We operate on a 52 or 53 week fiscal year ending on the Sunday closest to
December 31. Our fiscal quarters are comprised of 13 weeks, with the exception
of the fourth quarter of a 53 week year, which contains 14 weeks. Our fiscal
year ended January 3, 2021 contained 53 weeks and our fiscal year ending
January 2, 2022 will contain 52 weeks.
Introduction
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations (or "MD&A") is written to help the reader understand our
company. The MD&A is provided as a supplement to, and should be read in
conjunction with our unaudited Condensed Consolidated Financial Statements
appearing elsewhere in this report and our Annual Report on Form 10-K for the
year ended January 3, 2021. The overview provides our perspective on the
individual sections of MD&A, which include the following:
Company Overview-a general description of our business and our key financial
measures.
Recent and Future Events Affecting Our Results of Operations-a description of
recent events that affect, and future events that may affect, our results of
operations.
Results from Operations-an analysis of our results of operations for the three
and six months ended July 4, 2021 compared to the three and six months ended
June 28, 2020 including a review of material items and known trends and
uncertainties.
Liquidity and Capital Resources-an analysis of historical information regarding
our sources of cash and capital expenditures, the existence and timing of
commitments and contingencies, changes in capital resources and a discussion of
cash flow items affecting liquidity.
Application of Critical Accounting Policies-an overview of accounting policies
requiring critical judgments and estimates.
Forward Looking Statements-cautionary information about forward-looking
statements and a description of certain risks and projections.
Company Overview
Carrols Restaurant Group, Inc. and its consolidated subsidiaries (collectively,
"Carrols Restaurant Group", the "Company", "we", "our" or "us") is one of the
largest restaurant companies in the United States and has been operating
restaurants for more than 60 years. We are the largest Burger King franchisee in
the United States, based on number of restaurants. As of July 4, 2021 we
operated, as franchisee, a total of 1,092 restaurants in 23 states under the
trade names of Burger King and Popeyes. This included 1,027 Burger King
restaurants in 23 Northeastern, Midwestern, Southcentral and Southeastern states
and 65 Popeyes restaurants in seven Southeastern states.
Any reference to "BKC" refers to Burger King Corporation and its indirect parent
company, Restaurant Brands International Inc. ("RBI"). Any reference to "PLK"
refers to Popeyes Louisiana Kitchen, Inc. and its indirect parent company, RBI.
The following is an overview of the key financial measures discussed in our
results of operations:
•Restaurant sales consists of food and beverage sales at our restaurants, net of
sales discounts and excluding sales tax collected. Restaurant sales are
influenced by changes in comparable restaurant sales, menu price increases, new
restaurant development, acquisitions of restaurants and closures of restaurants.
Comparable restaurant sales reflect the change in year-over-year sales for a
comparable restaurant base. Restaurants we acquire are included in comparable
restaurant sales after they have been owned for 12 months, newly developed
restaurants are included in comparable restaurant sales after they have been
open for 15 months, and remodeled restaurants are excluded for the period they
are closed for
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remodel. Restaurants are excluded from comparable restaurant sales during
extended periods of closure, which primarily occur due to restaurant remodeling
activity. For comparative purposes, where applicable, the calculation of the
changes in comparable restaurant sales is based either on a 53-week or 52-week
year and compares against the respective 52-week prior period.
•Food, beverage, and packaging costs consists of food, beverage and packaging
costs and delivery commissions, less purchase discounts and vendor rebates.
Food, beverage, and packaging costs are generally influenced by changes in
commodity costs, the mix of items sold, the level of promotional discounting,
the effectiveness of our restaurant-level controls to manage food and paper
costs, and the relative contribution of delivery sales.
•Restaurant wages and related expenses include all restaurant management and
hourly productive labor costs and related benefits, employer payroll taxes and
restaurant-level bonuses. Payroll and related benefits are subject to inflation,
including minimum wage increases and increased costs for health insurance,
workers' compensation insurance and federal and state unemployment insurance.
•Restaurant rent expense includes straight-lined lease costs and variable rent
on our restaurant leases characterized as operating leases.
•Other restaurant operating expenses include all other restaurant-level
operating costs, the major components of which are royalty expenses paid to BKC
and PLK, utilities, repairs and maintenance, real estate taxes and credit card
fees.
•Advertising expense includes advertising payments to BKC and PLK based on a
percentage of sales as required under our franchise and operating agreements and
additional marketing and promotional expenses in certain of our markets.
•General and administrative expenses are comprised primarily of salaries and
expenses associated with corporate and administrative functions that support the
development and operations of our restaurants, legal, auditing and other
professional fees, acquisition costs and stock-based compensation expense.
•EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net
Income (Loss) are non-GAAP financial measures. EBITDA represents net income
(loss) before income taxes, interest expense, and depreciation and amortization.
Adjusted EBITDA represents EBITDA adjusted to exclude impairment and other lease
charges, acquisition costs, stock-based compensation expense, abandoned
development costs, restaurant pre-opening costs, non-recurring litigation and
other professional expenses, loss on extinguishment of debt and other income and
expense. Adjusted Restaurant-Level EBITDA represents income (loss) from
operations as adjusted to exclude general and administrative expenses,
depreciation and amortization, impairment and other lease charges, pre-opening
costs and other income and expense. Adjusted Net Income (Loss) represents net
income (loss) as adjusted, net of tax, to exclude impairment and other lease
charges, acquisition costs, abandoned development costs, pre-opening costs,
non-recurring litigation and other professional expenses, other income and
expense and loss on extinguishment of debt.
We are presenting Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted
Net Income (Loss) because we believe that they provide a more meaningful
comparison than EBITDA and net income (loss) of our core business operating
results, as well as with those of other similar companies. Additionally, we
present Adjusted Restaurant-Level EBITDA because it excludes restaurant
pre-opening costs, other income and expense, and the impact of general and
administrative expenses such as salaries and expenses associated with corporate
and administrative functions that support the development and operations of our
restaurants, legal, auditing and other professional fees. Although these costs
are not directly related to restaurant-level operations, these costs are
necessary for the profitability of our restaurants. Management believes that
Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Income
(Loss), when viewed with the Company's results of operations in accordance with
U.S. GAAP and the accompanying reconciliations on page 41, provide useful
information about operating performance and period-over-period growth, and
provide additional information that is useful for evaluating the operating
performance of our core business without regard to potential distortions.
Additionally, management believes that Adjusted EBITDA and Adjusted
Restaurant-Level EBITDA permit investors to gain an understanding of the factors
and trends affecting our ongoing cash earnings, from which capital investments
are made and debt is serviced.
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However, EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted
Net Income (Loss) are not measures of financial performance or liquidity under
U.S. GAAP and, accordingly, should not be considered as alternatives to net
income, income from operations or cash flow from operating activities as
indicators of operating performance or liquidity. Also, these measures may not
be comparable to similarly titled captions of other companies. For the
reconciliation between Net Income (Loss) to EBITDA, Adjusted EBITDA and Adjusted
Net Income (Loss) and the reconciliation of income from operations to Adjusted
Restaurant-Level EBITDA, see page 41.
EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net
Income (Loss) have important limitations as analytical tools. These limitations
include the following:
•EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect our
capital expenditures, future requirements for capital expenditures or
contractual commitments to purchase capital equipment;
•EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect the
interest expense or the cash requirements necessary to service principal or
interest payments on our debt;
•Although depreciation and amortization are non-cash charges, the assets that we
currently depreciate and amortize will likely have to be replaced in the future,
and EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect
the cash required to fund such replacements; and
•EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net
Income (Loss) do not reflect the effect of earnings or charges resulting from
matters that our management does not consider to be indicative of our ongoing
operations. However, some of these charges (such as impairment and other lease
charges and acquisition costs) have recurred and may reoccur.
•Depreciation and amortization primarily includes the depreciation of fixed
assets, including equipment, owned buildings and leasehold improvements utilized
in our restaurants, the amortization of franchise rights from our acquisitions
of restaurants and the amortization of franchise fees paid to BKC and PLK.
•Impairment and other lease charges are determined through our assessment of the
recoverability of property and equipment and intangible assets by determining
whether the carrying value of these assets can be recovered over their
respective remaining lives through undiscounted future operating cash flows. A
potential impairment charge is evaluated whenever events or changes in
circumstances indicate that the carrying amounts of these assets may not be
fully recoverable. Lease charges are recorded for our obligations under the
related leases for closed locations net of estimated sublease recoveries.
•Interest expense consists of interest expense associated with our term B and
term B-1 loans under our Senior Credit Facilities, 5.875% Senior Notes Due 2029
(the "Notes"), revolving credit borrowings under our Senior Credit Facilities,
finance lease liabilities, amortization of deferred financing costs, and
amortization of original issue discounts.
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Recent and Future Events Affecting our Results of Operations
Burger King Restaurant Acquisitions
From the beginning of 2020 through July 4, 2021, we acquired 19 restaurants from
other franchisees in the following transactions ($ in thousands):
       Closing Date               Number of Restaurants           Purchase

