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, 2022contained 52 weeks. The three months ended April 3, 2022and April 4, 2021each contained thirteen weeks. The fiscal year ending January 1, 2023will contain 52 weeks.
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
April 3, 2022, we operated 138 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 April 3, 2022, we had 23 franchised Pollo Tropical restaurants located in Puerto Rico, Panama, Guyana, Ecuador, the Bahamas, and the U.S. Virgin Islands, and eight licensed Pollo Tropical restaurants located in Floridaconsisting of five 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
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.
Labor challenges and inflationary factors
Hours of operations have been limited due to labor shortages which are affecting our brand and the restaurant industry. In the first quarter of 2022, we estimate that operating hours were reduced by approximately 4.3% as a result of labor shortages. Additionally, we experienced increased overtime due to training and staffing shortages. In response to these labor shortages and competition for labor, we implemented special incentive pay in affected locations and for particular days of the week, and we have introduced sign-on bonuses payable after a specified term of service. In addition, we believe that approximately
$0.2 millionof the labor cost increases in the first quarter of 2022 for overtime and staffing-related incentives are short-term in nature. We have intensified our focus on accelerating labor optimization efforts to improve staffing efficiency, which we believe will increase both staff availability and margins. Inflationary factors have been experienced primarily in labor, food costs, and other operating costs categories. Due primarily to higher wage rates, restaurant wages and related expenses as a percentage of net sales increased to 24.8% in the first quarter of 2022 from 23.2% in the first quarter of 2021. Commodity costs as a percentage of net sales increased 4.9% in the first quarter of 2022 compared to the first quarter of 2021. Chicken costs, the primary protein purchased, are not expected to increase significantly for the remainder of 2022. Utilities costs as a percentage of net sales also increased to 3.8% in the first quarter of 2022 from 3.3% in the first quarter of 2021. Pricing action has been taken to offset labor, food and 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, and a 5.0% increase in March 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 first quarter of 2022, barring unforeseen changes in our cost structure and operating environment. 16
Executive Summary – Consolidated Operating Performance for the Three Months Ended
Our first quarter 2022 results and highlights include the following:
•We recognized a net loss of
$(1.4) million, or $(0.05)per diluted share, in the first quarter of 2022 compared to a net loss of $(2.1) million, or $(0.08)per diluted share, in the first quarter of 2021 due primarily to the impact of increased comparable restaurant sales at Pollo Tropical and lower impairment and other lease charges in the first quarter of 2022, partially offset by higher cost of sales, labor costs, repair and maintenance costs, general and administrative expenses, advertising costs and delivery fees in the first quarter of 2022. The loss in the first quarter of 2021 was primarily the result of the loss from discontinued operations. •We recognized a loss from continuing operations of $(1.3) million, or $(0.05)per diluted share, in the first quarter of 2022 compared to a loss from continuing operations of $(0.7) million, or $(0.03)per diluted share, in the first quarter of 2021 primarily as a result of the foregoing. •Total revenues increased 8.4% in the first quarter of 2022 to $95.6 millioncompared to $88.2 millionin the first quarter of 2021, driven by an increase in comparable restaurant sales at Pollo Tropical. Comparable restaurant sales increased 8.0% for our Pollo Tropical restaurants resulting from an increase in the net impact of product/channel mix and pricing of 15.0%, partially offset by a decrease in comparable restaurant transactions of 7.0%. •Consolidated Adjusted EBITDA decreased $4.4 millionin the first quarter of 2022 to $5.3 millioncompared to $9.7 millionin the first quarter of 2021, driven primarily by higher labor costs, repair and maintenance, utilities, insurance costs and delivery fee expense, and sales mix and commodity costs within cost of sales, partially offset by the impact of higher restaurant 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." Results of Operations
Unless otherwise stated, this analysis of operating results relates to our continuing operations.
