CARROLS RESTAURANT GROUP, INC. - Quarter Report: 2022 April (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended April 3, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File Number: 001-33174
CARROLS RESTAURANT GROUP, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 83-3804854 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 968 James Street | ||||||||
| Syracuse, | New York | 13203 | ||||||
| (Address of principal executive office) | (Zip Code) | |||||||
Registrant’s telephone number, including area code: (315) 424-0513
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $.01 per share | TAST | The NASDAQ Global Market | ||||||||||||
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 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, 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.
| 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. o | ||||||||||||||
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 May 6, 2022, Carrols Restaurant Group, Inc. had 53,255,697 shares of its common stock, $.01 par value, outstanding.
CARROLS RESTAURANT GROUP, INC.
FORM 10-Q
QUARTER ENDED APRIL 3, 2022
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2
PART I—FINANCIAL INFORMATION
ITEM 1—INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CARROLS RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
| April 3, 2022 | January 2, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 8,481 | $ | 29,151 | |||||||
| Trade and other receivables | 19,894 | 16,644 | |||||||||
| Inventories | 13,174 | 14,023 | |||||||||
| Prepaid rent | 1,214 | 1,581 | |||||||||
| Prepaid expenses and other current assets | 13,031 | 6,802 | |||||||||
| Refundable income taxes | 147 | 147 | |||||||||
| Total current assets | 55,941 | 68,348 | |||||||||
Property and equipment, net of accumulated depreciation of $502,760 and $489,588, respectively | 335,301 | 337,702 | |||||||||
Franchise rights, net of accumulated amortization of $150,983 and $147,486, respectively (Note 4) | 323,272 | 326,769 | |||||||||
| Goodwill (Note 4) | 124,451 | 124,451 | |||||||||
Franchise agreements, at cost less accumulated amortization of $15,383 and $14,608, respectively | 30,258 | 30,788 | |||||||||
| Operating right-of-use assets, net (Note 7) | 785,310 | 791,763 | |||||||||
| Other assets | 11,929 | 7,243 | |||||||||
| Total assets | $ | 1,666,462 | $ | 1,687,064 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt and finance lease liabilities (Notes 7 and 8) | $ | 6,289 | $ | 5,794 | |||||||
| Current portion of operating lease liabilities (Note 7) | 45,428 | 44,688 | |||||||||
| Accounts payable | 30,375 | 31,164 | |||||||||
| Accrued interest | 5,009 | 9,433 | |||||||||
| Accrued payroll, related taxes and benefits | 43,498 | 50,855 | |||||||||
| Accrued real estate taxes | 6,703 | 8,256 | |||||||||
| Other liabilities | 29,182 | 18,433 | |||||||||
| Total current liabilities | 166,484 | 168,623 | |||||||||
| Long-term debt and finance lease liabilities, net of current portion (Notes 7 and 8) | 486,618 | 465,317 | |||||||||
| Operating lease liabilities (Note 7) | 796,946 | 802,959 | |||||||||
| Deferred income taxes, net (Note 9) | 2,424 | 7,617 | |||||||||
| Accrued postretirement benefits | 1,528 | 1,552 | |||||||||
| Other liabilities (Note 6) | 13,284 | 26,772 | |||||||||
| Total liabilities | 1,467,284 | 1,472,840 | |||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Stockholders’ equity (Note 13): | |||||||||||
Preferred stock, par value $.01; authorized 20,000,000 shares, issued and outstanding—100 shares | — | — | |||||||||
Voting common stock, par value $.01; authorized—100,000,000 shares, issued—55,360,650 and 53,374,341 shares, respectively, and outstanding—50,788,597 and 49,932,558 shares, respectively | 529 | 520 | |||||||||
| Additional paid-in capital | 289,748 | 287,816 | |||||||||
| Accumulated deficit | (82,665) | (61,396) | |||||||||
| Accumulated other comprehensive income | 5,693 | 1,411 | |||||||||
| Treasury stock, at cost | (14,127) | (14,127) | |||||||||
| Total stockholders’ equity | 199,178 | 214,224 | |||||||||
| Total liabilities and stockholders’ equity | $ | 1,666,462 | $ | 1,687,064 | |||||||
See notes to unaudited condensed consolidated financial statements.
3
CARROLS RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
| Restaurant sales | $ | 399,476 | $ | 389,993 | |||||||
| Operating expenses: | |||||||||||
| Food, beverage and packaging costs | 123,057 | 113,790 | |||||||||
| Restaurant wages and related expenses | 141,620 | 129,646 | |||||||||
| Restaurant rent expense (Note 7) | 31,013 | 30,314 | |||||||||
| Other restaurant operating expenses | 65,407 | 61,419 | |||||||||
| Advertising expense | 15,964 | 15,369 | |||||||||
General and administrative expenses (including stock-based compensation of $1,941 and $1,469, respectively) | 22,017 | 21,369 | |||||||||
| Depreciation and amortization | 19,542 | 20,609 | |||||||||
| Impairment and other lease charges (Note 5) | 496 | 353 | |||||||||
| Other expense, net | 202 | 227 | |||||||||
| Total operating expenses | 419,318 | 393,096 | |||||||||
| Loss from operations | (19,842) | (3,103) | |||||||||
| Interest expense | 7,436 | 6,726 | |||||||||
| Loss before income taxes | (27,278) | (9,829) | |||||||||
Benefit from income taxes (Note 9) | (6,009) | (2,661) | |||||||||
Net loss | $ | (21,269) | $ | (7,168) | |||||||
Basic and diluted net loss per share (Note 14) | $ | (0.42) | $ | (0.14) | |||||||
Shares used in computing net loss per share: | |||||||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic and diluted weighted average common shares outstanding | 50,460,279 | 49,824,140 | |||||||||
| Comprehensive loss, net of tax: | |||||||||||
Net loss | $ | (21,269) | $ | (7,168) | |||||||
| Change in valuation of interest rate swap (Notes 6 and 8) | 4,282 | 3,159 | |||||||||
| Comprehensive loss | $ | (16,987) | $ | (4,009) | |||||||
See notes to unaudited condensed consolidated financial statements.
4
CARROLS RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
(Unaudited)
| Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Retained | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Paid-In | Earnings | Comprehensive | Treasury Stock | Stockholders' | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | (Deficit) | Income (Loss) | Shares | Amount | Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 2, 2022 | 52,037,511 | $ | 520 | 100 | $ | — | $ | 287,816 | $ | (61,396) | $ | 1,411 | (2,104,953) | $ | (14,127) | $ | 214,224 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 1,941 | — | — | — | — | 1,941 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of non-vested shares and RSUs | 856,039 | 9 | — | — | (9) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (21,269) | — | — | — | (21,269) | |||||||||||||||||||||||||||||||||||||||||||||||||
Change in valuation of interest rate swap, net of income taxes of $1,268 (Note 8) | — | — | — | — | — | — | 4,282 | — | — | 4,282 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 3, 2022 | 52,893,550 | $ | 529 | 100 | $ | — | $ | 289,748 | $ | (82,665) | $ | 5,693 | (2,104,953) | $ | (14,127) | $ | 199,178 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, January 3, 2021 | 51,486,116 | $ | 515 | 100 | $ | — | $ | 306,469 | $ | (18,367) | $ | (3,015) | (2,096,734) | $ | (14,070) | $ | 271,532 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 1,469 | — | — | — | — | 1,469 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of non-vested shares and RSUs | 522,406 | 5 | — | — | (5) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (7,168) | — | — | — | (7,168) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | — | — | (8,219) | (57) | (57) | |||||||||||||||||||||||||||||||||||||||||||||||||
Change in valuation of interest rate swap, net of income taxes of $1,046 (Note 8) | — | — | — | — | — | — | 3,159 | — | — | 3,159 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 4, 2021 | 52,008,522 | $ | 520 | 100 | $ | — | $ | 307,933 | $ | (25,535) | $ | 144 | (2,104,953) | $ | (14,127) | $ | 268,935 | ||||||||||||||||||||||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
5
CARROLS RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
| Cash flows provided by (used in) operating activities: | |||||||||||
| Net loss | $ | (21,269) | $ | (7,168) | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
| Loss on disposals of property and equipment, including sale-leasebacks | 218 | 220 | |||||||||
| Stock-based compensation | 1,941 | 1,469 | |||||||||
| Impairment and other lease charges | 496 | 353 | |||||||||
| Depreciation and amortization | 19,542 | 20,609 | |||||||||
| Amortization of deferred financing costs | 543 | 549 | |||||||||
| Amortization of discount on debt | 32 | 200 | |||||||||
| Deferred income taxes | (6,009) | (2,661) | |||||||||
| Changes in other operating assets and liabilities | (22,063) | (6,535) | |||||||||
| Net cash provided by (used in) operating activities | (26,569) | 7,036 | |||||||||
| Cash flows used for investing activities: | |||||||||||
| Capital expenditures: | |||||||||||
| New restaurant development | (2,622) | (1,643) | |||||||||
| Restaurant remodeling | (5,319) | (1,758) | |||||||||
| Other restaurant capital expenditures | (4,151) | (5,831) | |||||||||
| Corporate and restaurant information systems | (1,097) | (1,395) | |||||||||
| Total capital expenditures | (13,189) | (10,627) | |||||||||
| Proceeds from sale of other assets | 635 | — | |||||||||
| Net cash used for investing activities | (12,554) | (10,627) | |||||||||
| Cash flows provided by (used in) financing activities: | |||||||||||
| Principal payments on Term B and B-1 Loans | (1,063) | (1,250) | |||||||||
| Borrowings under revolving credit facility | 47,750 | — | |||||||||
| Repayments under revolving credit facility | (27,750) | — | |||||||||
| Principal payments on finance lease liabilities | (484) | (137) | |||||||||
| Purchase of treasury shares | — | (57) | |||||||||
| Net cash provided by (used in) financing activities | 18,453 | (1,444) | |||||||||
| Net decrease in cash and cash equivalents | (20,670) | (5,035) | |||||||||
| Cash and cash equivalents, beginning of period | 29,151 | 64,964 | |||||||||
| Cash and cash equivalents, end of period | $ | 8,481 | $ | 59,929 | |||||||
| Supplemental disclosures: | |||||||||||
| Interest paid on long-term debt | $ | 11,260 | $ | 5,960 | |||||||
| Interest paid on lease financing obligations | 26 | 26 | |||||||||
| Interest paid on finance leases | 108 | 22 | |||||||||
| Accruals for capital expenditures | 2,920 | 2,989 | |||||||||
| Finance lease obligations incurred | 3,038 | 546 | |||||||||
| Gain on sale-leaseback transactions | (74) | (4) | |||||||||
| Operating lease assets and liabilities resulting from lease modifications and new leases | 5,620 | 6,882 | |||||||||
| Operating cash flows related to operating leases | 25,521 | 25,354 | |||||||||
See notes to unaudited condensed consolidated financial statements.
6
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except share and per share amounts)
1. Business Description
At April 3, 2022, Carrols Restaurant Group, Inc. (“Carrols Restaurant Group”) operated, as franchisee, 1,026 Burger King® restaurants in 23 Northeastern, Midwestern, Southcentral and Southeastern states and 65 Popeyes® restaurants in seven Southeastern states. Carrols Restaurant Group, Inc. is a holding company and conducts all of its operations through its direct and indirect wholly-owned subsidiaries Carrols Corporation and New CFH, LLC and their wholly-owned subsidiaries. Carrols Corporation's material wholly-owned subsidiary is Carrols LLC, a Delaware limited liability company. New CFH LLC's material direct and indirect wholly-owned subsidiaries include Frayser Quality, LLC and Nashville Quality, LLC (and together with New CFH, LLC's immaterial direct and indirect subsidiaries, collectively, “New CFH”). Unless the context otherwise requires, Carrols Restaurant Group and its direct and indirect wholly-owned subsidiaries are collectively referred to as the “Company.”
2. Significant Accounting Policies
Basis of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its direct and indirect 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 three months ended April 3, 2022 and April 4, 2021 each contained thirteen weeks. The 2022 fiscal year will end January 1, 2023 and will contain 52 weeks.
Basis of Presentation. The unaudited condensed consolidated financial statements as of and for the three months ended April 3, 2022 and April 4, 2021 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such unaudited condensed consolidated financial statements have been included. The results of operations for the three months ended April 3, 2022 are not necessarily indicative of the results to be expected for the full year.
These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended January 2, 2022. The January 2, 2022 consolidated balance sheet data is derived from those audited consolidated financial statements.
Use of Estimates. The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include accrued occupancy costs, insurance liabilities, lease accounting matters, the valuation of acquired assets and liabilities, interest rate swap valuation, the valuation of deferred income tax assets and liabilities, and the evaluation for impairment of goodwill, long-lived assets and franchise rights. Actual results could differ from those estimates.
Segment Information. Operating segments are components of an entity for which discrete financial information is available and is regularly reviewed by the chief operating decision maker in order to allocate resources and assess performance. The Company's chief operating decision-maker, our President and Chief Executive Officer (“CEO”), currently evaluates the Company's operations from a number of different operational perspectives; however, resource allocation decisions are determined based on the chief operating decision-maker's evaluation of the total Company operations. The Company derives all significant revenues from a single operating segment, its restaurant business. Accordingly, the Company views the operating results of its restaurants as one reportable segment.
7
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
Business Combinations. In accordance with ASC 805, the Company allocates the purchase price of an acquired business to its identifiable assets and liabilities based on the estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. The excess value of the net identifiable assets and liabilities acquired over the purchase price, if any, is recorded as a bargain purchase gain. The Company uses all available information to estimate fair values of identifiable intangible assets and property acquired. In making these determinations, the Company may engage an independent third-party valuation specialist to assist with the valuation of certain leasehold improvements, franchise rights and favorable and unfavorable leases.