Price             Fee-Owned (1)              Market Location
June 17, 2021                                          14       $        27,603                       12        Fort Wayne, Indiana
June 23, 2021                                           5                 3,216                        1        Battle Creek, Michigan
                                              19                $        30,819                       13


(1) The 2021 acquisitions included the purchase of 13 fee-owned restaurants, of
which 12 are expected to be sold in sale-leaseback transactions during 2021 for
net proceeds of $20.1 million although there is no assurance that we can
complete such transactions during 2021 or at all.
The unaudited pro forma impact on the results of operations for the 2021
acquisitions is included below. The unaudited pro forma results of operations
are not necessarily indicative of the results that would have occurred had the
acquisitions been consummated at the beginning of the periods presented, nor are
they necessarily indicative of any future consolidated operating results. This
unaudited pro forma financial information does not give effect to any
anticipated synergies, operating efficiencies or cost savings or any transaction
costs related to the 2021 acquired restaurants. The following table summarizes
certain unaudited pro forma financial information related to our operating
results for the three and six months ended July 4, 2021:
                                           Three Months Ended                              Six Months Ended
                                  July 4, 2021           June 28, 2020           July 4, 2021           June 28, 2020
Total revenue                   $     430,017          $      374,489          $     826,024          $      730,929
Income (Loss) from operations   $       6,807          $       14,933          $       4,324          $       (6,696)
Adjusted EBITDA                 $      29,933          $       38,648          $      50,419          $       43,038


