Fiesta Restaurant Group, Inc. - Quarter Report: 2022 October (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 October 2, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File Number: 001-35373
__________________________________________________________
FIESTA RESTAURANT GROUP, INC.
(Exact name of Registrant as specified in its charter)
__________________________________________________________
DE | 90-0712224 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 14800 Landmark Boulevard, Suite 500 | 75254 | |||||||
| Dallas | TX | (Zip Code) | ||||||
| (Address of principal executive office) | ||||||||
Registrant's telephone number, including area code: (972) 702-9300
__________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
| Common Stock, par value $0.01 per share | FRGI | NASDAQ Global Select 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | Accelerated Filer | ☒ | ||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | ☒ | ||||||||
| Emerging Growth Company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 4, 2022, Fiesta Restaurant Group, Inc. had 25,990,019 shares of its common stock, $0.01 par value, outstanding.
FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED OCTOBER 2, 2022
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1
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
| October 2, 2022 | January 2, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | 42,591 | $ | 36,797 | |||||||
| Restricted cash | 3,631 | 3,837 | |||||||||
| Accounts receivable | 4,027 | 6,223 | |||||||||
| Inventories | 2,335 | 2,524 | |||||||||
| Prepaid rent | 109 | 109 | |||||||||
| Income tax receivable | 3,562 | 3,846 | |||||||||
| Prepaid expenses and other current assets | 5,622 | 5,706 | |||||||||
| Total current assets | 61,877 | 59,042 | |||||||||
| Property and equipment, net | 85,024 | 89,884 | |||||||||
| Operating lease right-of-use assets | 147,402 | 154,127 | |||||||||
| Goodwill | 56,307 | 56,307 | |||||||||
| Other assets | 5,705 | 7,753 | |||||||||
| Total assets | $ | 356,315 | $ | 367,113 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 72 | $ | 63 | |||||||
| Accounts payable | 14,101 | 12,342 | |||||||||
| Accrued payroll, related taxes and benefits | 8,464 | 8,475 | |||||||||
| Accrued real estate taxes | 4,163 | 1,630 | |||||||||
| Other current liabilities | 17,902 | 18,032 | |||||||||
| Total current liabilities | 44,702 | 40,542 | |||||||||
| Long-term debt, net of current portion | 376 | 438 | |||||||||
| Operating lease liabilities | 155,770 | 163,270 | |||||||||
| Deferred tax liabilities | 150 | 229 | |||||||||
| Other non-current liabilities | 7,682 | 7,763 | |||||||||
| Total liabilities | 208,680 | 212,242 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, $0.01 par value; 20,000,000 shares authorized, no shares issued | — | — | |||||||||
Common stock, $0.01 par value; 100,000,000 shares authorized, 28,854,142 and 28,445,812 shares issued, respectively, and 24,973,291 and 24,829,002 shares outstanding, respectively | 278 | 277 | |||||||||
| Additional paid-in capital | 186,106 | 182,686 | |||||||||
| Retained earnings (accumulated deficit) | (8,450) | 2,043 | |||||||||
Treasury stock, at cost; 2,862,538 and 2,847,792 shares, respectively | (30,299) | (30,135) | |||||||||
| Total stockholders' equity | 147,635 | 154,871 | |||||||||
| Total liabilities and stockholders' equity | $ | 356,315 | $ | 367,113 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED OCTOBER 2, 2022 AND OCTOBER 3, 2021
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 2, 2022 | October 3, 2021 | October 2, 2022 | October 3, 2021 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Restaurant sales | $ | 95,309 | $ | 88,014 | $ | 288,532 | $ | 266,618 | |||||||||||||||
| Franchise royalty revenues and fees | 322 | 578 | 1,195 | 1,344 | |||||||||||||||||||
| Total revenues | 95,631 | 88,592 | 289,727 | 267,962 | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of sales | 30,875 | 26,984 | 94,202 | 81,843 | |||||||||||||||||||
Restaurant wages and related expenses (including stock-based compensation expense of $5, $13, $18 and $44, respectively) | 24,977 | 24,648 | 73,134 | 66,888 | |||||||||||||||||||
| Restaurant rent expense | 6,033 | 5,924 | 18,036 | 17,625 | |||||||||||||||||||
| Other restaurant operating expenses | 16,702 | 14,740 | 50,107 | 42,260 | |||||||||||||||||||
| Advertising expense | 3,311 | 2,757 | 9,420 | 8,030 | |||||||||||||||||||
General and administrative (including stock-based compensation expense of $1,473, $1,097, $3,484 and $3,137, respectively) | 12,140 | 11,167 | 37,273 | 32,883 | |||||||||||||||||||
| Depreciation and amortization | 5,052 | 5,328 | 15,398 | 15,291 | |||||||||||||||||||
| Impairment and other lease charges (recoveries) | 34 | 30 | 1,442 | (224) | |||||||||||||||||||
| Closed restaurant rent expense, net of sublease income | 535 | 710 | 1,316 | 2,426 | |||||||||||||||||||
| Other expense (income), net | (787) | 138 | (653) | 431 | |||||||||||||||||||
| Total operating expenses | 98,872 | 92,426 | 299,675 | 267,453 | |||||||||||||||||||
| Income (loss) from operations | (3,241) | (3,834) | (9,948) | 509 | |||||||||||||||||||
| Interest expense | 83 | 160 | 253 | 282 | |||||||||||||||||||
| Income (loss) from continuing operations before taxes | (3,324) | (3,994) | (10,201) | 227 | |||||||||||||||||||
| Provision for (benefit from) income taxes | (391) | (763) | 521 | 1,473 | |||||||||||||||||||
| Loss from continuing operations | (2,933) | (3,231) | (10,722) | (1,246) | |||||||||||||||||||
| Income from discontinued operations, net of tax | 17 | 20,493 | 229 | 16,336 | |||||||||||||||||||
| Net income (loss) | $ | (2,916) | $ | 17,262 | $ | (10,493) | $ | 15,090 | |||||||||||||||
| Earnings (loss) per common share: | |||||||||||||||||||||||
| Continuing operations – basic | $ | (0.12) | $ | (0.12) | $ | (0.43) | $ | (0.05) | |||||||||||||||
| Discontinued operations – basic | — | 0.78 | 0.01 | 0.62 | |||||||||||||||||||
| Basic | $ | (0.12) | $ | 0.66 | $ | (0.42) | $ | 0.57 | |||||||||||||||
| Continuing operations – diluted | $ | (0.12) | $ | (0.12) | $ | (0.43) | $ | (0.05) | |||||||||||||||
| Discontinued operations – diluted | — | 0.78 | 0.01 | 0.62 | |||||||||||||||||||
| Diluted | $ | (0.12) | $ | 0.66 | $ | (0.42) | $ | 0.57 | |||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | 24,971,244 | 25,508,930 | 24,916,848 | 25,443,341 | |||||||||||||||||||
| Diluted | 24,971,244 | 25,508,930 | 24,916,848 | 25,443,341 | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE AND NINE MONTHS ENDED OCTOBER 2, 2022 AND OCTOBER 3, 2021
(In thousands, except share data)
(Unaudited)
| Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Treasury Stock | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at January 3, 2021 | 25,293,149 | $ | 273 | $ | 176,614 | $ | (8,327) | $ | (20,779) | $ | 147,781 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,163 | — | — | 1,163 | |||||||||||||||||||||||||||||
| Vesting of restricted shares | 109,528 | 1 | (1) | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (2,089) | — | (2,089) | |||||||||||||||||||||||||||||
| Balance at April 4, 2021 | 25,402,677 | 274 | 177,776 | (10,416) | (20,779) | 146,855 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,241 | — | — | 1,241 | |||||||||||||||||||||||||||||
| Vesting of restricted shares | 126,791 | 1 | (1) | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (83) | — | (83) | |||||||||||||||||||||||||||||
| Balance at July 4, 2021 | 25,529,468 | 275 | 179,016 | (10,499) | (20,779) | 148,013 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 2,637 | — | — | 2,637 | |||||||||||||||||||||||||||||
| Vesting of restricted shares | 152,728 | 2 | (2) | — | — | — | |||||||||||||||||||||||||||||
| Purchase of treasury stock | (338,223) | — | — | — | (3,924) | (3,924) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 17,262 | — | 17,262 | |||||||||||||||||||||||||||||
| Balance at October 3, 2021 | 25,343,973 | $ | 277 | $ | 181,651 | $ | 6,763 | $ | (24,703) | $ | 163,988 | ||||||||||||||||||||||||
| Balance at January 2, 2022 | 24,829,002 | $ | 277 | $ | 182,686 | $ | 2,043 | $ | (30,135) | $ | 154,871 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 549 | — | — | 549 | |||||||||||||||||||||||||||||
| Vesting of restricted shares | 66,372 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Purchase of treasury stock | (14,746) | — | — | — | (164) | (164) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (1,356) | — | (1,356) | |||||||||||||||||||||||||||||
| Balance at April 3, 2022 | 24,880,628 | 277 | 183,235 | 687 | (30,299) | 153,900 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,394 | — | — | 1,394 | |||||||||||||||||||||||||||||
| Vesting of restricted shares | 90,445 | 1 | (1) | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (6,221) | — | (6,221) | |||||||||||||||||||||||||||||
| Balance at July 3, 2022 | 24,971,073 | 278 | 184,628 | (5,534) | (30,299) | 149,073 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,478 | — | — | 1,478 | |||||||||||||||||||||||||||||
| Vesting of restricted shares | 2,218 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (2,916) | — | (2,916) | |||||||||||||||||||||||||||||
| Balance at October 2, 2022 | 24,973,291 | $ | 278 | $ | 186,106 | $ | (8,450) | $ | (30,299) | $ | 147,635 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 2, 2022 AND OCTOBER 3, 2021
(In thousands)
(Unaudited)
| Nine Months Ended | |||||||||||
| October 2, 2022 | October 3, 2021 | ||||||||||
| Operating activities: | |||||||||||
| Net income (loss) | $ | (10,493) | $ | 15,090 | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Gain on disposals of property and equipment, net | — | (217) | |||||||||
| Stock-based compensation | 3,421 | 5,041 | |||||||||
| Impairment and other lease charges (recoveries) | 1,442 | (92) | |||||||||
| Loss on extinguishment of debt | — | 5,307 | |||||||||
| Gain on sale of Taco Cabana | — | (24,066) | |||||||||
| Depreciation and amortization | 15,398 | 23,090 | |||||||||
| Amortization of deferred financing costs | 60 | 506 | |||||||||
| Deferred income taxes | (79) | (3,325) | |||||||||
| Changes in other operating assets and liabilities | 7,892 | (1,564) | |||||||||
| Net cash provided by operating activities | 17,641 | 19,770 | |||||||||
| Investing activities: | |||||||||||
| Capital expenditures: | |||||||||||
| Restaurant remodeling | (4,852) | (2,020) | |||||||||
| Other restaurant capital expenditures | (5,697) | (11,848) | |||||||||
| Corporate and restaurant information systems | (1,603) | (1,645) | |||||||||
| Total capital expenditures | (12,152) | (15,513) | |||||||||
| Proceeds from sale of Taco Cabana | — | 74,910 | |||||||||
| Proceeds from disposals of properties | — | 1,307 | |||||||||
| Proceeds from insurance recoveries | 312 | — | |||||||||
| Proceeds from sale-leaseback transactions | — | 3,083 | |||||||||
| Net cash provided by ( used in) investing activities | (11,840) | 63,787 | |||||||||
| Financing activities: | |||||||||||
| Repayment of secured debt | — | (75,000) | |||||||||
| Principal payments on finance leases | (49) | (199) | |||||||||
| Premium associated with debt extinguishment | — | (2,238) | |||||||||
| Payments to purchase treasury stock | (164) | (3,924) | |||||||||
| Net cash used in financing activities | (213) | (81,361) | |||||||||
| Net change in cash and restricted cash | 5,588 | 2,196 | |||||||||
| Cash and restricted cash, beginning of period | 40,634 | 53,362 | |||||||||
| Cash and restricted cash of discontinued operations, beginning of period | — | 257 | |||||||||
| Cash and restricted cash of discontinued operations, end of period | — | — | |||||||||
| Cash and restricted cash, end of period | $ | 46,222 | $ | 55,815 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Basis of Presentation
Business Description. Fiesta Restaurant Group, Inc. ("Fiesta Restaurant Group" or "Fiesta") owns, operates and franchises Pollo Tropical restaurants through its wholly-owned subsidiaries Pollo Operations, Inc. and Pollo Franchise, Inc. (collectively "Pollo Tropical"). Fiesta owned, operated and franchised Taco Cabana restaurants through its wholly-owned subsidiary, Taco Cabana, Inc. and its subsidiaries (collectively "Taco Cabana") through August 15, 2021. Unless the context otherwise requires, Fiesta and its subsidiaries are collectively referred to as the "Company." At October 2, 2022, the Company owned and operated 137 Pollo Tropical® restaurants located in Florida and franchised a total of 32 Pollo Tropical restaurants. The franchised Pollo Tropical restaurants include 17 in Puerto Rico, two in Panama, one in Guyana, two in Ecuador, one in the Bahamas, six on college campuses in Florida, and locations at one hospital and two sports and entertainment stadiums in Florida. The Company operates its business as one operating and reportable segment.
