ PAUL E. TWOHIG | Director | |||||||||||||
| Paul E. Twohig | ||||||||||||||
| /s/ SHERRILL KAPLAN | Director | |||||||||||||
| Sherrill Kaplan | ||||||||||||||
| /s/ ANDREW RECHTSCHAFFEN | Director | |||||||||||||
| Andrew Rechtschaffen | ||||||||||||||