Impact of the COVID-19 Pandemic
In response to the impact that the COVID-19 pandemic has had on our business
operations and the continuing uncertainty in the economy in general, we have
taken steps to adapt our business and strengthen and preserve our liquidity,
including the following:
•In March 2020, we closed the dining rooms in all our restaurants and modified
operating hours in line with local ordinances and day-part sales trends. These
closures were in effect through most of the second quarter of 2020, with each
restaurant operating according to their respective local governmental guidelines
as well as safety procedures developed by BKC and PLK. We have re-opened our
dining rooms as individual states and local governments have rolled back
restrictions. By the end of the second quarter of 2021, most of our dining rooms
have reopened. During the second quarter of 2021, we saw a modest shift in
guests returning to dining rooms, with take-out and dine-in representing
approximately 14% of net sales in June of 2021 as compared with 10% in December
of 2020 and 30% for all of 2019.
•We launched delivery services in March of 2020 at approximately 800 of our
restaurants. Since then, we have added additional third-party delivery partners
as they became available as well as expanded the number of restaurants where
delivery service is offered as new locations were covered by our delivery
partners. For the second quarter of 2021, delivery comprised approximately 4.7%
of total restaurant sales.
•We temporarily closed 46 restaurants in late March 2020 and early April 2020
that were geographically close to one of our other restaurants, and these
closures were in effect for most of the second quarter of 2020. By the end of
2020, we had reopened all of these restaurants with the exception of two Burger
King restaurants we permanently closed in the third quarter of 2020.
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•We reduced regional and corporate overhead by streamlining our regional
management and support structure, improving our training process and instituted
a 10% temporary reduction in all non-restaurant wages for the second quarter of
2020. This reduction in wages was restored as of July 1, 2020.
•As allowed under the Coronavirus Aid, Relief and Economic Security Act, as
amended (the "CARES Act"), we deferred payment of the employer portion of Social
Security taxes through the end of 2020. The amount of the cumulative deferral at
the end of 2020 was approximately $21.6 million, of which 50% is payable on each
of December 31, 2021 and December 31, 2022 which remains unpaid as of July 4,
2021, with $10.8 million included in accrued payroll, related taxes and benefits
and $10.8 million included in other liabilities, long-term in the accompanying
condensed consolidated balance sheets.
•We negotiated with our landlords other than BKC to secure $5.8 million in
deferral or abatement of 2020 cash rent obligations, of which $4.8 million was
or is expected to be repaid over various periods which began in the third
quarter of 2020. We have repaid $3.6 million related to these deferrals through
the second quarter of 2021.
•During the second quarter of 2020, we optimized payment terms with our key
vendors and suppliers and utilized deferral opportunities with our utility
vendors. These reverted to normal payment terms in July of 2020. During the
course of the pandemic, we have experienced a number of minor and/or temporary
supply chain issues which we continue to monitor as the communities we operate
in reopen.
Throughout the course of the evolving pandemic, we have been adapting our
business in order to continue operating safely. Although the COVID-19 pandemic
has negatively impacted customer traffic, the immediate actions taken to
continue drive-thru and carry-out business operations and secure additional
liquidity minimized the financial impact on the Company's results of operations,
financial condition and cash flows.
While significant uncertainty remains as to when or the manner in which the
circumstances surrounding the COVID-19 pandemic will change, we believe our
business model and world-class brands are ideally positioned to serve value and
convenience-seeking customers as the communities we operate in are reopening and
customers are returning to pre-pandemic behaviors and activities. We saw the
results of these efforts in 2020 which have continued into 2021. In the second
quarter of 2021, our Burger King restaurant sales were 7.8% higher than
restaurant sales in the comparable period of 2019.
Area Development and Remodeling Agreement
The Company, Carrols Corporation, Carrols LLC, and BKC entered into an Area
Development Agreement (the "ADA") which commenced on April 30, 2019 and was set
to end on September 30, 2024 and which superseded the Operating Agreement dated
as of May 30, 2012, as amended, between Carrols LLC and BKC. The ADA was amended
and restated by all parties on January 4, 2021 (the "Amended ADA"). Pursuant to
the ADA and for a cost of $3.0 million, BKC had assigned to Carrols LLC the
right of first refusal on the sale of franchisee-operated restaurants in 16
states and a limited number of counties in four additional states ("ADA ROFR").
The ADA ROFR was terminated in connection with the Amended ADA.
Under the Amended ADA, Carrols LLC has agreed to open, build and operate a total
of 50 new Burger King restaurants, 80% of which must be in Kentucky, Tennessee
and Indiana. This includes four Burger King restaurants by September 30, 2021,
10 additional Burger King restaurants by September 30, 2022, 12 additional
Burger King restaurants by September 30, 2023, 12 additional Burger King
restaurants by September 30, 2024 and 12 additional Burger King restaurants by
September 30, 2025.
In addition, pursuant to the Amended ADA, BKC granted Carrols LLC franchise
pre-approval to build new Burger King restaurants or acquire Burger King
restaurants from Burger King franchisees with respect to 500 Burger King
restaurants in the aggregate in (i) Kentucky, Tennessee and Indiana (excluding
certain geographic areas in Indiana) and (ii) (a) 16 states, which include
Arkansas, Indiana, Kentucky, Louisiana, Maine, Maryland, Michigan, Mississippi,
North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee,
Vermont and Virginia (subject to certain exceptions for certain limited
geographic areas within certain states) and (b) any other geographic locations
that Carrols LLC enters after the commencement date of the Amended ADA pursuant
to BKC procedures subject to certain limitations.
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In connection with an acquisition of restaurants in 2019 we assumed a
development agreement for Popeyes, which included an assignment by PLK of its
right of first refusal under its franchise agreements with its franchisees for
acquisitions in two southern states, as well as a development commitment to
open, build and operate approximately 80 new Popeyes restaurants over six years.
This development agreement with PLK was terminated on March 17, 2021, with
certain covenants applicable to us surviving the termination. PLK reserved the
right to charge us a $0.6 million fee if the parties to the termination
agreement are not able to come to a mutually agreeable solution with respect to
such fee within a six-month period.
Capital Expenditures
We estimate our capital expenditures in 2021 will be approximately $60 million,
net of estimated sale-leaseback activity. We incurred $26.0 million of capital
expenditures in the first six months of 2021, net of sale-leaseback proceeds,
properties purchased for sale-leaseback, and insurance proceeds and excluding
acquisitions.
We opened two Burger King restaurants in the first six months of 2021. In all of
2021, we expect to complete development of seven new Burger King restaurants one
new Popeye's restaurant and to remodel 16 Burger King restaurants and seven
Popeyes restaurants.
Issuance of Notes and Amendments to our Senior Credit Facilities
On April 30, 2019, we entered into a senior secured credit facility which
provided for senior secured credit facilities in an aggregate principal amount
of $550.0 million (as amended, the "Senior Credit Facilities"), consisting of
(i) a term loan B facility in an aggregate principal amount of $425.0 million
(the "Term Loan B Facility"), the entire amount of which was borrowed by us on
April 30, 2019 and (ii) a revolving credit facility (including a sub-facility of
$35.0 million for standby letters of credit) in an aggregate principal amount of
$125.0 million (the "Revolving Credit Facility"). Prior to the entry into the
amendments described below, borrowings under the Term Loan B Facility and the
Revolving Credit Facility bore interest at a rate per annum, at our option, of
(i) the Alternate Base Rate (such definition and all other definitions used
herein and otherwise not defined herein shall have the meanings set forth in the
Senior Credit Facilities) plus the applicable margin of 2.25% or (ii) the LIBOR
Rate plus a margin of 3.25% (as defined in the Senior Credit Facilities). The
Term Loan B Facility matures on April 30, 2026 and the Revolving Credit Facility
originally matured on April 30, 2024.
On December 13, 2019, we entered into the First Amendment to our Senior Credit
Facilities (the "First Amendment") which amended a financial covenant under the
Senior Credit Facilities applicable solely with respect to the Revolving Credit
Facility that previously required the Company to maintain quarterly a Total Net
Leverage Ratio of not greater than 4.75 to 1.00 (measured on a most recent four
quarter basis), to now require that the Company maintain only a First Lien
Leverage Ratio of not greater than 5.75 to 1.00 (as measured on a most recent
four quarter basis) if, and only if, on the last day of any fiscal quarter
(beginning with the fiscal quarter ended December 29, 2019), the sum of the
aggregate principal amount of outstanding revolving credit borrowings under the
Revolving Credit Facility and the aggregate face amount of letters of credit
issued under the Revolving Credit Facility (excluding undrawn letters of credit
in an aggregate face amount up to $12.0 million) exceeds 35% of the aggregate
amount of the maximum revolving credit borrowings under the Revolving Credit
Facility. The First Amendment also reduced the aggregate maximum revolving
credit borrowings under the Revolving Credit Facility by $10.0 million to a
total of $115.0 million.
On March 25, 2020, we entered into the Second Amendment to our Senior Credit
Facilities (the "Second Amendment"). The Second Amendment, among other things,
(i) increased the aggregate maximum commitments available for revolving credit
borrowings (including standby letters of credit) under the Revolving Credit
Facility (the "Revolving Committed Amount") by $15.4 million to a total of
$130.4 million, (ii) amended the definition of Applicable Margin (such
definition and all other definitions used herein and otherwise not defined
herein shall be the meanings set forth in the Senior Credit Facilities), (iii)
provided for a commitment fee (the "Ticking Fee") beginning on the 180th day
after the Second Amendment Effective Date and for so long as the Revolving
Committed Amount remained greater than $115.0 million, and (iv) provided that
the Company shall use the proceeds of an Extension of Credit which results in
the sum of the aggregate principal amount of outstanding Revolving Loans plus
the aggregate amount of LOC Obligations equaling an amount in excess of $115.0
million solely for ongoing operations of the Company and its subsidiaries and
shall not be held as cash on the balance sheet. The terms outlined as (ii),
(iii) and (iv) were modified in the Sixth Amendment described below.
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On April 8, 2020, we entered into the Third Amendment to our Senior Credit
Facilities which increased the aggregate maximum commitments available for
revolving credit borrowings (including standby letters of credit) under the
Revolving Credit Facility by $15.4 million to a total of $145.8 million.
On April 16, 2020, we entered into the Fourth Amendment to our Senior Credit
Facilities (the "Fourth Amendment"). The Fourth Amendment permits us to incur
and, if necessary, repay indebtedness incurred pursuant to the Paycheck
Protection Program (the "PPP") under the CARES Act. Subsequent to the Fourth
Amendment, we withdrew our application for relief under the PPP and returned the
funds upon receipt.
On June 23, 2020 (the "Fifth Amendment Effective Date"), we entered into the
Fifth Amendment to our Senior Credit Facilities (the "Fifth Amendment"). The
Fifth Amendment increased the Term Loan (as defined in the Senior Credit
Facilities) borrowings in the aggregate principal amount of $75 million of
Incremental Term B-1 Loans (as defined in the Senior Credit Facilities). The
Incremental Term B-1 Loans constituted a new tranche of Term Loans ranking pari
passu in right of payment and security with the Initial Term Loans (as defined
in the Senior Credit Facilities) for all purposes under the Senior Credit
Facilities. The Incremental Term B-1 Loans had the same terms as outstanding
borrowings under the Company's existing Term Loan B facility pursuant to and in
accordance with the Senior Credit Facilities, provided that (i) borrowings under
the Incremental Term B-1 Loans bore interest at a rate per annum, at our option,
of (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus
the applicable margin of 5.25% or (b) the LIBOR Rate (as defined in the Senior
Credit Facilities) (which shall not be less than 1% for Incremental Term B-1
Loans) plus the applicable margin of 6.25% and (ii) certain prepayments of the
Incremental Term B-1 Loans by us prior to the first anniversary of the Fifth
Amendment Effective Date would be subject to a premium to the Administrative
Agent (as defined in the Senior Credit Facilities), for the ratable account of
each applicable Term Loan Lender (as defined in the Senior Credit Facilities)
holding Incremental Term B-1 Loans on the date of such prepayment equal to the
Applicable Make-Whole Amount (as defined in the Senior Credit Facilities) with
respect to the principal amount of the Incremental Term B-1 Loans so prepaid.
The principal amount of the Incremental Term B-1 Loans amortized in an aggregate
annual amount equal to 1% of the original principal amount of the Incremental
Term B-1 Loans and were repayable in consecutive quarterly installments on the
last day of our fiscal quarters beginning on the third fiscal quarter of 2020
with the remaining outstanding principal amount of the Incremental Term B-1 Loan
and all accrued but unpaid interest and other amounts payable with respect to
the Incremental Term B-1 Loan would have been due on April 30, 2026 which is the
Term Loan Maturity Date (as defined in the Senior Credit Facilities). The Term
B-1 Loans were repaid in full on June 28, 2021.
On April 6, 2021, we entered into the Sixth Amendment to our Senior Credit
Facilities (the "Sixth Amendment"). The Sixth Amendment increased the aggregate
maximum commitments available for revolving credit borrowings (including standby
letters of credit) under our Revolving Credit Facility by $29.2 million to a
total of $175.0 million. The Sixth Amendment also amended the definitions in the
Senior Credit Facilities of (i) Applicable Margin, to provide that the
Applicable Margin for borrowings under the Revolving Credit Facility (including
Letter of Credit Fees) shall be at a rate per annum equal to 3.25% for LIBOR
Rate Loans and 2.25% for Alternate Base Rate Loans, and (ii) Revolving Maturity
Date, to provide that the Revolving Maturity Date is extended to January 29,
2026. In addition, the Sixth Amendment amended the Senior Credit Facilities to
remove our obligation to (i) pay a Ticking Fee pursuant to the Ticking Fee Rate
and (ii) use the proceeds of an Extension of Credit which results in the sum of
the aggregate principal amount of outstanding Revolving Loans plus the aggregate
amount of LOC Obligations equaling an amount in excess of $115.0 million solely
for our ongoing operations and not to hold as cash on the balance sheet.
On June 28, 2021, we entered into the Seventh Amendment to our Senior Credit
Facilities (the "Seventh Amendment"). The Seventh Amendment revised (a) the
initial amount for calculating the Available Amount (as defined in the Senior
Credit Facilities) from $27.0 million to $50.0 million which is utilized, among
other items, in determining the amount of Restricted Payments (as defined in the
Senior Credit Facilities) and Permitted Investments (as defined in the Senior
Credit Facilities), (b) the calculation of the Company's ability to incur an
Incremental Term Loan (as defined in the Senior Credit Facilities) or an
increase to the Revolving Committed Amount from $135.0 million to
$180.0 million, and (c) the general basket for Restricted Payments, Permitted
Investments and Restricted Junior Debt Payment (as defined in the Senior Credit
Facilities) from an aggregate amount not to exceed the greater of (i)
$27.0 million and (ii) 20% of Consolidated EBITDA (as defined in the Senior
Credit Facilities) as of the most recently completed Reference Period (as
defined in the Senior Credit
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Facilities) to (i) $50.0 million and (ii) 40% of Consolidated EBITDA as of the
most recently completed Reference Period. In addition, the Seventh Amendment
revises the Total Net Leverage Ratio required for the Company to make Restricted
Payments or prepay Junior Debt (as defined in the Senior Credit Facilities) with
unutilized Available Amount from 3.00 to 1.00 to 4.00 to 1.00. The Seventh
Amendment also provided for affiliates of the Company to acquire up to 20% of
the outstanding term loans pursuant to certain transactions.
On June 28, 2021, we issued $300.0 million principal amount of the Notes in a
private placement. The proceeds of the offering, together with $46.0 million of
revolving credit borrowings under our Senior Credit Facilities, were used to (i)
repay $74.4 million of outstanding term B-1 loans and $243.6 million of
outstanding term B loans under our Senior Credit Facilities (which included
scheduled principal payments), (ii) to pay fees and expenses related to the
offering of the Notes and the Seventh Amendment and (iii) for working capital
and general corporate purposes, including for possible future repurchases of our
common stock and/or a dividend payment and/or payments on our common stock.
Carrols Restaurant Group and certain of its subsidiaries (the "Guarantors")
entered into the Indenture (the "Indenture") dated as of June 28, 2021 with the
Bank of New York Mellon Trust Company governing the Notes. The Indenture
provides that the Notes will mature on July 1, 2029 and will bear interest at
the rate of 5.875% per annum, payable semi-annually on July 1 and January 1 of
each year, beginning on January 1, 2022. The entire principal amount of the
Notes will be due and payable in full on the maturity date. The Indenture
further provides that we (i) may redeem some or all of the Notes at any time
after July 1, 2024 at the redemption prices described therein, (ii) may redeem
up to 40% of the Notes using the proceeds of certain equity offerings completed
before July 1, 2024 and (iii) must offer to purchase the Notes if it sells
certain of its assets or if specific kinds of changes in control occur, all as
set forth in the Indenture. The Notes are senior unsecured obligations of
Carrols Restaurant Group and are guaranteed on an unsecured basis by the
Guarantors. The Indenture contains certain covenants that limit the ability of
Carrols Restaurant Group and the Guarantors to, among other things: incur
indebtedness or issue preferred stock; incur liens; pay dividends or make
distributions in respect of capital stock or make certain other restricted
payments or investments; sell assets; agree to payment restrictions affecting
Restricted Subsidiaries (as defined in the Indenture); enter into transaction
with affiliates; or merge, consolidate or sell substantially all of the assets.
Such restrictions are subject to certain exceptions and qualifications all as
set forth in the Indenture.
As of July 4, 2021, there were $46.0 million revolving credit borrowings
outstanding and $9.0 million of letters of credit were issued under our
Revolving Credit Facility. After reserving for issued letters of credit, $120.0
million was available for revolving credit borrowings under our Senior Credit
Facilities at July 4, 2021.
Interest Rate Swap Agreement
We entered into a five-year interest rate swap agreement commencing March 3,
2020 and ending February 28, 2025 with a notional amount of $220.0 million to
swap variable rate interest payments (one-month LIBOR plus the applicable
margin) under our Senior Credit Facilities for fixed interest payments bearing
an interest rate of 0.915% plus the applicable margin in our Senior Credit
Facilities.
Stock Repurchase Program
On August 2, 2019, our Board of Directors approved a stock repurchase plan (the
"Repurchase Program") under which we may repurchase up to $25 million of our
outstanding common stock. The authorization became effective August 2, 2019, and
on August 10, 2021, was extended through August 2, 2023. Purchases under the
Repurchase Program may be made from time to time in open market transactions at
prevailing market prices or in privately negotiated transactions (including,
without limitation, the use of Rule 10b5-1 plans) in compliance with applicable
federal securities laws, including Rule 10b-18 under the Securities Exchange Act
of 1934, as amended.
During the year ended January 3, 2021, we repurchased in open market
transactions 1,534,304 shares at an average share price of $6.52 for a total
cost of $10.0 million under the Repurchase Program, all during the fourth
quarter of 2020. We did not repurchase any shares in the six months ended
July 4, 2021.
As of July 4, 2021, $11.0 million was available to repurchase shares under the
Repurchase Program. We have no obligation to repurchase additional shares of
stock under the Repurchase Program, and the timing, actual number and value of
shares purchased will depend on our stock price, trading volume, general market
and economic conditions and other factors.
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Special Cash Dividend
Effective August 12, 2021, the Board declared a $25.0 million special cash
dividend amounting to $0.41 per share on all issued and outstanding shares of
common stock, including common stock issuable on the conversion of our Series B
Convertible Preferred Stock. The special cash dividend will be paid on October
5, 2021 to stockholders of record as of the close of business on August 25,
2021. Our preliminarily assessment is that the special cash dividend will be
treated as a tax-free return of capital causing a reduction in holder's adjusted
tax basis in Carrols Restaurant Group, Inc. common stock. If a holder's basis is
reduced to zero, any remaining portion of the special cash dividend would be
taxed as capital gains. Final determination of the tax treatment will be based
on Form 1099s that will be sent to holders in 2022. Holders should consult with
their tax advisors to determine tax treatment of the special cash dividend.
Future Restaurant Closures
We evaluate the performance of our restaurants on an ongoing basis including an
assessment of the current and future operating results of each restaurant in
relation to its cash flow and future occupancy costs, and with regard to
franchise agreement renewals, the cost of required capital improvements. We may
elect to close restaurants based on these evaluations.
In 2020, excluding one restaurant relocated within its trade area, we closed 33
Burger King restaurants which included fourteen Burger King restaurants
permanently closed in the first six months of 2020. In the first six months of
2021, we permanently closed three Burger King restaurants. We currently
anticipate less than five restaurant closures in 2021, outside of any
restaurants being relocated within their trade area at the end of their
respective lease term.
Our determination of whether to close restaurants in the future is subject to
further evaluation and may change. We may incur lease charges in the future from
closures of underperforming restaurants prior to the expiration of their
contractual lease term. We do not believe that the future impact on our results
of operations due to restaurant closures will be material, although there can be
no assurance in this regard.
Effect of Minimum Wage Increases
Certain of the states and municipalities in which we operate have increased
their minimum wage rates for 2021 and in many cases have also approved
additional increases for future periods. Most notably, New York State increased
the minimum wage applicable to our business to $14.50 an hour on January 1, 2021
and then to 15.00 an hour on July 1, 2021, from $13.75 an hour in 2020 and
$12.75 per hour in 2019. New York State has an Urban Youth Credit through 2022
for which we have been receiving approximately $500,000 per year since 2016. We
had 125 restaurants in New York State at July 4, 2021. As of such date, we also
had one restaurant in Massachusetts that has annual minimum wage increases
reaching $15.00 per hour in 2023, 10 restaurants in New Jersey that have annual
minimum wage increases reaching $15.00 per hour in 2024, and 45 total
restaurants in Illinois and Maryland that have annual minimum wage increases
reaching $15.00 per hour in 2025.
We typically attempt to offset the effects of wage inflation, at least in part,
through periodic menu price increases. However, no assurance can be given that
we will be able to offset these wage increases in the future. Additionally, in
the current labor market we have seen pressure on wage rates irrespective of the
statutory minimums as the re-opening of the economy increased demand for labor
at all levels of the workforce.

