The following Management's Discussion and Analysis of financial condition and results of operations ("MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying notes. Any reference to restaurants refers to Company-owned restaurants unless otherwise indicated. Throughout this MD&A, we refer toFiesta Restaurant Group, Inc. , together with its consolidated subsidiaries, as "Fiesta," "we," "our" and "us." We use a 52-53 week fiscal year ending on the Sunday closest toDecember 31 . The fiscal year endedJanuary 3, 2021 contained 53 weeks. The three and nine months endedOctober 3, 2021 andSeptember 27, 2020 each contained thirteen weeks. The fiscal year endingJanuary 2, 2022 will contain 52 weeks. Company Overview Prior to the sale of our Taco Cabana brand onAugust 16, 2021 , we owned, operated and franchised two restaurant brands, Pollo Tropical® and Taco Cabana®, which have over 30 and 40 years, respectively, of operating history and loyal customer bases. Our Pollo Tropical restaurants feature fire-grilled and crispy citrus marinated chicken and other freshly prepared menu items, while Taco Cabana restaurants specialize in Mexican-inspired food with most items made fresh. The Taco Cabana brand is included in discontinued operations in the condensed consolidated financial statements for all periods presented. We believe that Pollo Tropical offers a distinct and unique flavor with broad appeal at a compelling value, which differentiates it in the competitive fast-casual and quick-service restaurant segments. Nearly all of our restaurants offer the convenience of drive-thru windows. As ofOctober 3, 2021 , we operated 138Pollo Tropical Company -owned restaurants, all of which are located inFlorida . We franchise our Pollo Tropical restaurants primarily internationally and as ofOctober 3, 2021 , we had 24 franchised Pollo Tropical restaurants located inPuerto Rico ,Panama ,Guyana ,Ecuador , theBahamas , and theU.S. Virgin Islands , five on college campuses inFlorida , and locations at a hospital and a sports and entertainment stadium inFlorida . We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets. Recent Events Affecting Our Results of Operations Sale of Taco Cabana OnJuly 1, 2021 , we entered into a stock purchase agreement for the sale of all outstanding capital stock ofTaco Cabana, Inc. , the parent company of the Taco Cabana business, for a cash purchase price of$85.0 million , subject to reduction for (i) closing adjustments of approximately$4.6 million related to maintenance and repair work at the Taco Cabana restaurants and landscaping replacement as a result of Winter Storm Uri, and (ii) certain other working capital adjustments as set forth in the stock purchase agreement (the "Taco Cabana Divestiture"). The transaction was completedAugust 16, 2021 , and the Company recognized a gain on the sale of Taco Cabana of$24.1 million during the three months endedOctober 3, 2021 , which is included within income from discontinued operations, net of tax, in the condensed consolidated statements of operations. See Note 2-Dispositions in our unaudited condensed consolidated financial statements. Proceeds from the sale were used to fully repay Fiesta's approximately$74.6 million of outstanding term loan borrowings under our senior credit facility and to pay divestiture transaction fees and a loan prepayment premium totaling approximately$4.2 million , comprised of a loan prepayment fee of 3.0% of the principal repaid of$2.2 million and divestiture transaction fees estimated at approximately$2.0 million . All revenues, costs and expenses and income taxes attributable to Taco Cabana, together with the gain on the sale of Taco Cabana and certain costs related to the transaction, have been aggregated within income (loss) from discontinued operations, net of tax, in the condensed consolidated statements of operations for all periods presented. No amounts for shared general and administrative operating support expense were allocated to discontinued operations. Interest expenses, the amortization of premiums and debt issuance costs of the senior credit facility and the loss on extinguishment of the senior credit facility are included within income (loss) from discontinued operations, net of tax. The results from discontinued operations are presented separately from the results from continuing operations within MD&A. Unless otherwise noted, amounts and disclosures throughout the MD&A relate to the Company's continuing operations. 