Discontinued Operations. On July 1, 2021, the Company entered into a stock purchase agreement for the sale of Taco Cabana, Inc. and its subsidiaries (collectively "Taco Cabana"). On August 16, 2021, the Company completed the sale of Taco Cabana. The Company has classified the revenues, costs and expenses and income taxes attributable to the Taco Cabana business segment, together with certain costs related to the transaction, within income (loss) from discontinued operations, net of tax, on the condensed consolidated statements of operations for all periods presented. See Note 2—Dispositions. Unless otherwise noted, amounts and disclosures throughout these notes to the condensed consolidated financial statements relate to the Company's continuing operations.
Basis of Consolidation. The unaudited condensed consolidated financial statements presented herein reflect the consolidated financial position, results of operations and cash flows of Fiesta and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Fiscal Year. The Company uses a 52–53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended January 2, 2022 contained 52 weeks. The three and nine months ended October 2, 2022 and October 3, 2021 each contained thirteen and thirty-nine weeks, respectively. The fiscal year ending January 1, 2023 will contain 52 weeks.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements for the three and nine months ended October 2, 2022 and October 3, 2021 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and nine months ended October 2, 2022 and October 3, 2021 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 and notes thereto for the year ended January 2, 2022 included in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2022. The January 2, 2022 balance sheet data is derived from those audited financial statements.
Reclassification. Certain prior period balances have been reclassified to conform to the current period presentation in the accompanying notes to the condensed consolidated financial statements.
Revenue Recognition. Revenue is recognized upon transfer of promised products or services to customers in an amount that reflects the consideration the Company received in exchange for those products or services. Revenues from the Company's owned and operated restaurants are recognized when payment is tendered at the time of sale. Franchise royalty revenues are based on a percentage of gross sales and are recorded as income when earned. Initial franchise fees and area development fees associated with new franchise agreements are not distinct from the continuing rights and services offered by the Company during the term of the related franchise agreements and are recognized as income over the term of the related franchise agreements. A portion of the initial franchise fee is allocated to training services and is recognized as revenue when the Company completes the training services.
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date under current market conditions. In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or
6
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
liabilities; and Level 3 inputs are unobservable and reflect management's own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:
•Current Assets and Liabilities. The carrying values reported on the condensed consolidated balance sheets of cash and restricted cash, accounts receivable and accounts payable approximate fair value because of the short maturity of those financial instruments.
•Revolving Credit Borrowings. The fair value of outstanding revolving credit borrowings under the Company's senior credit facility, which is considered Level 2, is based on current LIBOR rates. There were no outstanding revolving credit borrowings under the Company's senior credit facility as of October 2, 2022 and January 2, 2022.
See Note 4 for discussion of the fair value measurement of non-financial assets.
Long-Lived Assets. The Company assesses the recoverability of property and equipment and definite-lived intangible assets, including right-of-use ("ROU") lease assets, by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. Impairment is reviewed whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. See Note 4—Impairment of Long-Lived Assets and Other Lease Charges (Recoveries).
Leases. The Company assesses whether an agreement contains a lease at inception. All leases are reviewed for finance or operating classification once control is obtained. The majority of the Company's leases are operating leases. Operating leases are included within operating lease right-of-use assets, other current liabilities, and operating lease liabilities in the condensed consolidated balance sheets. Finance leases are included within property and equipment, net, current portion of long-term debt, and long-term debt, net of current portion in the condensed consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any lease payments made in advance and is reduced by lease incentives received. As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate at commencement date in determining the present value of lease payments. Lease terms include options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company assumes options are reasonably certain to be exercised when such options are required to achieve a minimum 20-year lease term for new restaurant properties and when it incurs significant leasehold improvement costs near the end of a lease term. The Company uses judgment and available data to allocate consideration in a contract when it leases land and a building. The Company also uses judgment in determining its incremental borrowing rate, which includes selecting a yield curve based on a synthetic credit rating determined using a valuation model. Lease expense for lease payments is recognized on a straight-line basis over the lease term unless the related ROU asset has been adjusted for an impairment charge. The Company has real estate lease agreements with lease and non-lease components, which are accounted for as a single lease component.
Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements. Estimates also affect the reported amounts of expenses during the reporting periods. Significant items subject to such estimates and assumptions include: insurance liabilities, evaluation for impairment of goodwill and long-lived assets, lease accounting matters, and deferred income tax assets. Actual results could differ from those estimates. Due to the uncertainty associated with the unprecedented nature of the COVID-19 pandemic and the impact it will have on the Company's operations and future cash flows, it is reasonably possible that the estimates of future cash flows used in impairment assessments will change in the near term and the effect of the change could be material.
2. Dispositions
On June 30, 2021, the Company's Board of Directors approved a stock purchase agreement, which was subsequently entered into by the Company on July 1, 2021, for the sale of all of the outstanding capital stock of Taco Cabana, Inc., including nearly all related assets and liabilities, for a cash purchase price of $85.0 million subject to reduction for (i) closing adjustments of approximately $4.6 million and (ii) certain other working capital adjustments as set forth in the stock purchase agreement. The transaction was completed August 16, 2021.
7
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
The Company filed an insurance claim for winter storm damages in Texas that occurred in the first quarter of 2021 and retained the right to receive the insurance claim proceeds. The Company recognized $0.4 million of insurance proceeds within income (loss) from discontinued operations, net of tax, in the nine months ended October 2, 2022 and $0.9 million of insurance proceeds in the fourth quarter of 2021, and expects to recognize any additional proceeds when the claim is ultimately resolved.
All revenues, costs and expenses and income taxes attributable to Taco Cabana, together with certain costs related to the transaction, have been aggregated within income (loss) from discontinued operations, net of tax, in the condensed consolidated statements of operations for all periods presented. No amounts for shared general and administrative operating support expense were allocated to discontinued operations. Depreciation and amortization related to Taco Cabana property and equipment and lease ROU assets was not recorded after June 30, 2021 when Taco Cabana was classified as held for sale. As required by the terms of the senior credit facility, the net proceeds from the sale were used to fully repay Fiesta's outstanding term loan borrowings on August 16, 2021. The early repayment was subject to a 103% loan prepayment premium. Interest expense and amortization of discount and debt issuance costs related to the term loan portion of the senior credit facility are included within income (loss) from discontinued operations, net of tax.
Upon completion of the sale of Taco Cabana, the Company provided certain services to Taco Cabana subject to a transition services agreement which expired on December 13, 2021. The Company retained certain closed Taco Cabana restaurant leases, including the associated operating lease right-of-use assets and operating lease liabilities. The Company also retained liability for Taco Cabana's accrued worker's compensation and general liability claims for periods prior to the sale. These liabilities are recognized in other current liabilities and other non-current liabilities in the condensed consolidated balance sheets. As there are estimates and assumptions inherent in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on historical trends or the severity of the claims, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.
8
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
During the nine months ended October 2, 2022, the Company recognized $0.2 million of income primarily related to insurance proceeds and a reduction of stock-based compensation of $(0.1) million, slightly offset by expenses related to workers' compensation claims within income (loss) from discontinued operations, net of tax, in the condensed consolidated statement of operations. A summary of the results of the discontinued operations for the three and nine months ended October 3, 2021 is as follows:
| Three Months Ended | Nine Months Ended | ||||||||||
| October 3, 2021 | October 3, 2021 | ||||||||||
| Major classes of line items constituting pretax loss of discontinued operations: | |||||||||||
| Revenues: | |||||||||||
| Total revenues | $ | 29,463 | $ | 152,339 | |||||||
| Costs and expenses: | |||||||||||
| Cost of sales | 8,872 | 43,480 | |||||||||
Restaurant wages and related expenses (including stock-based compensation expense of $122 and $172, respectively) | 10,054 | 48,399 | |||||||||
| Restaurant rent expense | 1,582 | 12,995 | |||||||||
| Other restaurant operating expenses | 5,364 | 24,814 | |||||||||
General and administrative (including stock-based compensation expense of $1,405 and $1,688, respectively) | 3,451 | 11,442 | |||||||||
| Depreciation and amortization | — | 7,799 | |||||||||
| Other income and expense items that are not major | 490 | 4,871 | |||||||||
| Total operating expenses | 29,813 | 153,800 | |||||||||
| Loss from operations | (350) | (1,461) | |||||||||
| Interest expense | 810 | 4,678 | |||||||||
| Gain on sale of Taco Cabana | (24,066) | (24,066) | |||||||||
| Loss on extinguishment of debt | 5,307 | 5,307 | |||||||||
| Income from discontinued operations before income taxes | 17,599 | 12,620 | |||||||||
| Benefit from income taxes | (2,894) | (3,716) | |||||||||
| Income from discontinued operations, net of tax | $ | 20,493 | $ | 16,336 | |||||||
9
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
A summary of significant investing activity and non-cash operating, investing, and financing activity of the discontinued operations for the nine months ended October 3, 2021 is as follows:
| Nine Months Ended | |||||
| October 3, 2021 | |||||
| Non-cash operating activities: | |||||
| Gain on disposals of property and equipment, net | $ | (217) | |||
| Stock-based compensation | 1,860 | ||||
| Impairment and other lease charges | 132 | ||||
| Loss on extinguishment of debt | 5,307 | ||||
| Gain on sale of Taco Cabana | (24,066) | ||||
| Depreciation and amortization | 7,799 | ||||
| Investing activities: | |||||
| Capital expenditures: | |||||
| New restaurant development | $ | — | |||
| Restaurant remodeling | (1,283) | ||||
| Other restaurant capital expenditures | (5,050) | ||||
| Corporate and restaurant information systems | (169) | ||||
| Total capital expenditures | (6,502) | ||||
| Proceeds from sale of Taco Cabana | 74,910 | ||||
| Proceeds from disposals of properties | 1,307 | ||||
| Proceeds from sale-leaseback transactions | 3,083 | ||||
| Net cash provided by investing activities – discontinued operations | $ | 72,798 | |||
| Supplemental cash flow disclosures: | |||||
| Interest paid on long-term debt | $ | 4,338 | |||
| Supplemental cash flow disclosures of non-cash investing and financing activities: | |||||
| Accruals for capital expenditures | $ | 410 | |||
| Right-of-use assets obtained in exchange for lease liabilities: | |||||
| Operating lease ROU assets | 5,156 | ||||
| Right-of-use assets and lease liabilities reduced for terminated leases: | |||||
| Operating lease ROU assets | 2,695 | ||||
| Operating lease liabilities | 3,443 | ||||
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
| October 2, 2022 | January 2, 2022 | ||||||||||
| Prepaid contract expenses | $ | 3,459 | $ | 4,462 | |||||||
| Other | 2,163 | 1,244 | |||||||||
| $ | 5,622 | $ | 5,706 | ||||||||
10
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
4. Impairment of Long-Lived Assets and Other Lease Charges (Recoveries)
The Company reviews its long-lived assets, principally property and equipment and lease ROU assets, for impairment at the restaurant level. The Company has elected to exclude operating lease payments and liabilities from future cash flows and carrying values, respectively, in its impairment review. In addition to considering management's plans, known regulatory or governmental actions and damage due to acts of God (hurricanes, tornadoes, etc.), the Company considers a triggering event to have occurred related to a specific restaurant if the restaurant's cash flows, exclusive of operating lease payments, for the last twelve months are less than a minimum threshold or if consistent levels of cash flows for the remaining lease period are less than the carrying value of the restaurant's assets. If an indicator of impairment exists for any of its assets, an estimate of undiscounted future cash flows, exclusive of operating lease payments, over the life of the primary asset for each restaurant is compared to that long-lived asset group's carrying value, excluding operating lease liabilities. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. There is uncertainty in the projected undiscounted future cash flows used in the Company's impairment review analysis. If actual performance does not achieve the projections, the Company may recognize impairment charges in future periods, and such charges could be material.