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Results of Operations
Three Months Ended July 4, 2021 Compared to Three Months Ended June 28, 2020
The following table highlights the key components of sales and the number of
restaurants in operation for our second quarter ended July 4, 2021 as compared
to the second quarter ended June 28, 2020 (inclusive of restaurants that were
temporarily closed due to COVID-19 during the period):
                                                                            

Three Months Ended


                                                               July 4, 2021                    June 28, 2020
Restaurant Sales                                                       424,541                           368,418
Burger King                                                            402,659                           345,649
Popeyes                                                                 21,882                            22,769

Change in Comparable Restaurant Sales % (a)                               11.5  %                           (5.6) %
Change in Comparable Burger King Restaurant Sales (a)                     12.6  %                           (6.4) %
Change in Comparable Popeyes Restaurant Sales (a)                         (5.3) %                           17.1

Burger King Restaurants operating at beginning of period:                1,010                             1,028
New restaurants opened, including relocations                                -                                 3
Restaurants acquired                                                        19                                 -
Restaurants closed, including relocations                                   (2)                               (4)
Burger King Restaurants at end of period                                 1,027                             1,027
Average number of operating Burger King restaurants                    1,008.9                             993.0

Popeyes Restaurants operating at beginning and end of period:

                                                                     65                                65

Average number of operating Popeyes restaurants                           65.0                              63.7


a.Restaurants we acquire are included in comparable restaurant sales after they
have been operated by us for 12 months. Sales from restaurants that we develop
are included in comparable restaurant sales after they have been open for 15
months. The calculation of changes in comparable restaurant sales is based on
the comparable 13-week period of the prior year, looking back 52 weeks.
Restaurant Sales. Total restaurant sales in the second quarter of 2021 increased
$56.1 million to $424.5 million from the second quarter of 2020. Our comparable
restaurant sales increased 11.5% compared to the second quarter of 2020 which
reflected an increase in customer traffic of 11.9% and a decrease in average
check of 0.3%. The change in average check included a 2.3% effective price
increase compared to the second quarter of 2020. The increase in customer
traffic realized during the second quarter of 2021 reflected the restoration of
sales lost in the early weeks of the COVID-19 pandemic in 2020. Promotional
sales discounts in the second quarter of 2021 were 19.8% of restaurant sales at
our Burger King restaurants compared to 20.8% in the second quarter of 2020.
Restaurant sales were also impacted by the inclusion of sales in 2021 from 46
restaurants that were temporarily closed due to the pandemic for most of the
second quarter of 2020 and the 22 restaurants closed since the end of the second
quarter of 2020.
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Operating Costs and Expenses (percentages stated as a percentage of total
revenue). The following table sets forth, for the three months ended July 4,
2021 and June 28, 2020, selected operating results as a percentage of total
revenue:
                                                    Three Months Ended
                                             July 4, 2021         June 28, 