24 -------------------------------------------------------------------------------- Table of Contents COVID-19 Pandemic The novel coronavirus (COVID-19) pandemic has affected and is continuing to affect the restaurant industry and the economy. In response to COVID-19 and in compliance with governmental restrictions, we closed the dining room seating areas in all restaurants, limiting service to take-out, drive-thru, and delivery operations beginning inmid-March 2020 . We re-opened certain dining rooms with limited capacity and hours during certain times in the second half of 2020. In 2021, we re-opened substantially all remaining dining rooms with limited hours by the end of February. We currently do not expect sales trends to significantly deteriorate further, although there can be no assurance that sales trends will not deteriorate further, and we have implemented measures to control or mitigate costs. Labor Challenges Hours of operations have been limited due to labor shortages which are affecting our brand and the restaurant industry. In the third quarter of 2021, we estimate that operating hours were reduced by approximately 3.8% as a result of labor shortages. Additionally, we experienced increased overtime due to training and staffing shortages. In response to these labor shortages and competition for labor, we implemented special incentive pay for our hourly restaurant employees fromMay 2021 throughAugust 2021 , provided sign-on and referral bonuses, and made permanent increases to hourly wage rates in lateAugust 2021 . To mitigate these additional labor costs, we increased menu prices by 3.7% in lateAugust 2021 and are planning price increases in the fourth quarter of 2021. This phased approach to price increases trails the wage rate increases and will result in improved labor margins in future quarters compared to the third quarter of 2021. In addition, we believe that approximately$0.9 million of the labor cost increases in the third quarter of 2021 for overtime and staffing-related incentives are short term in nature. We have intensified our focus on accelerating labor optimization efforts to improve staffing efficiency, which we believe will increase both staff availability and margins. Executive Summary-Consolidated Operating Performance for the Three Months EndedOctober 3, 2021 Our third quarter 2021 results and highlights include the following: •We recognized net income of$17.3 million , or$0.66 per diluted share, in the third quarter of 2021 compared to a net income of$4.6 million , or$0.18 per diluted share, in the third quarter of 2020 due primarily to the impact of income from discontinued operations of$20.5 million in the third quarter of 2021 compared to$0.2 million in the third quarter of 2020 due primarily to the gain on the sale of Taco Cabana. Higher Pollo Tropical labor costs, advertising costs, general and administrative expenses, repair and maintenance costs and delivery fees in the third quarter of 2021 were partially offset by increased comparable restaurant sales at Pollo Tropical and lower impairment and other lease charges in the third quarter of 2021. In addition, a gain on the sale-leaseback of owned properties in the third quarter of 2020 and an income tax benefit related to reducing our deferred tax asset valuation allowance and reclassifying certain assets as qualified improvement property and other changes to depreciation methods for certain assets in conjunction with filing our 2019 federal income tax return in 2020 contributed to lower income from continuing operations in the third quarter of 2021 compared to the third quarter of 2020. •We recognized a loss from continuing operations of$(3.2) million , or$(0.12) per diluted share, in the third quarter of 2021 compared to income from continuing operations of$4.4 million , or$0.17 per diluted share, in the third quarter of 2020 primarily as a result of the foregoing. •Total revenues increased 13.7% in the third quarter of 2021 to$88.6 million compared to$77.9 million in the third quarter of 2020, driven by an increase in comparable restaurant sales at Pollo Tropical due in part to lapping the impact of the pandemic in 2020. Comparable restaurant sales increased 13.8% for our Pollo Tropical restaurants resulting from an increase in comparable restaurant transactions of 4.2% and an increase in the net impact of product/channel mix and pricing of 9.6%. •Continuing Operations Consolidated Adjusted EBITDA decreased$4.5 million in the third quarter of 2021 to$3.7 million compared to$8.2 million in the third quarter of 2020, driven primarily by higher labor costs, advertising costs, general and administrative expenses, repair and maintenance costs and delivery fees, partially offset by higher restaurant sales. Continuing Operations Consolidated Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Continuing Operations Consolidated Adjusted EBITDA and a reconciliation from net income to Continuing Operations Consolidated Adjusted EBITDA, see "Management's Use of Non-GAAP Financial Measures." •Within discontinued operations, the impact of the gain on the sale of Taco Cabana, the impact of classifying Taco Cabana as held for sale-including the absence of depreciation and amortization related to property and equipment and lease ROU assets-in the third quarter of 2021, and higher Taco Cabana restaurant sales were partially offset by a loss on extinguishment of the outstanding term loan borrowings under our senior credit facility, higher interest costs and additional costs related to the sale of Taco Cabana. 