The Company estimates that the seller's carrying value of acquired restaurant equipment, subject to certain adjustments, is equivalent to the fair value of this equipment at the date of the acquisition. The fair values of assumed franchise agreements are valued as if the remaining term of the agreement is at the market rate. The fair values of acquired land, buildings, certain leasehold improvements and restaurant equipment subject to finance leases are determined using both the cost approach and market approach using significant inputs observable in the open market. The Company categorizes these inputs as Level 2 inputs under ASC 820. The fair value of acquired franchise rights and favorable or unfavorable leases positions are determined using the income approach and include unobservable inputs. The Company categorizes these inputs as Level 3 inputs under ASC 820.
Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. At both April 3, 2022 and January 2, 2022, the Company did not have any cash invested in money market funds classified as cash equivalents on the condensed consolidated balance sheets.
Food, beverage and packaging costs. The Company includes food, beverage and packaging costs and delivery charges, net of any vendor purchase discounts and rebates, in food, beverage, and packaging costs.
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. 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 the Company's own assumptions. Financial instruments include cash and cash equivalents, trade and other receivables, accounts payable and long-term debt. The carrying amounts of cash and cash equivalents, trade and other receivables and accounts payable approximate fair value because of the short-term nature of these financial instruments. The carrying amount of the Term B Loans at April 3, 2022 approximate fair value because of their variable rates. The fair value of the Carrols Restaurant Group 5.875% Senior Notes due 2029 is based on a recent trading value, which is considered a Level 2 input, and at April 3, 2022 was approximately $243.0 million.
The Company recognizes its derivative arrangements on the balance sheet at fair value, which is considered a Level 2 input. The Company’s only derivative is an interest rate swap which is designated as a cash flow hedge. Accordingly, the effective portion of the changes in the fair value of this arrangement is recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of the changes in the fair value of this arrangement is immediately recognized in earnings as interest expense. The Company classifies cash inflows and outflows from derivatives within operating activities on the condensed consolidated statements of cash flows.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analysis of long-lived assets, goodwill and intangible assets. Long-lived assets and definite-lived intangible assets are measured at fair value on a nonrecurring basis using Level 3 inputs. As described in Note 5, the Company recorded long-lived asset impairment charges of $0.2 million during the three months ended April 3, 2022 and $0.3 million during the three months ended April 4, 2021.
8
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
Recently Issued Accounting Pronouncements. In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04 (“ASU 2020-04”) and subsequently ASU No. 2021-01, Reference Rate Reform (Topic 848) in March 2020 and January 2021, respectively. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, including derivative instruments impacted by changes in the interest rates used for discounting cash flows for computing variable margin settlements, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or other reference rates expected to be discontinued in 2022 or 2023. The ASUs establish certain contract modification principles that entities can apply in other areas that may be affected by reference rate reform and certain elective hedge accounting expedients and exceptions. The ASUs may be applied prospectively and are effective for all entities as of March 12, 2020 through December 31, 2022. The Company will adopt this guidance at the discontinuance of LIBOR. The Company is currently evaluating the guidance to determine the timing and extent to which it will apply to the Company's borrowing and interest rate swap arrangements. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.
Subsequent events. The Company reviewed and evaluated subsequent events through the issuance date of the Company’s unaudited condensed consolidated financial statements.
3. Acquisitions
In 2021, the Company acquired an aggregate of 19 Burger King restaurants from other franchisees in the following transactions (in thousands except number of restaurants):
| Closing Date | Number of Restaurants | Purchase Price | Fee-Owned (1) | Market Location | |||||||||||||||||||
| June 17, 2021 | 14 | $ | 27,603 | 12 | Fort Wayne, Indiana | ||||||||||||||||||
| June 23, 2021 | 5 | 3,216 | 1 | Battle Creek, Michigan | |||||||||||||||||||
| 19 | $ | 30,819 | 13 | ||||||||||||||||||||
(1) The 2021 acquisitions included the purchase of 13 fee-owned restaurants, of which 12 were sold in sale-leaseback transactions during the third quarter of 2021 for net proceeds of approximately $20.2 million.
9
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
The Company allocated the aggregate purchase price for the 2021 acquisitions at their estimated fair values. The following table summarizes the final allocation of the aggregate purchase price for the 2021 acquisitions reflected in the condensed consolidated balance sheets as of January 2, 2022:
| Inventory | $ | 229 | |||
| Land and buildings | 20,376 | ||||
| Restaurant equipment | 850 | ||||
| Restaurant equipment - subject to finance leases | 29 | ||||
| Right-of-use assets | 2,997 | ||||
| Leasehold improvements | 550 | ||||
| Franchise fees | 411 | ||||
| Franchise rights | 6,025 | ||||
| Deferred income taxes | 484 | ||||
| Goodwill | 1,832 | ||||
| Operating lease liabilities | (2,900) | ||||
| Finance lease liabilities for restaurant equipment | (35) | ||||
| Accounts payable | (29) | ||||
| Net assets acquired | $ | 30,819 | |||
Goodwill recorded in connection with the 2021 acquisitions represents costs in excess of fair values assigned to the underlying net assets of acquired restaurants. Acquired goodwill that is expected to be deductible for income tax purposes was $1.8 million in 2021.
The results of operations for the restaurants acquired are included from the closing date of the respective acquisition. The 2021 acquired restaurants contributed restaurant sales of $5.2 million in the three months ended April 3, 2022. It is impracticable to disclose net earnings for the post-acquisition period for the acquired restaurants as net earnings of these restaurants were not tracked on a collective basis due to the integration of administrative functions, including field supervision.
The unaudited pro forma impact on the results of operations for the restaurants acquired in 2021 for the three months ended April 4, 2021 are included below. The unaudited pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. The following table summarizes the Company's unaudited pro forma operating results:
| Three Months Ended | |||||
| April 4, 2021 | |||||
| Total revenue | $ | 396,006 | |||
| Net loss | $ | (6,703) | |||
| Basic and diluted net loss per share | $ | (0.13) | |||
This unaudited pro forma financial information does not give effect to any anticipated synergies, operating efficiencies, cost savings or integration costs related to the acquired restaurants.
10
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
4. Intangible Assets
Goodwill. 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 eighth month of its fiscal year. As part of this goodwill impairment assessment, the Company considers certain qualitative factors, such as the Company’s performance, business forecasts and expansion plans. Using both the income approach and the market approach, the Company compares the fair value of each of its reporting units to carrying value. The Company assessed events and circumstances from the date of its annual goodwill impairment test through April 3, 2022 and there were no indicators representing a triggering event. There were no recorded goodwill impairment losses during the three months ended April 3, 2022 and April 4, 2021.
Franchise Rights. Amounts allocated to franchise rights for each acquisition of Burger King and Popeyes restaurants are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one -year renewal period.
The Company assesses the potential impairment of franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each acquisition. 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. No impairment charges were recorded related to the Company’s franchise rights for three months ended April 3, 2022 and April 4, 2021. The change in franchise rights for the three months ended April 3, 2022 is summarized below:
| Balance at January 2, 2022 | $ | 326,769 | |||
| Amortization expense | (3,497) | ||||
| Balance at April 3, 2022 | $ | 323,272 | |||
Amortization expense related to franchise rights was $3.5 million and $3.4 million for the three months ended April 3, 2022 and April 4, 2021, respectively. The Company expects annual amortization expense to be $14.0 million in fiscal 2022, 2023 and 2024 and $13.9 million in 2025 and thereafter.
5. Impairment of Long-Lived Assets and Other Lease Charges
The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. If an indicator of impairment exists for any of its assets, an estimate of the undiscounted future cash flows over the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. 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. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for any right-of-use ("ROU") lease asset impairment or lease-related costs during the remaining term, net of any estimated sublease recoveries.
The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions. The Company determines the fair value of right-of-use lease assets based on an assessment of market rents and a discounted future cash flow model. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy.
11
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
During the three months ended April 3, 2022, the Company recorded impairment and other lease charges of $0.5 million consisting of $0.1 million of initial impairment charges for one underperforming restaurant, capital expenditures at previously impaired restaurants of $0.1 million and $0.3 million of other lease charges related to a restaurant closed during the first quarter.
During the three months ended April 4, 2021, the Company recorded impairment and other lease charges of $0.4 million due primarily to assets at a restaurant closed during the quarter.
6. Other Liabilities, Long-Term
Other liabilities, long-term, at April 3, 2022 and January 2, 2022 consisted of the following:
| April 3, 2022 | January 2, 2022 | ||||||||||
| Accrued occupancy costs | $ | 1,752 | $ | 1,741 | |||||||
| Accrued workers’ compensation and general liability claims | 4,567 | 4,947 | |||||||||
| Deferred compensation | 2,245 | 2,286 | |||||||||
| Deferred federal payroll taxes | — | 10,808 | |||||||||
| Lease finance obligations | 3,417 | 5,780 | |||||||||
| Other | 1,303 | 1,210 | |||||||||
| $ | 13,284 | $ | 26,772 | ||||||||
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (as amended, the “CARES Act”) as a response to the economic uncertainty resulting from COVID-19. The CARES Act provided for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 (which was subsequently deferred to January 3, 2022) and the remaining 50% due December 31, 2022 (which was subsequently deferred to January 3, 2023). As of April 3, 2022, $10.8 million of this deferral remained to be repaid and was recorded in accrued payroll, related taxes and benefits.
7. Leases
The Company utilizes land and buildings in its operations under various 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 twenty years and provide for renewal options with rent escalations. The exercise of such renewal options is generally at the Company’s sole discretion. The Company evaluates renewal options at lease commencement and upon any lease amendments or remodeling activity to determine if such options are reasonably certain to be exercised based on economic factors. Certain leases also require variable 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.
ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments in exchange for that right of use. As the rate implicit within our leases is not readily determinable, the Company uses market and term-specific incremental borrowing rates which consider the rate of interest it expects to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. ROU assets are also reduced by lease incentives, increased by initial direct costs and adjusted by favorable lease assets and unfavorable lease liabilities.
Variable lease components represent amounts that are contractually fixed as a percentage of sales and are recognized in expense as incurred. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets and are recognized as lease expense on a straight-line basis over the lease term. The Company does not account for lease components (e.g., fixed payments including rent) separately from non-lease components (e.g. common area maintenance).
12
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
The Company also utilizes certain restaurant equipment under various finance lease agreements with initial terms of generally to eight years. The Company does not consider any one of these individual leases material to the Company's operations.
For certain leases where rent escalates based upon a change in a financial index, such as the Consumer Price Index, the difference between the index at lease inception and the subsequent fluctuations in that index are included in variable lease costs. Additionally, because the Company has elected to not separate lease and non-lease components, in limited instances variable costs also include payments to the landlord for common area maintenance, real estate taxes, insurance and other operating expenses. Lease expense is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those costs are incurred.
As a result of the COVID-19 pandemic and the resulting economic uncertainty in the restaurant industry in 2020, the Company contacted each of its landlords to potentially negotiate accommodations to preserve cash. For certain leases the Company was able to modify existing payment terms, in some cases through deferral of existing payments until future periods and in some cases through a reduction in payments that would otherwise have been due. The Company elected the practical expedient to not evaluate whether a deferral of rent within the current term is a lease modification. Any concessions which resulted in an extension of the existing lease term were accounted for as a lease modification under current U.S. GAAP guidance. The total rent that was or will be deferred or abated as a result of requests for pandemic-related relief from landlords other than Burger King Corporation (“BKC”, see Note 12) was $5.8 million, of which $4.8 million has been or remains to be repaid over various schedules which began in the third quarter of 2020. As of April 3, 2022, $0.1 million remains to be repaid to landlords related to these deferrals.
Lease Cost
The components and classification of lease expense for the three months ended April 3, 2022 and April 4, 2021 are as follows:
| Three Months Ended | ||||||||||||||||||||
| Lease cost | Classification | April 3, 2022 | April 4, 2021 | |||||||||||||||||
Operating lease cost(1) | Restaurant rent expense | $ | 26,604 | $ | 25,742 | |||||||||||||||
Operating lease cost(2) | General and administrative | 213 | 256 | |||||||||||||||||
| Variable lease cost | Restaurant rent expense | 4,409 | 4,572 | |||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||
| Amortization of right-of-use assets | Depreciation and amortization | 487 | 132 | |||||||||||||||||
| Interest on lease liabilities | Interest expense | 108 | 22 | |||||||||||||||||
| Total lease cost | $ | 31,821 | $ | 30,724 | ||||||||||||||||
(1)Includes short-term leases which are not material.
(2)Represents operating lease costs for property and equipment not directly related to restaurant operations.
13
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
8. Long-term Debt
Long-term debt at April 3, 2022 and January 2, 2022 consisted of the following:
| April 3, 2022 | January 2, 2022 | ||||||||||
| Senior Credit Facility: | |||||||||||
| Term B Loans | $ | 170,813 | $ | 171,875 | |||||||
| Revolving credit borrowings | 20,000 | — | |||||||||
| Senior Notes Due 2029 | 300,000 | 300,000 | |||||||||
| Finance lease liabilities | 8,860 | 6,306 | |||||||||
| Total Funded debt | 499,673 | 478,181 | |||||||||
| Less: current portion of long-term debt and finance lease liabilities | (6,289) | (5,794) | |||||||||
| Less: unamortized debt issuance costs | (6,218) | (6,490) | |||||||||
| Less: unamortized original issue discount | (548) | (580) | |||||||||
| Total Long-term debt | $ | 486,618 | $ | 465,317 | |||||||
Senior Credit Facility. On April 30, 2019, the Company entered into senior secured credit facilities in an aggregate principal amount of $550.0 million, consisting of (i) a Term Loan B Facility in an aggregate principal amount of $425.0 million (the “Term Loan B Facility”) maturing on April 30, 2026 and (ii) a revolving credit facility (including a sub-facility of $35.0 million for standby letters of credit) in an aggregate principal amount of $125.0 million maturing on April 30, 2024 (the “Revolving Credit Facility” and, together with the Term Loan B Facility, the “Senior Credit Facilities”).