2020


Costs and expenses (all restaurants):
Food, beverage and packaging costs                    29.8  %            28.4  %
Restaurant wages and related expenses                 32.4  %            30.4  %
Restaurant rent expense                                7.2  %             7.9  %
Other restaurant operating expenses                   15.3  %            14.7  %
Advertising expense                                    4.0  %             3.9  %
General and administrative                             4.9  %             5.0  %


Food, beverage and packaging costs increased to 29.8% of restaurant sales in the
second quarter of 2021 from 28.4% of restaurant sales in the second quarter of
2020. This increase reflected increased commodity pricing at our Burger King
restaurants (1.5%) and increased delivery sales (0.3%). These cost pressures
were offset in part by the impact of menu price increases taken at our Burger
King restaurants since the end of the second quarter of 2020 (0.9%) and lower
levels of promotional discounting in the quarter at our Burger King restaurants
(0.3%).
Restaurant wages and related expenses increased to 32.4% of restaurant sales in
the second quarter of 2021 from 30.4%. In the second quarter of 2020, we
benefited from labor adjustments we made at the onset of the COVID-19 pandemic
to restrict overtime and reduce staffing levels. Specifically, in the second
quarter of 2020, we had reduced our labor requirements and hours based on
operating day part sales trends and in response to dining room closures. As the
economy has reopened, our restaurants have restored operating hours and staffing
levels to the extent to support more normal operations.
We have seen pressure on wage rates in the current labor market irrespective of
statutory minimums as the re-opening of the economy increased demand for labor
at all levels of the workforce. The impact of hourly labor rate increases in the
second quarter of 2021, inclusive of minimum wage increases, was 11.9% when
compared to the prior year period.
Restaurant rent expense increased $1.6 million, but decreased as a percentage of
restaurant sales to 7.2% in the second quarter of 2021 from 7.9% in the second
quarter of 2020 due primarily to the impact of higher sales on fixed rent
expense.
Other restaurant operating expenses increased as a percentage of restaurant
sales to 15.3% in the second quarter of 2021 from 14.7% of restaurant sales in
the second quarter of 2020. The second quarter of 2020 reflected cost savings
realized from the constrained pandemic operating environment. As our dining
rooms have reopened and restaurants have resumed pre-pandemic operations, we saw
higher spending on repair and maintenance (0.2%), security costs (0.2%,
including investments in smart safe technology), and equipment rental (0.1%).
Advertising expense was 4.0% of restaurant sales in the second quarter of 2021
and 3.9% in the second quarter of 2020.
Adjusted Restaurant-Level EBITDA. As a result of the factors discussed above,
Adjusted Restaurant-Level EBITDA decreased $6.3 million, or 11.6%, to $47.9
million in the second quarter of 2021 compared to $54.1 million in the second
quarter of 2020. As a percentage of total restaurant sales, Adjusted
Restaurant-Level EBITDA decreased to 11.3% in the second quarter of 2021 from
14.7% in the second quarter of 2020. For a reconciliation between Adjusted
Restaurant-Level EBITDA and loss from operations see page 41.
General and Administrative Expenses. General and administrative expenses
increased $2.1 million in the second quarter of 2021 to $20.7 million, and
decreased as a percentage of total restaurant sales to 4.9% in the second
quarter of 2021 from 5.0% in the second quarter of 2020. The $2.1 million
increase was due to lapping against short-term salary and travel reductions in
effect for the second quarter of 2020 ($2.0 million).
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Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA decreased to
$29.3 million in the second quarter of 2021 from $38.0 million in the second
quarter of 2020. As a percentage of total restaurant sales, Adjusted EBITDA
decreased to 6.9% in the second quarter of 2021 from 10.3% in the second quarter
of 2020. For a reconciliation between net loss and EBITDA and Adjusted EBITDA
see page 41.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $0.1 million to $20.4 million in the second quarter of 2021 from $20.3
million in the second quarter of 2020.
Impairment and Other Lease Charges. Impairment and other lease charges were $0.1
million due primarily to assets at a restaurant location closed during the
quarter. During the second quarter of 2020, impairment and other lease charges
were $2.9 million, consisting of $2.6 million of initial impairment charges
for six underperforming restaurants, capital expenditures of $0.1 million at
underperforming restaurants, and $0.2 million of other lease charges
Other Expense (Income), net. Other expense, net in the second quarter of 2021
was $0.7 million which consisted of a loss on disposal of assets of $0.7
million. Other income, net for the three months ended June 28, 2020 included a
loss on disposal of assets of $0.1 million, loss on sale-leaseback transactions
of $0.8 million and a gain on insurance recoveries from property damage at our
restaurants of $1.3 million.
Loss on Extinguishment of Debt. We recognized a loss on extinguishment of debt
of $8.5 million during the second quarter of 2021 in connection with the early
extinguishment of our term B-1 loans and partial extinguishment of our term B
loans under our Senior Credit Facilities. The loss consisted of a proportional
write-off of unamortized debt issuance costs and unamortized original issuance
discount.
Interest Expense. Interest expense increased to $6.9 million in the second
quarter of 2021 from $6.4 million in the second quarter of 2020. Our weighted
average interest rate for borrowings under the Senior Credit Facilities
increased to 4.4% in the second quarter of 2021 from 4.3% in the second quarter
of 2020, as our higher interest rate term B-1 loan under our Senior Credit
Facilities was outstanding for most of the second quarter of 2021 and incurred
at the end of the prior year second quarter.
Provision (Benefit) for Income Taxes. For the three months ended July 4, 2021,
the benefit for income taxes was derived using an estimated effective annual
income tax rate for all of 2021 of 11.0%. The difference compared to the
statutory rate for 2021 is attributable to various permanent non-deductible
expenses which are not directly related to the amount of pre-tax loss recorded
in a period.
During the second quarter of 2021, we also recorded an increase to the valuation
allowance on our deferred income tax assets of $2.6 million due to an increase
in our projected tax loss for the year as a result of the loss on debt
extinguishment recorded in the second quarter. There were no other discrete tax
adjustments in the second quarter of 2021.
For the three months ended June 28, 2020, the provision for income taxes was
derived using an estimated effective annual income tax rate for all of 2020 of
36.7%. During the second quarter of 2020, a benefit of $1.8 million was
recognized to reduce the valuation allowance which had been recorded on all of
our net deferred income tax assets at the end of the first quarter of 2020.
There were no other discrete tax adjustments in the second quarter of 2020.
Net Income (Loss). As a result of the above, net loss for the second quarter of
2021 was $9.6 million, or $0.19 per diluted share, compared to net income in the
second quarter of 2020 of $7.8 million, or $0.13 per diluted share.
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Six Months Ended July 4, 2021 Compared to Six Months Ended June 28, 2020
The following table highlights the key components of sales for the six-month
period ended July 4, 2021 as compared to the six-month period ended June 28,
2020:
                                                                                 Six Months Ended
                                                                   July 4, 2021                  June 28, 2020
Restaurant Sales                                                          814,534                         719,936
Burger King                                                               771,147                         675,286
Popeyes                                                                    43,387                          44,650

Change in Comparable Restaurant Sales % (a)                                  12.6  %                         (5.6) %
Change in Comparable Burger King Restaurant Sales (a)                        13.6  %                         (6.0) %
Change in Comparable Popeyes Restaurant Sales (a)                            (2.5) %                         17.1

Burger King Restaurants operating at beginning of period:                   1,009                           1,036
New restaurants opened, including relocations                                   2                               6
Restaurants acquired                                                           19                               -
Restaurants closed, including relocations (b)                                  (3)                            (15)
Burger King Restaurants at end of period                                    1,027                           1,027
Average number of operating Burger King restaurants                       1,009.0                         1,011.6

Popeyes Restaurants operating at beginning and end of period:                  65                              65

Average number of operating Popeyes restaurants                              65.0                            64.2


a.Restaurants we acquire are included in comparable restaurant sales after they
have been operated by us for 12 months. Sales from restaurants that we develop
are included in comparable restaurant sales after they have been open for 15
months. The calculation of changes in comparable restaurant sales is based on
the comparable 26-week period.
b.For the first six months of 2020, new restaurants opened includes one
restaurant relocated within its market area and closed restaurants includes one
restaurant closed as a result of relocation.
Restaurant Sales. Total restaurant sales in the first six months of 2021
increased 13.1% to $814.5 million from $719.9 million in the first six months of
2020. Comparable restaurant sales increased 12.6% in the first six months of
2021 due to an increase in customer traffic of 7.1% and an increase in average
check of 5.2%. The effect in the first six months of 2021 from menu price
increases taken since the beginning of 2020 was approximately 1.5%. Restaurant
sales were also impacted by the inclusion of sales in 2021 from 46 restaurants
that were temporarily closed due to the pandemic for most of the second quarter
of 2020 and the 22 restaurants closed since the end of the second quarter of
2020.