25 -------------------------------------------------------------------------------- Table of Contents Results of Operations Unless otherwise noted, this discussion of operating results relates to our continuing operations. The following table summarizes the changes in the number and mix ofPollo Tropical Company -owned and franchised restaurants. Pollo Tropical Owned Franchised Total January 3, 2021 138 29 167 New - - - Closed - - - April 4, 2021 138 29 167 New - - - Closed - - - July 4, 2021 138 29 167 New - 2 2 Closed - - - October 3, 2021 138 31 169 December 29, 2019 142 32 174 New - 1 1 Closed (1) - (1) March 29, 2020 141 33 174 New - - - Closed - - - June 28, 2020 141 33 174 New - - - Closed (3) - (3) September 27, 2020 138 33 171 Three Months EndedOctober 3, 2021 Compared to Three Months EndedSeptember 27, 2020 The following table sets forth, for the three months endedOctober 3, 2021 andSeptember 27, 2020 , selected operating results as a percentage of restaurant sales. Three Months Ended October 3, 2021 September 27, 2020 Pollo Tropical Costs and expenses: Cost of sales 30.7 % 31.7 % Restaurant wages and related expenses 28.0 % 23.3 % Restaurant rent expense 6.7 % 7.2 % Other restaurant operating expenses 16.7 % 15.6 % Advertising expense 3.1 % 1.1 % Revenues. Revenues include restaurant sales and franchise royalty revenues and fees. Restaurant sales consist of food and beverage sales, net of discounts, at our restaurants. Franchise royalty revenues and fees represent ongoing royalty payments that are determined based on a percentage of franchisee sales and the amortization of initial franchise fees and area development fees associated with the opening of new franchised restaurants. Restaurant sales are influenced by new restaurant openings, closures of restaurants and changes in comparable restaurant sales. 26 -------------------------------------------------------------------------------- Table of Contents Total revenues increased 13.7% to$88.6 million in the third quarter of 2021 from$77.9 million in the third quarter of 2020. Restaurant sales increased 13.4% to$88.0 million in the third quarter of 2021 from$77.6 million in the third quarter of 2020. The following table presents the primary drivers of the increase in restaurant sales for Pollo Tropical for the third quarter of 2021 compared to the third quarter of 2020 (in millions). Pollo Tropical: Increase in comparable restaurant sales$ 10.6 Decrease in sales related to closed restaurants, including a temporary closure (0.2) Total increase$ 10.4 Restaurants are included in comparable restaurant sales after they have been open for 18 months. Restaurants are excluded from comparable restaurant sales for any fiscal month in which the restaurant was closed for more than five days. Comparable restaurant sales are compared to the same period in the prior year. As a result of the 53rd week in fiscal 2020, our 2021 fiscal year began one week later than our 2020 fiscal year. Changes in comparable restaurant sales are impacted by the shift in weeks as the thirteen weeks endedOctober 3, 2021 are not directly comparable on a calendar basis to the thirteen weeks endedSeptember 27, 2020 . Comparable restaurant sales increased 13.8% for Pollo Tropical restaurants in the third quarter of 2021 compared to the third quarter of 2020. Increases or decreases in comparable restaurant sales result primarily from an increase or decrease in comparable restaurant transactions and in average check. Changes in average check are primarily driven by changes in sales channel and sales mix, and to a lesser extent, menu price increases net of discounts and promotions. For Pollo Tropical, an increase in the net impact of product/channel mix and pricing of 9.6% was coupled with an increase in comparable restaurant transactions of 4.2% in the third quarter of 2021 compared to the third quarter of 2020. The increase in product/channel mix and pricing was driven primarily by increases in dine-in, delivery, and drive-thru average check, and menu price increases of 5.7%. Comparable restaurant sales in the third quarter of 2020 for Pollo Tropical were negatively impacted by governmental restrictions at the onset of the COVID-19 pandemic. Comparable restaurant sales for Pollo Tropical in the third quarter of 2021 increased 0.9% compared to the same fiscal period in 2019. The third quarter of 2019 was negatively affected by the impact of Hurricane Dorian. We believe restaurant sales were negatively impacted by reduced operating hours due to labor shortages. Franchise revenues increased by$0.2 million to$0.6 million in the third quarter of 2021 compared to the third quarter of 2020 due to higher sales at franchised restaurants in 2021 primarily as a result of the impact of COVID-19 in 2020. Operating Costs and Expenses. Operating costs and expenses include cost of sales, restaurant wages and related expenses, other restaurant expenses and advertising expenses. Cost of sales consists of food, paper and beverage costs including packaging costs, less rebates and purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities, including chicken and beef, are generally purchased under contracts for future periods of up to one year. Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related taxes and benefits are subject to inflation, including minimum wage increases and changes in costs for health insurance, workers' compensation insurance and state unemployment insurance. Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are utilities, repairs and maintenance, general liability insurance, sanitation, supplies and credit card and delivery fees. Advertising expense includes all promotional expenses including television, radio, billboards and other sponsorships and promotional activities and agency fees. Pre-opening costs include costs incurred prior to opening a restaurant, including restaurant employee wages and related expenses, travel expenditures, recruiting, training, promotional costs associated with the restaurant opening and rent, including any non-cash rent expense recognized during the construction period. Pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening. 27 -------------------------------------------------------------------------------- Table of Contents The following table presents the primary drivers of the changes in the components of restaurant operating margins for the third quarter of 2021 compared to the third quarter of 2020. All percentages are stated as a percentage of restaurant sales: Pollo Tropical: Cost of sales: Menu price increases (1.0) % Sales mix (0.7) % Lower promotions and discounts (0.3) % Higher commodity cost 0.7 % Operating inefficiency 0.4 % Other (0.1) % Net decrease in cost of sales as a percentage of restaurant sales
(1.0) %
Restaurant wages and related expenses: Higher labor costs due to higher wage rates and overtime(1) 3.1 %
Higher other labor costs including special incentive pay and sign-on bonuses
1.3 % Higher payroll taxes due to higher wage rates and overtime(1) 0.4 % Higher incentive bonus(2) 0.1 %
Lower medical benefits costs including the impact of higher sales
(0.4) %
Other 0.2 %
Net increase in restaurant wages and related costs as a percentage of restaurant sales
4.7 % Other operating expenses: Higher repair and maintenance costs 0.6 %
Higher delivery fee expense due to increased delivery channel sales
0.6 % Higher restaurant operating supplies 0.3 % Impact of higher restaurant sales on utilities costs
(0.3) %
Other (0.1) % Net increase in other restaurant operating expenses as a percentage of restaurant sales 1.1 % Advertising expense: Increased advertising 2.0 %
Net increase in advertising expense as a percentage of restaurant sales
2.0 % (1) Higher wage rates, overtime pay and payroll taxes due in part to labor shortages in 2021. (2) Primarily due to guaranteed bonus payments. Restaurant Rent Expense. Restaurant rent expense includes base rent, contingent rent and common area maintenance and property taxes related to our leases characterized as operating leases. Restaurant rent expense, as a percentage of total restaurant sales, decreased to 6.7% in the third quarter of 2021 from 7.2% in the third quarter of 2020 due primarily to the impact of higher restaurant sales which were partially offset by higher rental costs related to sale-leasebacks and renewed leases. General and Administrative Expenses. General and administrative expenses are comprised primarily of (1) salaries and expenses associated with the development and support of our Company and brand and the management oversight of the operation of our restaurants; and (2) legal, auditing and other professional fees, corporate system costs, and stock-based compensation expense. 28 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses were$11.2 million for the third quarter of 2021 and$9.1 million for the third quarter of 2020, and as a percentage of total revenues, general and administrative expenses increased to 12.6% in the third quarter of 2021 compared to 11.7% in the third quarter of 2020, due primarily to continuing mobile app development and maintenance costs and higher incentive-primarily stock-based compensation-and other support costs. General and administrative expenses include corporate overhead costs allocated to Taco Cabana that are not included in discontinued operations. General and administrative expenses for the third quarter of 2021 included$0.6 million related to digital and brand repositioning costs. General and administrative expenses for the third quarter of 2020 included$0.1 million related to severance costs associated with positions eliminated in response to the COVID-19 pandemic and$0.1 million related to digital and brand repositioning costs. Adjusted EBITDA. Adjusted EBITDA is the primary measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance and is defined as earnings attributable to the applicable segment before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants. Adjusted EBITDA may not necessarily be comparable to other similarly titled captions of other companies due to differences in methods of calculation. Adjusted EBITDA includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, development, and other administrative functions. Consolidated Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Adjusted EBITDA and Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see the heading entitled "Management's Use of Non-GAAP Financial