On December 13, 2019, the Company entered into the First Amendment to its Senior Credit Facilities (the “First Amendment”) which amended a financial covenant under the Senior Credit Facilities applicable solely with respect to the Revolving Credit Facility that previously required the Company to maintain quarterly a Total Net Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 4.75 to 1.00 (measured on a most recent four quarter basis), to now require that the Company maintain only a First Lien Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 5.75 to 1.00 (as measured on a most recent four quarter basis) if, and only if, on the last day of any fiscal quarter (beginning with the fiscal quarter ended December 29, 2019), the sum of the aggregate principal amount of outstanding revolving credit borrowings under the Revolving Credit Facility and the aggregate face amount of letters of credit issued under the Revolving Credit Facility (excluding undrawn letters of credit in an aggregate face amount up to $12.0 million) exceeds 35% of the aggregate amount of the maximum revolving credit borrowings under the Revolving Credit Facility. The First Amendment also reduced the aggregate maximum revolving credit borrowings under the Revolving Credit Facility by $10.0 million to a total of $115.0 million.
On March 25, 2020, the Company entered into the Second Amendment to its Senior Credit Facilities (the “Second Amendment”). The Second Amendment, among other things, (i) increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility (the “Revolving Committed Amount”) by $15.4 million to a total of $130.4 million, (ii) amended the definition of Applicable Margin (such definition and all other definitions used herein and otherwise not defined herein shall be the meanings set forth in the Senior Credit Facilities), (iii) provided for a commitment fee (the “Ticking Fee”) beginning on the 180th day after the Second Amendment Effective Date and for so long as the Revolving Committed Amount remained greater than $115.0 million, and (iv) provided that the Company shall use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of $115.0 million solely for ongoing operations of the Company and its subsidiaries and shall not be held as cash on the balance sheet. The terms outlined as (ii), (iii) and (iv) were modified in the Sixth Amendment described below.
14
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
On April 8, 2020, the Company entered into the Third Amendment to its Senior Credit Facilities which increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility by $15.4 million to a total of $145.8 million.
On April 16, 2020, the Company entered into the Fourth Amendment to its Senior Credit Facilities (the “Fourth Amendment”). The Fourth Amendment permits the Company to incur and, if necessary, repay indebtedness incurred pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. Subsequent to the Fourth Amendment, the Company withdrew its application for relief under the PPP and returned the funds upon receipt.
On June 23, 2020 (the “Fifth Amendment Effective Date”), the Company entered into the Fifth Amendment to its Senior Credit Facilities (the “Fifth Amendment”). The Fifth Amendment increased the Term Loan (as defined in the Senior Credit Facilities) borrowings in the aggregate principal amount of $75 million of Incremental Term B-1 Loans (as defined in the Senior Credit Facilities). The Incremental Term B-1 Loans constituted a new tranche of Term Loans ranking pari passu in right of payment and security with the Initial Term Loans for all purposes under the Senior Credit Facilities. The Incremental Term B-1 Loans had the same terms as outstanding borrowings under the Company's existing Term Loan B facility pursuant to and in accordance with the Senior Credit Facilities, provided that (i) borrowings under the Incremental Term B-1 Loans bore interest at a rate per annum, at the Company’s option, of (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus the applicable margin of 5.25% or (b) the LIBOR Rate (as defined in the Senior Credit Facilities) (which shall not be less than 1% for Incremental Term B-1 Loans) plus the applicable margin of 6.25% and (ii) certain prepayments of the Incremental Term B-1 Loans by the Company prior to the first anniversary of the Fifth Amendment Effective Date would be subject to a premium to the Administrative Agent (as defined in the Senior Credit Facilities), for the ratable account of each applicable Term Loan Lender (as defined in the Senior Credit Facilities) holding Incremental Term B-1 Loans on the date of such prepayment equal to the Applicable Make-Whole Amount (as defined in the Senior Credit Facilities) with respect to the principal amount of the Incremental Term B-1 Loans so prepaid. The principal amount of the Incremental Term B-1 Loans amortized in an aggregate annual amount equal to 1% of the original principal amount of the Incremental Term B-1 Loans and were repayable in consecutive quarterly installments on the last day of the Company's fiscal quarters beginning on the third fiscal quarter of 2020. The remaining outstanding principal amount of the Incremental Term B-1 Loan and all accrued but unpaid interest and other amounts payable with respect to the Incremental Term B-1 Loan would be due on April 30, 2026, which is the Term Loan Maturity Date (as defined in the Senior Credit Facilities). The net proceeds of the Incremental Term B-1 Loans were $71.3 million after original issue discount and were used for general corporate purposes, including repayment of the outstanding balance of the Revolving Credit Facility. The Term B-1 Loans were repaid in full on June 28, 2021.
On April 6, 2021, the Company entered into the Sixth Amendment to its Senior Credit Facilities (the “Sixth Amendment”) which increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility by $29.2 million to a total of $175.0 million. The Sixth Amendment also amended the definitions in the Senior Credit Facilities of (i) Applicable Margin, to provide that the Applicable Margin for borrowings under the Revolving Credit Facility (including Letter of Credit Fees) shall be at a rate per annum equal to 3.25% for LIBOR Rate Loans and 2.25% for Alternate Base Rate Loans, and (ii) Revolving Maturity Date, to provide that the Revolving Maturity Date is extended to January 29, 2026. In addition, the Sixth Amendment amended the Senior Credit Facilities to remove the obligation by the Company to (i) pay a Ticking Fee pursuant to the Ticking Fee Rate and (ii) use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of $115.0 million solely for ongoing operations of the Company and its subsidiaries and not to hold as cash on the balance sheet.
15
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
On June 28, 2021, the Company entered into the Seventh Amendment to its Senior Credit Facilities (the “Seventh Amendment”). The Seventh Amendment revised (a) the initial amount for calculating the Available Amount (as defined in the Senior Credit Facilities) from $27.0 million to $50.0 million which is utilized, among other items, in determining the amount of Restricted Payments (as defined in the Senior Credit Facilities) and Permitted Investments (as defined in the Senior Credit Facilities), (b) the calculation of the Company's ability to incur an Incremental Term Loan (as defined in the Senior Credit Facilities) or an increase to the Revolving Committed Amount from $135.0 million to $180.0 million, and (c) the general basket for Restricted Payments, Permitted Investments and Restricted Junior Debt Payment (as defined in the Senior Credit Facilities) from an aggregate amount not to exceed the greater of (i) $27.0 million and (ii) 20% of Consolidated EBITDA (as defined in the Senior Credit Facilities) as of the most recently completed Reference Period (as defined in the Senior Credit Facilities) to (i) $50.0 million and (ii) 40% of Consolidated EBITDA as of the most recently completed Reference Period. In addition, the Seventh Amendment revises the Total Net Leverage Ratio required for the Company to make Restricted Payments or prepay Junior Debt (as defined in the Senior Credit Facilities) with unutilized Available Amount from 3.00 to 1.00 to 4.00 to 1.00. The Seventh Amendment also provided for affiliates of the Company to acquire up to 20% of the outstanding term loans pursuant to certain transactions.
On September 30, 2021, the Company entered into the Eighth Amendment to its Senior Credit Facilities (the “Eighth Amendment”). The Eighth Amendment increased the aggregate maximum commitments available for revolving credit borrowings under the revolving credit facility by $40.0 million to a total of $215.0 million.
The Company’s obligations under the Senior Credit Facilities are guaranteed by its subsidiaries and are secured by first priority liens on substantially all of the assets of the Company and its subsidiaries, including a pledge of all of the capital stock and equity interests of its subsidiaries.
Under the Senior Credit Facilities, the Company is required to make mandatory prepayments of borrowings in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions).
The Senior Credit Facilities contain certain covenants, including, without limitation, those limiting the Company’s and its subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in all material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. In addition, the Senior Credit Facilities require the Company to meet a First Lien Leverage Ratio (as defined in the Senior Credit Facilities) if revolving credit borrowings exceed 35% of the aggregate borrowing capacity, as described under the First Amendment above. As the $20.0 million borrowings under the Revolving Credit Facility at April 3, 2022 did not exceed 35% of the aggregate borrowing capacity, no First Lien Leverage Ratio calculation was required. However, if the Company had been subject to the First Lien Leverage Ratio, the Company's First Lien Leverage Ratio was 2.59 to 1.00 as of April 3, 2022 which was below the required First Lien Leverage Ratio of 5.75 to 1.00. As a result, the Company does not expect to have to reduce its term loan borrowings mandatorily with Excess Cash Flow (as defined in the Senior Credit Facilities). The Company was in compliance with the covenants under its Senior Credit Facilities at April 3, 2022.
The Senior Credit Facilities contain customary default provisions, including that 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 events of default which include, without limitation, payment default, covenant default, bankruptcy default, cross-default on other indebtedness, judgment default and the occurrence of a change of control.
The Term Loan B Facility requires quarterly installment payments, which began on September 30, 2019. Amounts outstanding at April 3, 2022 are due and payable as follows:
(i) sixteen remaining quarterly installments of $1.1 million;
(ii) one final payment of $153.8 million on April 30, 2026.
16
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
At April 3, 2022, borrowings under the Senior Credit Facilities bore interest as follows (subject to interest rate swap as described below):
(i) Revolving Credit Facility: at a rate per annum equal to (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus 2.50% or (b) LIBOR Rate (as defined in the Senior Credit Facilities) plus 3.50%.
(ii) Term Loan B Facility: at a rate per annum equal to (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus 2.25% or (b) LIBOR Rate (as defined in the Senior Credit Facilities) plus 3.25%.
The weighted average interest rate for borrowings on long-term debt balances was 4.9% for three months ended April 3, 2022, and 4.4% for the three months ended April 4, 2021.
As of April 3, 2022, there were $20.0 million revolving credit borrowings outstanding and $9.0 million of letters of credit issued under the Revolving Credit Facility. After reserving for issued letters of credit and outstanding revolving credit borrowings, $186.0 million was available for revolving credit borrowings under the Senior Credit Facilities at April 3, 2022.
Senior Notes due 2029. On June 28, 2021, the Company issued $300.0 million principal amount of 5.875% Senior Notes due 2029 (the “Notes”) in a private placement. The proceeds of the offering, together with $46.0 million of revolving credit borrowings under the Senior Credit Facilities, were used to (i) repay $74.4 million of outstanding term B-1 loans and $243.6 million of outstanding term B loans under the Senior Credit Facilities (which included scheduled principal payments), (ii) to pay fees and expenses related to the offering of the Notes and the Seventh Amendment and (iii) for working capital and general corporate purposes, including for possible future repurchases of its common stock and/or a dividend payment and/or payments on its common stock.
Carrols Restaurant Group and certain of its subsidiaries (the "Guarantors") entered into the Indenture (the “Indenture”) dated as of June 28, 2021 with the Bank of New York Mellon Trust Company governing the Notes. The Indenture provides that the Notes will mature on July 1, 2029 and will bear interest at the rate of 5.875% per annum, payable semi-annually on July 1 and January 1 of each year, beginning on January 1, 2022. The entire principal amount of the Notes will be due and payable in full on the maturity date. The Indenture further provides that the Company (i) may redeem some or all of the Notes at any time after July 1, 2024 at the redemption prices described therein, (ii) may redeem up to 40% of the Notes using the proceeds of certain equity offerings completed before July 1, 2024 and (iii) must offer to purchase the Notes if it sells certain of its assets or if specific kinds of changes in control occur, all as set forth in the Indenture. The Notes are senior unsecured obligations of Carrols Restaurant Group and are guaranteed on an unsecured basis by the Guarantors. The Indenture contains certain covenants that limit the ability of Carrols Restaurant Group and the Guarantors to, among other things: incur indebtedness or issue preferred stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments; sell assets; agree to payment restrictions affecting Restricted Subsidiaries (as defined in the Indenture); enter into transactions with affiliates; or merge, consolidate or sell substantially all of the assets. Such restrictions are subject to certain exceptions and qualifications all as set forth in the Indenture. The Company was in compliance with all such covenants as of April 3, 2022.
Interest Rate Swap. In March 2020, the Company entered into an interest rate swap agreement with certain of its lenders under the Senior Credit Facilities to mitigate the risk of increases in the variable interest rate related to term loan borrowings under the Senior Credit Facilities. The interest rate swap fixed the interest rate on 50% of the outstanding borrowings under the Senior Credit Facility at 0.915% plus the applicable margin in its Senior Credit Facilities. The agreement matures on February 28, 2025 and had an original notional amount of $220.0 million. The differences between the variable LIBOR rate and the interest rate swap rate of 0.915% are settled monthly.
On November 12, 2021, the Company partially terminated this interest rate swap to reduce the notional amount hedged from $220.0 million to $120.0 million. The reduction, which settled with net proceeds to the Company of $0.2 million, left the fixed rate and other terms of the swap arrangement unchanged and provided the flexibility to repay borrowings under the Senior Credit Facilities which previously needed to be maintained at the hedged $220.0 million notional amount. The Company made additional interest payments to settle the interest rate swap of $0.2 million during the three months ended April 3, 2022 and $0.4 million in the three months ended April 4, 2021.
17
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
The fair value of the Company's interest rate swap agreement was an asset of $5.7 million as of April 3, 2022 which is included in long-term other assets in the accompanying condensed consolidated balance sheets. Changes in the valuation of the Company's interest rate swap were included as a component of other comprehensive income and will be reclassified to earnings as the income or losses are realized. The Company expects to reclassify net gains totaling $0.9 million into earnings in the next twelve months.
The Company's counterparties under this arrangement provided the Company with quarterly statements of the market values of these instruments based on significant inputs that were observable or could be derived principally from, or corroborated by, observable market data for substantially the full term of the asset or liability. The Company classified this within Level 2 of the valuation hierarchy described in Note 2. The impact on the derivative liabilities for the Company and the counterparties' non-performance risk to the derivative trades was considered when measuring the fair value of derivative liabilities.