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Operating Costs and Expenses (percentages stated as a percentage of total
revenue unless otherwise noted). The following table sets forth, for the six
months ended July 4, 2021 and June 28, 2020, selected operating results as a
percentage of total revenue:
                                                    Six Months Ended
                                            July 4, 2021        June 28, 

2020


Costs and expenses (all restaurants):
Food, beverage and packaging costs                  29.5  %            28.8 

%


Restaurant wages and related expenses               32.8  %            32.8 

%


Restaurant rent expense                              7.5  %             8.1 

%


Other restaurant operating expenses                 15.5  %            15.6  %
Advertising expense                                  4.0  %             3.9  %
General and administrative                           5.2  %             5.5  %


Food, beverage and packaging costs increased to 29.5% in the first six months of
2021 from 28.8% in the first six months of 2020. This increase reflected
increased commodity pricing at our Burger King restaurants (1.0%) and increased
delivery sales (0.5%). These cost pressures were offset in part by the impact of
menu price increases taken at our Burger King restaurants since the beginning of
2020 (0.7%) and improved operational efficiencies at our Burger King restaurants
(0.2%).
Restaurant wages and related expenses was 32.8% in each of the first six months
of 2021 and the first six months of 2020. The efficiencies we gained due to
labor adjustments we made during the second quarter of 2020 in response to the
COVID-19 environment benefited the year-over-year comparison in the first
quarter, and offset the year-over-year increase we saw in the second quarter
from restoring labor hours and labor rate pressures. The impact of hourly labor
rate increases over the first six months of 2021, inclusive of minimum wage
increases, was 8.8% when compared to the prior year period.
Restaurant rent expense decreased to 7.5% in the first six months of 2021 from
8.1% in the first six months of 2020 due to the effect of higher sales volumes
on fixed rental costs.
Other restaurant operating expenses decreased to 15.5% in the first six months
of 2021 from 15.6% in the first six months of 2020. The second quarter of 2020
reflected cost savings realized from the constrained pandemic operating
environment. As our dining rooms have reopened and restaurants have resumed
pre-pandemic operations, we saw higher spending on repair and maintenance
(0.1%), security costs (0.1%, including investments in smart safe technology),
and equipment rental (0.1%), which were partially offset by savings in utilities
(0.2%) and operating supplies (0.1%).
Advertising expense was 4.0% in the first six months of 2021 from 3.9% in the
first six months of 2020.
Adjusted Restaurant-Level EBITDA. As a result of the factors above, Adjusted
Restaurant-Level EBITDA increased $10.4 million, or 13.6%, to $87.4 million in
the first six months of 2021 compared to $76.9 million in the prior year period,
and, as a percentage of total revenue, was 10.7% in both the first six months of
2021 and 2020. For a reconciliation between Adjusted Restaurant-Level EBITDA and
income (loss) from operations see page 41.
General and Administrative Expenses. General and administrative expenses
increased $2.7 million in the first six months of 2021 to $42.1 million and, as
a percentage of total revenue, decreased to 5.2% from 5.5% in the prior year
period. The increase in total general and administrative expenses in the first
six months of 2021 was primarily due to lapping against short-term salary and
travel reductions in effect for the second quarter of 2020 ($2.0 million) and
higher bonus expense in 2021 ($2.5 million, including stock-based compensation),
which were partially offset by a reduction in regional and corporate overhead
costs from streamlining our regional management structure, improving our
training process and reducing travel that impacted the first quarter's
year-over-year comparison ($1.6 million).
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Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA increased to
$49.2 million in the first six months of 2021 from $42.0 million in the first
six months of 2020. For a reconciliation between net income (loss) and EBITDA
and Adjusted EBITDA see page 41.
Depreciation and Amortization Expense. Depreciation and amortization expense
decreased to $41.0 million in the first six months of 2021 from $41.3 million in
the first six months of 2020.
Impairment and Other Lease Charges. Impairment and other lease charges were $0.5
million in the first six months of 2021, which included capital expenditures of
$0.3 million at previously impaired restaurants and $0.2 million of other lease
charges.
Impairment and other lease charges were $5.8 million in the first six months of
2020, which included $4.1 million of asset impairment charges at nine
underperforming restaurants, $0.3 million of capital expenditures at previously
impaired restaurants, and $1.4 million of other lease charges primarily due to
nine restaurants closed during the first quarter of 2020.
Other Expense (Income), net. The first six months of 2021 included a loss on
disposal of assets of $0.9 million.
In the first six months of 2020 other income, net included gains related to
insurance recoveries from property damage at four of its restaurants of $1.6
million, net gain on ten sale-leaseback transactions of $0.6 million and a loss
on disposal of assets of $0.2 million.
Loss on Extinguishment of Debt. We recognized a loss on extinguishment of debt
of $8.5 million during the second quarter of 2021 in connection with the early
extinguishment of our term B-1 loans and partial extinguishment of our term B
loans under our Senior Credit Facilities. The loss consisted of the proportional
write-off of unamortized debt issuance costs and unamortized original issuance
discount.
Interest Expense. Interest expense increased to $13.7 million in the first six
months of 2021 from $13.5 million in the first six months of 2020. The weighted
average interest rate on borrowings under our Senior Credit Facilities decreased
to 4.4% in the first six months of 2021 from 4.6% in the first six months of
2020, as the variable rates on our borrowings benefited from reduced LIBOR
rates.
Provision (Benefit) for Income Taxes. The benefit for income taxes for the first
six months of 2021 was derived using an estimated effective annual income tax
rate for all of 2021 of 11.0%, which excludes any discrete tax adjustments. The
difference compared to the statutory rate for 2021 is attributable to various
permanent non-deductible expenses which are not directly related to the amount
of pre-tax loss recorded in a period. There was $0.7 million of tax benefit from
net discrete tax adjustments during the six months ended July 4, 2021.
During the second quarter of 2021, we also recorded an increase to the valuation
allowance on our deferred income tax assets of $2.6 million due to an increase
in our projected tax loss for the year as a result of the loss on debt
extinguishment recorded in the second quarter of 2021.
The benefit for income taxes for the first six months of 2020 was derived using
an estimated effective annual income tax rate for all of 2020 of 36.7%, which
excludes any discrete tax adjustments. There were no discrete tax adjustments in
the six months ended June 28, 2020. The deferred tax benefit from our pretax
loss during the six months of 2020 was offset by tax expense of $0.4 million
from an increase to the valuation allowance on our net deferred tax assets as of
June 28, 2020.
Net Loss. As a result of the above, net loss for the first six months of 2021
was $16.7 million, or $0.34 per diluted share, compared to a net loss in first
six months of 2020 of $14.4 million, or $0.28 per diluted share.
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Reconciliations of net income (loss) to EBITDA, Adjusted EBITDA and Adjusted Net
Income (Loss), and Income (Loss) from operations to Adjusted Restaurant-Level
EBITDA for the three and six months ended July 4, 2021 and June 28, 2020 are as
follows (in thousands, except for per share data):
                                                    Three Months Ended                              Six Months Ended
Reconciliation of EBITDA and Adjusted      July 4, 2021           June 28, 2020           July 4, 2021           June 28, 2020

EBITDA:


Net income (loss)                        $      (9,559)         $        

7,842 $ (16,727) $ (14,367) Provision (benefit) from income taxes

              (32)                     90                 (2,693)                 (6,888)
Interest expense                                 6,942                   6,370                 13,668                  13,510
Depreciation and amortization                   20,421                  20,296                 41,030                  41,327
EBITDA                                          17,772                  34,598                 35,278                  33,582
Impairment and other lease charges                 144                   2,941                    497                   5,822
Acquisition costs (1)                              292                     274                    292                     355
Stock-based compensation expense                 1,614                   1,109                  3,083                   2,241
Abandoned development costs (2)                      -                     869                      -                   1,557
Pre-opening costs (3)                                -                      10                     29                      99
Litigation and other professional
expenses (4)                                       232                     219                    514                     280
Loss on extinguishment of debt                   8,538                       -                  8,538                       -
Other expense (income), net (5)(6)                 715                  (2,003)                   942                  (1,947)
Adjusted EBITDA                          $      29,307          $       38,017          $      49,173          $       41,989