Measures." Adjusted EBITDA. Adjusted EBITDA for Pollo Tropical decreased to$6.3 million , or 7.1% of total revenues, in the third quarter of 2021 from$10.6 million , or 13.6% of total revenues, in the third quarter of 2020 due primarily to higher labor costs, advertising costs, repair and maintenance costs, and delivery fees, partially offset by the impact of higher restaurant sales and improved cost of sales margins. Continuing Operations Consolidated Adjusted EBITDA, a non-GAAP financial measure, decreased to$3.7 million in the third quarter of 2021 from$8.2 million in the third quarter of 2020. For a reconciliation from net income to Continuing Operations Consolidated Adjusted EBITDA, see the heading entitled "Management's Use of Non-GAAP Financial Measures." Restaurant-level Adjusted EBITDA. We also use Restaurant-level Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-level Adjusted EBITDA for Pollo Tropical decreased to$13.0 million , or 14.8% of restaurant sales, in the third quarter of 2021 from$16.4 million , or 21.2% of restaurant sales, in the third quarter of 2020 primarily due to the foregoing. For a reconciliation from Adjusted EBITDA to Restaurant-level Adjusted EBITDA, see the heading entitled "Management's Use of Non-GAAP Financial Measures." Depreciation and Amortization. Depreciation and amortization expense decreased to$5.3 million in the third quarter of 2021 from$5.4 million in the third quarter of 2020 due primarily to decreased depreciation as a result of entering into sale-leaseback transactions for several owned restaurant locations and impairing closed restaurant assets, partially offset by an increase in depreciation related to ongoing reinvestment and enhancements to our restaurants that have been made since the third quarter of 2020. s Impairment and Other Lease Charges. Impairment and other lease charges was less than$0.1 million in the third quarter of 2021 compared to charges of$2.4 million in the third quarter of 2020. Impairment and other lease charges for the three months endedSeptember 27, 2020 for Pollo Tropical include impairment charges of$2.6 million related primarily to the write-down of saucing islands and self-service soda machines that were removed from dining rooms as a result of COVID-19 and a gain of$(0.2) million from lease terminations. 29 -------------------------------------------------------------------------------- Table of Contents Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related trailing twelve-month cash flows are below a certain threshold. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets, exclusive of operating lease payments, to their respective carrying values, excluding operating lease liabilities. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset group's carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, and for right-of-use lease assets, current market lease rent and discount rates, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material. Due to the uncertainty associated with the unprecedented nature of the COVID-19 pandemic and the impact it will have on our operations and future cash flows, it is reasonably possible that the estimates of future cash flows used in impairment assessments will change in the near term and the effect of the change could be material. For ten Pollo Tropical restaurants with combined carrying values (excluding right-of-use lease assets) of$6.6 million , projected cash flows are not substantially in excess of their carrying values. If the performance of these restaurants deteriorates from current projections, an impairment charge could be recognized in future periods, and such charge could be material. Closed Restaurant Rent Expense, Net of Sublease Income. Closed restaurant rent expense, net of sublease income was$0.7 million for the third quarter of 2021 and consisted of closed restaurant rent and ancillary lease costs of$2.3 million net of sublease income of$(1.6) million . Closed restaurant rent expense, net of sublease income was$0.9 million for the third quarter of 2020 and consisted of closed restaurant rent and ancillary lease costs of$2.3 million net of sublease income of$(1.4) million . Other Expense (Income), Net. Other expense (income), net for the third quarter of 2021 primarily consisted of costs for the transfer and storage of equipment from closed restaurants and other closed restaurant related costs of$0.1 million . Other expense, net was$(1.4) million for the third quarter of 2020 and primarily consisted of total gains of$(1.6) million on the sale-leaseback of two restaurant properties and the sale of one restaurant property, partially offset by the costs for the removal, transfer, and storage of equipment from closed restaurants and other closed restaurant related costs of$0.2 million . Interest Expense. Interest expense increased to$0.2 million in the third quarter of 2021 compared to$0.1 million the third quarter of 2020. Benefit from Income Taxes. The effective tax rate was 19.1% and (14,606.7)% for the third quarter of 2021 and 2020, respectively. The benefit from income taxes for the third quarter of 2021 and 