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Table of Contents

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 September 27, 2020
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


Table of Contents

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 October 29, 2020, Fiesta Restaurant Group, Inc. had 25,920,828 shares of its common stock, $0.01 par value, outstanding.


Table of Contents

FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 27, 2020
 
 
 
Page
PART I   FINANCIAL INFORMATION
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
 
 
 
Item 1
 
 
 
Item 1A
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
Item 5
 
 
 
Item 6

1

Table of Contents

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)
 
September 27, 2020
 
December 29, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
17,997

 
$
13,413

Accounts receivable
8,457

 
7,933

Inventories
3,281

 
3,394

Prepaid rent
115

 
117

Income tax receivable
11,121

 
3,821

Prepaid expenses and other current assets
13,287

 
10,605

Total current assets
54,258

 
39,283

Property and equipment, net
174,551

 
211,944

Operating lease right-of-use assets
258,913

 
251,272

Goodwill
56,307

 
56,307

Other assets
7,739

 
9,835

Total assets
$
551,768

 
$
568,641

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
262

 
$
212

Accounts payable
28,950

 
14,776

Accrued payroll, related taxes and benefits
9,599

 
9,866

Accrued real estate taxes
7,959

 
6,497

Other current liabilities
34,174

 
32,269

Total current liabilities
80,944

 
63,620

Long-term debt, net of current portion
41,586

 
76,823

Operating lease liabilities
265,356

 
256,798

Deferred tax liabilities
5,311

 
4,759

Other non-current liabilities
12,646

 
8,405

Total liabilities
405,843

 
410,405

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Preferred stock, $0.01 par value; 20,000,000 shares authorized, no shares issued

 

Common stock, $0.01 par value; 100,000,000 shares authorized, 27,914,555 and 27,461,697 shares issued, respectively, and 25,291,941 and 25,612,597 shares outstanding, respectively
273

 
271

Additional paid-in capital
175,614

 
173,132

Retained earnings (accumulated deficit)
(9,183
)
 
1,884

Treasury stock, at cost; 1,993,495 and 1,493,495 shares, respectively
(20,779
)
 
(17,051
)
Total stockholders' equity
145,925

 
158,236

Total liabilities and stockholders' equity
$
551,768

 
$
568,641


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents

FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 27, 2020 AND SEPTEMBER 29, 2019
(In thousands, except share and per share data)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2020
 
September 29, 2019
 
September 27, 2020
 
September 29, 2019
Revenues:
 
 
 
 
 
 
 
Restaurant sales
$
136,819

 
$
163,589

 
$
404,452

 
$
499,483

Franchise royalty revenues and fees
513

 
659

 
1,447

 
1,998

Total revenues
137,332

 
164,248

 
405,899

 
501,481

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
41,752

 
52,056

 
125,835

 
156,324

Restaurant wages and related expenses (including stock-based compensation expense of $47, $102, $152 and $145, respectively)
35,545

 
44,459

 
109,787

 
135,261

Restaurant rent expense
11,174

 
11,970

 
33,792

 
35,613

Other restaurant operating expenses
21,138

 
24,153

 
61,638

 
68,429

Advertising expense
2,033

 
6,385

 
9,959

 
17,789

General and administrative (including stock-based compensation expense of $597, $509, $2,332 and $1,993, respectively)
11,855

 
13,820

 
38,527

 
42,387

Depreciation and amortization
9,432

 
10,165

 
28,427

 
29,520

Pre-opening costs

 
77

 
69

 
863

Impairment and other lease charges
2,404

 
3,254

 
8,922

 
4,667

Goodwill impairment

 
21,424

 

 
67,909

Closed restaurant rent expense, net of sublease income
1,481

 
726

 
4,943

 
3,485

Other expense (income), net
(1,304
)
 
64

 
388

 
920

Total operating expenses
135,510

 
188,553

 
422,287

 
563,167

Income (loss) from operations
1,822

 
(24,305
)
 
(16,388
)
 
(61,686
)
Interest expense
1,172

 
823

 
3,370

 
3,024

Loss on extinguishment of debt
212

 

 
212

 

Income (loss) before income taxes
438

 
(25,128
)
 