Reconciliation of Adjusted
Restaurant-Level EBITDA:
Income (loss) from operations              $     5,889          $    14,302          $   2,786          $  (7,745)
Add:
General and administrative expenses             20,698               18,581             42,067             39,368

Pre-opening costs (3)                                -                   10                 29                 99
Depreciation and amortization                   20,421               20,296             41,030             41,327
Impairment and other lease charges                 144                2,941                497              5,822
Other expense (income), net (5)(6)                 715               (2,003)               942             (1,947)
Adjusted Restaurant-Level EBITDA           $    47,867          $    54,127

$ 87,351 $ 76,924




Reconciliation of Adjusted Net Loss:
Net income (loss)                        $    (9,559)         $     7,842          $ (16,727)         $ (14,367)
Add:
Impairment and other lease charges               144                2,941                497              5,822
Acquisition costs (1)                            292                  274                292                355
Abandoned development costs (2)                    -                  869                  -              1,557
Pre-opening costs (3)                              -                   10                 29                 99
Litigation and other professional
expenses (4)                                     232                  219                514                280
Other expense (income), net (5)(6)               715               (2,003)               942             (1,947)
Income tax effect on above adjustments
(7)                                             (346)                (578)              (569)            (1,542)
Loss on extinguishment of debt                 8,538                    -              8,538                  -
Adjusted Net Income (Loss)               $        16          $     9,574          $  (6,484)         $  (9,743)
Adjusted diluted net income (loss) per
share (8)                                $         -          $      0.16          $   (0.13)         $   (0.19)
Adjusted diluted weighted average common
shares outstanding (in thousands of
shares)                                          59,431               60,332             49,871             50,869


(1)Acquisition costs for the three and six months ended July 4, 2021 mostly
include integration, travel, legal and professional fees incurred in connection
with restaurant acquisitions during the second quarter in 2021, which were
included in general and administrative expenses. Acquisition costs for the three
and six months ended June 28, 2020 mostly include legal and professional fees
incurred in connection with the acquisition of 165 Burger King and 55 Popeyes
restaurants from Cambridge Franchise Holdings, LLC in 2019 which were included
in general and administrative expenses.
(2)Abandoned development costs for the three and six months ended June 28, 2020
represents the write-off of capitalized costs due to the abandoned development
in 2020 of previously planned new restaurant locations.
(3)Pre-opening costs for the three and six months ended July 4, 2021 and
June 28, 2020 include training, labor and occupancy costs incurred during the
construction of new restaurants.
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(4)Litigation and other professional expenses for the three and six months ended
July 4, 2021 and June 28, 2020 include costs pertaining to an ongoing lawsuit
with one of the Company's former vendors, as well as other non-recurring
professional service expenses.
(5)Other expense (income), net, for the three and six months ended July 4, 2021,
included a loss on disposal of assets of $0.7 million and $0.9 million,
respectively.
(6)Other expense (income), net, for the three months ended June 28, 2020
included gains related to insurance recoveries from property damage at four of
our restaurants of $1.3 million, a net gain on three sale-leaseback transactions
of $0.8 million and a loss on disposal of assets of $0.1 million. Other expense
(income), net, for the six months ended June 28, 2020 included gains related to
insurance recoveries from property damage at four of our restaurants of $1.6
million, net gain on ten sale-leaseback transactions of $0.6 million and a loss
on disposal of assets of $0.2 million.
(7)The income tax effect related to the adjustments to Adjusted Net Income
(Loss) other than loss on extinguishment of debt was calculated using an
incremental income tax rate of 25% for the three and six months ended July 4,
2021 and June 28, 2020. The loss on extinguishment of debt is not adjusted for
tax as its benefit was offset by a valuation allowance charge in the three and
six months ended July 4, 2021.
(8)Adjusted diluted net income (loss) per share is calculated based on Adjusted
net income (loss) and the dilutive weighted average common shares outstanding
for the respective periods.
Liquidity and Capital Resources
As is common in the restaurant industry, we maintain relatively low levels of
accounts receivable and inventories and receive trade credit based upon
negotiated terms for purchasing food products and other supplies. As a result,
we may at times maintain current liabilities in excess of current assets, which
results in a working capital deficit. We are able to operate with a substantial
working capital deficit because:
•restaurant operations are primarily conducted on a cash basis;
•rapid turnover results in a limited investment in inventories; and
•cash from sales is usually received before related liabilities for food,
supplies and payroll become due.
Interest payments under our debt obligations, capital expenditures including for
our remodeling initiatives, payments of royalties and advertising to BKC and PLK
and payments related to our lease obligations represent significant liquidity
requirements for us, not including any discretionary expenditures for the
acquisition or development of additional Burger King and Popeyes restaurants.
If our future financing needs increase, we may need to arrange additional debt
or equity financing. We continually evaluate and consider various financing
alternatives to enhance or supplement our existing financial resources,
including our Senior Credit Facilities. However, there can be no assurance that
we will be able to enter into any such arrangements on acceptable terms or at
all.
We believe our cash balances, cash generated from our operations and
availability of revolving credit borrowings under our Senior Credit Facilities
provide sufficient cash availability to cover our anticipated working capital
needs, capital expenditures and debt service requirements for at least the next
twelve months.
Operating Activities. Net cash provided by operating activities was $26.6
million in the first six months of 2021 compared to net cash provided by
operating activities of $47.9 million in the first six months of 2020. The
decrease was due primarily to an increase of $1.7 million in EBITDA offset by a
decrease in cash provided by working capital components of $30.4 million.
Working capital changes in the first six months of 2020 reflected temporary
actions we took at the onset of the pandemic in order to preserve cash and
increase liquidity, which did not recur in 2021, including deferring payments
with suppliers and landlords and deferring employer payroll taxes.
Investing Activities. Net cash used for investing activities in the first six
months of 2021 and 2020 was $56.8 million and $25.0 million, respectively. This
included $30.8 million of cash paid for the acquisition of 19 restaurants in two
acquisitions during the first six months of 2021. This cost included the
purchase of 13 fee-owned restaurants, of which 12 are expected to be sold in
sale-leaseback transactions during 2021 for net proceeds of approximately $20.1
million, although there is no assurance that we will complete such transactions
during 2021 or at all.
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Capital expenditures are a large component of our investing activities and
include: (1) new restaurant development, which may include the purchase of real
estate; (2) restaurant remodeling, which includes the renovation or rebuilding
of the interior and exterior of our existing restaurants including expenditures
associated with our franchise agreement renewals and certain restaurants that we
acquire; (3) other restaurant capital expenditures, which include capital
maintenance expenditures for the ongoing reinvestment and enhancement of our
restaurants, and from time to time, to support BKC's and PLK's initiatives; and
(4) corporate and restaurant information systems, including expenditures for our
point-of-sale systems for restaurants that we acquire.
The following table sets forth our capital expenditures for the periods
presented (in thousands):
                                                                            

Six Months Ended


                                                                   July 4, 2021           June 28, 2020
New restaurant development                                       $       2,615          $       13,952
Restaurant remodeling                                                    6,854                   7,349
Other restaurant capital expenditures                                    9,446                   5,555
Corporate and restaurant information systems                             7,560                   6,288
Total capital expenditures                                       $      26,475          $       33,144
Number of new restaurant openings, including relocations                     2                       6