2020 was derived using the actual effective tax rate for the year-to-date period, which includes changes in the valuation allowance as a result of originating temporary differences during the year. The benefit from income taxes in the third quarter of 2020 includes a$1.9 million benefit as a result of reclassifying certain assets as qualified improvement property as permitted by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and other changes to depreciation methods for certain assets made in conjunction with a cost segregation study conducted prior to filing our 2019 federal income tax return and a$2.5 million adjustment to reduce our deferred tax valuation allowance related to this reclassification and filing our 2019 federal income tax returns. The CARES Act includes provisions that eliminate the 80% of taxable income limitation for certain net operating loss carryforward deductions and allow net operating losses arising in 2018, 2019, and 2020 to be carried back for up to five years and includes technical amendments that are retroactive to 2018 which permit certain assets to be classified as qualified improvement property and expensed immediately. Income from Discontinued Operations. All revenues, costs and expenses and income taxes attributable to Taco Cabana have been aggregated within income (loss) from discontinued operations, net of tax, in the consolidated statements of operations for all periods presented. Taco Cabana results of operations are included throughAugust 15, 2021 in the third quarter of 2021 compared to a full quarter in the third quarter of 2020 due to the sale of Taco Cabana onAugust 16, 2021 . A gain of$24.1 million was recognized on the sale of Taco Cabana in the third quarter of 2021. See Note 2-Dispositions in our unaudited condensed consolidated financial statements. Net Income. As a result of the foregoing, we had net income of$17.3 million in the third quarter of 2021 compared to net income of$4.6 million in the third quarter of 2020. 30 -------------------------------------------------------------------------------- Table of Contents Nine Months EndedOctober 3, 2021 Compared to Nine Months EndedSeptember 27, 2020 The following table sets forth, for the nine months endedOctober 3, 2021 andSeptember 27, 2020 , selected operating results as a percentage of restaurant sales: Nine Months Ended October 3, 2021 September 27, 2020 Pollo Tropical Costs and expenses: Cost of sales 30.7 % 32.1 % Restaurant wages and related expenses 25.1 % 23.9 % Restaurant rent expense 6.6 % 7.5 % Other restaurant operating expenses 15.7 % 15.5 % Advertising expense 3.0 % 2.4 % Revenues. Total revenues increased 17.8% to$268.0 million in the nine months endedOctober 3, 2021 from$227.5 million in the nine months endedSeptember 27, 2020 . Restaurant sales increased 17.7% to$266.6 million in the nine months endedOctober 3, 2021 from$226.6 million in the nine months endedSeptember 27, 2020 . The following table presents the primary drivers of the increase in restaurant sales for Pollo Tropical for the nine months endedOctober 3, 2021 compared to the nine months endedSeptember 27, 2020 (in millions): Pollo Tropical: Increase in comparable restaurant sales$ 41.4 Decrease in sales related to closed restaurants, including a temporary closure (1.4) Total increase$ 40.0 Comparable restaurant sales for Pollo Tropical restaurants increased 18.6% in the nine months endedOctober 3, 2021 . Comparable restaurant sales were significantly impacted by governmental restrictions, closed dining rooms, reductions in operating hours and reduced staffing as a result of COVID-19 in 2020. For Pollo Tropical, an increase in the net impact of product/channel mix and pricing of 12.9% was coupled with an increase in comparable restaurant transactions of 5.7% in the nine months endedOctober 3, 2021 compared to the nine months endedSeptember 27, 2020 . The increase in product/channel mix and pricing was driven primarily by increases in delivery and drive-thru average check and sales channel penetration, and menu price increases of 3.6%. Comparable restaurant sales for Pollo Tropical in the nine months endedOctober 3, 2021 decreased 1.4% compared to the same fiscal period in 2019. Hurricane Dorian negatively impacted comparable restaurant sales in 2019. We believe restaurant sales were negatively impacted by reduced operating hours due to labor shortages. Franchise revenues increased by$0.5 million to$1.3 million in the nine months endedOctober 3, 2021 compared to the nine months endedSeptember 27, 2020 due to higher sales at franchised restaurants in 2021 primarily as a result of the impact of COVID-19 in 2020. 31 -------------------------------------------------------------------------------- Table of Contents The following table presents the primary drivers of the changes in the components of restaurant operating margins for the nine months endedOctober 3, 2021 compared to the nine months endedSeptember 27, 2020 . All percentages are stated as a percentage of restaurant sales. Pollo Tropical: Cost of sales: Lower promotions and discounts (0.8) % Menu price increases (0.6) % Sales mix (0.6) % Higher commodity costs 0.5 % Other 0.1 %