(19,970
)
 
(64,710
)
Benefit from income taxes
(4,155
)
 
(2,946
)
 
(8,903
)
 
(1,377
)
Net income (loss)
$
4,593

 
$
(22,182
)
 
$
(11,067
)
 
$
(63,333
)
Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.18

 
$
(0.84
)
 
$
(0.44
)
 
$
(2.37
)
Diluted
0.18

 
(0.84
)
 
(0.44
)
 
(2.37
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
25,290,357

 
26,548,116

 
25,359,004

 
26,734,822

Diluted
25,291,719

 
26,548,116

 
25,359,004

 
26,734,822



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents

FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE AND NINE MONTHS ENDED SEPTEMBER 27, 2020 AND SEPTEMBER 29, 2019
(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 December 30, 2018
26,858,988

 
$
270

 
$
170,290

 
$
72,268

 
$
(2,769
)
 
$
240,059

Stock-based compensation

 

 
792

 

 

 
792

Vesting of restricted shares
68,286

 

 
(1
)
 

 

 
(1
)
Cumulative effect of adopting a new accounting standard

 

 

 
14,002

 

 
14,002

Purchase of treasury stock
(158,269
)
 

 

 

 
(2,199
)
 
(2,199
)
Net income

 

 

 
2,289

 

 
2,289

Balance at March 31, 2019
26,769,005

 
270

 
171,081

 
88,559

 
(4,968
)
 
254,942

Stock-based compensation

 

 
735

 

 

 
735

Vesting of restricted shares
57,547

 
1

 
(1
)
 

 

 

Net loss

 

 

 
(43,440
)
 

 
(43,440
)
Balance at June 30, 2019
26,826,552

 
271

 
171,815

 
45,119

 
(4,968
)
 
212,237

Stock-based compensation

 

 
611

 

 

 
611

Vesting of restricted shares
6,277

 

 

 

 

 

Purchase of treasury stock
(906,268
)
 

 

 

 
(9,158
)
 
(9,158
)
Net loss

 

 

 
(22,182
)
 

 
(22,182
)
Balance at September 29, 2019
25,926,561

 
$
271

 
$
172,426

 
$
22,937

 
$
(14,126
)
 
$
181,508

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 29, 2019
25,612,597

 
$
271

 
$
173,132

 
$
1,884

 
$
(17,051
)
 
$
158,236

Stock-based compensation

 

 
812

 

 

 
812

Vesting of restricted shares
73,998

 

 

 

 

 

Purchase of treasury stock
(500,000
)
 

 

 

 
(3,728
)
 
(3,728
)
Net loss

 

 

 
(7,317
)
 

 
(7,317
)
Balance at March 29, 2020
25,186,595

 
271

 
173,944

 
(5,433
)
 
(20,779
)
 
148,003

Stock-based compensation

 

 
1,028

 

 

 
1,028

Vesting of restricted shares
101,661

 
2

 
(2
)
 

 

 

Net loss

 

 

 
(8,343
)
 

 
(8,343
)
Balance at June 28, 2020
25,288,256

 
273

 
174,970

 
(13,776
)
 
(20,779
)
 
140,688

Stock-based compensation

 

 
644

 

 

 
644

Vesting of restricted shares
3,685

 

 

 

 

 

Net income

 

 

 
4,593

 

 
4,593

Balance at September 27, 2020
25,291,941

 
$
273

 
$
175,614

 
$
(9,183
)
 
$
(20,779
)
 
$
145,925





The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents

FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 27, 2020 AND SEPTEMBER 29, 2019
(In thousands)
(Unaudited)
 
Nine Months Ended
 
September 27, 2020
 
September 29, 2019
Operating activities:
 
 
 
Net loss
$
(11,067
)
 
$
(63,333
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Gain on disposals of property and equipment
(1,047
)
 
(6
)
Stock-based compensation
2,484

 
2,138

Impairment and other lease charges
8,922

 
4,667

Goodwill impairment

 
67,909

Loss on extinguishment of debt
212

 

Depreciation and amortization
28,427

 
29,520

Amortization of deferred financing costs
261

 
203

Deferred income taxes
552

 
(2,112
)
Changes in other operating assets and liabilities
18,230

 
11,988

Net cash provided by operating activities
46,974

 
50,974

Investing activities:
 