A summary of impairment of long-lived assets and other lease charges (recoveries) is as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 2, 2022 | October 3, 2021 | October 2, 2022 | October 3, 2021 | ||||||||||||||||||||
| Impairment of long-lived assets | $ | 132 | $ | 30 | $ | 2,288 | $ | 172 | |||||||||||||||
| Other lease charges (recoveries) | (98) | — | (846) | (396) | |||||||||||||||||||
| $ | 34 | $ | 30 | $ | 1,442 | $ | (224) | ||||||||||||||||
Impairment charges for the three and nine months ended October 2, 2022 related primarily to impairment of assets from four and eight underperforming Pollo Tropical restaurants, respectively, for which continued performance declines resulted in a decrease in the estimated future cash flows. For the three months ended October 2, 2022, other lease charges (recoveries) consist of a gain from a lease term reassessment. Additionally, the nine months ended October 2, 2022 consist of net gains from lease terminations.
Impairment charges for the three and nine months ended October 3, 2021 related primarily to impairment of equipment from previously impaired and closed restaurants. For the nine months ended October 3, 2021, other lease charges (recoveries) related primarily to gains from lease terminations.
The Company determines the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions, the Company's history of using these assets in the operation of its business and the Company's expectation of how a market participant would value the assets. In addition, for those restaurants reviewed for impairment where the Company owns the land and building, the Company utilizes third-party information such as a broker quoted value to determine the fair value of the property, when applicable. The Company also utilizes discounted future cash flows to determine the fair value of assets for certain leased restaurants with positive discounted projected future cash flows. The Company utilizes current market lease rent and discount rates to determine the fair value of right-of-use lease assets. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The Level 3 assets measured at fair value associated with impairment charges recorded during the nine months ended October 2, 2022 totaled $1.6 million.
11
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
5. Other Liabilities
Other current liabilities consist of the following:
| October 2, 2022 | January 2, 2022 | ||||||||||
| Operating lease liabilities | $ | 10,812 | $ | 10,381 | |||||||
| Accrued workers' compensation and general liability claims | 2,264 | 3,083 | |||||||||
| Sales and property taxes | 1,371 | 921 | |||||||||
| Other | 3,455 | 3,647 | |||||||||
| $ | 17,902 | $ | 18,032 | ||||||||
Other non-current liabilities consist of the following:
| October 2, 2022 | January 2, 2022 | ||||||||||
| Accrued workers' compensation and general liability claims | $ | 6,432 | $ | 6,432 | |||||||
| Deferred compensation | 263 | 320 | |||||||||
| Other | 987 | 1,011 | |||||||||
| $ | 7,682 | $ | 7,763 | ||||||||
6. Stockholders' Equity
Purchase of Treasury Stock
In 2018, the Company's board of directors approved a share repurchase program for up to 1,500,000 shares of the Company's common stock. In 2019, the Company's board of directors approved increases to the share repurchase program of an additional 1,500,000 shares of the Company's common stock for an aggregate approval of 3,000,000 shares of the Company's common stock. Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by the Company's board of directors. The Company repurchased 14,746 shares of common stock valued at approximately $0.2 million during the nine months ended October 2, 2022. As of October 2, 2022, 137,462 shares of common stock remain available for purchase under the share repurchase program. The repurchased shares are held as treasury stock at cost.
Stock-Based Compensation
On April 28, 2021, the stockholders of the Company approved the Fiesta Restaurant Group, Inc. 2021 Stock Incentive Plan (the "2021 Plan"). Following a grant of a total 37,874 shares to non-employee directors under the Company's 2012 Stock Incentive Plan (the "2012 Plan") on April 28, 2021, no additional shares will be granted under the 2012 Plan.
During the nine months ended October 2, 2022, the Company granted certain employees a total of 227,781 non-vested restricted shares under the 2021 Plan that vest and become non-forfeitable over a -year vesting period. Additionally, during the nine months ended October 2, 2022, the Company granted certain employees a total of 185,000 non-vested restricted shares under the 2021 Plan that vest and become non-forfeitable over a -year vesting period. During the nine months ended October 2, 2022, the Company granted non-employee directors a total of 80,268 non-vested restricted shares under the 2021 Plan that vest and become non-forfeitable over a -year vesting period. The weighted average fair value at grant date for non-vested shares issued during the nine months ended October 2, 2022 and October 3, 2021 was $8.83 per share and $16.83 per share, respectively.
12
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
During the nine months ended October 2, 2022, the Company also granted certain employees a total of 107,539 restricted stock units under the 2021 Plan subject to performance conditions. The restricted stock units vest and become non-forfeitable at the end of a -year vesting period. The number of shares into which these restricted stock units convert is based on the attainment of certain financial performance conditions and ranges from no shares, if the minimum performance condition is not met, to 215,078 shares if the maximum performance condition is met. The weighted average fair value at grant date for the restricted stock units granted during the nine months ended October 2, 2022 and October 3, 2021 was $9.02 per share and $17.43 per share, respectively.
Stock-based compensation expense from continuing operations for the three and nine months ended October 2, 2022 was $1.5 million and $3.5 million, respectively, and for the three and nine months ended October 3, 2021 was $1.1 million and $3.2 million, respectively. Stock-based compensation expense from discontinued operations for the nine months ended October 2, 2022 was $(0.1) million and for the three and nine months ended October 3, 2021 was $1.5 million and $1.9 million, respectively. At October 2, 2022, the total unrecognized stock-based compensation expense related to non-vested restricted shares and restricted stock units was approximately $5.6 million. At October 2, 2022, the remaining weighted average vesting period for non-vested restricted shares was 1.3 years and restricted stock units was 2.1 years.
A summary of all non-vested restricted shares and restricted stock units activity for the nine months ended October 2, 2022 is as follows:
| Non-Vested Shares | Restricted Stock Units | ||||||||||||||||||||||
| Shares | Weighted Average Grant Date Fair Value | Units | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
| Outstanding at January 2, 2022 | 769,018 | $ | 11.19 | 64,175 | $ | 17.45 | |||||||||||||||||
| Granted | 493,049 | 8.83 | 107,539 | 9.02 | |||||||||||||||||||
| Vested and released | (159,035) | 12.16 | — | — | |||||||||||||||||||
| Forfeited | (84,719) | 10.97 | (5,021) | 17.43 | |||||||||||||||||||
| Outstanding at October 2, 2022 | 1,018,313 | $ | 9.92 | 166,693 | $ | 12.01 | |||||||||||||||||
The fair value of non-vested restricted shares and restricted stock units granted during the nine months ended October 2, 2022 is based on the closing stock price on the date of grant.
7. Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") is computed by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during each period. Non-vested restricted shares contain a non-forfeitable right to receive dividends on a one-to-one per share ratio to common shares and are thus considered participating securities. The impact of the participating securities is included in the computation of basic EPS pursuant to the two-class method. The two-class method of computing EPS is an earnings allocation formula that determines earnings attributable to common shares and participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. EPS is computed by dividing undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and non-vested restricted shares based on the weighted average shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if the restricted stock units were to be converted into common shares. Restricted stock units with performance conditions are only included in the diluted EPS calculation to the extent that performance conditions have been met at the measurement date. Diluted EPS is computed by adjusting the basic weighted average number of common shares by the dilutive effect of the restricted stock units, determined using the treasury stock method.
All outstanding restricted stock units in the three and nine months ended October 2, 2022 and the three months ended October 3, 2021 were performance-based awards which had not yet met their performance conditions as of October 2, 2022 and October 3, 2021, respectively. For the nine months ended October 3, 2021, all shares of outstanding restricted stock units were excluded from the computation of diluted EPS because including these restricted stock units would have been antidilutive as a result of the loss from continuing operations in the nine months ended October 3, 2021.
13
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
The computation of basic and diluted EPS is as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 2, 2022 | October 3, 2021 | October 2, 2022 | October 3, 2021 | ||||||||||||||||||||
| Basic and diluted EPS: | |||||||||||||||||||||||
| Loss from continuing operations | $ | (2,933) | $ | (3,231) | $ | (10,722) | $ | (1,246) | |||||||||||||||
| Income from discontinued operations, net of tax | 17 | 20,493 | 229 | 16,336 | |||||||||||||||||||
| Net income (loss) | $ | (2,916) | $ | 17,262 | $ | (10,493) | $ | 15,090 | |||||||||||||||
| Less: income allocated to participating securities | — | 542 | — | 523 | |||||||||||||||||||
| Net income (loss) available to common shareholders | $ | (2,916) | $ | 16,720 | $ | (10,493) | $ | 14,567 | |||||||||||||||
| Weighted average common shares—basic | 24,971,244 | 25,508,930 | 24,916,848 | 25,443,341 | |||||||||||||||||||
| Restricted stock units | — | — | — | — | |||||||||||||||||||
| Weighted average common shares—diluted | 24,971,244 | 25,508,930 | 24,916,848 | 25,443,341 | |||||||||||||||||||
| Earnings (loss) from continuing operations per common share—basic | $ | (0.12) | $ | (0.12) | $ | (0.43) | $ | (0.05) | |||||||||||||||
| Earnings (loss) from discontinued operations per common share—basic | — | 0.78 | 0.01 | 0.62 | |||||||||||||||||||
| Earnings (loss) per common share—basic | $ | (0.12) | $ | 0.66 | $ | (0.42) | $ | 0.57 | |||||||||||||||
| Earnings (loss) from continuing operations per common share—diluted | $ | (0.12) | $ | (0.12) | $ | (0.43) | $ | (0.05) | |||||||||||||||
| Earnings (loss) from discontinued operations per common share—diluted | — | 0.78 | 0.01 | 0.62 | |||||||||||||||||||
| Earnings (loss) per common share—diluted | $ | (0.12) | $ | 0.66 | $ | (0.42) | $ | 0.57 | |||||||||||||||
8. Commitments and Contingencies
Lease Assignments. Pollo Tropical assigned two leases to third parties on properties where it no longer operates with lease terms expiring in 2033 and 2036. Although the assignees are responsible for making the payments required by the lease, the Company is a guarantor under the leases.