9. Income Taxes
The benefit for income taxes for the three months ended April 3, 2022 and April 4, 2021 was comprised of the following:
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
| Current | $ | — | $ | — | |||||||
| Deferred | (8,216) | (2,661) | |||||||||
| Change in valuation allowance | 2,207 | — | |||||||||
| Benefit for income taxes | $ | (6,009) | $ | (2,661) | |||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.
The benefit for income taxes for the three months ended April 3, 2022 was derived using an estimated effective annual income tax rate for all of 2022 of 22.0%, which is inclusive of the estimated change in the Company's deferred tax assets valuation allowance and excludes other discrete tax adjustments. The difference compared to the statutory rate for 2022 is attributed to various nondeductible tax expenses and non-refundable business credits which are not directly related to the amount of pre-tax loss recorded in the period as well as the valuation allowance charge. There were no discrete tax adjustments during the three months ended April 3, 2022.
The benefit for income taxes for the three months ended April 4, 2021 was derived using an estimated effective annual income tax rate for all of 2021 of 21.3%, which excluded any discrete tax adjustments. The difference compared to the statutory rate for 2021 is attributed to various nondeductible tax expenses. The income tax benefit for the three months ended April 4, 2021 included $0.7 million of tax benefit from net discrete tax adjustments.
The Company's federal net operating loss carryforwards generated prior to December 31, 2017 expire beginning in 2035. Federal net operating losses generated subsequent to 2017 have no expiration date. As of April 3, 2022, the Company had federal net operating loss carryforwards of approximately $127.8 million, general business credits ("GBC") carryforwards of $40.0 million and approximately $143.9 million in state net operating loss carryforwards. The Company's GBC carryforwards begin to expire in 2031 and state net operating loss carryforwards begin to expire in 2022.
18
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
The Company performs an assessment of positive and negative evidence regarding the realization of its deferred income tax assets as required by ASC 740. Under ASC 740, the weight given to negative and positive evidence is commensurate only to the extent that such evidence can be objectively verified. ASC 740 prescribes that objective historical evidence, in particular the Company’s three-year cumulative loss position at April 3, 2022, be given greater weight than subjective evidence, including the Company’s forecast of future taxable income, which include assumptions that cannot be objectively verified. In determining the likelihood of future realization of the deferred income tax assets as of April 3, 2022 and January 2, 2022 the Company considered both positive and negative evidence and weighted the effect of such evidence based upon its objectivity. At April 3, 2022 and January 2, 2022, the Company determined that a valuation allowance was needed for certain federal income tax credits in the amount of $26.2 million and $24.4 million, respectively, as they may expire prior to their utilization by the Company. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as projections for growth. The Company recorded income tax expense of $2.2 million in the three months ended April 3, 2022 relative to this valuation reserve.
The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At April 3, 2022 and January 2, 2022, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions. The tax years 2018 - 2021 remain open to examination by the major 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 the uncertainties regarding the timing of examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.
10. Stock-Based Compensation
Stock-based compensation expense for the three months ended April 3, 2022 and April 4, 2021 was $1.9 million and $1.5 million, respectively.
As of April 3, 2022, the total unrecognized stock-based compensation expense relating to time-vested restricted shares and stock options was approximately $7.0 million and the Company expects to record an additional $2.9 million in stock-based compensation expense related to the vesting of these awards in the remainder of 2022. The remaining weighted average vesting period for stock options and non-vested shares was 2.3 years.
Time-vested Restricted Shares. During the three months ended April 3, 2022, the Company granted 1,026,000 time-vested restricted shares to certain of its employees and officers and 226,584 time-vested restricted shares to its outside directors. These shares generally vest in equal installments over their three-year service period, provided the participant has continuously remained an employee, officer or director of the Company.
In addition, on April 1, 2022, the Company granted 100,000 time-vested restricted shares with a two-year vesting period to its new CEO. These shares will vest in equal installments over their two-year service period, provided the participant has continuously remained employed by the Company.
19
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
The Company's time vested shares vest, become non-forfeitable and are expensed over their respective vesting period. The following is a summary of all time-vested restricted share activity for the three months ended April 3, 2022:
| Shares | Weighted Average Grant Date Price | ||||||||||
Non-vested at January 2, 2022 | 1,336,830 | $ | 6.55 | ||||||||
| Granted | 1,352,584 | $ | 2.75 | ||||||||
| Vested | (765,189) | $ | 6.72 | ||||||||
| Forfeited | (57,125) | $ | 5.23 | ||||||||
| Non-vested at April 3, 2022 | 1,867,100 | $ | 3.77 | ||||||||
The fair value of time-vested shares is based on the closing price on the date of grant. In accordance with a transition agreement entered into in connection with the retirement of our former CEO, his remaining 165,000 unvested time-vested restricted shares vested on April 1, 2022.
Performance-based Restricted Shares. On April 1, 2022, 600,000 performance-based restricted shares were granted to our new CEO. These shares fully vest on the third anniversary of the grant date based on the achievement of contractually defined EBITDA and share price growth targets. The fair value of the market-based restricted shares is determined using a Monte Carlo simulation valuation model and these shares will be expensed over their three year performance-based vesting period based on the probability of the Company's attainment of the contractually defined targets.
Stock Options. The Company has issued options to purchase shares of its common stock to certain employees and officers of the Company. These options become exercisable and are being expensed over their three-year vesting period. In accordance with a transition agreement entered into in connection with the retirement of our former CEO, his remaining 412,500 unvested options became fully vested and exercisable on April 1, 2022. The options expire seven years from the date of the grant and were issued with an exercise price equal to the fair market value of the stock price on the date of grant, or $7.12 per share.
The following is a summary of all stock option activity for the three months ended April 3, 2022:
| Options | Weighted Average Exercise Price | Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value(1) | |||||||||||
Options outstanding at January 2, 2022 | 1,025,000 | |||||||||||||
| Forfeited | (49,500) | $7.12 | ||||||||||||
Options Outstanding at April 3, 2022 | 975,500 | $7.12 | 5.4 | $— | ||||||||||
Vested or expected to vest at April 3, 2022 | 975,500 | $7.12 | 5.4 | $— | ||||||||||
Options exercisable at April 3, 2022 | 761,000 | $7.12 | 5.4 | $— | ||||||||||
(1)The aggregate intrinsic value is calculated using the difference between the market price of the Company's common stock at April 3, 2022 of $2.13 and the grant price for only those awards that have a grant price that is less than the market price of the Company's common stock at April 3, 2022. There were no awards having a grant price less than the market price of the Company's common stock at April 3, 2022.
Restricted Stock Units. The Company has issued restricted stock units (“RSUs”) on shares of the Company's common shares to certain officers of the Company.
The following is a summary of all RSU activity for the three months ended April 3, 2022:
20
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
| Units | |||||
Non-vested at January 2, 2022 | 129,620 | ||||
| Vested | (90,850) | ||||
| Non-vested at April 3, 2022 | 38,770 | ||||
11. Commitments and Contingencies
Lease Guarantees. Fiesta Restaurant Group, Inc. (“Fiesta”), a former wholly-owned subsidiary of the Company, was spun-off in 2012 to the Company's stockholders. As of April 3, 2022, the Company is a guarantor under 17 leases from the time when Fiesta was its subsidiary, which have lease terms expiring on various dates through 2030. As of April 3, 2022, the guarantees include eight Fiesta restaurant property leases and nine Taco Cabana leases of which all but one Fiesta-owned restaurant is still operating. Eight of these guarantees are for leases with Pollo Operations, Inc, a wholly owned subsidiary of Fiesta, and nine of the guarantees are for leases with Texas Taco Cabana, L.P., an indirect subsidiary of Taco Cabana, Inc. (together with all direct and indirect subsidiaries, “Taco”). Taco was a wholly owned subsidiary of Fiesta until August 16, 2021 when Fiesta sold all of its outstanding capital stock of Taco Cabana, Inc. to YTC Enterprises, LLC, an affiliate of Yadav Enterprises, Inc. The Company is fully liable for all obligations under the terms of the leases in the event that a tenant fails to pay any sums due under the lease, subject to indemnification provisions of the Separation and Distribution Agreement entered into in connection with the spin-off of Fiesta.
The maximum potential amount of future undiscounted rental payments the Company could be required to make under these leases at April 3, 2022 was $8.3 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. The Company has not recorded a liability for these guarantees in accordance with ASC 460 - Guarantees as Fiesta has indemnified the Company for all such obligations and the Company did not believe it was probable it would be required to perform under any of the guarantees or direct obligations.
Litigation. The Company is party to various litigation matters that arise in the ordinary course of business. The Company does not believe that the outcome of any of these matters will have a material adverse effect on its consolidated financial statements.
Supplier Concentrations. The Company primarily utilizes four distributors, McLane Company Inc., Lineage Foodservice Solutions, LLC, Reinhart Food Service LLC and Performance Foodservice, to supply its Burger King restaurants with the majority of its foodstuffs. As of April 3, 2022, such distributors supplied 31%, 30%, 29% and 10%, respectively, of the Company's Burger King restaurants. The Company utilizes five distributors for its Popeyes restaurants, two for poultry products and three for all other products. For the Company's Popeyes restaurants, one distributor, Customized Distribution Services, supplies poultry products to 69% of its restaurants and supplies non-poultry products to 91% of its restaurants.
Transition Agreement. On September 23, 2021, the Company entered into a transition agreement with its former CEO Daniel T. Accordino, which outlines certain payments to be made in connection with his retirement which occurred on April 1, 2022, subject to his compliance with terms of the agreement.
21
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
12. Transactions with Related Parties
In connection with an acquisition of restaurants from BKC in 2012, Carrols Restaurant Group issued to BKC 100 shares of Series A Convertible Preferred Stock, which Carrols Restaurant Group, BKC and Blue Holdco 1, LLC (“Blue Holdco” and, together with BKC, the “BKC Stockholders”) exchanged for 100 shares of newly issued Series B Convertible Preferred Stock (“Series B Preferred Stock”) in 2018. These preferred shares are convertible into 9,414,580 shares of common stock, which as of April 3, 2022 represents approximately 15.0% of the outstanding shares of the Company's common stock after giving effect to the conversion of the Series B Preferred Stock and excluding shares held in treasury. Pursuant to the Certificate of Designation of the Series B Preferred Stock (the “Certificate of Designation”), the BKC Stockholders are entitled to elect two representatives on the Company's Board of Directors. The approval of the BKC Stockholders is also required before the Company can take certain actions, including, among other things, amending the Company’s certificate of incorporation or bylaws, declaring or paying a special cash dividend, amending the size of the Company’s Board of Directors, or engaging in any business other than the ownership and operation of Burger King restaurants, in each case as more particularly described in the Certificate of Designation.
The Company operates its Burger King restaurants under franchise agreements with BKC and its Popeyes restaurants under franchise agreements with Popeyes Louisiana Kitchen, Inc. (“PLK”), a subsidiary of Restaurant Brands International Inc. (“RBI"). These franchise agreements generally provide for an initial term of twenty years and currently have an initial franchise fee of $50,000. With BKC's and PLK's respective approval, the Company can elect to extend franchise agreements for additional 20 year terms, provided that the restaurant meets the current restaurant image standard and the Company is not in default under terms of the franchise agreement. In addition to the initial franchise fee, the Company generally pays BKC a monthly royalty at a rate of 4.5% of Burger King restaurant sales and PLK a weekly royalty at a rate of 5.0% of Popeyes restaurant sales. Royalty expense was $17.7 million and $17.1 million in the three months ended April 3, 2022 and April 4, 2021, respectively, and is included in other restaurant operating expenses in the condensed consolidated statements of comprehensive loss. Beginning in May of 2021, the Company also pays a monthly fee to BKC for use of its digital platform which was $0.4 million in the three months ended April 3, 2022 and is included in other restaurant operating expenses in the condensed consolidated statements of comprehensive loss.
The Company is also generally required to contribute 4% of restaurant sales from its restaurants to an advertising fund utilized by BKC and PLK for advertising, promotional programs and public relations activities, and additional amounts for local advertising in markets that approve such advertising. Advertising expense associated with these expenditures was $15.6 million and $15.1 million in the three months ended April 3, 2022 and April 4, 2021, respectively.
As of April 3, 2022 and April 4, 2021, the Company leased 224 and 230 of its restaurant locations from BKC, respectively. As of April 3, 2022 and April 4, 2021, the terms and conditions of the leases with BKC are identical to those between BKC and their third party lessors for 95 and 100 restaurants, respectively. Aggregate rent under these BKC leases was $6.7 million for each of the three months ended April 3, 2022 and April 4, 2021, respectively. The Company does not believe that such lease terms have been significantly affected by the fact that the Company and BKC are deemed to be related parties.
As of April 3, 2022 and January 2, 2022, the Company owed BKC and PLK $16.9 million and $16.3 million, respectively, related to the payment of advertising, royalties, digital fees, rent and real estate taxes, which is normally remitted on a monthly basis.
22
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
The Company, Carrols Corporation, Carrols LLC, and BKC entered into an Amended Area Development Agreement on January 4, 2021 (the “Amended ADA”). Under the Amended ADA, Carrols LLC has agreed to open, build and operate a total of 50 new Burger King restaurants, 80% of which must be in Kentucky, Tennessee and Indiana. This includes four Burger King restaurants by September 30, 2021, 10 additional Burger King restaurants by September 30, 2022, 12 additional Burger King restaurants by September 30, 2023, 12 additional Burger King restaurants by September 30, 2024 and 12 additional Burger King restaurants by September 30, 2025. There is a 90-day cure period to meet the required restaurant development each development year. The Company is in ongoing discussions with BKC regarding its development plans, and does not believe the penalties, if any, associated with not meeting these commitments will be material.
