We operate on a 52 or 53 week fiscal year ending on the Sunday closest toDecember 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 endedJanuary 3, 2021 contained 53 weeks and our fiscal year endingJanuary 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 endedJanuary 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 endedJuly 4, 2021 compared to the three and six months endedJune 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 OverviewCarrols Restaurant Group, Inc. and its consolidated subsidiaries (collectively, "Carrols Restaurant Group ", the "Company", "we", "our" or "us") is one of the largest restaurant companies inthe United States and has been operating restaurants for more than 60 years. We are the largest Burger King franchisee inthe United States , based on number of restaurants. As ofJuly 4, 2021 we operated, as franchisee, a total of 1,092 restaurants in 23 states under the trade names of Burger King andPopeyes . This included 1,027 Burger King restaurants in 23 Northeastern, Midwestern, Southcentral and Southeastern states and 65Popeyes restaurants in seven Southeastern states. Any reference to "BKC" refers toBurger King Corporation and its indirect parent company, Restaurant Brands International Inc. ("RBI"). Any reference to "PLK" refers toPopeyes 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 26 -------------------------------------------------------------------------------- Table of Contents 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 withU.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. 27 -------------------------------------------------------------------------------- Table of Contents However, EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Income (Loss) are not measures of financial performance or liquidity underU.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. 28 -------------------------------------------------------------------------------- Table of Contents Recent and Future Events Affecting our Results of Operations Burger King Restaurant Acquisitions From the beginning of 2020 throughJuly 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$20.1 million although there is no assurance that we can complete such transactions during 2021 or at all. The unaudited pro forma impact on the results of operations for the 2021 acquisitions is included below. The unaudited pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. This unaudited pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings or any transaction costs related to the 2021 acquired restaurants. The following table summarizes certain unaudited pro forma financial information related to our operating results for the three and six months endedJuly 4, 2021 : Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Total revenue$ 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: •InMarch 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 lateMarch 2020 and earlyApril 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. 29 -------------------------------------------------------------------------------- Table of Contents •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 ofJuly 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 ofSocial 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 ofDecember 31, 2021 andDecember 31, 2022 which remains unpaid as ofJuly 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 onApril 30, 2019 and was set to end onSeptember 30, 2024 and which superseded the Operating Agreement dated as ofMay 30, 2012 , as amended, betweenCarrols LLC and BKC. TheADA was amended and restated by all parties onJanuary 4, 2021 (the "Amended ADA"). Pursuant to theADA and for a cost of$3.0 million , BKC had assigned toCarrols 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 inKentucky ,Tennessee andIndiana . This includes four Burger King restaurants bySeptember 30, 2021 , 10 additional Burger King restaurants bySeptember 30, 2022 , 12 additional Burger King restaurants bySeptember 30, 2023 , 12 additional Burger King restaurants bySeptember 30, 2024 and 12 additional Burger King restaurants bySeptember 30, 2025 . In addition, pursuant to the Amended ADA, BKC grantedCarrols 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 andIndiana (excluding certain geographic areas inIndiana ) and (ii) (a) 16 states, which includeArkansas ,Indiana ,Kentucky ,Louisiana ,Maine ,Maryland ,Michigan ,Mississippi ,North Carolina ,Ohio ,Pennsylvania ,Rhode Island ,South Carolina ,Tennessee ,Vermont andVirginia (subject to certain exceptions for certain limited geographic areas within certain states) and (b) any other geographic locations thatCarrols LLC enters after the commencement date of the Amended ADA pursuant to BKC procedures subject to certain limitations. 30 -------------------------------------------------------------------------------- Table of Contents In connection with an acquisition of restaurants in 2019 we assumed a development agreement forPopeyes , 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 newPopeyes restaurants over six years. This development agreement with PLK was terminated onMarch 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 sevenPopeyes restaurants. Issuance of Notes and Amendments to our Senior Credit Facilities OnApril 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 onApril 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 onApril 30, 2026 and the Revolving Credit Facility originally matured onApril 30, 2024 . OnDecember 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 endedDecember 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 . OnMarch 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. 31 -------------------------------------------------------------------------------- Table of Contents OnApril 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 . OnApril 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. OnJune 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 onApril 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 onJune 28, 2021 . OnApril 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 toJanuary 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 TickingFee 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. OnJune 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 32 -------------------------------------------------------------------------------- Table of Contents 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. OnJune 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 ofJune 28, 2021 with theBank of New York Mellon Trust Company governing the Notes. The Indenture provides that the Notes will mature onJuly 1, 2029 and will bear interest at the rate of 5.875% per annum, payable semi-annually onJuly 1 andJanuary 1 of each year, beginning onJanuary 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 afterJuly 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 beforeJuly 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 ofCarrols Restaurant Group and are guaranteed on an unsecured basis by the Guarantors. The Indenture contains certain covenants that limit the ability ofCarrols 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 ofJuly 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 atJuly 4, 2021 . Interest Rate Swap Agreement We entered into a five-year interest rate swap agreement commencingMarch 3, 2020 and endingFebruary 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 OnAugust 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 effectiveAugust 2, 2019 , and onAugust 10, 2021 , was extended throughAugust 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 endedJanuary 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 endedJuly 4, 2021 . As ofJuly 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. 33 -------------------------------------------------------------------------------- Table of Contents Special Cash Dividend EffectiveAugust 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 onOctober 5, 2021 to stockholders of record as of the close of business onAugust 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 inCarrols 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 onJanuary 1, 2021 and then to 15.00 an hour onJuly 1, 2021 , from$13.75 an hour in 2020 and$12.75 per hour in 2019.New York State has anUrban Youth Credit through 2022 for which we have been receiving approximately$500,000 per year since 2016. We had 125 restaurants inNew York State atJuly 4, 2021 . As of such date, we also had one restaurant inMassachusetts that has annual minimum wage increases reaching$15.00 per hour in 2023, 10 restaurants inNew Jersey that have annual minimum wage increases reaching$15.00 per hour in 2024, and 45 total restaurants inIllinois andMaryland 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. 34 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months EndedJuly 4, 2021 Compared to Three Months EndedJune 28, 2020 The following table highlights the key components of sales and the number of restaurants in operation for our second quarter endedJuly 4, 2021 as compared to the second quarter endedJune 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