The maximum potential liability for future rental payments that the Company could be required to make under these leases at October 2, 2022 was $4.4 million. The Company could also be obligated to pay property taxes and other lease-related costs. The obligations under these leases will generally continue to decrease over time as the operating leases expire. The Company does not believe it is probable that it will be ultimately responsible for the obligations under these leases.
Indemnity of Lease Guarantees. As discussed in Note 2—Dispositions, Taco Cabana, Inc., a former wholly-owned subsidiary of the Company, was sold in the third quarter of 2021 to YTC Enterprises LLC ("YTC Enterprises") through a stock purchase agreement. The Company's previous owners, Carrols Restaurant Group, Inc. ("Carrols") remains a guarantor under 12 Taco Cabana restaurant property leases with lease terms expiring on various dates through 2030, all of which are still operating, as of October 2, 2022. The Company has indemnified Carrols for all obligations under the guarantees per the terms of the Separation and Distribution Agreement entered into in connection with the spin-off of Fiesta. The Company remains liable for all obligations under the terms of the leases in the event YTC Enterprises fails to pay any sums due under the lease, subject to indemnification provisions under the stock purchase agreement.
The maximum potential amount of future undiscounted rental payments the Company could be required to make under these leases at October 2, 2022 was $7.4 million. The obligations under these leases will generally continue to decrease over time as these operating leases expire, except for any execution of renewal options that exist under the original leases. No payments related to these guarantees have been made by the Company to date and none are expected to be required to be made in the future. YTC Enterprises has indemnified the Company for all such obligations and the Company does not believe it is probable it will be required to perform under any of the guarantees or direct obligations.
Legal Matters. The Company is a party to various legal proceedings incidental to the conduct of business. The Company does not believe that the outcome of any of these matters will have a material effect on its condensed consolidated financial statements. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be
14
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.
During the three months ended October 2, 2022, the Company recognized legal settlement proceeds of approximately $1.3 million before legal fees within other expense (income), net, in the condensed consolidated statement of operations.
9. Related Party Transactions
The Company engaged Jefferies LLC ("Jefferies"), an affiliate of one of the current members of Fiesta's board of directors, and a subsidiary of Jefferies Financial Group, Inc, a holder of more than 20 percent of the total outstanding shares of Fiesta, in connection with a refinancing of the Company's former amended senior credit facility in 2020 and other advisory services including related to the sale of Taco Cabana. The Company paid fees of $1.7 million to Jefferies and reimbursed Jefferies for reasonable out of pocket and ancillary expenses of less than $0.1 million when the refinancing was completed in the fourth quarter of 2020. The Company paid Jefferies a transaction advisory fee of $2.0 million upon the sale of Taco Cabana. As of October 2, 2022 and January 2, 2022, there were no amounts due to the related party recognized on the condensed consolidated balance sheets.
10. Supplemental Cash Flow Information
The following table details supplemental cash flow disclosures of non-cash investing and financing activities from continuing operations:
| Nine Months Ended | |||||||||||
| October 2, 2022 | October 3, 2021 | ||||||||||
| Supplemental cash flow disclosures: | |||||||||||
| Interest paid on long-term debt | $ | 145 | $ | 178 | |||||||
| Income tax payments (refunds), net | 381 | (6,253) | |||||||||
| Supplemental cash flow disclosures of non-cash investing and financing activities: | |||||||||||
| Accruals for capital expenditures | $ | 3,431 | $ | 2,357 | |||||||
| Right-of-use assets obtained in exchange for lease liabilities: | |||||||||||
| Operating lease ROU assets | 6,591 | 2,956 | |||||||||
| Right-of-use assets and lease liabilities reduced for terminated leases: | |||||||||||
| Operating lease ROU assets | 3,474 | 2,288 | |||||||||
| Operating lease liabilities | 4,523 | 2,793 | |||||||||
| Cash and restricted cash reconciliation: | |||||||||||
| Beginning of period | |||||||||||
| Cash | $ | 36,797 | $ | 49,778 | |||||||
| Restricted cash | 3,837 | 3,584 | |||||||||
| Cash and restricted cash, beginning of period | $ | 40,634 | $ | 53,362 | |||||||
| End of period | |||||||||||
| Cash | $ | 42,591 | $ | 51,978 | |||||||
| Restricted cash | 3,631 | 3,837 | |||||||||
| Cash and restricted cash, end of period | $ | 46,222 | $ | 55,815 | |||||||
15
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)
11. Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848) ("ASU No. 2020-04"), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective as of March 12, 2020 through December 31, 2022. As of October 2, 2022, the Company's only exposure to LIBOR rates was the undrawn $10.0 million revolving credit facility under its senior credit facility. Upon cessation of the LIBOR, the senior credit facility would use a benchmark replacement rate. According to ASU No. 2020-04, modifications of contracts within the scope of Topic 470 Debt should be accounted for by prospectively adjusting the effective interest rate. The Company does not expect ASU No. 2020-04 to have a significant impact on its financial statements.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of financial condition and results of operations ("MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying notes. Any reference to restaurants refers to Company-owned restaurants unless otherwise indicated. Throughout this MD&A, we refer to Fiesta Restaurant Group, Inc., together with its consolidated subsidiaries, as "Fiesta," "we," "our" and "us."
We use a 52–53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended January 2, 2022 contained 52 weeks. The three and nine months ended October 2, 2022 and October 3, 2021 each contained thirteen and thirty-nine weeks, respectively. The fiscal year ending January 1, 2023 will contain 52 weeks.
Company Overview
We own, operate and franchise the restaurant brand Pollo Tropical®, which has over 30 years of operating history and a loyal customer base. Our Pollo Tropical locations feature fire-grilled and crispy citrus marinated chicken and other freshly prepared menu items. We believe the brand offers a distinct and unique flavor with broad appeal at a compelling value, which differentiates it in the competitive fast-casual and quick-service restaurant segments. All but one of our restaurants offer the convenience of drive-thru windows. As of October 2, 2022, we operated 137 Pollo Tropical Company-owned restaurants, all of which are located in Florida.
We franchise our Pollo Tropical restaurants primarily in international markets, and as of October 2, 2022, we had 23 franchised Pollo Tropical restaurants located in Puerto Rico, Panama, Guyana, Ecuador, and the Bahamas, and nine licensed Pollo Tropical restaurants located in Florida consisting of six on college campuses and locations at a hospital and two sports and entertainment stadiums. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets.
Recent Events Affecting Our Results of Operations
Hurricane Ian
During the third quarter of 2022, Florida was struck by Hurricane Ian. In an effort to ensure the safety of our team members, select Pollo Tropical restaurants in the storm's path were closed early on September 27, 2022 and all Pollo Tropical restaurants were closed on September 28, 2022. From September 29, 2022 through October 3, 2022, a total of 38 restaurants in the hardest hit markets of Ft. Myers, Naples, Orlando and Tampa were closed for all or a portion of that time period due to storm conditions and utility outages. There was no significant facilities damage to Company-owned restaurants and by October 8, 2022, all restaurants were open for business and we expect to file insurance claims upon completion of the final assessment of damages and losses.
Due to the business disruption related to Hurricane Ian, the Company incurred expenses totaling $0.5 million for spoiled inventory and for incremental labor costs from paying hourly employees for scheduled time not worked due to temporary restaurants closures. We estimate that Hurricane Ian negatively impacted income (loss) from operations by approximately $1.6 million and negatively impacted comparable restaurant sales and transactions by approximately 2.6% and 2.2%, respectively, for the third quarter of 2022.
Labor Challenges and Inflationary Factors
Hours of operations have been limited due to labor shortages which are affecting our brand and the restaurant industry. Overall staffing levels have shown improvement between the second and third quarters of 2022, however, challenges still exist which have reduced operating hours as a result of labor shortages. In response to these labor shortages and competition for labor, we have continued providing special incentive pay in affected locations and for particular days of the week, and we have provided sign-on bonuses payable after a specified term of service. We believe these labor cost increases for staffing-related incentives are short-term in nature. We have continued our focus on accelerating labor optimization efforts to improve staffing efficiency, which we believe will increase both staff availability and margins. As a result of our efforts, staffing levels improved in June 2022 and through the third quarter of 2022, enabling us to more consistently open all service channels, particularly dine-in, curbside and digital.
Inflationary factors have been experienced primarily in food costs and other operating costs categories. Commodity costs as a percentage of net sales increased 4.7% in the third quarter of 2022 compared to the third quarter of 2021. Utilities costs as a percentage of net sales also increased to 4.3% in the third quarter of 2022 from 3.8% in the third quarter of 2021 primarily due to higher energy prices in 2022.
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Pricing action has been taken to offset labor, food and other operating cost increases. In order to maintain value perceptions with our customers, we implemented a phased approach to menu price increases and took lower pricing increases on items purchased by value-conscious customers including our "Pollo Time" promotional items. Recent price increases include a 5.2% price increase in mid-December 2021, a 5.0% increase in March 2022, a 1.4% increase in June 2022, and a 4.0% increase in September 2022. As a result of this phased approach to menu price increases, margin improvement is trailing the impact of cost increases noted above, with improved margins expected in future quarters compared to the third quarter of 2022, barring unforeseen changes in our cost structure and operating environment.
COVID-19 Pandemic
The novel coronavirus (COVID-19) pandemic has affected and is continuing to affect the restaurant industry and the economy. Based on current conditions, we do not expect sales trends to significantly deteriorate further as a direct result of COVID-19. However, labor shortages may negatively impact sales trends and there can be no assurance that sales trends will not deteriorate further. We have implemented measures to control costs to mitigate any negative impact from the COVID-19 pandemic and labor shortages.
Executive Summary—Consolidated Operating Performance for the Three Months Ended October 2, 2022
Our third quarter 2022 results and highlights include the following:
•We recognized a net loss of $(2.9) million, or $(0.12) per diluted share, in the third quarter of 2022 compared to net income of $17.3 million, or $0.66 per diluted share, in the third quarter of 2021 due primarily to the impact of income from discontinued operations of $20.5 million in the third quarter of 2021 compared to less than $0.1 million in the third quarter of 2022. The loss in the third quarter of 2022 was primarily the result of higher Pollo Tropical cost of sales, repair and maintenance costs, utilities costs, general and administrative expenses, and advertising costs, partially offset by increased comparable restaurant sales in the third quarter of 2022.
•We recognized a loss from continuing operations of $(2.9) million, or $(0.12) per diluted share, in the third quarter of 2022 compared to a loss from continuing operations of $(3.2) million, or $(0.12) per diluted share, in the third quarter of 2021 primarily as a result of the foregoing.