In addition, pursuant to the Amended ADA, BKC granted Carrols LLC franchise pre-approval to build new Burger King restaurants or acquire Burger King restaurants from Burger King franchisees with respect to 500 Burger King restaurants in the aggregate in (i) Kentucky, Tennessee and Indiana (excluding certain geographic areas in Indiana) and (ii) (a) 16 states, which include Arkansas, Indiana, Kentucky, Louisiana, Maine, Maryland, Michigan, Mississippi, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont and Virginia (subject to certain exceptions for certain limited geographic areas within certain states) and (b) any other geographic locations that Carrols LLC enters after the commencement date of the Amended ADA pursuant to BKC procedures subject to certain limitations.
In connection with an acquisition of restaurants in 2019, the Company assumed a development agreement for Popeyes, which included an assignment by PLK of its right of first refusal under its franchise agreements with its franchisees for acquisitions in two southern states, as well as a development commitment to open, build and operate approximately 80 new Popeyes restaurants over six years. This development agreement with PLK was terminated on March 17, 2021, with certain covenants applicable to the Company surviving the termination. PLK reserved the right to charge the Company a $0.6 million fee if PLK and the Company were not able to come to a mutually agreeable solution with respect to such fee within a six-month period. The Company has not recorded a liability for such amount as the risk of loss is only considered reasonably possible at this time.
13. Stockholders' Equity
Stock Repurchase Program. On August 2, 2019, the Company's Board of Directors approved a stock repurchase plan (“Repurchase Program”) under which the Company may repurchase up to $25 million of its outstanding common stock. The authorization became effective August 2, 2019.
On August 10, 2021, the Company's Board of Directors approved an extension of the Company's Repurchase Program with approximately $11.0 million of its original $25 million in capacity remaining. The authorization will expire on August 2, 2023, unless terminated earlier by the Board of Directors. Purchases under the Repurchase Program may be made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions (including, without limitation, the use of Rule 10b5-1 plans) in compliance with applicable federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The Company has no obligation to repurchase stock under the Repurchase Program, and the timing, actual number and value of shares purchased will depend on the Company's stock price, trading volume, general market and economic conditions, and other factors.
At April 3, 2022, $11.0 million was available to repurchase shares under the Repurchase Program. Shares repurchased are being held in treasury until they are retired at the discretion of the Board of Directors.
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CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
14. Net Loss per Share
The Company applies the two-class method to calculate and present net income (loss) per share. The Company's non-vested restricted share awards and Series B Convertible Preferred Stock contain non-forfeitable rights to dividends and are considered participating securities for purposes of computing net income (loss) per share pursuant to the two-class method. Under the two-class method, net earnings are reduced by the amount of dividends declared (whether paid or unpaid) and the remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. As the Company incurred a net loss for the three months ended April 3, 2022 and April 4, 2021, and losses are not allocated to participating securities under the two-class method, such method is not applicable for the aforementioned interim reporting periods.
Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted net income (loss) per share reflects additional shares of common stock outstanding, where applicable, calculated using the treasury stock method or the two-class method.
The following table sets forth the calculation of basic and diluted net loss per share:
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
Basic net loss per share: | |||||||||||
| Net loss | $ | (21,269) | $ | (7,168) | |||||||
| Weighted average common shares outstanding | 50,460,279 | 49,824,140 | |||||||||
Basic net loss per share | $ | (0.42) | $ | (0.14) | |||||||
Diluted net loss per share: | |||||||||||
| Net loss | $ | (21,269) | $ | (7,168) | |||||||
Shares used in computing diluted net loss per share | 50,460,279 | 49,824,140 | |||||||||
Diluted net loss per share | $ | (0.42) | $ | (0.14) | |||||||
Shares excluded from diluted net loss per share computations(1) | 11,920,450 | 11,013,120 | |||||||||
(1)Shares issuable upon conversion of preferred stock and non-vested shares were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive.
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ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We operate on a 52 or 53 week fiscal year ending on the Sunday closest to December 31. Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53 week year, which contains 14 weeks. Our fiscal years ended January 2, 2022 and January 1, 2023 each contain 52 weeks.
Introduction
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (or “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 unaudited Condensed Consolidated Financial Statements appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended January 2, 2022. The overview provides our perspective on the individual sections of MD&A, which include the following:
Company Overview—a general description of our business and our key financial measures.
Recent and Future Events Affecting Our Results of Operations—a description of recent events that affect, and future events that may affect, our results of operations.
Results from Operations—an analysis of our results of operations for the three months ended April 3, 2022 compared to the three months ended April 4, 2021, including a review of material items and known trends and uncertainties.
Liquidity and Capital Resources—an analysis of our cash flows, including capital expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion of known trends that may impact liquidity.
Application of Critical Accounting Policies—an overview of accounting policies requiring critical judgments and estimates.
Forward Looking Statements—cautionary information about forward-looking statements and a description of certain risks and projections.
Company Overview
Carrols Restaurant Group, Inc. and its consolidated subsidiaries (collectively, “Carrols Restaurant Group”, the “Company”, “we”, “our” or “us”) is one of the largest restaurant companies in the United States and has been operating restaurants for more than 60 years. We are the largest Burger King franchisee in the United States based on number of restaurants, and have operated Burger King restaurants since 1976. As of April 3, 2022 we operated, as franchisee, a total of 1,091 restaurants in 23 states under the trade names of Burger King and Popeyes. This included 1,026 Burger King restaurants in 23 Northeastern, Midwestern, Southcentral and Southeastern states and 65 Popeyes restaurants in seven Southeastern states. During the second quarter of 2021, we acquired 19 Burger King® restaurants in two separate transactions, which we refer to as the "2021 acquired restaurants."
Any reference to “BKC” refers to Burger King Corporation and its indirect parent company, Restaurant Brands International Inc. (“RBI”). Any reference to “PLK” refers to Popeyes Louisiana Kitchen, Inc. and its indirect parent company, RBI.
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The following is an overview of the key financial measures discussed in our results of operations:
•Restaurant sales consists of food and beverage sales at our restaurants, net of sales discounts and refunds and excluding sales tax. Restaurant sales are influenced by changes in comparable restaurant sales, menu price increases, new restaurant development, acquisitions of restaurants, franchisor promotions and closures of restaurants. Comparable restaurant sales reflect the change in year-over-year sales for a comparable restaurant base. Restaurants we acquire are included in comparable restaurant sales after they have been owned for 12 months and newly developed restaurants are included in comparable restaurant sales after they have been open for 15 months. Restaurants are excluded from comparable restaurant sales during extended periods of closure, which primarily occur due to restaurant remodeling activity. For comparative purposes, where applicable, the calculation of the changes in comparable restaurant sales is based either on a 53-week or 52-week year and compares against the respective 52-week prior period.
•Food, beverage, and packaging costs consists of food, beverage and packaging costs and delivery commissions, less purchase discounts and vendor rebates. Food, beverage, and packaging costs are generally influenced by changes in commodity costs, the mix of items sold, the level of promotional discounting, the effectiveness of our restaurant-level controls to manage food and paper costs, and the relative contribution of delivery sales.
•Restaurant wages and related expenses include all restaurant management and hourly productive labor costs and related benefits, employer payroll taxes and restaurant-level bonuses. Payroll and related benefits are subject to inflation, including minimum wage increases as well as competitive wage increases required to adequately staff our restaurants and increased costs for health insurance, workers’ compensation insurance and federal and state unemployment insurance.
•Restaurant rent expense includes straight-lined lease costs and variable rent on our restaurant leases characterized as operating leases.
•Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses paid to BKC and PLK, utilities, repairs and maintenance, operating supplies, real estate taxes and credit card fees.
•Advertising expense includes advertising payments to BKC and PLK based on a percentage of sales as required under our franchise and operating agreements and additional local marketing and promotional expenses in certain of our markets.
•General and administrative expenses are comprised primarily of salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, legal, auditing and other professional fees, acquisition costs and stock-based compensation expense.
•EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss are non-GAAP financial measures. EBITDA represents net loss before income taxes, interest expense, and depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude impairment and other lease charges, stock-based compensation expense, restaurant pre-opening costs, executive transition, non-recurring litigation and other professional expenses, and other income and expense. Adjusted Restaurant-Level EBITDA represents loss from operations as adjusted to exclude general and administrative expenses, depreciation and amortization, impairment and other lease charges, pre-opening costs and other income and expense. Adjusted Net Loss represents net loss as adjusted, net of tax, to exclude impairment and other lease charges, restaurant pre-opening costs, executive transistion, non-recurring litigation and other professional expenses and other income and expense.
We are presenting Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss because we believe that they provide a more meaningful comparison than EBITDA and net loss of our core business operating results, as well as with those of other similar companies. Additionally, we present Adjusted Restaurant-Level EBITDA because it excludes restaurant pre-opening costs, other income and expense, and the impact of general and administrative expenses such as salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, legal, auditing and other professional fees. Although these costs are not directly related to restaurant-level operations, these costs are necessary for the profitability of our restaurants. Management believes that Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and
26
Adjusted Net Loss, when viewed with our results of operations in accordance with U.S. GAAP and the accompanying reconciliations on page 34, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA and Adjusted Restaurant-Level EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.
However, EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss are not measures of financial performance or liquidity under U.S. GAAP and, accordingly, should not be considered as alternatives to net loss, loss from operations 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. For the reconciliation between Net Loss to EBITDA, Adjusted EBITDA and Adjusted Net Loss and the reconciliation of income from operations to Adjusted Restaurant-Level EBITDA, see page 34.
EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss have important limitations as analytical tools. These limitations include the following:
•EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;
•EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect the interest expense or the cash requirements necessary to service principal or interest payments on our debt;
•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 EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect the cash required to fund such replacements; and
•EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Loss do not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges (such as impairment and other lease charges and acquisition costs) have recurred and may reoccur.
•Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants, the amortization of franchise rights from our acquisitions of restaurants and the amortization of franchise fees paid to BKC and PLK.
•Impairment and other lease charges are determined through our assessment of the recoverability of property and equipment and intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. A potential impairment charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries.
•Interest expense consists of interest expense associated with our Term B and Term B-1 Loans under our Senior Credit Facilities, our 5.875% Senior Notes Due 2029 (the "Notes"), our revolving credit borrowings under our Senior Credit Facilities, finance lease liabilities, amortization of deferred financing costs, amortization of original issue discount, and payments required under our interest rate swap arrangement.
27
Recent and Future Events Affecting our Results of Operations
Burger King Restaurant Acquisitions
In 2021, we acquired 19 restaurants from other franchisees in the following transactions ($ in thousands):
| Closing Date | Number of Restaurants | Purchase Price | Fee-Owned(1) | Market Location | |||||||||||||||||||
| June 17, 2021 | 14 | $ | 27,603 | 12 | Fort Wayne, Indiana | ||||||||||||||||||
| June 23, 2021 | 5 | 3,216 | 1 | Battle Creek, Michigan | |||||||||||||||||||
| 19 | $ | 30,819 | 13 | ||||||||||||||||||||
(1) The 2021 acquisitions included the purchase of 13 fee-owned restaurants, of which 12 were sold in sale-leaseback transactions during the third quarter of 2021 for net proceeds of approximately $20.2 million.
The unaudited pro forma impact on the results of operations for the 2021 acquisitions is included below. The unaudited pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. This unaudited pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings or any transaction costs related to the 2021 acquired restaurants. The following table summarizes certain unaudited pro forma financial information related to our operating results for the three months ended April 4, 2021:
| Three Months Ended | ||||||||
| April 4, 2021 | ||||||||
| Total revenue | $ | 396,006 | ||||||
| Loss from operations | $ | (2,483) | ||||||
| Adjusted EBITDA | $ | 20,486 | ||||||
Area Development and Remodeling Agreement
The Company, Carrols Corporation, Carrols LLC, and BKC entered into an Amended Area Development on January 4, 2021 (the “Amended ADA”). Under the Amended ADA, Carrols LLC has agreed to open, build and operate a total of 50 new Burger King restaurants, 80% of which must be in Kentucky, Tennessee and Indiana. This includes four Burger King restaurants by September 30, 2021, 10 additional Burger King restaurants by September 30, 2022, 12 additional Burger King restaurants by September 30, 2023, 12 additional Burger King restaurants by September 30, 2024 and 12 additional Burger King restaurants by September 30, 2025. There is a 90-day cure period to meet the required restaurant development each development year. We are in ongoing discussions with BKC regarding our development plans, and do not believe the penalties, if any, associated with not meeting these commitments will be material.
In addition, pursuant to the Amended ADA, BKC granted Carrols LLC franchise pre-approval to build new Burger King restaurants or acquire Burger King restaurants from Burger King franchisees with respect to 500 Burger King restaurants in the aggregate in (i) Kentucky, Tennessee and Indiana (excluding certain geographic areas in Indiana) and (ii) (a) 16 states, which include Arkansas, Indiana, Kentucky, Louisiana, Maine, Maryland, Michigan, Mississippi, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont and Virginia (subject to certain exceptions for certain limited geographic areas within certain states) and (b) any other geographic locations that Carrols LLC enters after the commencement date of the Amended ADA pursuant to BKC procedures subject to certain limitations.
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In connection with an acquisition of restaurants in 2019 we assumed a development agreement for Popeyes, which included an assignment by PLK of its right of first refusal under its franchise agreements with its franchisees for acquisitions in two southern states, as well as a development commitment to open, build and operate approximately 80 new Popeyes restaurants over six years. This development agreement with PLK was terminated on March 17, 2021, with certain covenants applicable to us surviving the termination. PLK reserved the right to charge us a $0.6 million fee if the parties to the termination agreement were not able to come to a mutually agreeable solution with respect to such fee within a six-month period. We have not recorded a liability for such amount as the risk of loss is only considered reasonably possible at this time.