Net decrease in cost of sales as a percentage of restaurant sales
(1.4) %
Restaurant wages and related expenses: Higher labor costs due to higher wage rates and overtime partially offset by the impact of higher restaurant sales(1)
0.8 % Higher incentive bonus(2) 0.4 % Higher other labor costs including special incentive pay and sign-on bonuses 0.3 % Lower medical benefits costs (0.5) % Other 0.2 %
Net increase in restaurant wages and related costs as a percentage of restaurant sales
1.2 % Other operating expenses: Higher delivery fee expense due to increased delivery channel sales 0.8 % Higher repair and maintenance costs 0.4 % Impact of higher restaurant sales on utilities cost (0.4) % Lower insurance costs (0.2) % Lower sanitation costs (0.1) % Other(3) (0.3) % Net increase in other restaurant operating expenses as a percentage of restaurant sales 0.2 % Advertising expense: Increased advertising 0.6 %
Net increase in advertising expense as a percentage of restaurant sales
0.6 % (1) Higher wage rates, overtime pay due in part to labor shortages in 2021. (2) Primarily due to guaranteed bonus payments. Guaranteed bonus payments, which were lower in 2020, are included in other labor costs above in 2020. (3) Consists of lower linen and uniform expense including masks, cleaning services and the impact of higher restaurant sales. Restaurant Rent Expense. Restaurant rent expense, as a percentage of total restaurant sales, decreased to 6.6% in the nine months endedOctober 3, 2021 from 7.5% in the nine months endedSeptember 27, 2020 due primarily to the impact of higher comparable restaurant sales which were partially offset by higher rental costs related to sale-leasebacks and renewed leases. 32 -------------------------------------------------------------------------------- Table of Contents General and Administrative Expenses. General and administrative expenses were$32.9 million for the nine months endedOctober 3, 2021 and$28.6 million for the nine months endedSeptember 27, 2020 and, as a percentage of total revenues, general and administrative expenses decreased to 12.3% in the nine months endedOctober 3, 2021 compared to 12.6% in the nine months endedSeptember 27, 2020 due primarily to the impact of higher total revenues partially offset by higher continuing mobile app development and maintenance costs and higher incentive and other support costs. General and administrative expenses include corporate overhead costs allocated to Taco Cabana that are not included in discontinued operations. General and administrative expense for the nine months endedOctober 3, 2021 included$1.7 million related to digital and brand repositioning costs. General and administrative expenses for the nine months endedSeptember 27, 2020 included$0.7 million related to severance costs associated with positions eliminated in response to the COVID-19 pandemic,$0.2 million related to digital and brand repositioning costs and$0.1 million related to search fees for senior executive positions. Adjusted EBITDA. Adjusted EBITDA for Pollo Tropical increased to$30.6 million , or 11.4% of total revenues, in the nine months endedOctober 3, 2021 from$24.4 million , or 10.7% of total revenues, in the nine months endedSeptember 27, 2020 due primarily to the impact of higher restaurant sales and improved cost of sales margins, partially offset by higher labor costs and delivery fees. Continuing Operations Consolidated Adjusted EBITDA, a non-GAAP financial measure, increased to$22.5 million in the nine months endedOctober 3, 2021 from$16.9 million in the nine months endedSeptember 27, 2020 . For a reconciliation from net income to Continuing Operations Consolidated Adjusted EBITDA, see the heading entitled "Management's Use of Non-GAAP Financial Measures." Restaurant-level Adjusted EBITDA. Restaurant-level Adjusted EBITDA, a non-GAAP financial measure, for Pollo Tropical increased to$50.3 million , or 18.9% of restaurant sales, in the nine months endedOctober 3, 2021 from$42.2 million , or 18.6% of restaurant sales, in the nine months endedSeptember 27, 2020 due primarily to the foregoing. For a reconciliation from Adjusted EBITDA to Restaurant-level Adjusted EBITDA, see the heading entitled "Management's Use of Non-GAAP Financial Measures." Depreciation and Amortization. Depreciation and amortization expense decreased to$15.3 million in the nine months endedOctober 3, 2021 from$16.4 million in the nine months endedSeptember 27, 2020 due primarily to decreased depreciation as a result of entering into sale-leaseback transactions for several owned restaurant locations and impairing closed restaurant assets, partially offset by an increase in depreciation related to ongoing reinvestment and enhancements to our restaurants that have been made since the third quarter of 2020. Impairment and Other Lease Charges. Impairment and other lease charges decreased to$(0.2) million in the nine months endedOctober 3, 2021 from$8.0 million in the nine months endedSeptember 27, 2020 . Impairment and other lease charges for the nine months endedOctober 3, 2021 include