•Total revenues increased 7.9% in the third quarter of 2022 to $95.6 million compared to $88.6 million in the third quarter of 2021, driven by an increase in comparable restaurant sales at Pollo Tropical, partially offset by the impact of Hurricane Ian. Comparable restaurant sales increased 9.3% for our Pollo Tropical restaurants resulting from an increase in the net impact of product/channel mix and pricing of 14.6%, partially offset by a decrease in comparable restaurant transactions of 5.3%.
•Consolidated Adjusted EBITDA increased $0.3 million in the third quarter of 2022 to $3.9 million compared to $3.7 million in the third quarter of 2021, driven primarily by the impact of higher restaurant sales, partially offset by higher utilities costs, repair and maintenance costs, advertising costs, general and administrative costs, as well as commodity costs and sales mix within cost of sales. Consolidated Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see "Management's Use of Non-GAAP Financial Measures."
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Results of Operations
Unless otherwise noted, this discussion of operating results relates to our continuing operations.
The following table summarizes the changes in the number and mix of Pollo Tropical Company-owned and franchised restaurants:
| Pollo Tropical | |||||||||||||||||
| Owned | Franchised | Total | |||||||||||||||
| January 2, 2022 | 138 | 31 | 169 | ||||||||||||||
| New | — | 1 | 1 | ||||||||||||||
| Closed | — | (1) | (1) | ||||||||||||||
| April 3, 2022 | 138 | 31 | 169 | ||||||||||||||
| New | — | — | — | ||||||||||||||
| Closed | — | (2) | (2) | ||||||||||||||
| July 3, 2022 | 138 | 29 | 167 | ||||||||||||||
| New | — | 3 | 3 | ||||||||||||||
| Closed | (1) | — | (1) | ||||||||||||||
| October 2, 2022 | 137 | 32 | 169 | ||||||||||||||
| January 3, 2021 | 138 | 29 | 167 | ||||||||||||||
| New | — | — | — | ||||||||||||||
| Closed | — | — | — | ||||||||||||||
| April 4, 2021 | 138 | 29 | 167 | ||||||||||||||
| New | — | — | — | ||||||||||||||
| Closed | — | — | — | ||||||||||||||
| July 4, 2021 | 138 | 29 | 167 | ||||||||||||||
| New | — | 2 | 2 | ||||||||||||||
| Closed | — | — | — | ||||||||||||||
| October 3, 2021 | 138 | 31 | 169 | ||||||||||||||
Three Months Ended October 2, 2022 Compared to Three Months Ended October 3, 2021
The following table sets forth, for the three months ended October 2, 2022 and October 3, 2021, selected operating results as a percentage of restaurant sales:
| Three Months Ended | |||||||||||
| October 2, 2022 | October 3, 2021 | ||||||||||
| Costs and expenses: | |||||||||||
| Cost of sales | 32.4 | % | 30.7 | % | |||||||
| Restaurant wages and related expenses | 26.2 | % | 28.0 | % | |||||||
| Restaurant rent expense | 6.3 | % | 6.7 | % | |||||||
| Other restaurant operating expenses | 17.5 | % | 16.7 | % | |||||||
| Advertising expense | 3.5 | % | 3.1 | % | |||||||
Revenues. Revenues include restaurant sales and franchise royalty revenues and fees. Restaurant sales consist of food and beverage sales, net of discounts, at our restaurants. Franchise royalty revenues and fees represent ongoing royalty payments that are determined based on a percentage of franchisee sales and the amortization of initial franchise fees and area development fees associated with the opening of new franchised restaurants. Restaurant sales are influenced by new restaurant openings, closures of restaurants and changes in comparable restaurant sales.
Total revenues increased 7.9% to $95.6 million in the third quarter of 2022 from $88.6 million in the third quarter of 2021. Restaurant sales increased 8.3% to $95.3 million in the third quarter of 2022 from $88.0 million in the third quarter of 2021.
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The following table presents the primary drivers of the increase in restaurant sales for Pollo Tropical for the third quarter of 2022 compared to the third quarter of 2021 (in millions):
| Increase in comparable restaurant sales | $ | 7.9 | |||
| Decrease in sales related to closed restaurants, including temporary and partial closures | (0.6) | ||||
| Total increase | $ | 7.3 | |||
Restaurants are included in comparable restaurant sales after they have been open for 18 months. Restaurants are excluded from comparable restaurant sales for any fiscal month in which the restaurant was closed for more than five days. Comparable restaurant sales are compared to the same period in the prior year.
Comparable restaurant sales increased 9.3% for Pollo Tropical restaurants in the third quarter of 2022 compared to the third quarter of 2021. Increases or decreases in comparable restaurant sales result primarily from an increase or decrease in comparable restaurant transactions and in average check. Changes in average check are primarily driven by menu price increases net of discounts and promotions and changes in sales channel and sales mix.
For Pollo Tropical, an increase in the net impact of product/channel mix and pricing of 14.6% was partially offset by a decrease in comparable restaurant transactions of 5.3% in the third quarter of 2022 compared to the third quarter of 2021. The increase in product/channel mix and pricing was driven primarily by menu price increases of 14.7% and increases in dine-in and delivery average check. We estimate that Hurricane Ian negatively impacted comparable restaurant sales and transactions by approximately 2.6% and 2.2%, respectively, in the third quarter of 2022. We believe staffing challenges had a negative impact on sales trends driven by reduced operating hours and sales channels in the third quarter of 2022. Comparable restaurant sales in the third quarter of 2022 were also negatively impacted by remodels and refreshes that temporarily closed dine-in and counter take-out operations.
Franchise revenues decreased to $0.3 million in the third quarter of 2022 from $0.6 million in the third quarter of 2021 due primarily to a temporary decrease in franchise royalty fees while a franchise agreement is being renegotiated.
Operating Costs and Expenses. Operating costs and expenses include cost of sales, restaurant wages and related expenses, other restaurant expenses and advertising expenses. Cost of sales consists of food, paper and beverage costs including packaging costs, less rebates and purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities, including chicken and beef, are generally purchased under contracts for future periods of up to one year.
Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related taxes and benefits are subject to inflation, including minimum wage increases and changes in costs for health insurance, workers' compensation insurance and state unemployment insurance.
Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are utilities, repairs and maintenance, general liability insurance, sanitation, supplies and credit card and delivery fees.
Advertising expense includes all promotional expenses including television, radio, billboards and other sponsorships and promotional activities and agency fees.
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The following table presents the primary drivers of the changes in the components of restaurant operating margins for the third quarter of 2022 compared to the third quarter of 2021. All percentages are stated as a percentage of restaurant sales:
| Pollo Tropical: | |||||
| Cost of sales: | |||||
| Higher commodity cost | 4.7 | % | |||
| Sales mix | 2.0 | % | |||
| Higher promotions and discounts | 0.2 | % | |||
| Menu price increases | (4.5) | % | |||
| Operating efficiency | (1.0) | % | |||
| Other | 0.3 | % | |||
| Net increase in cost of sales as a percentage of restaurant sales | 1.7 | % | |||
| Restaurant wages and related expenses: | |||||
| Lower other labor costs including special incentive pay and sign-on bonuses | (1.4) | % | |||
Lower incentive bonus(1) | (0.4) | % | |||
| Lower medical benefits costs including the impact of higher sales | (0.2) | % | |||
Higher labor costs due to higher wage rates and training costs, partially offset by the impact of higher restaurant sales(2) | 0.3 | % | |||
| Other | (0.1) | % | |||
| Net decrease in restaurant wages and related costs as a percentage of restaurant sales | (1.8) | % | |||
| Other operating expenses: | |||||
| Higher utilities costs | 0.6 | % | |||
| Higher repair and maintenance costs | 0.5 | % | |||
| Higher property and general liability insurance costs | 0.2 | % | |||
| Lower operating supplies | (0.3) | % | |||
| Lower delivery fee expense | (0.2) | % | |||
| Net increase in other restaurant operating expenses as a percentage of restaurant sales | 0.8 | % | |||
| Advertising expense: | |||||
| Increased advertising | 0.4 | % | |||
| Net increase in advertising expense as a percentage of restaurant sales | 0.4 | % | |||
(1) Primarily due to guaranteed bonus payments in 2021.
(2) Higher wage rates and payroll taxes due in part to labor shortages in 2022.
Restaurant Rent Expense. Restaurant rent expense includes base rent, contingent rent and common area maintenance and property taxes related to our leases characterized as operating leases. Restaurant rent expense, as a percentage of total restaurant sales, decreased to 6.3% in the third quarter of 2022 from 6.7% in the third quarter of 2021 due primarily to the impact of higher restaurant sales which were partially offset by higher rental costs related to renewed leases.
General and Administrative Expenses. General and administrative expenses are comprised primarily of (1) salaries and expenses associated with the development and support of our Company and brand and the management oversight of the operation of our restaurants; and (2) legal, auditing and other professional fees, corporate system costs, and stock-based compensation expense.
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General and administrative expenses were $12.1 million for the third quarter of 2022 and $11.2 million for the third quarter of 2021 and, as a percentage of total revenues, increased to 12.7% in the third quarter of 2022 compared to 12.6% in the third quarter of 2021 due primarily to higher employee and other support costs, partially offset by higher total revenue. General and administrative expenses for the third quarter of 2022 included $0.9 million in non-recurring expenses comprised of $0.7 million of general and administrative efficiency initiative costs, which includes $0.3 million for accelerated charges related to deferred implementation and service contract costs related to its current accounting system, and $0.2 million digital platform costs. General and administrative expenses for the third quarter of 2021 included $0.2 million related to non-recurring digital platform costs.
Consolidated Adjusted EBITDA. Consolidated Adjusted EBITDA, a non-GAAP financial measure, is the primary measure of profit or loss used by our chief operating decision maker for purposes of assessing performance and is defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges (recoveries), goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants.
Consolidated Adjusted EBITDA may not necessarily be comparable to other similarly titled captions of other companies due to differences in methods of calculation. For a discussion of our use of Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see the heading titled "Management's Use of Non-GAAP Financial Measures."
Consolidated Adjusted EBITDA increased to $3.9 million, or 4.1% of total revenues, in the third quarter of 2022 from $3.7 million, or 4.1% of total revenues, in the third quarter of 2021 due primarily to the impact of higher restaurant sales, partially offset by higher utilities costs, repair and maintenance costs, advertising costs, insurance costs, general and administrative costs, as well as commodity costs and sales mix within cost of sales.
Restaurant-level Operating Profit. We also use Restaurant-level Operating Profit (formerly Restaurant-Level Adjusted EBITDA), a non-GAAP financial measure, as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Consolidated Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs and general and administrative expenses (including corporate-level general and administrative expenses).
Restaurant-level Operating Profit increased to $13.4 million, or 14.1% of restaurant sales, in the third quarter of 2022 from $13.0 million, or 14.7% of restaurant sales, in the third quarter of 2021 primarily due to the foregoing. For a reconciliation from income (loss) from operations to Restaurant-level Operating Profit, see the heading titled "Management's Use of Non-GAAP Financial Measures."
Depreciation and Amortization. Depreciation and amortization expense decreased to $5.1 million in the third quarter of 2022 from $5.3 million in the third quarter of 2021 primarily as a result of decreased depreciation related to impairment of assets from underperforming and closed restaurants, partially offset by an increase in depreciation related to ongoing reinvestment and enhancements to our restaurants that have been made since the third quarter of 2021.