Capital Expenditures
We expect that our capital expenditures in 2022 will remain at levels similar to our capital expenditures in 2021 and 2020. We continue to review on an ongoing basis our future development and remodel plans in relation to our available capital resources, supply chain availability and our expected return on investment.
We incurred $12.6 million of capital expenditures in the first three months of 2022, net of proceeds from sale of other assets in the quarter. We opened two Burger King restaurants and completed remodels of five Burger King restaurants in the first three months of 2022. In all of 2022, we expect to complete development of six new Burger King restaurants and to remodel nine Burger King restaurants and three Popeyes restaurants.
Issuance of Notes and Amendments to our Senior Credit Facilities
On April 30, 2019, we entered into a senior secured credit facility which provided for senior secured credit facilities in an aggregate principal amount of $550.0 million (as amended, the “Senior Credit Facilities”), consisting of (i) a term loan B facility in an aggregate principal amount of $425.0 million (the “Term Loan B Facility”), the entire amount of which was borrowed by us on April 30, 2019 and (ii) a revolving credit facility (including a sub-facility of $35.0 million for standby letters of credit) in an aggregate principal amount of $125.0 million (the “Revolving Credit Facility”). Prior to the entry into the amendments described below, borrowings under the Term Loan B Facility and the Revolving Credit Facility bore interest at a rate per annum, at our option, of (i) the Alternate Base Rate (such definition and all other definitions used herein and otherwise not defined herein shall have the meanings set forth in the Senior Credit Facilities) plus the applicable margin of 2.25% or (ii) the LIBOR Rate plus a margin of 3.25% (as defined in the Senior Credit Facilities). The Term Loan B Facility matures on April 30, 2026 and the Revolving Credit Facility originally matured on April 30, 2024.
On December 13, 2019, we entered into the First Amendment to our Senior Credit Facilities (the “First Amendment”) which amended a financial covenant under the Senior Credit Facilities applicable solely with respect to the Revolving Credit Facility that previously required the Company to maintain quarterly a Total Net Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 4.75 to 1.00 (measured on a most recent four quarter basis), to now require that the Company maintain only a First Lien Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 5.75 to 1.00 (as measured on a most recent four quarter basis) if, and only if, on the last day of any fiscal quarter (beginning with the fiscal quarter ended December 29, 2019), the sum of the aggregate principal amount of outstanding revolving credit borrowings under the Revolving Credit Facility and the aggregate face amount of letters of credit issued under the Revolving Credit Facility (excluding undrawn letters of credit in an aggregate face amount up to $12.0 million) exceeds 35% of the aggregate amount of the maximum revolving credit borrowings under the Revolving Credit Facility. The First Amendment also reduced the aggregate maximum revolving credit borrowings under the Revolving Credit Facility by $10.0 million to a total of $115.0 million.
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On March 25, 2020, we entered into the Second Amendment to our Senior Credit Facilities (the “Second Amendment”). The Second Amendment, among other things, (i) increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility (the “Revolving Committed Amount”) by $15.4 million to a total of $130.4 million, (ii) amended the definition of Applicable Margin (such definition and all other definitions used herein and otherwise not defined herein shall be the meanings set forth in the Senior Credit Facilities), (iii) provided for a commitment fee (the “Ticking Fee”) beginning on the 180th day after the Second Amendment Effective Date and for so long as the Revolving Committed Amount remained greater than $115.0 million, and (iv) provided that the Company shall use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of $115.0 million solely for ongoing operations of the Company and its subsidiaries and shall not be held as cash on the balance sheet. The terms outlined as (ii), (iii) and (iv) were modified in the Sixth Amendment described below.
On April 8, 2020, we entered into the Third Amendment to our Senior Credit Facilities which increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility by $15.4 million to a total of $145.8 million.
On April 16, 2020, we entered into the Fourth Amendment to our Senior Credit Facilities (the “Fourth Amendment”). The Fourth Amendment permits us to incur and, if necessary, repay indebtedness incurred pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. Subsequent to the Fourth Amendment, we withdrew our application for relief under the PPP and returned the funds upon receipt.
On June 23, 2020 (the “Fifth Amendment Effective Date”), we entered into the Fifth Amendment to our Senior Credit Facilities (the “Fifth Amendment”). The Fifth Amendment increased the Term Loan (as defined in the Senior Credit Facilities) borrowings in the aggregate principal amount of $75 million of Incremental Term B-1 Loans (as defined in the Senior Credit Facilities). The Incremental Term B-1 Loans constituted a new tranche of Term Loans ranking pari passu in right of payment and security with the Initial Term Loans (as defined in the Senior Credit Facilities) for all purposes under the Senior Credit Facilities. The Incremental Term B-1 Loans had the same terms as outstanding borrowings under the Company's existing Term Loan B facility pursuant to and in accordance with the Senior Credit Facilities, provided that (i) borrowings under the Incremental Term B-1 Loans bore interest at a rate per annum, at our option, of (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus the applicable margin of 5.25% or (b) the LIBOR Rate (as defined in the Senior Credit Facilities) (which shall not be less than 1% for Incremental Term B-1 Loans) plus the applicable margin of 6.25% and (ii) certain prepayments of the Incremental Term B-1 Loans by us prior to the first anniversary of the Fifth Amendment Effective Date would be subject to a premium to the Administrative Agent (as defined in the Senior Credit Facilities), for the ratable account of each applicable Term Loan Lender (as defined in the Senior Credit Facilities) holding Incremental Term B-1 Loans on the date of such prepayment equal to the Applicable Make-Whole Amount (as defined in the Senior Credit Facilities) with respect to the principal amount of the Incremental Term B-1 Loans so prepaid. The principal amount of the Incremental Term B-1 Loans amortized in an aggregate annual amount equal to 1% of the original principal amount of the Incremental Term B-1 Loans and were repayable in consecutive quarterly installments on the last day of our fiscal quarters beginning on the third fiscal quarter of 2020. The remaining outstanding principal amount of the Incremental Term B-1 Loan and all accrued but unpaid interest and other amounts payable with respect to the Incremental Term B-1 Loan would have been due on April 30, 2026, which was the Term Loan Maturity Date (as defined in the Senior Credit Facilities). The Term B-1 Loans were repaid in full on June 28, 2021.
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On April 6, 2021, we entered into the Sixth Amendment to our Senior Credit Facilities (the “Sixth Amendment”), which increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under our Revolving Credit Facility by $29.2 million to a total of $175.0 million. The Sixth Amendment also amended the definitions in the Senior Credit Facilities of (i) Applicable Margin, to provide that the Applicable Margin for borrowings under the Revolving Credit Facility (including Letter of Credit Fees) shall be at a rate per annum equal to 3.25% for LIBOR Rate Loans and 2.25% for Alternate Base Rate Loans, and (ii) Revolving Maturity Date, to provide that the Revolving Maturity Date is extended to January 29, 2026. In addition, the Sixth Amendment amended the Senior Credit Facilities to remove our obligation to (i) pay a Ticking Fee pursuant to the Ticking Fee Rate and (ii) use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of $115.0 million solely for our ongoing operations and not to hold as cash on the balance sheet.
On June 28, 2021, we entered into the Seventh Amendment to our Senior Credit Facilities (the “Seventh Amendment”). The Seventh Amendment revised (a) the initial amount for calculating the Available Amount (as defined in the Senior Credit Facilities) from $27.0 million to $50.0 million which is utilized, among other items, in determining the amount of Restricted Payments (as defined in the Senior Credit Facilities) and Permitted Investments (as defined in the Senior Credit Facilities), (b) the calculation of the Company's ability to incur an Incremental Term Loan (as defined in the Senior Credit Facilities) or an increase to the Revolving Committed Amount from $135.0 million to $180.0 million, and (c) the general basket for Restricted Payments, Permitted Investments and Restricted Junior Debt Payment (as defined in the Senior Credit Facilities) from an aggregate amount not to exceed the greater of (i) $27.0 million and (ii) 20% of Consolidated EBITDA (as defined in the Senior Credit Facilities) as of the most recently completed Reference Period (as defined in the Senior Credit Facilities) to (i) $50.0 million and (ii) 40% of Consolidated EBITDA as of the most recently completed Reference Period. In addition, the Seventh Amendment revises the Total Net Leverage Ratio required for the Company to make Restricted Payments or prepay Junior Debt (as defined in the Senior Credit Facilities) with unutilized Available Amount from 3.00 to 1.00 to 4.00 to 1.00. The Seventh Amendment also provided for affiliates of the Company to acquire up to 20% of the outstanding term loans pursuant to certain transactions.
On June 28, 2021, we issued $300.0 million principal amount of Notes in a private placement. The proceeds of the offering, together with $46.0 million of revolving credit borrowings under our Senior Credit Facilities, were used to (i) repay $74.4 million of outstanding term B-1 loans and $243.6 million of outstanding term B loans under our Senior Credit Facilities (which included scheduled principal payments), (ii) to pay fees and expenses related to the offering of the Notes and the Seventh Amendment and (iii) for working capital and general corporate purposes, including for possible future repurchases of our common stock and/or a dividend payment and/or payments on our common stock.
Carrols Restaurant Group and certain of its subsidiaries (the “Guarantors”) entered into the Indenture (the “Indenture”) dated as of June 28, 2021 with the Bank of New York Mellon Trust Company governing the Notes. The Indenture provides that the Notes will mature on July 1, 2029 and will bear interest at the rate of 5.875% per annum, payable semi-annually on July 1 and January 1 of each year, beginning on January 1, 2022. The entire principal amount of the Notes will be due and payable in full on the maturity date. The Indenture further provides that we (i) may redeem some or all of the Notes at any time after July 1, 2024 at the redemption prices described therein, (ii) may redeem up to 40% of the Notes using the proceeds of certain equity offerings completed before July 1, 2024 and (iii) must offer to purchase the Notes if it sells certain of its assets or if specific kinds of changes in control occur, all as set forth in the Indenture. The Notes are senior unsecured obligations of Carrols Restaurant Group and are guaranteed on an unsecured basis by the Guarantors. The Indenture contains certain covenants that limit the ability of Carrols Restaurant Group and the Guarantors to, among other things: incur indebtedness or issue preferred stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments; sell assets; agree to payment restrictions affecting Restricted Subsidiaries (as defined in the Indenture); enter into transactions with affiliates; or merge, consolidate or sell substantially all of the assets. Such restrictions are subject to certain exceptions and qualifications all as set forth in the Indenture.
On September 30, 2021, we entered into the Eighth Amendment to our Senior Credit Facilities (the “Eighth Amendment”). The Eighth Amendment increased the aggregate maximum commitments available for revolving credit borrowings under the revolving credit facility by $40.0 million to a total of $215.0 million.
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As of April 3, 2022, there were $20.0 million revolving credit borrowings outstanding and $9.0 million of letters of credit were issued under our Revolving Credit Facility. After reserving for issued letters of credit and outstanding revolving credit borrowings, $186.0 million was available for revolving credit borrowings under our Senior Credit Facilities at April 3, 2022.
Interest Rate Swap Agreement
We entered into a five-year interest rate swap agreement commencing March 3, 2020 and ending February 28, 2025 with a notional amount of $220.0 million to swap variable rate interest payments (one-month LIBOR plus the applicable margin) under our Senior Credit Facilities for fixed interest payments bearing an interest rate of 0.915% plus the applicable margin in our Senior Credit Facilities. On November 12, 2021, we partially terminated this interest rate swap to reduce the notional amount hedged from $220.0 million to $120.0 million, and obtain the flexibility to repay borrowings under the Senior Credit Facilities which previously needed to be maintained at the hedged $220.0 million notional amount. The fixed rate and other terms of the swap arrangement remained unchanged as a result of the partial termination, which settled with net proceeds to us of $0.2 million.
Stock Repurchase Program
On August 2, 2019, our Board of Directors approved a stock repurchase plan (the “Repurchase Program”) under which we may repurchase up to $25 million of our outstanding common stock. The authorization became effective August 2, 2019, and on August 10, 2021, was extended through August 2, 2023. Purchases under the Repurchase Program may be made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions (including, without limitation, the use of Rule 10b5-1 plans) in compliance with applicable federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended.
During the year ended January 3, 2021, we repurchased in open market transactions 1,534,304 shares at an average share price of $6.52 for a total cost of $10.0 million under the Repurchase Program, all during the fourth quarter of 2020. We did not repurchase any shares in the three months ended April 3, 2022.
As of April 3, 2022, $11.0 million was available to repurchase shares under the Repurchase Program. We have no obligation to repurchase additional shares of stock under the Repurchase Program, and the timing, actual number and value of shares purchased will depend on our stock price, trading volume, general market and economic conditions and other factors.
Future Restaurant Closures
We evaluate the performance of our restaurants on an ongoing basis including an assessment of the current and future operating results of each restaurant in relation to its cash flow and future occupancy costs, and with regard to franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on these evaluations.
In all of 2021 we closed five Burger King restaurants, excluding one restaurant relocated within its trade area. In the first three months of 2022, we permanently closed two Burger King restaurants. We currently anticipate approximately 15 to 20 restaurant closures in 2022, outside of any restaurants being relocated within their trade area.
Our determination of whether to close restaurants in the future is subject to further evaluation and may change. We may incur lease charges in the future from closures of underperforming restaurants prior to the expiration of their contractual lease term. We do not believe that the future impact on our results of operations due to restaurant closures will be material, although there can be no assurance in this regard.
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Effect of Minimum Wage Increases
Certain of the states and municipalities in which we operate have increased their minimum wage rates for 2021 and in many cases have also approved additional increases for future periods. Most notably, New York State increased the minimum wage applicable to our business to $14.50 an hour on January 1, 2021 and then to 15.00 an hour on July 1, 2021, from $13.75 an hour in 2020 and $12.75 per hour in 2019. New York State has a Youth Jobs Program tax credit through 2027 for which we have been receiving approximately $500,000 per year since 2016. We had 124 restaurants in New York State at April 3, 2022. As of such date, we also had one restaurant in Massachusetts that has annual minimum wage increases reaching $15.00 per hour in 2023, 10 restaurants in New Jersey that have annual minimum wage increases reaching $15.00 per hour in 2024, and 45 total restaurants in Illinois and Maryland that have annual minimum wage increases reaching $15.00 per hour in 2025.