 
 
Capital expenditures:
 
 
 
New restaurant development
(1,846
)
 
(10,681
)
Restaurant remodeling
(1,087
)
 
(368
)
Other restaurant capital expenditures
(5,847
)
 
(15,845
)
Corporate and restaurant information systems
(3,136
)
 
(7,179
)
Total capital expenditures
(11,916
)
 
(34,073
)
Proceeds from disposals of properties
2,864

 
1,774

Proceeds from insurance recoveries

 
42

Proceeds from sale-leaseback transactions
6,284

 

Net cash used in investing activities
(2,768
)
 
(32,257
)
Financing activities:
 
 
 
Borrowings on revolving credit facility
154,143

 
21,000

Repayments on revolving credit facility
(189,225
)
 
(30,000
)
Borrowings of unsecured debt
15,000

 

Repayments of unsecured debt
(15,000
)
 

Principal payments on finance leases
(166
)
 
(109
)
Financing costs associated with debt amendment
(646
)
 

Payments to purchase treasury stock
(3,728
)
 
(11,357
)
Net cash used in financing activities
(39,622
)
 
(20,466
)
Net change in cash
4,584

 
(1,749
)
Cash, beginning of period
13,413

 
5,258

Cash, end of period
$
17,997

 
$
3,509


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5

Table of Contents
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 two restaurant brands through its wholly-owned subsidiaries Pollo Operations, Inc. and its subsidiaries, Pollo Franchise, Inc. (collectively "Pollo Tropical"), and Taco Cabana, Inc. and its subsidiaries (collectively "Taco Cabana"). Unless the context otherwise requires, Fiesta and its subsidiaries, Pollo Tropical and Taco Cabana, are collectively referred to as the "Company." At September 27, 2020, the Company owned and operated 138 Pollo Tropical® restaurants and 145 Taco Cabana® restaurants. All of the Pollo Tropical restaurants are located in Florida and all of the Taco Cabana restaurants are located in Texas. At September 27, 2020, the Company franchised a total of 33 Pollo Tropical restaurants and seven Taco Cabana restaurants. The franchised Pollo Tropical restaurants include 17 in Puerto Rico, four in Panama, two in Guyana, one in Ecuador, one in the Bahamas, seven on college campuses and one at a hospital in Florida. The franchised Taco Cabana restaurants include six in New Mexico and one on a college campus in Texas.
The COVID-19 pandemic has affected and is continuing to affect the restaurant industry and the economy. In response to COVID-19 and in compliance with governmental restrictions, the Company closed the dining room seating areas in all Pollo Tropical and Taco Cabana restaurants, limiting service to take-out, drive-thru, and delivery operations beginning in mid-March 2020. During the second quarter of 2020, certain restrictions were lifted and the Company opened certain dining rooms on a limited basis; however, it temporarily closed all dining rooms on July 12, 2020, in response to increased COVID-19 infection rates in both Texas and Florida. The Company began re-opening certain dining rooms and patios with limited capacity and hours at both brands and the state of Florida removed restaurant capacity restrictions in late September 2020. The Company expects the COVID-19 restrictions and economic impact to result in reduced earnings. As the COVID-19 situation is dynamic, the Company does not currently know when it will resume full operations or when its results of operations will return to pre-COVID-19 levels.
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 5253 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended December 29, 2019 contained 52 weeks. The three and nine months ended September 27, 2020 and September 29, 2019 each contained thirteen and thirty-nine weeks, respectively. The fiscal year ending January 3, 2021 will contain 53 weeks.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 27, 2020 and September 29, 2019 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 September 27, 2020 and September 29, 2019 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 December 29, 2019 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2019. The December 29, 2019 balance sheet data is derived from those audited financial statements.
Guidance Adopted in 2020. In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted this new accounting standard on December 30, 2019 and will apply it prospectively to all implementation costs incurred after the date of adoption. The adoption of this standard did not have a material effect on the Company's financial statements. The Company deferred and amortized application development stage costs for cloud-based computing arrangements over the life of the related service (subscription) agreement in the same line item that the fees associated with the subscription arrangement were presented prior to adoption of the new standard.