Impairment and Other Lease Charges (Recoveries). Impairment and other lease charges (recoveries) remained flat at less than $0.1 million in the third quarter of 2022 compared to the third quarter of 2021.
Impairment and other lease charges (recoveries) for the three months ended October 2, 2022 include impairment charges of $0.1 million related primarily to impairment of assets from four underperforming Pollo Tropical restaurants, partially offset by a gain from a lease term reassessment of $(0.1) million.
Impairment and other lease charges (recoveries) for the three months ended October 3, 2021 consist of impairment charges related primarily to impairment of equipment from previously impaired and closed restaurants.
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Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related trailing twelve-month cash flows are below a certain threshold. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets, exclusive of operating lease payments, to their respective carrying values, excluding operating lease liabilities. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset group's carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, and for right-of-use lease assets, current market lease rent and discount rates, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material. Due to the uncertainty associated with the unprecedented nature of the COVID-19 pandemic and the impact it may continue to have on our operations and future cash flows, it is reasonably possible that the estimates of future cash flows used in impairment assessments will change in the near term and the effect of the change could be material.
For one Pollo Tropical restaurant with a carrying value (excluding a right-of-use lease asset) of $0.8 million, projected cash flows are not substantially in excess of its carrying values. If the performance of this restaurant deteriorates from current projections, an impairment charge could be recognized in future periods, and such charge could be material.
Closed Restaurant Rent Expense, Net of Sublease Income. Closed restaurant rent expense, net of sublease income, was $0.5 million for the third quarter of 2022 and consisted of closed restaurant rent and ancillary lease costs of $2.1 million net of sublease income of $(1.5) million. Closed restaurant rent expense, net of sublease income, was $0.7 million for the third quarter of 2021 and consisted of closed restaurant rent and ancillary lease costs of $2.3 million net of sublease income of $(1.6) million.
Other Expense (Income), Net. Other expense (income), net, for the third quarter of 2022 primarily consisted of net proceeds from a legal settlement of $(0.8) million. Other expense (income), net, for the third quarter of 2021 was $0.1 million and primarily consisted of costs for the transfer and storage of equipment from closed restaurants and other closed restaurant related costs.
Loss from Operations. As a result of the foregoing, we had a loss from operations of $(3.2) million, or (3.4)% of restaurant sales, in the third quarter of 2022 compared to a loss from operations of $(3.8) million, or (4.4)% of restaurant sales, in the third quarter of 2021.
Interest Expense. Interest expense decreased to $0.1 million in the third quarter of 2022 compared to $0.2 million in the third quarter of 2021.
Benefit from Income Taxes. The effective tax rate was 11.8% and 19.1% for the third quarter of 2022 and 2021, respectively. The benefit from income taxes for the third quarter of 2022 was derived using an estimated annual effective tax rate of (2.1)% which includes changes in the valuation allowance as a result of originating temporary differences during the year and excludes the discrete impact of a tax deficiency from the vesting of restricted shares of $0.2 million. The benefit from income taxes for the third quarter of 2021 was derived using the actual effective tax rate for the year-to-date period, which includes changes in the valuation allowance as a result of originating temporary differences during the year.
Income (Loss) from Discontinued Operations, Net of Tax. All revenues, costs and expenses and income taxes attributable to Taco Cabana have been aggregated within income (loss) from discontinued operations, net of tax, in the condensed consolidated statement of operations for all periods presented. During the third quarter of 2022, we recognized less than $0.1 million of income, primarily related to income tax benefits, within income (loss) from discontinued operations, net of tax, in the condensed consolidated statement of operations.
Taco Cabana results of operations are included through August 15, 2021 in the third quarter of 2021 due to the sale of Taco Cabana on August 16, 2021. A gain of $24.1 million was recognized on the sale of Taco Cabana in the third quarter of 2021. See Note 2—Dispositions in our unaudited condensed consolidated financial statements.
Net Loss. As a result of the foregoing, we had a net loss of $(2.9) million, or (3.0)% of total revenue, in the third quarter of 2022 compared to net income of $17.3 million, or 19.5% of total revenue, in the third quarter of 2021.
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Nine Months Ended October 2, 2022 Compared to Nine Months Ended October 3, 2021
The following table sets forth, for the nine months ended October 2, 2022 and October 3, 2021, selected operating results as a percentage of restaurant sales:
| Nine Months Ended | |||||||||||
| October 2, 2022 | October 3, 2021 | ||||||||||
| Costs and expenses: | |||||||||||
| Cost of sales | 32.6 | % | 30.7 | % | |||||||
| Restaurant wages and related expenses | 25.3 | % | 25.1 | % | |||||||
| Restaurant rent expense | 6.3 | % | 6.6 | % | |||||||
| Other restaurant operating expenses | 17.4 | % | 15.9 | % | |||||||
| Advertising expense | 3.3 | % | 3.0 | % | |||||||
Revenues. Total revenues increased 8.1% to $289.7 million in the nine months ended October 2, 2022 from $268.0 million in the nine months ended October 3, 2021. Restaurant sales increased 8.2% to $288.5 million in the nine months ended October 2, 2022 from $266.6 million in the nine months ended October 3, 2021.
The following table presents the primary drivers of the increase in restaurant sales for Pollo Tropical for the nine months ended October 2, 2022 compared to the nine months ended October 3, 2021 (in millions):
| Increase in comparable restaurant sales | $ | 22.4 | |||
| Decrease in sales related to closed restaurants, including a temporary closure | (0.5) | ||||
| Total increase | $ | 21.9 | |||
Comparable restaurant sales increased 8.5% for Pollo Tropical restaurants in the nine months ended October 2, 2022.
For Pollo Tropical, an increase in the net impact of product/channel mix and pricing of 14.9% was partially offset by a decrease in comparable restaurant transactions of 6.4% in the nine months ended October 2, 2022 compared to the nine months ended October 3, 2021. The increase in product/channel mix and pricing was driven primarily by menu price increases of 14.3% and increases in dine-in and delivery average check. We estimate that Hurricane Ian negatively impacted comparable restaurant sales and transactions by approximately 0.8% and 0.7%, respectively, in the nine months ended October 2, 2022. We believe staffing challenges had a negative impact on sales trends driven by reduced operating hours and sales channels in the nine months ended October 2, 2022. Comparable restaurant sales in the nine months ended October 2, 2022 were also negatively impacted by remodels and refreshes that temporarily closed dine-in and counter take-out operations.
Franchise revenues decreased to $1.2 million in the nine months ended October 2, 2022 from $1.3 million in the nine months ended October 3, 2021 due primarily to a temporary decrease in franchise royalty fees while a franchise agreement is being renegotiated.
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The following table presents the primary drivers of the changes in the components of restaurant operating margins for the nine months ended October 2, 2022 compared to the nine months ended October 3, 2021. All percentages are stated as a percentage of restaurant sales:
| Pollo Tropical: | |||||
| Cost of sales: | |||||
| Higher commodity costs | 5.2 | % | |||
| Sales mix | 1.3 | % | |||
| Higher promotions and discounts | 0.3 | % | |||
| Menu price increases | (4.5) | % | |||
| Operating efficiency | (0.6) | % | |||
| Other | 0.2 | % | |||
| Net increase in cost of sales as a percentage of restaurant sales | 1.9 | % | |||
| Restaurant wages and related expenses: | |||||
Higher labor costs due to higher wage rates, overtime pay and training costs, partially offset by the impact of higher restaurant sales(1) | 1.3 | % | |||
| Lower other labor costs including special incentive pay and sign-on bonuses | (0.8) | % | |||
Lower incentive bonus(2) | (0.3) | % | |||
| Net increase in restaurant wages and related costs as a percentage of restaurant sales | 0.2 | % | |||
| Other operating expenses: | |||||
| Higher repair and maintenance costs | 0.8 | % | |||
| Higher utilities costs | 0.5 | % | |||
| Higher property and general liability insurance costs | 0.3 | % | |||
| Higher delivery fee expense due to increased delivery channel sales | 0.2 | % | |||
| Lower operating supplies | (0.2) | % | |||
| Other | (0.1) | % | |||
| Net increase in other restaurant operating expenses as a percentage of restaurant sales | 1.5 | % | |||
| Advertising expense: | |||||
| Increased advertising | 0.3 | % | |||
| Net increase in advertising expense as a percentage of restaurant sales | 0.3 | % | |||
(1) Higher wage rates, overtime pay and payroll taxes due in part to labor shortages in 2022.
(2) Primarily due to guaranteed bonus payments in 2021.
Restaurant Rent Expense. Restaurant rent expense, as a percentage of total restaurant sales, decreased to 6.3% in the nine months ended October 2, 2022 from 6.6% in the nine months ended October 3, 2021 due primarily to the impact of higher comparable restaurant sales which were partially offset by higher rental costs related to renewed leases.
General and Administrative Expenses. General and administrative expenses were $37.3 million for the nine months ended October 2, 2022 and $32.9 million for the nine months ended October 3, 2021 and, as a percentage of total revenues, increased to 12.9% in the nine months ended October 2, 2022 compared to 12.3% in the nine months ended October 3, 2021 due primarily to increased professional fees, higher employee and other support costs, partially offset by higher total revenue. General and administrative expense for the nine months ended October 2, 2022 included $3.8 million in non-recurring expenses comprised of $1.9 million of professional fees, $1.1 million of general and administrative efficiency initiative costs, which includes $0.3 million related to the acceleration and write-off of costs related to accounting system implementation, and $0.8 million digital platform costs. General and administrative expenses for the nine months ended October 3, 2021 included $0.8 million related to non-recurring digital platform costs.
Consolidated Adjusted EBITDA. Consolidated Adjusted EBITDA, a non-GAAP financial measure, decreased to $14.9 million, or 5.1% of total revenues, in the nine months ended October 2, 2022 from $22.5 million, or 8.4% of total revenues, in
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the nine months ended October 3, 2021 due primarily to higher commodity costs and sales mix within cost of sales, labor costs, repair and maintenance costs, and utilities costs, partially offset by the impact of higher restaurant sales. For a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see the heading titled "Management's Use of Non-GAAP Financial Measures."
Restaurant-level Operating Profit. Restaurant-level Operating Profit, a non-GAAP financial measure, decreased to $43.7 million, or 15.1% of restaurant sales, in the nine months ended October 2, 2022 from $50.0 million, or 18.8% of restaurant sales, in the nine months ended October 3, 2021 due primarily to the foregoing. For a reconciliation from income (loss) from operations to Restaurant-level Operating Profit, see the heading titled "Management's Use of Non-GAAP Financial Measures."
Depreciation and Amortization. Depreciation and amortization expense increased to $15.4 million in the nine months ended October 2, 2022 from $15.3 million in the nine months ended October 3, 2021 due primarily to increased depreciation related to ongoing reinvestment and enhancements to our restaurants, partially offset by decreased depreciation related to impairment of assets from underperforming restaurants that have been made since the third quarter of 2021.
Impairment and Other Lease Charges (Recoveries). Impairment and other lease charges (recoveries) increased to $1.4 million in the nine months ended October 2, 2022 from $(0.2) million in the nine months ended October 3, 2021.
Impairment and other lease charges (recoveries) for the nine months ended October 2, 2022 include impairment charges of $2.3 million related primarily to impairment of assets from eight underperforming Pollo Tropical restaurants, partially offset by net gains from lease terminations and a lease term reassessment of $(0.8) million.