In the current labor market, we have seen competitive pressure on wage rates that have significantly outpaced statutory minimums as the re-opening of the economy has increased demand for labor at all levels of the workforce.
We typically attempt to offset the effects of wage inflation, at least in part, through periodic menu price increases. However, no assurance can be given that we will be able to offset these wage increases in the future.
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Results of Operations
Reconciliations of Net loss to EBITDA, Adjusted EBITDA and Adjusted Net Loss, and Loss from operations to Adjusted Restaurant-Level EBITDA for the three months ended April 3, 2022 and April 4, 2021 are as follows (in thousands, except for per share data):
| Three Months Ended | |||||||||||
| Reconciliation of EBITDA and Adjusted EBITDA: | April 3, 2022 | April 4, 2021 | |||||||||
Net loss | $ | (21,269) | $ | (7,168) | |||||||
Benefit from income taxes | (6,009) | (2,661) | |||||||||
| Interest expense | 7,436 | 6,726 | |||||||||
| Depreciation and amortization | 19,542 | 20,609 | |||||||||
| EBITDA | (300) | 17,506 | |||||||||
| Impairment and other lease charges | 496 | 353 | |||||||||
| Stock-based compensation expense | 1,941 | 1,469 | |||||||||
Pre-opening costs(1) | 45 | 29 | |||||||||
Executive transition, litigation and other professional expenses(2) | 1,918 | 282 | |||||||||
Other expense, net(3)(4) | 202 | 227 | |||||||||
| Adjusted EBITDA | $ | 4,302 | $ | 19,866 | |||||||
| Reconciliation of Adjusted Restaurant-Level EBITDA: | |||||||||||
| Loss from operations | $ | (19,842) | $ | (3,103) | |||||||
| Add: | |||||||||||
| General and administrative expenses | 22,017 | 21,369 | |||||||||
Pre-opening costs(1) | 45 | 29 | |||||||||
| Depreciation and amortization | 19,542 | 20,609 | |||||||||
| Impairment and other lease charges | 496 | 353 | |||||||||
Other expense, net(3)(4) | 202 | 227 | |||||||||
| Adjusted Restaurant-Level EBITDA | $ | 22,460 | $ | 39,484 | |||||||
| Reconciliation of Adjusted Net Loss: | |||||||||||
| Net loss | $ | (21,269) | $ | (7,168) | |||||||
| Add: | |||||||||||
| Impairment and other lease charges | 496 | 353 | |||||||||
Pre-opening costs(1) | 45 | 29 | |||||||||
Executive transition, litigation and other professional expenses(2) | 1,918 | 282 | |||||||||
Other expense, net(3)(4) | 202 | 227 | |||||||||
Income tax effect on above adjustments(5) | (665) | (223) | |||||||||
Valuation allowance for deferred taxes(6) | 2,207 | — | |||||||||
| Adjusted Net Loss | $ | (17,066) | $ | (6,500) | |||||||
Adjusted diluted net loss per share(7) | $ | (0.34) | $ | (0.13) | |||||||
| Adjusted diluted weighted average common shares outstanding | 50,460 | 49,824 | |||||||||
(1)Pre-opening costs for the three months ended April 3, 2022 and April 4, 2021 include training, labor and occupancy costs incurred during the construction of new restaurants.
(2)Executive transition, litigation and other professional expenses for the three months ended April 3, 2022 and April 4, 2021 include executive recruiting and transistion costs, costs pertaining to an ongoing lawsuit with one of the Company's former vendors and other non-recurring professional service expenses.
(3)Other expense, net, for the three months ended April 3, 2022 included a loss on disposal of assets of $0.3 million.
(4)Other expense, net, for the three months ended April 4, 2021 included a loss on disposal of assets of $0.2 million.
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(5)The income tax effect related to the adjustments to Adjusted Net Loss was calculated using an incremental income tax rate of 25% for the three months ended April 3, 2022 and April 4, 2021.
(6)Reflects the removal of the income tax expense recorded in connection with an increase to our valuation allowance on deferred income tax assets during the three months ended April 3, 2022.
(7)Adjusted diluted net loss per share is calculated based on Adjusted Net Loss and the dilutive weighted average common shares outstanding for the respective periods, where applicable.
Three Months Ended April 3, 2022 Compared to Three Months Ended April 4, 2021
The following table highlights the key components of sales and the number of restaurants in operation for our first quarter ended April 3, 2022 as compared to the first quarter ended April 4, 2021:
| Three Months Ended | |||||||||||
| April 3, 2022 | April 4, 2021 | ||||||||||
| Restaurant Sales | $ | 399,476 | $ | 389,993 | |||||||
| Burger King | 377,828 | 368,488 | |||||||||
| Popeyes | 21,648 | 21,505 | |||||||||
Change in Comparable Restaurant Sales(a) | 1.7 | % | 13.8 | % | |||||||
Change in Comparable Burger King Restaurant Sales(a) | 1.6 | % | 14.7 | % | |||||||
Change in Comparable Popeyes Restaurant Sales(a) | 2.2 | % | 0.5 | % | |||||||
| Burger King Restaurants operating at beginning of period: | 1,026 | 1,009 | |||||||||
New restaurants opened, including relocations(b) | 2 | 2 | |||||||||
Restaurants closed, including relocations(b) | (2) | (1) | |||||||||
| Burger King Restaurants at end of period | 1,026 | 1,010 | |||||||||
| Average number of operating Burger King restaurants | 1,023.7 | 1,009.0 | |||||||||
| Popeyes Restaurants operating at beginning and end of period: | 65 | 65 | |||||||||
| Average number of operating Popeyes restaurants | 65.0 | 65.0 | |||||||||
a.Restaurants we acquire are included in comparable restaurant sales after they have been operated by us for 12 months. Sales from restaurants that we develop are included in comparable restaurant sales after they have been open for 15 months. The calculation of changes in comparable restaurant sales is based on a comparison to the comparable 13-week period 52 weeks prior.
b.There were no restaurant relocations during the periods presented.
Restaurant Sales. Total restaurant sales in the first quarter of 2022 increased $9.5 million to $399.5 million from the first quarter of 2021. Our comparable restaurant sales increased 1.7% compared to the first quarter of 2021 which reflected an increase in average check of 9.6% and a decrease in customer traffic of 7.2%. The change in average check included a 7.7% effective price increase compared to the first quarter of 2021 for our Burger King restaurants. Promotional sales discounts in the first quarter of 2022 were 18.4% of restaurant sales at our Burger King restaurants compared to 23.0% in the first quarter of 2021. Restaurant sales were also impacted by the inclusion of sales in 2022 from the 19 restaurants acquired in the second quarter of 2021, four new Burger King restaurants built since the end of the first quarter of 2021 and six restaurants closed since the end of the first quarter of 2021.
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Operating Costs and Expenses (percentages stated as a percentage of total revenue). The following table sets forth, for the three months ended April 3, 2022, April 4, 2021 and January 2, 2022, selected operating results as a percentage of total revenue:
| Three Months Ended (13 weeks) | |||||||||||||||||
| April 3, 2022 | April 4, 2021 | January 2, 2022 | |||||||||||||||
| Costs and expenses (all restaurants): | |||||||||||||||||
| Food, beverage and packaging costs | 30.8 | % | 29.2 | % | 30.8 | % | |||||||||||
| Restaurant wages and related expenses | 35.5 | % | 33.2 | % | 34.0 | % | |||||||||||
| Restaurant rent expense | 7.8 | % | 7.8 | % | 7.5 | % | |||||||||||
| Other restaurant operating expenses | 16.4 | % | 15.7 | % | 15.5 | % | |||||||||||
| Advertising expense | 4.0 | % | 3.9 | % | 4.0 | % | |||||||||||
| General and administrative | 5.5 | % | 5.5 | % | 5.4 | % | |||||||||||
Food, beverage and packaging costs increased to 30.8% of restaurant sales in the first quarter of 2022 from 29.2% of restaurant sales in the first quarter of 2021, but were consistent as a percentage of sales sequentially from our fourth quarter of 2021. This increase compared to last year reflects increased commodity pricing at our Burger King restaurants (4.4%), increased commodities pricing at our Popeyes restaurants (0.3%) and increased delivery commissions (0.2%). These cost pressures were offset in part by the impact of menu price increases taken at our Burger King restaurants since the end of the first quarter of 2021 (2.3%) and lower promotional discounting in the first quarter of 2022 at our Burger King restaurants (1.2%).
Restaurant wages and related expenses increased to 35.5% of restaurant sales in the first quarter of 2022 from 33.2% in the first quarter of 2021 and 34.0% in the fourth quarter of 2021. We benefited in the first quarter of 2021 from labor adjustments we made at the onset of the COVID-19 pandemic to restrict overtime and reduce staffing levels. Beginning late in the second quarter of 2021, we have seen competitive pressure on wage rates that has significantly outpaced statutory minimums as the re-opening of the economy increased demand for labor at all levels of the workforce. The impact of base hourly labor rate increases in the first quarter of 2022, inclusive of minimum wage increases, was 13.6% when compared to the prior year period. Sequentially, restaurant wages and related expenses were higher as a percentage of sales in the first quarter of 2022 than in the fourth quarter of 2021 due to seasonally lower sales volumes in the first quarter.
Restaurant rent expense as a percentage of restaurant sales was 7.8% in both the first quarter of 2022 and the first quarter of 2021. Sequentially, restaurant rent expense as a percentage of restaurant sales increased due primarily to the impact of seasonally lower sales on fixed rent expense.
Other restaurant operating expenses increased as a percentage of restaurant sales to 16.4% in the first quarter of 2022 from 15.7% of restaurant sales in the first quarter of 2021 and 15.5% in the fourth quarter of 2021. Our first quarter of 2021 results reflected cost savings realized from the constrained pandemic operating environment. As our dining rooms have reopened and restaurants have resumed pre-pandemic operations, we saw higher spending on utilities (0.3%), security costs (0.3%, including investments in smart safe technology) and repair and maintenance (0.1%) as well as increased insurance costs (0.2%). Sequentially, we saw higher expenses as a percentages of sales from utilities (0.2%) and repair and maintenance (0.3%) due to seasonally lower sales in the first quarter as well as increased insurance costs (0.2%).
Advertising expense was 4.0% of restaurant sales the first quarter of 2022 and 3.9% in the first quarter of 2021.
Adjusted Restaurant-Level EBITDA. As a result of the factors discussed above, Adjusted Restaurant-Level EBITDA decreased $17.0 million, or 43.1%, to $22.5 million in the first quarter of 2022 compared to $39.5 million in the first quarter of 2021. As a percentage of total restaurant sales, Adjusted Restaurant-Level EBITDA decreased to 5.6% in the first quarter of 2022 from 10.1% in the first quarter of 2021. For a reconciliation between Adjusted Restaurant-Level EBITDA and loss from operations see page 34.
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General and Administrative Expenses. General and administrative expenses increased $0.6 million in the first quarter of 2022 to $22.0 million, and was 5.5% as a percentage of total restaurant sales in both the first quarter of 2022 and the first quarter of 2021. The $0.6 million increase was due to lower performance bonus accruals of $2.3 million, which was partially offset by executive transition costs of $1.1 million, increased travel costs of $0.3 million and higher training costs of $0.3 million.
Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA decreased to $4.3 million in the first quarter of 2022 from $19.9 million in the first quarter of 2021. As a percentage of total restaurant sales, Adjusted EBITDA decreased to 1.1% in the first quarter of 2022 from 5.1% in the first quarter of 2021. For a reconciliation between net loss and EBITDA and Adjusted EBITDA see page 34.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased $1.1 million to $19.5 million in the first quarter of 2022 from $20.6 million in the first quarter of 2021.
Impairment and Other Lease Charges. Impairment and other lease charges were $0.5 million consisting of $0.1 million of initial impairment charges for one underperforming restaurant, capital expenditures at previously impaired restaurants of $0.1 million and $0.3 million of other lease charges primarily from one location closed in the period. During the first quarter of 2021, we recorded impairment and other lease charges of $0.4 million due primarily to a restaurant closed during the quarter.
Other Expense, net. Other expense, net was $0.2 million in the first quarter of 2022 and 2021, both primarily representing losses on disposal of assets.
Interest Expense. Interest expense increased to $7.4 million in the first quarter of 2022 from $6.7 million in the first quarter of 2021. Our weighted average interest rate for long-term borrowings increased to 4.9% in the first quarter of 2022 from 4.4% in the first quarter of 2021, due to the impact of the 5.875% interest rate on our new Senior Notes issued in June of 2021.
Benefit for Income Taxes. For the three months ended April 3, 2022, the benefit for income taxes was derived using an estimated effective annual income tax rate for all of 2022 of 22.0%. The difference compared to the statutory rate for 2022 is attributable to various permanent non-deductible expenses and non-refundable business credits which are not directly related to the amount of pre-tax loss recorded in the period as well as the impact of increases to our valuation allowance on our deferred income tax assets. During the three months ended April 3, 2022, our benefit for income taxes from continuing operations was reduced by $2.2 million due to an increase in our valuation allowance on our deferred income tax assets. There were no discrete tax expenses in the first quarter of 2022.
For the three months ended April 4, 2021, the benefit for income taxes was derived using an estimated effective annual income tax rate for all of 2020 of 21.3%. The difference compared to the statutory rate for 2021 was attributable to various permanent non-deductible expenses which are not directly related to the amount of pre-tax loss recorded in a period. There was $0.7 million in net discrete tax benefit in the first quarter of 2021.