The following table summarizes the changes in the number and composition of
Pollo Tropical Owned Franchised Total January 2, 2022 138 31 169 New - 1 1 Closed - (1) (1) April 3, 2022 138 31 169 January 3, 2021 138 29 167 New - - - Closed - - - April 4, 2021 138 29 167
Three months completed
The following table sets forth, for the three months ended
April 3, 2022and April 4, 2021, selected operating results as a percentage of restaurant sales: Three Months Ended April 3, 2022 April 4, 2021 Costs and expenses: Cost of sales 32.3 % 31.1 % Restaurant wages and related expenses 24.8 % 23.2 % Restaurant rent expense 6.3 % 6.7 % Other restaurant operating expenses 17.5 % 15.1 % Advertising expense 3.0 % 2.7 % 17
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 8.4% to
$95.6 millionin the first quarter of 2022 from $88.2 millionin the first quarter of 2021. Restaurant sales increased 8.4% to $95.2 millionin the first quarter of 2022 from $87.8 millionin the first quarter of 2021. The following table presents the primary drivers of the increase in restaurant sales for Pollo Tropical for the first quarter of 2022 compared to the first quarter of 2021 (in millions): Increase in comparable restaurant sales $ 7.0Increase in sales related to closed restaurants, including temporary and partial closures 0.4 Total increase $ 7.4Restaurants 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 8.0% for Pollo Tropical restaurants in the first quarter of 2022 compared to the first 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 15.0% was partially offset by a decrease in comparable restaurant transactions of 7.0% in the first quarter of 2022 compared to the first quarter of 2021. The increase in product/channel mix and pricing was driven primarily by increases in dine-in, delivery, and drive-thru average check, and menu price increases of 13.8%. We believe staffing challenges had a negative impact on sales trends driven by reduced operating hours and sales channels in the first quarter of 2022. Comparable restaurant sales in adequately staffed markets increased 11.1% in the first quarter of 2022 compared the first quarter of 2021. Comparable restaurant sales in the first quarter of 2022 were negatively impacted by remodels and refreshes that temporarily closed dine-in and counter take-out operations. We estimate that these temporary dine-in closures negatively impacted comparable restaurant sales by approximately 0.4% in the first quarter of 2022.
Franchise revenues remained stable at
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 salaries and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses, and related benefits. Payroll taxes and related taxes and benefits are subject to inflation, including increases in the minimum wage and changes in the costs of health insurance, workers’ compensation insurance and unemployment insurance of State.
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 costs include all promotional expenses, including television, radio, billboards and other sponsorship and promotional activities and agency fees.
The following table outlines the key drivers of changes in the components of restaurant operating margins for the first quarter of 2022 compared to the first quarter of 2021. All percentages are expressed as a percentage of restaurant sales:
Pollo Tropical: Cost of sales: Higher commodity cost 4.9 % Sales mix 1.0 % Higher promotions and discounts 0.2 % Menu price increases (4.4) % Operating efficiency (0.7) % Other 0.2 %
Net increase in cost of sales as a percentage of restaurant sales
1.2 % Restaurant wages and related expenses: Higher labor costs due to higher wage rates and overtime(1) 2.0 %
Reduced medical benefit costs, including the impact of increased sales
(0.3) % Lower incentive bonus(2) (0.2) % Other 0.1 %
Net increase in restaurant wages and related costs as a percentage of restaurant sales
1.6 % Other operating expenses: Higher repair and maintenance costs 1.3 % Higher utilities costs 0.5 %
Higher delivery costs due to increased delivery channel sales
0.4 % Higher insurance costs 0.4 % Lower professional fees and services (0.2) % Other 0.1 % Net increase in other restaurant operating expenses as a percentage of restaurant sales 2.5 % Advertising expense: Increased advertising 0.3 %
Net increase in advertising spend as a percentage of restaurant sales
(1) Increase in wage rates, overtime and social charges partly due to labor shortages in 2022. (2) Mainly due to guaranteed bonuses in 2021.
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 first quarter of 2022 from 6.7% in the first 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. General and administrative expenses were
$12.3 millionfor the first quarter of 2022 and $10.7 millionfor the first quarter of 2021, and as a percentage of total revenues, general and administrative expenses increased to 12.9% in the first quarter of 2022 compared to 12.1% in the first quarter of 2021, due primarily to increased professional fees, higher employee benefits and other support costs. General and administrative expenses for the first quarter of 2022 included $1.3 millionin non-recurring expenses comprised of $0.7 millionof professional fees, $0.3 milliondigital platform costs, and $0.3 millionof general and administrative efficiency initiative costs. General and administrative expenses for the first quarter of 2021 included $0.3 millionrelated to non-recurring digital costs. 19
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 decreased to
$5.3 million, or 5.5% of total revenues, in the first quarter of 2022 from $9.7 million, or 11.0% of total revenues, in the first quarter of 2021 due primarily to higher labor costs, repair and maintenance costs, utilities costs, general and administrative costs, and sales mix and commodity costs within cost of sales, partially offset by the impact of higher restaurant sales. Restaurant-level Adjusted EBITDA. We also use Restaurant-level Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as 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 Adjusted EBITDA decreased to $15.3 million, or 16.1% of restaurant sales, in the first quarter of 2022 from $18.7 million, or 21.2% of restaurant sales, in the first quarter of 2021 primarily due to the foregoing. For a reconciliation from Consolidated Adjusted EBITDA to Restaurant-level Adjusted EBITDA, see the heading titled "Management's Use of Non-GAAP Financial Measures." Depreciation and Amortization. Depreciation and amortization expense remained flat at $5.1 millionin the first quarter of 2022 compared to the first quarter of 2021.