Impairment and other lease charges (recoveries) for the nine months ended October 3, 2021 include net gains from lease terminations of $(0.4) million, partially offset by impairment charges of $0.2 million related primarily to impairment of equipment from previously impaired and closed restaurants.
Closed Restaurant Rent Expense, Net of Sublease Income. Closed restaurant rent expense, net of sublease income was $1.3 million for the nine months ended October 2, 2022 and consisted of closed restaurant rent and ancillary lease costs of $6.4 million net of sublease income of $(5.1) million. Closed restaurant rent expense, net of sublease income was $2.4 million for the nine months ended October 3, 2021 and consisted of closed restaurant rent and ancillary lease costs of $6.9 million net of sublease income of $(4.5) million.
Other Expense (Income), Net. Other expense (income), net, was $(0.7) million for the nine months ended October 2, 2022 and primarily consisted of net proceeds from a legal settlement of $(0.8) million, partially offset by other closed restaurant related costs. Other expense (income), net, was $0.4 million for the nine months ended October 3, 2021 and primarily consisted of costs for the removal, transfer, and storage of equipment from closed restaurants and other closed restaurant related costs.
Income (Loss) from Operations. As a result of the foregoing, we had a loss from operations of $(9.9) million, or (3.4)% of restaurant sales, for the nine months ended October 2, 2022 compared to income from operation of $0.5 million, or 0.2% of restaurant sales, for the nine months ended October 3, 2021.
Interest Expense. Interest expense remained flat at $0.3 million for the nine months ended October 2, 2022 compared to the nine months ended October 3, 2021.
Provision for Income Taxes. The effective tax rate was (5.1)% and 648.9% for the nine months ended October 2, 2022 and October 3, 2021, respectively. The provision for income taxes for the nine months ended October 2, 2022 was derived using an estimated annual effective tax rate of (2.1)% which includes changes in the valuation allowance as a result of originating temporary differences during the year and excludes the discrete impact of a tax deficiency from the vesting of restricted shares of $0.2 million. The provision for income taxes for the nine months ended October 3, 2021 was derived using the actual effective tax rate for the year-to-date period, which includes changes in the valuation allowance as a result of originating temporary differences during the year and excludes an out-of-period adjustment that increased our income tax provision.
Income (Loss) from Discontinued Operations. During the nine months ended October 2, 2022, we recognized $0.2 million of income, primarily related to insurance proceeds and a reduction of stock-based compensation, slightly offset by expenses related to workers' compensation claims within income (loss) from discontinued operations, net of tax, in the condensed consolidated statement of operations.
Taco Cabana results of operations are included through August 15, 2021 in the nine months ended October 3, 2021 due to the sale of Taco Cabana on August 16, 2021. A gain of $24.1 million was recognized on the sale of Taco Cabana in the nine months ended October 3, 2021. See Note 2—Dispositions in our unaudited condensed consolidated financial statements.
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Net Income (Loss). As a result of the foregoing, we had a net loss of $(10.5) million, or (3.6)% of total revenue, for the nine months ended October 2, 2022 compared to net income of $15.1 million, or 5.6% of total revenue, for the nine months ended October 3, 2021.
Liquidity and Capital Resources
Unless otherwise noted, this discussion of liquidity and capital resources relates to our combined operations.
We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. Although, as a result of our substantial cash balance, we did not have a working capital deficit at October 2, 2022, we have the ability to operate with a substantial working capital deficit (and we have historically operated with a working capital deficit) because:
•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 supplies and payroll become due.
Capital expenditures and payments related to our lease obligations represent significant liquidity requirements for us. We believe our cash reserves, cash generated from our operations, and availability of borrowings under our senior credit facility will provide sufficient cash availability to cover our anticipated working capital needs and capital expenditures for the next twelve months. We used the net proceeds from the sale of Taco Cabana to repay the outstanding term loan under our senior credit facility in the third quarter of 2021.
Operating Activities. Net cash provided by operating activities in the first nine months of 2022 and 2021 was $17.6 million and $19.8 million, respectively. The decrease in net cash provided by operating activities in the nine months ended October 2, 2022 was primarily driven by a decrease in Consolidated Adjusted EBITDA, including contributions from discontinued operations, the receipt of income tax refunds in 2021, and the timing of payments.
Investing Activities. Net cash used in investing activities in the first nine months of 2022 was $11.8 million compared to net cash provided by investing activities in the same period of 2021 of $63.8 million. Capital expenditures are generally the largest component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling/reimaging, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems.
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The following table sets forth our capital expenditures from continuing operations for the periods presented (dollars in thousands):
| Pollo Tropical | Other | Continuing Operations | |||||||||||||||
| Nine Months Ended October 2, 2022: | |||||||||||||||||
| New restaurant development | $ | — | $ | — | $ | — | |||||||||||
| Restaurant remodeling | 4,852 | — | 4,852 | ||||||||||||||
Other restaurant capital expenditures(1) | 5,697 | — | 5,697 | ||||||||||||||
| Corporate and restaurant information systems | 1,525 | 78 | 1,603 | ||||||||||||||
| Total capital expenditures | $ | 12,074 | $ | 78 | $ | 12,152 | |||||||||||
| Number of new restaurant openings | — | — | |||||||||||||||
| Nine Months Ended October 3, 2021: | |||||||||||||||||
| New restaurant development | $ | — | $ | — | $ | — | |||||||||||
| Restaurant remodeling | 737 | — | 737 | ||||||||||||||
Other restaurant capital expenditures(1) | 6,798 | — | 6,798 | ||||||||||||||
| Corporate and restaurant information systems | 883 | 593 | 1,476 | ||||||||||||||
| Total capital expenditures | $ | 8,418 | $ | 593 | $ | 9,011 | |||||||||||
| Number of new restaurant openings | — | — | |||||||||||||||
(1) Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our unaudited condensed consolidated financial statements. For the nine months ended October 2, 2022 and October 3, 2021, total restaurant repair and maintenance expenses were approximately $11.2 million and $8.6 million, respectively.
The following table sets forth our capital expenditures from discontinued operations for the period presented (dollars in thousands):
| Taco Cabana | |||||
| Nine Months Ended October 3, 2021: | |||||
| New restaurant development | $ | — | |||
| Restaurant remodeling | 1,283 | ||||
Other restaurant capital expenditures(1) | 5,050 | ||||
| Corporate and restaurant information systems | 169 | ||||
| Total capital expenditures | $ | 6,502 | |||
| Number of new restaurant openings | — | ||||
(1) Excludes restaurant repair and maintenance expenses included in discontinued operations in our unaudited condensed consolidated financial statements. For the nine months ended October 3, 2021, total restaurant repair and maintenance expenses from discontinued operations were approximately $5.5 million.
Net cash provided by investing activities from discontinued operations in the first nine months of 2022 included proceeds from insurance recoveries of $0.3 million. Net cash used in investing activities from discontinued operations in the first nine months of 2021 included net proceeds of $74.9 million from the sale of Taco Cabana, $3.1 million from the sale-leaseback of two restaurant properties and net proceeds of $1.3 million from the sale of an additional restaurant property.
Total capital expenditures in 2022 are expected to be between $20.0 million and $25.0 million.
Financing Activities. Net cash used in financing activities in the first nine months of 2022 was $0.2 million and primarily consisted of payments to repurchase our common stock. Net cash used in financing activities in the first nine months of 2021 included term loan borrowing repayments under our senior credit facility of $75.0 million, $3.9 million in payments to repurchase our common stock, a $2.2 million payment for a premium associated with extinguishment of the term loan under our senior credit facility and $0.2 million in principal payments on finance leases.
Senior Credit Facility. On November 23, 2020, we terminated our former amended senior secured revolving credit facility and entered into a new senior secured credit facility, which is referred to as the "senior credit facility." The senior credit facility was comprised of a term loan facility (the "term loan facility") of $75.0 million and a revolving credit facility (the "revolving
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credit facility") of up to $10.0 million and matures on November 23, 2025. The senior credit facility also provides for potential incremental term loan borrowing increases of up to $37.5 million in the aggregate, subject to, among other items, compliance with a minimum Total Leverage Ratio and other terms specified in the senior credit facility. As required by the terms of the senior credit facility, the net proceeds from the sale of Taco Cabana were used to fully repay our outstanding term loan borrowings on August 16, 2021. The early repayment was subject to a 103% loan prepayment premium.
The senior credit facility provides that we be in compliance with the Total Leverage Ratio under the senior credit facility beginning January 3, 2022. We will be permitted to exercise equity cure rights with respect to compliance with the Total Leverage Ratio subject to certain restrictions as set forth in the senior credit facility.
Borrowings under the senior credit facility bear interest at a rate per annum, at our option, equal to either (all terms as defined in the senior credit facility):
1) the Base Rate plus the Applicable Margin of 6.75% with a minimum Base Rate of 2.00%, or
2) the LIBOR (or Benchmark Replacement) Rate plus the Applicable Margin of 7.75%, with a minimum LIBOR (or Benchmark Replacement) Rate of 1.00%.
In addition, the senior credit facility requires us to pay a commitment fee of 0.50% per annum on the daily amount of the unused portion of the revolving credit facility.
The outstanding borrowings under the revolving credit facility are prepayable without penalty or premium (other than customary breakage costs). The outstanding borrowings under the term loan facility were voluntarily prepayable by us, and the term loan facility provided that each of the following required a mandatory prepayment of outstanding term loan borrowings by us as follows: (i) 100% of any cash Net Proceeds (as defined in the senior credit facility) in excess of $2.0 million individually or in the aggregate over the term of the senior credit facility in respect of any Casualty Event (as defined in the senior credit facility) affecting collateral provided that we were permitted to reinvest such Net Proceeds in accordance with the senior credit facility, (ii) 100% of any Net Proceeds of a Specified Equity Contribution (as defined in the senior credit facility), (iii) 100% of any cash Net Proceeds from the issuance of debt issued by us or our subsidiaries other than Permitted Debt (as defined in the senior credit facility), (iv) 100% of any Net Proceeds from the Disposition (as defined in the senior credit facility) of certain assets individually, or in the aggregate, in excess of $2.0 million in any fiscal year provided that we were permitted to reinvest such Net Proceeds in accordance with the senior credit facility and (v) beginning with the fiscal year ending January 2, 2022, an amount equal to the Excess Cash Flow (as defined in the senior credit facility) in accordance with the senior credit facility.
Our senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of our indebtedness having an outstanding principal amount in excess of $5.0 million which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.
The senior credit facility contains certain covenants, including, without limitation, those limiting our ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of our business in any material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends.
Our obligations under the senior credit facility are secured by all of our and our subsidiaries' assets (including a pledge of all of the capital stock and equity interests of our subsidiaries).
Under the senior credit facility, the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include, without limitation, payment default, covenant defaults, bankruptcy type defaults, defaults on other indebtedness, certain judgments or upon the occurrence of a change of control (as specified in the senior credit facility).
As of October 2, 2022, we were in compliance with the financial covenants under our senior credit facility. At October 2, 2022, $10.0 million was available for borrowing under the revolving credit facility.
Off-Balance Sheet Arrangements and Cash Requirements
We have no off-balance sheet arrangements.
There have been no significant changes outside the ordinary course of business to our cash requirements since January 2, 2022. Information regarding our cash requirements is included under "Cash Requirements" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022.
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Inflation
The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses and energy costs. Labor costs in our restaurants are impacted by a number of factors such as labor supply and changing market conditions, as well as changes in the federal and state hourly minimum wage rates as well as changes in payroll related taxes, including federal and state unemployment taxes. Labor supply across other industries also negatively impacts the costs of supplies, commodities, logistics, and utilities. We typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to fully offset such inflationary cost increases in the future.