Net Loss. As a result of the above, net loss for the first quarter of 2022 was $21.3 million, or $0.42 per diluted share, compared to net loss in the first quarter of 2021 of $7.2 million, or $0.14 per diluted share.
Liquidity and Capital Resources
As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories and receive trade credit based upon negotiated terms for purchasing food products and other supplies. As a result, we may at times maintain current liabilities in excess of current assets, which results in a working capital deficit. We are able to operate with a substantial working capital deficit because:
•restaurant operations are primarily conducted on a cash basis;
•rapid turnover results in a limited investment in inventories; and
•cash from sales is usually received before related liabilities for food, supplies and payroll become due.
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Interest payments under our debt obligations, capital expenditures including for our remodeling initiatives, payments of royalties and advertising to BKC and PLK, and payments related to our lease obligations each represent significant liquidity requirements for us, not including any discretionary expenditures for the acquisition or development of additional Burger King and Popeyes restaurants.
If our future financing needs increase, we may need to arrange additional debt or equity financing. We continually evaluate and consider various financing alternatives to enhance or supplement our existing financial resources, including our Senior Credit Facilities. However, there can be no assurance that we will be able to enter into any such arrangements on acceptable terms or at all.
We believe our cash balances, cash generated from our operations and availability of revolving credit borrowings under our Senior Credit Facilities provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for at least the next twelve months.
Operating Activities. Net cash used for operating activities was $26.6 million in the first three months of 2022 compared to net cash provided by operating activities of $7.0 million in the first three months of 2021. The decrease was due primarily to a decrease of $17.8 million in EBITDA and a decrease in cash provided by working capital components of $15.5 million. Working capital changes in the first three months of 2022 included the repayment of $10.8 million of employer payroll taxes deferred in 2020 under the CARES Act as well as a net reduction in accrued interest of $4.4 million.
Investing Activities. Net cash used for investing activities in the first three months of 2022 and 2021 was $12.6 million and $10.6 million, respectively.
Capital expenditures are a large component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants including expenditures associated with our franchise agreement renewals and certain restaurants that we acquire; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants, and from time to time, to support BKC's and PLK's initiatives; and (4) corporate and restaurant information systems, including expenditures for our point-of-sale systems for restaurants that we acquire.
The following table sets forth our capital expenditures for the periods presented (in thousands):
Three Months Ended | ||||||||||||||
| April 3, 2022 | April 4, 2021 | |||||||||||||
| New restaurant development | $ | 2,622 | $ | 1,643 | ||||||||||
| Restaurant remodeling | 5,319 | 1,758 | ||||||||||||
| Other restaurant capital expenditures | 4,151 | 5,831 | ||||||||||||
| Corporate and restaurant information systems | 1,097 | 1,395 | ||||||||||||
| Total capital expenditures | $ | 13,189 | $ | 10,627 | ||||||||||
| Number of new restaurant openings, including relocations | 2 | 2 | ||||||||||||
In the first three months of 2022, investing activities also included proceeds from the sale of other assets of $0.6 million.
Financing Activities. Net cash provided by financing activities in the first three months of 2022 was $18.5 million and included $20.0 million of net revolving credit borrowings under our Senior Credit Facilities, principal payments of $1.1 million of outstanding term B loans under our Senior Credit Facilities, and principal payments on finance leases of $0.5 million.
Net cash used in financing activities in the three months of 2021 was $1.4 million and included principal payments of $1.3 million on the Term Loan B Facility and principal payments on finance leases of $0.1 million.
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Senior Notes due 2029. On June 28, 2021, we issued $300.0 million principal amount of the Notes in a private placement as described above under “—Recent and Future Events Affecting our Results of Operations-Issuance of Notes and Amendments to our Senior Credit Facilities”. The proceeds of the offering, together with $46.0 million of revolving credit borrowings under our Senior Credit Facilities, were used to (i) repay $74.4 million of outstanding term B-1 loans and $243.6 million of outstanding term B loans under our Senior Credit Facilities (which included scheduled principal payments), (ii) to pay fees and expenses related to the offering of the Notes and the Seventh Amendment and (iii) for working capital and general corporate purposes, including for possible future repurchases of its common stock and/or a dividend payment and/or payments on its common stock.
Senior Credit Facilities. As described above under “—Recent and Future Events Affecting Our Results of Operations—Issuance of Notes and Amendments to our Senior Credit Facilities”, we entered into the Senior Credit Facilities and subsequent amendments to the Senior Credit Facilities. Our obligations under the Senior Credit Facilities are guaranteed by our subsidiaries and are secured by first priority liens on substantially all of our assets and our subsidiaries, including a pledge of all of the capital stock and equity interests of our subsidiaries. Under the Senior Credit Facilities, we are required to make mandatory prepayments of borrowings following dispositions of assets, debt issuances and the receipt of insurance and condemnation proceeds (all subject to certain exceptions).
At April 3, 2022, borrowings under our Senior Credit Facilities bore interest as follows:
(i) Revolving Credit Facility: at a rate per annum equal to (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus 2.50% or (b) LIBOR Rate (as defined in the Senior Credit Facilities) plus 3.50%.
(ii) Term B loans: at a rate per annum equal to (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus 2.25% or (b) LIBOR Rate (as defined in the Senior Credit Facilities) plus 3.25%.
The weighted average interest rate for borrowings on long-term debt balances were 4.9% for the three months ended April 3, 2022 and 4.4% for the three months ended April 4, 2021.
The Term Loan B Facility is due and payable in quarterly installments which began on September 30, 2019. Amounts outstanding at April 3, 2022 are due and payable as follows:
(i) sixteen quarterly installments of $1.1 million;
(ii) one final payment of $153.8 million on April 30, 2026.
The Revolving Credit Facility matures on January 29, 2026. As of April 3, 2022, there were $20.0 million revolving credit borrowings outstanding and $9.0 million of letters of credit issued under the Revolving Credit Facility. After reserving for issued letters of credit and outstanding revolving credit borrowings, $186.0 million was available for revolving credit borrowings under the Senior Credit Facilities at April 3, 2022.
The Senior Credit Facilities contain certain covenants, including without limitation, those limiting our and our subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in any material respect, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. In addition, the Senior Credit Facilities require us to meet a First Lien Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 5.75 to 1.00 (as measured on a most recent four quarter basis) if, and only if, on the last day of any fiscal quarter, the sum of the aggregate principal amount of outstanding revolving credit borrowings under the Revolving Credit Facility and the aggregate face amount of letters of credit issued under the Revolving Credit Facility (excluding undrawn letters of credit in an aggregate face amount up to $12.0 million) exceeds 35% of the aggregate amount of the maximum revolving credit borrowings under the Revolving Credit Facility. As the $20.0 million borrowings under the Revolving Credit Facility at April 3, 2022 did not exceed 35% of the aggregate borrowing capacity, no First Lien Leverage Ratio calculation was required. However, if we had been subject to the First Lien Leverage Ratio, the Company's First Lien Leverage Ratio was 2.59 to 1.00 as of April 3, 2022 which was below the required First Lien Leverage Ratio of 5.75 to 1.00. As a result, we do not expect to have to reduce our term loan borrowings mandatorily with Excess Cash Flow (as defined in the Senior Credit Facilities). We were in compliance with the financial covenants under our Senior Credit Facilities at April 3, 2022.
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The Senior Credit Facilities contain customary default provisions, including that 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 events of default which include, without limitation, payment default, covenant default, bankruptcy default, cross-default on other indebtedness, judgment default and the occurrence of a change of control.
In March 2020, we entered into an interest rate swap agreement certain of our lenders under the Senior Credit Facilities to mitigate the risk of increases in the variable interest rate related to term loan borrowings under the Term Loan B Facility. The interest rate swap fixed the interest rate on $220.0 million of outstanding borrowings under the Senior Credit Facilities at 0.915% plus the applicable margin in its Senior Credit Facilities. The agreement matures on February 28, 2025. On November 12, 2021, we partially terminated this interest rate swap to reduce the notional amount hedged from $220.0 million to $120.0 million and obtain the flexibility to repay borrowings under the Senior Credit Facilities which previously needed to be maintained at the hedged $220.0 million notional amount. The fixed rate and other terms of the swap arrangement remained unchanged as a result of the partial termination, which settled with net proceeds to us of $0.2 million.
The differences between the variable LIBOR rate and the interest rate swap rate of 0.915% are settled monthly. We made payments of $0.2 million and $0.4 million to settle the interest rate swap during the three months ended April 3, 2022 and April 4, 2021, respectively. The fair value of our interest rate swap agreement was an asset of $5.7 million as of April 3, 2022 and is included in long-term other assets in the accompanying condensed consolidated balance sheets. Changes in the valuation of our interest rate swap were included as a component of other comprehensive loss, and will be reclassified to earnings as the losses are realized. We expect to reclassify net gains totaling $0.9 million into earnings in the next twelve months.
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A table of our contractual obligations as of January 2, 2022 was included in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 2, 2022. There have been no significant changes to our contractual obligations during the three months ended April 3, 2022 other than as described under “—Recent and Future Events Affecting Our Results of Operations—Issuance of Notes and Amendments to our Senior Credit Facilities”.
Inflation
The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses, the cost of providing medical and prescription drug insurance to our employees and energy costs. Wages paid in our restaurants are impacted by changes in federal and state hourly minimum wage rates and the Fair Labor Standards Act. Accordingly, changes in the federal and state hourly minimum wage rates and increases in the wage level to not be considered an hourly employee will directly affect our labor costs.
In the current labor market, we have seen competitive pressure on wage rates that have significantly outpaced statutory minimums as the re-opening of the economy has increased demand for labor at all levels in the workforce. In 2021 and 2022, we have experienced inflationary cost pressures in labor and commodity costs as a result of challenges impacting our restaurants and our supply chains. The COVID-19 pandemic has increased the difficulty and cost of maintaining adequate staffing levels at our restaurants as well as for businesses in our supply chain that we depend on for commodities. At this point, there is limited visibility as to when these inflationary pressures may abate.
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 offset such inflationary cost increases in the future.
Application of Critical Accounting Policies
Our unaudited condensed consolidated financial statements 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 “Significant Accounting Policies” footnote in the notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022. 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. There have been no material changes affecting our critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022.
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Forward Looking Statements
This Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are predictive in nature or that depend upon or refer to future events or conditions are forward-looking statements. These statements are often identified by the words “may”, “might”, “will”, “should”, “anticipate”, “believe”, “expect”, “intend”, “estimate”, “hope”, “plan” or similar expressions. In addition, expressions of our strategies, intentions or plans are also forward looking statements. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties, both known and unknown. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date. There are important factors that could cause actual results to differ materially from those in forward-looking statements, many of which are beyond our control. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected or implied in the forward-looking statements. We have identified significant factors that could cause actual results to differ materially from those stated or implied in the forward-looking statements. We believe important factors that could cause actual results to differ materially from our expectations include the following, in addition to other risks and uncertainties discussed herein and in our Annual Report on Form 10-K for the period ended January 2, 2022:
•The impact of the COVID-19 pandemic;
•Effectiveness of the Burger King and Popeyes advertising programs and the overall success of the Burger King and Popeyes brands;
•Increases in food costs and other commodity costs;
•Our ability to hire and retain employees at current or increased wage rates;
•Competitive conditions, including pricing pressures, discounting, aggressive marketing, the potential impact of competitors’ new unit openings and promotions on sales of our restaurants, and competition impacting the cost and availability of labor;
•Our ability to integrate any restaurants we acquire;
•Regulatory factors;
•Environmental conditions and regulations;
•General economic conditions, particularly in the retail sector;
•Weather conditions;
•Fuel prices;
•Significant disruptions in service or supply by any of our suppliers or distributors;
•Changes in consumer perception of dietary health and food safety;
•Labor and employment benefit costs, including the effects of minimum wage increases, healthcare reform and changes in the Fair Labor Standards Act;
•The outcome of pending or future legal claims or proceedings;
•Our ability to manage our growth and successfully implement our business strategy;
•Our ability to service our indebtedness;
•Our borrowing costs and credit ratings, which may be influenced by the credit ratings of our competitors;
•The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties; and
•Factors that affect the restaurant industry generally, including recalls if products become adulterated or misbranded, liability if our products cause injury, ingredient disclosure and labeling laws and regulations, reports of cases of foodborne illnesses such as “mad cow” disease, and the possibility that consumers could lose confidence in the safety and quality of certain food products as well as negative publicity regarding food quality, illness, injury, or other health concerns.
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ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes from the information presented in Item 7A included in our Annual Report on Form 10-K for the year ended January 2, 2022 with respect to our market risk sensitive instruments.
A 1% change in interest rates would have resulted in a $0.7 million change to interest expense for both the three months ended April 3, 2022 and April 4, 2021.
ITEM 4—CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d – 15(e) 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. 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 April 3, 2022.
Changes in Internal Control. During the three months ended April 3, 2022, we did not make any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to various litigation matters that arise in the ordinary course of business. We do not believe that the outcome of any of these other matters meet the disclosure or recognition standards, nor will they have a material adverse effect on our consolidated financial statements.
Item 1A. Risk Factors
Part I - Item 1A of the Annual Report on Form 10-K for the fiscal year ended January 2, 2022 describes important risk factors that could materially affect our business, consolidated financial condition or results of operations or cause our operating results to differ materially from the indicated or cause our operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-Q or presented elsewhere by management from time to time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
Item 6. Exhibits
(a)The following exhibits are filed as part of this report.
| Exhibit No. | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101.INS | 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 | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CARROLS RESTAURANT GROUP, INC. | |||||
| Date: May 12, 2022 | /s/ Paulo A. Pena | ||||
| (Signature) | |||||
| Paulo A. Pena President and Chief Executive Officer | |||||
| Date: May 12, 2022 | /s/ Anthony E. Hull | ||||
| (Signature) | |||||
| Anthony E. Hull Vice President, Chief Financial Officer and Treasurer | |||||
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