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)



Revenue Recognition. Revenue is recognized upon transfer of promised products or services to customers in an amount that reflects the consideration the Company received in exchange for those products or services. Revenues from the Company's owned and operated restaurants are recognized when payment is tendered at the time of sale. Franchise royalty revenues are based on a 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 at the measurement date under current market conditions. In determining fair value, the accounting standards establish a three-level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect management's own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:
Current Assets and Liabilities. The carrying values reported on the balance sheet of cash, accounts receivable and accounts payable approximate fair value because of the short maturity of those financial instruments.
Revolving Credit Borrowings. The Company's senior credit facility was amended on July 10, 2020. The fair value of outstanding revolving credit borrowings under the Company's senior secured revolving credit facility (the "senior credit facility") and the amended senior secured revolving credit facility (the "amended senior credit facility"), which is considered Level 2, is based on current LIBOR rates. The fair value of the amended senior credit facility and senior credit facility was approximately $39.9 million at September 27, 2020 and $75.0 million at December 29, 2019, respectively. The carrying value of the amended senior credit facility and senior credit facility was $39.9 million at September 27, 2020 and $75.0 million at December 29, 2019, respectively.
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 3—Impairment of Long-Lived Assets and Other Lease Charges.
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.
As a result of the COVID-19 pandemic the Company entered into rent deferral agreements with approximately 185 landlords as of September 27, 2020. Under these agreements, certain rent payments are deferred without penalty for various periods, generally for up to three months. The Company also entered into two limited abatement agreements. The Company has elected to account for lease concessions and deferrals resulting directly from COVID-19 as though the enforceable rights and obligations to the

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Table of Contents
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)



concessions and deferrals existed in the respective contracts at lease inception and did not account for the concessions and deferrals as lease modifications.
During the third quarter of 2020, the Company sold two restaurant properties for total proceeds of $6.3 million in sale-leaseback transactions that resulted in a total gain of $1.5 million, which is recognized in other expense (income), net in the condensed consolidated statements of operations, and a financial liability of $0.5 million, which is recognized in other current and non-current liabilities in the condensed consolidated balance sheet.
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. The Company's current estimates assume that operating restrictions, regulations and directives for restaurants and other changes related to COVID-19 will continue to have a significant impact through at least the first half of 2021 with the greatest impact in the near term.

2. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
 
September 27, 2020
 
December 29, 2019
Prepaid contract expenses
$
3,591

 
$
4,410

Assets held for sale(1)
7,098

 
4,110

Other
2,598

 
2,085

 
$
13,287

 
$
10,605


(1)
As of September 27, 2020, two closed Pollo Tropical restaurant properties and one operating and two closed Taco Cabana restaurant properties owned by the Company were classified as held for sale. As of December 29, 2019, one closed Pollo Tropical restaurant property and two closed Taco Cabana restaurant properties owned by the Company were classified as held for sale.

3. Impairment of Long-Lived Assets and Other Lease Charges
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.

8

Table of Contents
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)



A summary of impairment of long-lived assets and other lease charges (recoveries) recorded by segment is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2020
 