Critical Accounting Estimates
Our unaudited interim condensed consolidated financial statements and accompanying notes 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 "Basis of Presentation" footnote in the notes to our consolidated financial statements for the year ended January 2, 2022 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. These estimates involve a significant level of estimation uncertainty and are reasonably likely to have a material impact on the financial condition or results of operations. There have been no material changes affecting our critical accounting policies for the nine months ended October 2, 2022.
Management's Use of Non-GAAP Financial Measures
Consolidated Adjusted EBITDA is a non-GAAP financial measure. We use Consolidated Adjusted EBITDA in addition to net income (loss) and income (loss) from operations to assess our performance, and we believe it is important for investors to be able to evaluate us using the same measures used by management. We believe this measure is an important indicator of our operational strength and the performance of our business and it provides a view of operations absent non-cash activity and items that are not related to the ongoing operation of our restaurants or affect comparability period over period. Consolidated Adjusted EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges (recoveries), goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants. Consolidated Adjusted EBITDA as calculated by us is not necessarily comparable to similarly titled measures reported by other companies, and should not be considered as an alternative to net income (loss), earnings (loss) per share, cash flows from operating activities or other financial information determined under GAAP.
We also use Restaurant-level Operating Profit (previously presented as Restaurant-level Adjusted EBITDA) as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Consolidated Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs, and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-level Operating Profit margin is derived by dividing Restaurant-level Operating Profit by restaurant sales. Restaurant-level Operating Profit is also a non-GAAP financial measure.
Management believes that Consolidated Adjusted EBITDA and Restaurant-level Operating Profit, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and reconciliation of income (loss) from operations to Restaurant-level Operating Profit (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also these measures may not be comparable to similarly titled captions of other companies.
All such financial measures have important limitations as analytical tools. These limitations include the following:
•Such financial information does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;
•Such financial information does not reflect interest expense or the cash requirements necessary to service payments on our debt;
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•Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and such financial information does not reflect the cash required to fund such replacements; and
•Such financial information does 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 and gains (such as impairment and other lease charges (recoveries), closed restaurant rent expense, net of sublease income, other income and expense and stock-based compensation expense) have recurred and may recur.
A reconciliation from consolidated net income (loss) to Consolidated Adjusted EBITDA follows (in thousands). All amounts are from continuing operations unless otherwise indicated.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 2, 2022 | October 3, 2021 | October 2, 2022 | October 3, 2021 | |||||||||||||||||||||||
| Net income (loss) | $ | (2,916) | $ | 17,262 | $ | (10,493) | $ | 15,090 | ||||||||||||||||||
| Loss (income) from discontinued operations, net of tax | (17) | (20,493) | (229) | (16,336) | ||||||||||||||||||||||
| Provision for (benefit from) income taxes | (391) | (763) | 521 | 1,473 | ||||||||||||||||||||||
| Income (loss) from continuing operations before taxes | (3,324) | (3,994) | (10,201) | 227 | ||||||||||||||||||||||
| Add: | ||||||||||||||||||||||||||
| Non-general and administrative adjustments: | ||||||||||||||||||||||||||
| Depreciation and amortization | 5,052 | 5,328 | 15,398 | 15,291 | ||||||||||||||||||||||
| Impairment and other lease charges (recoveries) | 34 | 30 | 1,442 | (224) | ||||||||||||||||||||||
| Interest expense | 83 | 160 | 253 | 282 | ||||||||||||||||||||||
| Closed restaurant rent expense, net of sublease income | 535 | 710 | 1,316 | 2,426 | ||||||||||||||||||||||
| Other expense (income), net | (787) | 138 | (653) | 431 | ||||||||||||||||||||||
| Stock-based compensation expense | 5 | 13 | 18 | 44 | ||||||||||||||||||||||
| Total non-general and administrative adjustments | 4,922 | 6,379 | 17,774 | 18,250 | ||||||||||||||||||||||
| General and administrative adjustments: | ||||||||||||||||||||||||||
| Stock-based compensation expense | 1,473 | 1,097 | 3,484 | 3,137 | ||||||||||||||||||||||
Non-recurring professional fees(1) | — | — | 1,902 | — | ||||||||||||||||||||||
G&A efficiency initiatives(2) | 650 | — | 1,104 | — | ||||||||||||||||||||||
| Restructuring costs and retention bonuses | — | — | — | 18 | ||||||||||||||||||||||
Digital costs(3) | 223 | 193 | 829 | 844 | ||||||||||||||||||||||
| Total general and administrative adjustments | 2,346 | 1,290 | 7,319 | 3,999 | ||||||||||||||||||||||
| Consolidated Adjusted EBITDA | $ | 3,944 | $ | 3,675 | $ | 14,892 | $ | 22,476 | ||||||||||||||||||
| Total revenues | $ | 95,631 | $ | 88,592 | $ | 289,727 | $ | 267,962 | ||||||||||||||||||
| Net income (loss) as a percentage of total revenues | (3.0) | % | 19.5 | % | (3.6) | % | 5.6 | % | ||||||||||||||||||
| Consolidated Adjusted EBITDA as a percentage of total revenues | 4.1 | % | 4.1 | % | 5.1 | % | 8.4 | % | ||||||||||||||||||
(1) Non-recurring professional fees consist of costs related to growth initiatives.
(2) G&A efficiency initiatives consist of non-recurring retention bonus costs and costs related to the acceleration and write-off of costs related to accounting system implementation.
(3) Digital costs for the three and nine months ended October 2, 2022 and October 3, 2021 include costs related to enhancing the digital experience for our customers.
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A reconciliation from income (loss) from operations to Restaurant-level Operating Profit follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 2, 2022 | October 3, 2021 | October 2, 2022 | October 3, 2021 | |||||||||||||||||||||||
| Income (loss) from operations | $ | (3,241) | $ | (3,834) | $ | (9,948) | $ | 509 | ||||||||||||||||||
| Add: | ||||||||||||||||||||||||||
| Non-general and administrative adjustments: | ||||||||||||||||||||||||||
| Depreciation and amortization | 5,052 | 5,328 | 15,398 | 15,291 | ||||||||||||||||||||||
| Impairment and other lease charges (recoveries) | 34 | 30 | 1,442 | (224) | ||||||||||||||||||||||
| Closed restaurant rent expense, net of sublease income | 535 | 710 | 1,316 | 2,426 | ||||||||||||||||||||||
| Other expense (income), net | (787) | 138 | (653) | 431 | ||||||||||||||||||||||
| Stock-based compensation expense | 5 | 13 | 18 | 44 | ||||||||||||||||||||||
| Total non-general and administrative adjustments | 4,839 | 6,219 | 17,521 | 17,968 | ||||||||||||||||||||||
| General and administrative adjustments: | ||||||||||||||||||||||||||
| Stock-based compensation expense | 1,473 | 1,097 | 3,484 | 3,137 | ||||||||||||||||||||||
Non-recurring professional fees(1) | — | — | 1,902 | — | ||||||||||||||||||||||
G&A efficiency initiatives(2) | 650 | — | 1,104 | — | ||||||||||||||||||||||
| Restructuring costs and retention bonuses | — | — | — | 18 | ||||||||||||||||||||||
Digital costs(3) | 223 | 193 | 829 | 844 | ||||||||||||||||||||||
| Total general and administrative adjustments | 2,346 | 1,290 | 7,319 | 3,999 | ||||||||||||||||||||||
| Consolidated Adjusted EBITDA | $ | 3,944 | $ | 3,675 | $ | 14,892 | $ | 22,476 | ||||||||||||||||||
| Restaurant-level adjustments: | ||||||||||||||||||||||||||
Add: Other general and administrative expense(4) | 9,794 | 9,877 | 29,954 | 28,884 | ||||||||||||||||||||||
| Less: Franchise royalty revenue and fees | 322 | 578 | 1,195 | 1,344 | ||||||||||||||||||||||
| Restaurant-level Operating Profit | $ | 13,416 | $ | 12,974 | $ | 43,651 | $ | 50,016 | ||||||||||||||||||
| Restaurant sales | $ | 95,309 | $ | 88,014 | $ | 288,532 | $ | 266,618 | ||||||||||||||||||
| Income (loss) from operations as a percentage of restaurant sales | (3.4) | % | (4.4) | % | (3.4) | % | 0.2 | % | ||||||||||||||||||
| Restaurant-level Operating Profit as a percentage of restaurant sales | 14.1 | % | 14.7 | % | 15.1 | % | 18.8 | % | ||||||||||||||||||
(1) Non-recurring professional fees consist of costs related to growth initiatives.
(2) G&A efficiency initiatives consist of non-recurring retention bonus costs and costs related to the acceleration and write-off of costs related to accounting system implementation.
(3) Digital costs for the three and nine months ended October 2, 2022 and October 3, 2021 include costs related to enhancing the digital experience for our customers.
(4) Excludes general and administrative adjustments included in Consolidated Adjusted EBITDA.
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Forward Looking Statements
Matters discussed in this report and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, express or implied, regarding our anticipated growth, operating results, future earnings per share, plans, objectives, the impact of our other business initiatives, the impact of our initiatives designed to strengthen our liquidity and cash position, including those related to working capital efficiency initiatives and sales of real property and the impact of the COVID-19 pandemic and our initiatives designed to respond to the COVID-19 pandemic on future sales, margins, earnings and liquidity, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). These statements are often identified by the words "believe," "positioned," "estimate," "project," "plan," "goal," "target," "assumption," "continue," "intend," "expect," "future," "anticipate," and other similar expressions, whether in the negative or the affirmative, that are not statements of historical fact. These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict, and you should not place undue reliance on our forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this report and in our other public filings with the United States Securities and Exchange Commission ("SEC"). All forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this report or other periodic reports represent our estimates as of the date made and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We purchase certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements have been negotiated in advance to minimize price volatility. Where possible, we use these types of purchasing techniques to control costs as an alternative to using financial instruments to hedge commodity prices. Additionally, shortages in key ingredients may impact commodity prices. In many cases, we believe we will be able to address commodity cost increases that are significant and appear to be long-term in nature by adjusting our menu pricing. However, long-term increases in commodity prices may result in lower restaurant-level operating margins.
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.
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 Securities Exchange Act of 1934, as amended (the "Exchange Act")), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures. We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 2, 2022.
Changes in Internal Control over Financial Reporting. No change occurred in our internal control over financial reporting during the third quarter of 2022 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to various litigation matters incidental to the conduct of business. We do not believe that the outcome of any of these matters will have a material adverse effect on our business, results of operations or financial condition.
ITEM 1A. RISK FACTORS
Part 1—Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 2, 2022, describes important factors that could cause our actual 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. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
(a) The following exhibits are filed as part of this report.
| Exhibit No. | ||||||||
| 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) | |||||||
+ Compensatory plan or arrangement
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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.
| FIESTA RESTAURANT GROUP, INC. | |||||
| Date: November 10, 2022 | /s/ RICHARD C. STOCKINGER | ||||
| (Signature) | |||||
| Richard C. Stockinger Chief Executive Officer | |||||
| Date: November 10, 2022 | /s/ DIRK MONTGOMERY | ||||
| (Signature) | |||||
| Dirk Montgomery Senior Vice President, Chief Financial Officer and Treasurer | |||||
| (Principal Financial Officer) | |||||
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