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. 35 -------------------------------------------------------------------------------- Table of Contents Operating Costs and Expenses (percentages stated as a percentage of total revenue). The following table sets forth, for the three months endedJuly 4, 2021 andJune 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 ). 36 -------------------------------------------------------------------------------- Table of Contents 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 endedJune 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 endedJuly 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 endedJune 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. 37 -------------------------------------------------------------------------------- Table of Contents Six Months EndedJuly 4, 2021 Compared to Six Months EndedJune 28, 2020 The following table highlights the key components of sales for the six-month period endedJuly 4, 2021 as compared to the six-month period endedJune 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. 38 -------------------------------------------------------------------------------- Table of Contents Operating Costs and Expenses (percentages stated as a percentage of total revenue unless otherwise noted). The following table sets forth, for the six months endedJuly 4, 2021 andJune 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 ). 39 -------------------------------------------------------------------------------- Table of Contents 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 endedJuly 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 endedJune 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 ofJune 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$0.28 per diluted share. 40 -------------------------------------------------------------------------------- Table of Contents Reconciliations of net income (loss) to EBITDA, Adjusted EBITDA and Adjusted Net Income (Loss), and Income (Loss) from operations to Adjusted Restaurant-Level EBITDA for the three and six months endedJuly 4, 2021 andJune 28, 2020 are as follows (in thousands, except for per share data): Three Months Ended Six Months Ended Reconciliation of EBITDA and Adjusted July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020
EBITDA:
Net income (loss)$ (9,559) $
7,842
(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
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 endedJuly 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 endedJune 28, 2020 mostly include legal and professional fees incurred in connection with the acquisition of 165 Burger King and 55Popeyes restaurants fromCambridge Franchise Holdings, LLC in 2019 which were included in general and administrative expenses. (2)Abandoned development costs for the three and six months endedJune 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 endedJuly 4, 2021 andJune 28, 2020 include training, labor and occupancy costs incurred during the construction of new restaurants. 41 -------------------------------------------------------------------------------- Table of Contents (4)Litigation and other professional expenses for the three and six months endedJuly 4, 2021 andJune 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 endedJuly 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 endedJune 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 endedJune 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 endedJuly 4, 2021 andJune 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 endedJuly 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 andPopeyes 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$20.1 million , although there is no assurance that we will complete such transactions during 2021 or at all. 42 -------------------------------------------------------------------------------- Table of Contents Capital expenditures are a large component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants including expenditures associated with our franchise agreement renewals and certain restaurants that we acquire; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants, and from time to time, to support BKC's and PLK's initiatives; and (4) corporate and restaurant information systems, including expenditures for our point-of-sale systems for restaurants that we acquire. The following table sets forth our capital expenditures for the periods presented (in thousands):
Six Months Ended
July 4, 2021 June 28, 2020 New restaurant development$ 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. OnJune 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). AtJuly 4, 2021 , borrowings under our Senior Credit Facilities bore interest as follows: 43 -------------------------------------------------------------------------------- Table of Contents (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 endedJuly 4, 2021 and 4.3% and 4.6% for the three and six months endedJune 28, 2020 , respectively. The term B loans are due and payable in quarterly installments, which began onSeptember 30, 2019 . Amounts outstanding atJuly 4, 2021 are due and payable as follows: (i) nineteen quarterly installments of$1.1 million ; (ii) one final payment of$153.8 million onApril 30, 2026 . As ofJuly 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 atJuly 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 atJuly 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 atJuly 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. InMarch 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 onFebruary 28, 2025 and has a notional amount of$220.0 million atJuly 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 endedJuly 4, 2021 , respectively. The fair value of our interest rate swap agreement was a liability of$2.5 million as ofJuly 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 ofJanuary 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 endedJanuary 3, 2021 . There have been no significant changes to our contractual obligations during the three months endedJuly 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". 44 -------------------------------------------------------------------------------- Table of Contents 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 inthe 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 endedJanuary 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 endedJanuary 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 endedJanuary 3, 2021 : •The impact of the COVID-19 pandemic; •Effectiveness of the Burger King andPopeyes 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; 45
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Table of Contents •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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