September 29, 2019
 
September 27, 2020
 
September 29, 2019
Pollo Tropical
$
2,395

 
$
165

 
$
8,023

 
$
(162
)
Taco Cabana
9

 
3,089

 
899

 
4,829

 
$
2,404

 
$
3,254

 
$
8,922

 
$
4,667


Impairment and other lease charges for the three and nine months ended September 27, 2020 for Pollo Tropical include impairment charges of $2.6 million and $7.3 million, respectively, and other lease charges (gains) of $(0.2) million and $0.7 million, respectively. Pollo Tropical impairment charges for the three months ended September 27, 2020 related primarily to the write-down of saucing islands and self-service soda machines that are being removed from dining rooms as a result of COVID-19. For the nine months ended September 27, 2020, impairment charges also include the impairment of assets from three underperforming Pollo Tropical restaurants, two of which were closed in the third quarter of 2020, for which continued sales declines coupled with the impact of expected sales declines resulted in a decrease in the estimated future cash flows and the write-down of assets held for sale to their fair value less costs to sell. For the three months ended September 27, 2020, other lease charges for Pollo Tropical related primarily to a gain from lease terminations of $(0.2) million. For the nine months ended September 27, 2020, other lease charges also included lease termination charges of $0.9 million for restaurant locations the Company decided not to develop. Impairment and other lease charges for the nine months ended September 27, 2020 for Taco Cabana include impairment charges of $1.1 million, and a gain from a lease termination of $(0.2) million. Taco Cabana impairment charges for the nine months ended September 27, 2020, related primarily to the write-down of assets held for sale to their fair value less costs to sell and the impairment of assets for two underperforming Taco Cabana restaurants for which continued sales declines coupled with the impact of expected sales declines resulted in a decrease in the estimated future cash flows.
Impairment and other lease charges for the three and nine months ended September 29, 2019 for Pollo Tropical include impairment charges of $0.2 million and $0.6 million, respectively, related primarily to additional impairment of equipment from previously impaired restaurants and a lease charge recoveries benefit related to previously closed restaurant lease terminations of $(0.8) million for the nine months ended September 29, 2019. Impairment and other lease charges for the three and nine months ended September 29, 2019 for Taco Cabana include impairment charges of $3.1 million and $4.9 million, respectively, related primarily to impairment of assets for eight underperforming Taco Cabana restaurants for which continued sales declines resulted in a decrease in the estimated future cash flows and equipment from previously impaired restaurants as well as a lease charge recoveries benefit related to previously closed restaurant lease terminations of $(0.1) million for the nine months ended September 29, 2019.
The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions, the Company's history of using these assets in the operation of its business and the Company's expectation of how a market participant would value the assets. In addition, for those restaurants reviewed for impairment where the Company owns the land and building, the Company utilized third-party information such as a broker quoted value to determine the fair value of the property. The Company also utilized discounted future cash flows to determine the fair value of assets for certain leased restaurants with positive discounted projected future cash flows. The Company utilized current market lease rent and discount rates to determine the fair value of right-of-use lease assets. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The Level 3 assets measured at fair value associated with impairment charges recorded during the nine months ended September 27, 2020 totaled $4.9 million.


9

Table of Contents
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)



4. Other Liabilities
Other current liabilities consist of the following:
 
September 27, 2020
 
December 29, 2019
Operating lease liabilities
$
23,932

 
$
22,338

Accrued workers' compensation and general liability claims
4,457

 
4,354

Sales and property taxes
1,807

 
1,889

Accrued occupancy costs(1)
365

 
891

Other
3,613

 
2,797

 
$
34,174

 
$
32,269


(1) 
Accrued occupancy costs primarily consisted of obligations pertaining to closed restaurant locations.

Other non-current liabilities consist of the following:
 
September 27, 2020
 
December 29, 2019
Accrued workers' compensation and general liability claims
$
7,348

 
$
7,348

Accrued payroll taxes(1)
3,719

 

Deferred compensation
457

 
424

Accrued occupancy costs(2)
78

 
78

Other
1,044

 
555

 
$
12,646

 
$
8,405


(1) 
Includes employer Social Security payroll tax deferred as a result of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")
(2) 
Accrued occupancy costs primarily consisted of obligations pertaining to closed restaurant locations.
The following table presents the activity in the closed restaurant reserve, of which $0.1 million is included in non-current liabilities at both September 27, 2020 and December 29, 2019, with the remainder in other current liabilities.
 
Nine Months Ended September 27, 2020
 
Year Ended December 29, 2019
Balance, beginning of period
$
752

 
$
8,819

Payments, net
(248
)
 
(1,405
)
Other adjustments(1)
(178
)
 
(6,662
)
Balance, end of period
$
326

 
$
752


(1)
As a result of adopting ASC 842 on December 31, 2018, the portion of the closed restaurant reserve related to operating lease rental payments totaling $6.0 million was reclassified and included as a component of the related ROU assets during the twelve months ended December 29, 2019. The portion of the closed restaurant reserve related to variable ancillary lease costs was not reclassified and was not included as a reduction to ROU assets.