In the first six months of 2020, investing activities also included net proceeds
of $18.9 million from the completion of ten sale-leaseback transaction and $1.7
million of insurance recoveries related to property damage at four of our
restaurants.
Financing Activities. Net cash provided by financing activities in the first six
months of 2021 was $21.4 million and included issuance of $300.0 million
principal amount of the Notes, principal payments of $319.3 million of
outstanding term B and B-1 loans under our Senior Credit Facilities, $46.0
million of revolving credit borrowings under our Senior Credit Facilities, and
$5.0 million in financing costs paid in connection with the debt issuance and
amendments to our Senior Credit Facilities. We also made principal payments on
finance leases of $0.3 million.
Net cash provided by financing activities in the six months of 2020 was $20.1
million and included net proceeds from the borrowing of a term B-1 loan under
our Senior Credit Facilities of $71.3 million, net repayments of $45.8 million
of revolving borrowings under our Revolving Credit Facility, principal payments
of $2.1 million on the Term Loan B Facility, financing costs associated with
borrowing a term B-1 loan under our Senior Credit Facilities and amendments to
our Senior Credit Facilities of $2.1 million and principal payments on finance
leases of $1.1 million.
Senior Notes due 2029. On June 28, 2021, the Company issued $300.0 million
principal amount of the Notes in a private placement as described above under
"-Recent and Future Events Affecting our Results of Operations-Issuance of Notes
and Amendments to our Senior Credit Facilities". The proceeds of the offering,
together with $46.0 million of revolving credit borrowings under our Senior
Credit Facilities, were used to (i) repay $74.4 million of outstanding term B-1
loans and $243.6 million of outstanding term B loans under our Senior Credit
Facilities (which included scheduled principal payments), (ii) to pay fees and
expenses related to the offering of the Notes and the Seventh Amendment and
(iii) for working capital and general corporate purposes, including for possible
future repurchases of its common stock and/or a dividend payment and/or payments
on its common stock.
Senior Credit Facilities. As described above under "-Recent and Future Events
Affecting Our Results of Operations-Issuance of Notes and Amendments to our
Senior Credit Facilities", we entered into the Senior Credit Facilities and
subsequent amendments to the Senior Credit Facilities. Our obligations under the
Senior Credit Facilities are guaranteed by our subsidiaries and are secured by
first priority liens on substantially all of our assets and our subsidiaries,
including a pledge of all of the capital stock and equity interests of our
subsidiaries. Under the Senior Credit Facilities, we are required to make
mandatory prepayments of borrowings following dispositions of assets, debt
issuances and the receipt of insurance and condemnation proceeds (all subject to
certain exceptions).
At July 4, 2021, borrowings under our Senior Credit Facilities bore interest as
follows:
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(i) Revolving Credit Facility: at a rate per annum equal to (a) the Alternate
Base Rate (as defined in the Senior Credit Facilities) plus 2.50% or (b) LIBOR
Rate (as defined in the Senior Credit Facilities) plus 3.50%.
(ii) Term B loans: at a rate per annum equal to (a) the Alternate Base Rate (as
defined plus 2.25% or (b) LIBOR Rate plus 3.25%.
The weighted average interest rate for borrowings on long-term debt balances
were 4.4% for both the three and six months ended July 4, 2021 and 4.3% and 4.6%
for the three and six months ended June 28, 2020, respectively.
The term B loans are due and payable in quarterly installments, which began on
September 30, 2019. Amounts outstanding at July 4, 2021 are due and payable as
follows:
(i) nineteen quarterly installments of $1.1 million;
(ii) one final payment of $153.8 million on April 30, 2026.
As of July 4, 2021, there were $46.0 million revolving credit borrowings
outstanding and $9.0 million of letters of credit issued under the Revolving
Credit Facility. After reserving for issued letters of credit, $120.0 million
was available for revolving credit borrowings under the Senior Credit Facilities
at July 4, 2021.
The Senior Credit Facilities contain certain covenants, including without
limitation, those limiting our and our subsidiaries' ability to, among other
things, incur indebtedness, incur liens, sell or acquire assets or businesses,
change the character of its business in any material respect, engage in
transactions with related parties, make certain investments, make certain
restricted payments or pay dividends. In addition, the Senior Credit Facilities
require us to meet a First Lien Leverage Ratio (as defined in the Senior Credit
Facilities). As the $46.0 million borrowings under the Revolving Credit Facility
at July 4, 2021 did not exceed 35% of the aggregate borrowing capacity, no First
Lien Leverage Ratio calculation was required. The Company was in compliance with
the covenants under its Senior Credit Facilities at July 4, 2021.
The Senior Credit Facilities contain customary default provisions, including
that the lenders may terminate their obligation to advance and may declare the
unpaid balance of borrowings, or any part thereof, immediately due and payable
upon the occurrence and during the continuance of customary events of default
which include, without limitation, payment default, covenant default, bankruptcy
default, cross-default on other indebtedness, judgment default and the
occurrence of a change of control.
In March 2020, we entered into an interest rate swap agreement certain of our
lenders under the Senior Credit Facilities to mitigate the risk of increases in
the variable interest rate related to term loan borrowings under the Term Loan B
Facility. The interest rate swap fixes the interest rate on $220.0 million of
outstanding borrowings under the Senior Credit Facilities at 0.915% plus the
applicable margin in its Senior Credit Facilities. The agreement matures on
February 28, 2025 and has a notional amount of $220.0 million at July 4, 2021.
The differences between the variable LIBOR rate and the interest rate swap rate
of 0.915% are settled monthly. We made payments of $0.4 million and $0.9 million
to settle the interest rate swap during the three and six months ended July 4,
2021, respectively. The fair value of our interest rate swap agreement was a
liability of $2.5 million as of July 4, 2021 and is included in long-term other
liabilities in the accompanying condensed consolidated balance sheets. Changes
in the valuation of our interest rate swap were included as a component of other
comprehensive income, and will be reclassified to earnings as the losses are
realized. We expect to reclassify net losses totaling $1.7 million into earnings
in the next twelve months.
Contractual Obligations
A table of our contractual obligations as of January 3, 2021 was included in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" of our Annual Report on Form 10-K for the fiscal year
ended January 3, 2021. There have been no significant changes to our contractual
obligations during the three months ended July 4, 2021 other than as described
under "-Recent and Future Events Affecting Our Results of Operations-Issuance of
Notes and Amendments to our Senior Credit Facilities".
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Inflation
The inflationary factors that have historically affected our results of
operations include increases in food and paper costs, labor and other operating
expenses, the cost of providing medical and prescription drug insurance to our
employees and energy costs. Wages paid in our restaurants are impacted by
changes in the Federal and state hourly minimum wage rates and the Fair Labor
Standards Act. Accordingly, changes in the Federal and state hourly minimum wage
rates and increases in the wage level to not be considered an hourly employee
will directly affect our labor costs. We typically attempt to offset the effect
of inflation, at least in part, through periodic menu price increases and
various cost reduction programs. However, no assurance can be given that we will
be able to offset such inflationary cost increases in the future.
Application of Critical Accounting Policies
Our unaudited condensed consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America. Preparing consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. These estimates and assumptions are affected
by the application of our accounting policies. Our significant accounting
policies are described in the "Basis of Presentation" footnote in the notes to
the Consolidated Financial Statements included in our Annual Report on Form 10-K
for the fiscal year ended January 3, 2021. Critical accounting estimates are
those that require application of management's most difficult, subjective or
complex judgments, often as a result of matters that are inherently uncertain
and may change in subsequent periods. There have been no material changes
affecting our critical accounting policies previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended January 3, 2021.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Statements
that are predictive in nature or that depend upon or refer to future events or
conditions are forward-looking statements. These statements are often identified
by the words "may", "might", "will", "should", "anticipate", "believe",
"expect", "intend", "estimate", "hope", "plan" or similar expressions. In
addition, expressions of our strategies, intentions or plans are also forward
looking statements. These statements reflect management's current views with
respect to future events and are subject to risks and uncertainties, both known
and unknown. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their date. There are
important factors that could cause actual results to differ materially from
those in forward-looking statements, many of which are beyond our control.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected or implied in the
forward-looking statements. We have identified significant factors that could
cause actual results to differ materially from those stated or implied in the
forward-looking statements. We believe important factors that could cause actual
results to differ materially from our expectations include the following, in
addition to other risks and uncertainties discussed herein and in our Annual
Report on Form 10-K for the period ended January 3, 2021:
•The impact of the COVID-19 pandemic;
•Effectiveness of the Burger King and Popeyes advertising programs and the
overall success of the Burger King and Popeyes brands;
•Increases in food costs and other commodity costs;
•Our ability to hire and retain employees at current or increased wage rates;
•Competitive conditions, including pricing pressures, discounting, aggressive
marketing and the potential impact of competitors' new unit openings and
promotions on sales of our restaurants;
•Our ability to integrate any restaurants we acquire;
•Regulatory factors;
•Environmental conditions and regulations;
•General economic conditions, particularly in the retail sector;
•Weather conditions;
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•Fuel prices;
•Significant disruptions in service or supply by any of our suppliers or
distributors;
•Changes in consumer perception of dietary health and food safety;
•Labor and employment benefit costs, including the effects of minimum wage
increases, healthcare reform and changes in the Fair Labor Standards Act;
•The outcome of pending or future legal claims or proceedings;
•Our ability to manage our growth and successfully implement our business
strategy;
•Our inability to service our indebtedness;
•Our borrowing costs and credit ratings, which may be influenced by the credit
ratings of our competitors;
•The availability and terms of necessary or desirable financing or refinancing
and other related risks and uncertainties; and
•Factors that affect the restaurant industry generally, including recalls if
products become adulterated or misbranded, liability if our products cause
injury, ingredient disclosure and labeling laws and regulations, reports of
cases of foodborne illnesses such as "mad cow" disease, and the possibility that
consumers could lose confidence in the safety and quality of certain food
products as well as negative publicity regarding food quality, illness, injury,
or other health concerns.

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