Depreciation and other rental charges (recoveries). Impairment and other lease charges (recoveries) decreased to
Depreciation and other rental charges (recoveries) for the three months ended
Depreciation and other rental charges (recoveries) for the three months ended
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 seven Pollo Tropical restaurants with combined carrying values (excluding right-of-use lease assets) of
$4.7 million, projected cash flows are not substantially in excess of their carrying values. If the performance of these restaurants 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 $0.4 millionfor the first quarter of 2022 and consisted of closed restaurant rent and ancillary lease costs of $2.2 millionnet of 20
sublease income of
$(1.8) million. Closed restaurant rent expense, net of sublease income, was $0.8 millionfor the first quarter of 2021 and consisted of closed restaurant rent and ancillary lease costs of $2.3 millionnet of sublease income of $(1.6) million. Other Expense (Income), Net. Other expense (income), net, for the first quarter of 2022 primarily consisted of closed restaurant related costs of $0.1 million. Other expense, net, for the first quarter of 2021 was $0.1 millionand primarily consisted of costs for the removal, transfer, and storage of equipment from closed restaurants and other closed restaurant related costs.
Interest charges. Interest expense remained stable at
Provision for (Benefit from) Income Taxes. The effective tax rate was 14.6% and 129.2% for the first quarter of 2022 and 2021, respectively. The benefit from income taxes for the first quarter of 2022 was derived using an estimated annual effective tax rate of 20.0% 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
$0.1 million. The provision for income taxes for the first quarter of 2021 was derived using an estimated annual effective tax rate of 57.6% 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 $0.3 millionand a $1.5 millionout-of-period adjustment that increased our income tax provision. Loss from Discontinued Operations, Net of Tax. All revenues, costs and expenses and income taxes attributable to Taco Cabanahave been aggregated within loss from discontinued operations, net of tax, in the condensed consolidated statement of operations for all periods presented. During the first quarter of 2022, we recognized $0.2 millionof expenses, primarily related to workers' compensation claims, and a reduction of stock-based compensation of $(0.1 million)within loss from discontinued operations, net of tax, in the condensed consolidated statement of operations. 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 $(1.4) millionin the first quarter of 2022 compared to a net loss of $(2.1) millionin the first quarter of 2021.
Cash and capital resources
Unless otherwise stated, this discussion of liquidity and capital resources relates to our combined businesses.
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
April 3, 2022, we have the ability to operate with a substantial working capital deficit (and we have historically operated with a working capital deficit) because:
•Catering operations are primarily conducted on a cash basis;
•Fast turnover results in limited investment in inventory; and
• Cash from sales is generally received before supplies and payroll payables 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 Cabanato 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 three months of 2022 and 2021 was $3.9 millionand $9.5 million, respectively. The decrease in net cash provided by operating activities in the three months ended April 3, 2022was 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 three months of 2022 was $3.6 millioncompared to offsetting sources and uses of cash in investing activities in the same period of 2021. 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. 21
The following table presents our capital expenditures related to continuing operations for the periods presented (in thousands of dollars):
Pollo Tropical Other Continuing Operations Three Months Ended
April 3, 2022: New restaurant development $ - $ - $ - Restaurant remodeling 1,480 - 1,480 Other restaurant capital expenditures(1) 1,904 - 1,904 Corporate and restaurant information systems 387 34 421 Total capital expenditures $ 3,771 $ 34$ 3,805 Number of new restaurant openings - - Three Months Ended April 4, 2021: New restaurant development $ - $ - $ - Restaurant remodeling 162 - 162 Other restaurant capital expenditures(1) 514 - 514 Corporate and restaurant information systems 33 356 389 Total capital expenditures $ 709 $ 356$ 1,065 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 three months ended April 3, 2022and April 4, 2021, total restaurant repair and maintenance expenses were approximately $3.8 millionand $2.5 million, respectively.