5. Long-Term Debt
Long-term debt consists of the following:
 
September 27, 2020
 
December 29, 2019
Revolving credit facility
$
39,918

 
$
75,000

Finance/capital leases
1,930

 
2,035

 
41,848

 
77,035

Less: current portion of long-term debt
(262
)
 
(212
)
 
$
41,586

 
$
76,823



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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)



Amended Senior Credit Facility. On July 10, 2020, the Company entered into the Second Amendment to Credit Agreement (the credit agreement as amended, the "amended senior credit facility") among the Company and a syndicate of lenders. The amended senior credit facility includes adjustments to the Adjusted Leverage Ratio and Fixed Charge Coverage Ratio (each as amended and defined in the amended senior credit facility) that are more reflective of current sales and profit trends. For the remainder of 2020, the only applicable financial covenants under the Company's amended senior credit facility that require compliance will be a minimum liquidity covenant and a maximum capital expenditure covenant discussed below. The amended senior credit facility reduced the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the amended senior credit facility (the "revolving commitment") by $30.0 million to $120.0 million on July 10, 2020. The amended senior credit facility further reduces the revolving commitment by (i) $15.0 million to $105.0 million on January 3, 2021 and (ii) $10.0 million to $95.0 million on April 4, 2021. On September 27, 2020, there were $39.9 million in outstanding borrowings under the amended senior credit facility.
The amended senior credit facility provides that the Company is not required to be in compliance with the Adjusted Leverage Ratio and Fixed Charge Coverage Ratio under the amended senior credit facility from July 10, 2020 through April 3, 2021. The Company is required to be in compliance with the Adjusted Leverage Ratio and Fixed Charge Coverage Ratio beginning with the fiscal quarter ending April 4, 2021 (the first quarter of 2021). After April 3, 2021, the Company will be permitted to exercise equity cures with respect to compliance with the Adjusted Leverage Ratio and Fixed Charge Coverage Ratio subject to certain restrictions as set forth in the amended senior credit facility. The amended senior credit facility also provides that the Company must maintain minimum liquidity (as defined in the amended senior credit facility, generally unrestricted cash plus available borrowings under the amended senior credit facility) of (i) $40.0 million through September 27, 2020, (ii) $30.0 million from September 28, 2020 through January 3, 2021, and (iii) $25.0 million on January 4, 2021 and thereafter.
Borrowings under the amended senior credit facility bear interest at a rate per annum, at the Company's option, equal to either (all terms as defined in the amended senior credit facility):
1)
the Alternate Base Rate plus the Applicable Rate of 4.00% with a minimum Alternate Base Rate of 2.00%, or
2)
the Adjusted LIBOR Rate plus the Applicable Rate of 5.00% with a minimum Adjusted LIBOR Rate of 1.00%.
In addition, the amended senior credit facility requires the Company to pay (i) a commitment fee of 0.50% per annum on the daily amount of the unused portion of the facility and (ii) a letter of credit participation fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit. The amended senior credit facility also provides for a benchmark replacement (as defined in the amended senior credit facility) for LIBOR, which may be a SOFR-based rate, when LIBOR becomes unavailable or an earlier date under certain circumstances.
The outstanding borrowings under the amended senior credit facility are prepayable without penalty (other than customary breakage costs). The amended senior credit facility requires that proceeds received when a prepayment event (as defined in the amended senior credit facility) occurs must be used to reduce the outstanding revolving credit borrowings under the amended senior credit facility which will result in a corresponding reduction of the revolving commitment. As of September 27, 2020, the outstanding revolving credit borrowings and revolving commitment were reduced by $9.1 million from proceeds received. The amended senior credit facility further provides that Company must prepay outstanding revolving credit borrowings if the outstanding revolving credit borrowings exceed $75.0 million and excess cash (as defined in the amended senior credit facility) of the Company exceeds $20.0 million.
The amended senior credit facility contains certain covenants, including, without limitation, those limiting Company's and its subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in any material respects, engage in certain transactions with related parties, make certain investments, make certain restricted payments or pay dividends, including, without limitation, (i) that capital expenditures by the Company cannot exceed an aggregate of $22.0 million for each of the fiscal years ending 2020 and 2021 and cannot exceed an aggregate of $25.0 million for the fiscal year ending 2022 (the "Capital Expenditures Covenant") and (ii) limiting the construction or development of new restaurants.
The amended senior credit facility also provides that the Company will be required to engage a financial advisor or chief restructuring officer if the Company is not in compliance with certain milestones.
The Company's obligations under the amended senior credit facility are secured by all of the assets of the Company and its subsidiaries (including a pledge of all of the capital stock and equity interests of its subsidiaries) pursuant to an amended and restated security agreement. Under the amended 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

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)



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 amended senior credit facility).
The amended senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of the Company's indebtedness having an outstanding principal amount of $5.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.
The amended senior credit facility matures on November 30, 2022. As of September 27, 2020, the Company was in compliance with the financial covenants under its amended senior credit facility. After reserving $3.5 million for letters of credit, $67.5 million was available for borrowing under the amended senior credit facility at September 27, 2020.
Senior Credit Facility. In November 2017, the Company entered into a senior secured revolving credit facility with a syndicate of lenders. Prior to July 10, 2020, the senior credit facility provided for aggregate revolving credit borrowings of up to $150.0 million (including up to $15.0 million available for letters of credit) and was scheduled to mature on November 30, 2022. The senior credit facility also provided for potential incremental increases of up to $50.0 million to the revolving credit borrowings available under the senior credit facility. The senior credit facility was amended on July 10, 2020.
Borrowings under the senior credit facility bore interest at a per annum rate, at the Company's option, equal to either (all terms as defined in the senior credit facility agreement):
1)
the Alternate Base Rate plus the applicable margin of 0.75% to 1.50% based on the Company's Adjusted Leverage Ratio, or
2)
the LIBOR Rate plus the applicable margin of 1.75% to 2.50% based on the Company's Adjusted Leverage Ratio.
In addition, the senior credit facility required the Company to pay (i) a commitment fee based on the applicable Commitment Fee rate of 0.25% to 0.35%, based on the Company's Adjusted Leverage Ratio, (with a rate of 0.35% at September 27, 2020) and the unused portion of the facility and (ii) a letter of credit participation fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit.

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 500,000 shares of common stock valued at approximately $3.7 million and 1,064,537 shares of common stock valued at approximately $11.3 million during the nine months ended September 27, 2020 and September 29, 2019, respectively. The shares repurchased in 2020 were purchased on or before March 12, 2020. The repurchased shares are held as treasury stock at cost. The Company's senior credit facility as amended on July 10, 2020 prohibits share repurchases, and the Company currently does not intend to repurchase additional shares of its common stock for the foreseeable future.

12

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)



Stock-Based Compensation
During the nine months ended September 27, 2020, the Company granted certain employees and non-employee directors a total of 501,706 non-vested restricted shares under the Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan (the "Fiesta Plan"). The shares granted to employees vest and become non-forfeitable over a four-year vesting period. The shares granted to non-employee directors vest and become non-forfeitable over a one-year vesting period, or for an initial grant to a new director, over a five-year vesting period. The weighted average fair value at grant date for non-vested shares issued during the nine months ended September 27, 2020 and September 29, 2019 was $8.27 and $13.00 per share, respectively.
The weighted average fair value at grant date for the restricted stock units subject to market conditions granted in the nine months ended September 29, 2019 was $1.76 per share.
Stock-based compensation expense for the three and nine months ended September 27, 2020 was $0.6 million and $2.5 million, respectively, and for the three and nine months ended September 29, 2019 was $0.6 million and $2.1 million, respectively. At September 27, 2020, the total unrecognized stock-based compensation expense related to non-vested restricted shares and restricted stock units was approximately $5.0 million. At September 27, 2020, the remaining weighted average vesting period for non-vested restricted shares was 2.8 years and restricted stock units was 0.4 years.
A summary of all non-vested restricted shares and restricted stock units activity for the nine months ended September 27, 2020 is as follows:
 
Non-Vested Shares
 
Restricted Stock Units
 
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding at December 29, 2019
355,605

 
$
15.47

 
176,362

 
$
9.42

Granted
501,706

 
8.27

 

 

Vested and released
(178,597
)
 