The following table presents our capital expenditures related to discontinued operations for the period presented (in thousands of dollars):
Taco Cabana Three Months Ended
April 4, 2021: New restaurant development $ - Restaurant remodeling 500
Other catering fixed assets(1) 1,458 Company and catering information systems 73 Total investments
$ 2,031Number of new restaurant openings - (1) Excludes restaurant repair and maintenance expenses included in discontinued operations in our unaudited condensed consolidated financial statements. For the three months ended April 4, 2021, total restaurant repair and maintenance expenses from discontinued operations were approximately $1.7 million. Net cash provided by investing activities from discontinued operations in the first three months of 2022 included proceeds from insurance recoveries of $0.2 million. Net cash used in investing activities from discontinued operations in the first three months of 2021 included net proceeds of $3.1 millionfrom the sale-leaseback of two restaurant properties.
Total capital expenditure in 2022 is expected to be between
Financing Activities. Net cash used in financing activities in the first three months of 2022 was
$0.2 millionand consisted of payments to repurchase our common stock. Net cash used in financing activities in the first three months of 2021 included term loan borrowing repayments under our senior credit facility of $0.2 millionand $0.1 millionin 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 millionand a revolving credit facility (the "revolving credit facility") of up to $10.0 millionand matures on November 23, 2025. The senior credit facility also provides for potential incremental term loan borrowing increases of up to $37.5 millionin the aggregate, subject to, among other items, compliance 22
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 Cabanawere 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 an annual rate, at our discretion, equal to (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 millionindividually 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 millionin 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 millionwhich 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 April 3, 2022, we were in compliance with the financial covenants under our senior credit facility. At April 3, 2022, $10.0 millionwas 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. 23
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.
Application of critical accounting policies
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, 2022included 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 three months ended April 3, 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 as calculated by us is not necessarily comparable to similarly titled measures reported by other companies, and should not be considered as an alternative to net income (loss), earnings (loss) per share, cash flows from operating activities or other financial information determined under GAAP. We also use Restaurant-level Adjusted EBITDA as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as 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 Adjusted EBITDA margin is derived by dividing Restaurant-level Adjusted EBITDA by restaurant sales. Restaurant-level Adjusted EBITDA is also a non-GAAP financial measure. Management believes that Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also these measures may not be comparable to similarly titled captions of other companies.
All of these financial measures have significant 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;
• This financial information does not reflect interest charges or cash requirements to service payments on our debt;
•Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and such financial information does not reflect the cash required to fund such replacements; and 24
•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 loss to Consolidated Adjusted EBITDA follows (in thousands). All amounts are from continuing operations unless otherwise indicated. Three Months Ended April 3, 2022 April 4, 2021 Net loss
$ (1,356) $ (2,089)Loss from discontinued operations, net of tax 55 1,394 Provision for (benefit from) income taxes (222) 3,077 Income (loss) from continuing operations before taxes (1,523) 2,382
Non-general and administrative adjustments: Depreciation and amortization 5,114 5,088 Impairment and other lease charges (recoveries) (702) (52) Interest expense 85 61 Closed restaurant rent expense, net of sublease income 380 750 Other expense (income), net 51 123 Stock-based compensation expense 7 16 Total non-general and administrative adjustments 4,935 5,986 General and administrative adjustments: Stock-based compensation expense 623 994 Non-recurring professional fees(1) 705 - G&A efficiency initiatives(2) 261 - Digital costs(3) 291 316 Total general and administrative adjustments 1,880 1,310 Consolidated Adjusted EBITDA
$ 5,292 $ 9,678Total revenues
Consolidated adjusted EBITDA as a percentage of total revenues
5.5 % 11.0 %
(1) Non-recurring professional fees include costs related to growth initiatives.
(2) G&A efficiency initiatives consist of one-time retention bonuses.
(3) Digital costs for the three months ended
include the costs of improving our customers’ digital experience.
A reconciliation between consolidated Adjusted EBITDA and Adjusted EBITDA at restaurant level follows (in thousands):
Three Months Ended April 3, 2022 April 4, 2021 Consolidated Adjusted EBITDA
$ 5,292 $ 9,678Restaurant-level adjustments: Add: Other general and administrative expense(1) 10,462 9,356 Less: Franchise royalty revenue and fees 409 375 Restaurant-level Adjusted EBITDA $ 15,345 $ 18,659Restaurant sales
Restaurant-level adjusted EBITDA as a percentage of restaurant sales
16.1 % 21.2 %
(1) Excludes general and administrative adjustments included in consolidated adjusted EBITDA.
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. 26
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