15.20

 
(747
)
 
32.44

Forfeited
(49,595
)
 
11.83

 
(25,030
)
 
8.33

Outstanding at September 27, 2020
629,119

 
$
10.13

 
150,585

 
$
9.49


The fair value of the non-vested restricted shares and all other restricted stock units is based on the closing price on the date of grant. The fair value of the restricted stock units subject to market conditions was estimated using the Monte Carlo simulation method. The assumptions used to value grant restricted stock units subject to market conditions are detailed below:
 
 
2019
Grant date stock price
 
$
14.66

Fair value at grant date
 
$
1.76

Risk free interest rate
 
2.53
%
Expected term (in years)
 
2

Dividend yield
 
%
Expected volatility
 
43.18
%



13

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)



7. Business Segment Information
The Company owns, operates and franchises two restaurant brands, Pollo Tropical® and Taco Cabana®, each of which is an operating segment. Pollo Tropical restaurants feature fire-grilled and crispy citrus marinated chicken and other freshly prepared menu items, while Taco Cabana restaurants specialize in Mexican-inspired food made fresh by hand.
Each segment's accounting policies are described in the summary of significant accounting policies in Note 1 to the Company's audited financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2019. The primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company's restaurants as set forth in the reconciliation table below.
The "Other" column includes corporate-related items not allocated to reportable segments and consists primarily of corporate-owned property and equipment, lease assets, miscellaneous prepaid costs, capitalized costs associated with the issuance of indebtedness, corporate cash accounts, and a current income tax receivable.
Three Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
September 27, 2020:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
77,604

 
$
59,215

 
$

 
$
136,819

Franchise revenue
 
336

 
177

 

 
513

Cost of sales
 
24,614

 
17,138

 

 
41,752

Restaurant wages and related expenses(1)
 
18,051

 
17,494

 

 
35,545

Restaurant rent expense
 
5,585

 
5,589

 

 
11,174

Other restaurant operating expenses
 
12,125

 
9,013

 

 
21,138

Advertising expense
 
815

 
1,218

 

 
2,033

General and administrative expense(2)
 
6,604

 
5,251

 

 
11,855

Adjusted EBITDA
 
10,621

 
4,172

 

 
14,793

Depreciation and amortization
 
5,171

 
4,261

 

 
9,432

Capital expenditures
 
1,457

 
1,112

 
644

 
3,213

September 29, 2019:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
88,309

 
$
75,280

 


 
$
163,589

Franchise revenue
 
432

 
227

 

 
659

Cost of sales
 
28,239

 
23,817

 

 
52,056

Restaurant wages and related expenses(1)
 
20,944

 
23,515

 

 
44,459

Restaurant rent expense
 
5,477

 
6,493

 

 
11,970

Other restaurant operating expenses
 
12,807

 
11,346

 

 
24,153

Advertising expense
 
3,130

 
3,255

 

 
6,385

General and administrative expense(2)
 
7,521

 
6,299

 

 
13,820

Adjusted EBITDA
 
10,980

 
1,174

 

 
12,154

Depreciation and amortization
 
5,529

 
4,636

 

 
10,165

Capital expenditures
 
6,402

 
5,015

 
985

 
12,402



14

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands, except per share data)



Nine Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
September 27, 2020:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
226,617

 
$
177,835

 
$

 
$
404,452

Franchise revenue
 
886

 
561

 

 
1,447

Cost of sales
 
72,666

 
53,169

 

 
125,835

Restaurant wages and related expenses(1)
 
54,196

 
55,591

 

 
109,787

Restaurant rent expense
 
16,885

 
16,907

 

 
33,792

Other restaurant operating expenses
 
35,225

 
26,413

 

 
61,638

Advertising expense
 
5,497

 
4,462

 

 
9,959

General and administrative expense(2)
 
20,630

 
17,897

 

 
38,527

Adjusted EBITDA
 
24,394

 
5,937

 

 
30,331

Depreciation and amortization
 
15,682

 
12,745

 

 
28,427

Capital expenditures
 
5,501

 
4,772

 
1,643

 
11,916

September 29, 2019:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
271,955

 
$
227,528

 
$

 
$
499,483

Franchise revenue