net gains from lease terminations of$(0.4) million , partially offset by impairment charges of$0.2 million related primarily to impairment of equipment from previously impaired and closed restaurants. Impairment and other lease charges for the nine months endedSeptember 27, 2020 for Pollo Tropical include impairment charges of$7.3 million related primarily to the impairment of assets from three underperforming Pollo Tropical restaurants, two of which we closed in the third quarter of 2020, the write-down of assets held for sale to their fair value less costs to sell, and the write-down of saucing islands and self-service soda machines that were removed from dining rooms as a result of COVID-19, and lease termination charges of$0.9 million for restaurant locations we decided not to develop, net of a gain of$(0.2) million from a lease termination. Closed Restaurant Rent Expense, Net of Sublease Income. Closed restaurant rent expense, net of sublease income was$2.4 million for the nine months endedOctober 3, 2021 and consisted of closed restaurant rent and ancillary lease costs of$6.9 million net of sublease income of$(4.5) million . Closed restaurant rent expense, net of sublease income was$3.3 million for the nine months endedSeptember 27, 2020 and consisted of closed restaurant rent and ancillary lease costs of$6.9 million net of sublease income of$(3.6) million . Other Expense (Income), Net. Other expense, net was$0.4 million for the nine months endedOctober 3, 2021 and primarily consisted of costs for the removal, transfer, and storage of equipment from closed restaurants and other closed restaurant related costs. Other income, net was$(0.4) million for the nine months endedSeptember 27, 2020 and primarily consisted of total gains of$(1.6) million on the sale-leaseback of two restaurant properties and the sale of one restaurant property, partially offset by$0.6 million for the write-off of site development costs and$0.5 million in costs for the removal, transfer, and storage of equipment from closed restaurants. 33 -------------------------------------------------------------------------------- Table of Contents Interest Expense. Interest expense increased to$0.3 million for the nine months endedOctober 3, 2021 compared to$0.2 million for the nine months endedSeptember 27, 2020 . Provision for (Benefit from) Income Taxes. The effective tax rate was 648.9% and 55.9% for the nine months endedOctober 3, 2021 andSeptember 27, 2020 , respectively. The provision for income taxes for the nine months endedOctober 3, 2021 was derived using the actual effective tax rate for the year to date period, which includes changes in the valuation allowance as a result of originating temporary differences during the year and excludes an out-of-period adjustment that increased our income tax provision. The benefit from income taxes for the nine months endedSeptember 27, 2020 was derived using the actual effective tax rate for the year to date period which includes a benefit of$1.9 million related to the carryback of net operating losses as a result of the CARES Act, a$1.9 million benefit as a result reclassifying certain assets as qualified improvement property as permitted by the CARES Act and other changes to depreciation methods for certain assets made in conjunction with a cost segregation study conducted prior to filing our 2019 federal income tax return, a$2.5 million adjustment to reduce our deferred tax valuation allowance related to this reclassification and filing our 2019 federal income tax returns. Income (Loss) from Discontinued Operations. Taco Cabana results of operations are included throughAugust 15, 2021 in the nine months endedOctober 3, 2021 compared to the full period in the nine months endedSeptember 27, 2020 due to the sale of Taco Cabana onAugust 16, 2021 . A gain of$24.1 million was recognized on the sale of Taco Cabana in the nine months endedOctober 3, 2021 . See Note 2-Dispositions in our unaudited condensed consolidated financial statements. Net Income (Loss). As a result of the foregoing, we had net income of$15.1 million for the nine months endedOctober 3, 2021 compared to a net loss of$(11.1) million for the nine months endedSeptember 27, 2020 . Liquidity and Capital Resources Unless otherwise noted, this discussion of liquidity and capital resources relates to our combined operations. We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. Although, as a result of our substantial cash balance, we did not have a working capital deficit atOctober 3, 2021 , we have the ability to operate with a substantial working capital deficit (and we have historically operated with a working capital deficit) because: •restaurant operations are primarily conducted on a cash basis; •rapid turnover results in a limited investment in inventories; and •cash from sales is usually received before related liabilities for supplies and payroll become due. Capital expenditures and payments related to our lease obligations represent significant liquidity requirements for us. We believe our cash reserves, cash generated from our operations, and availability of borrowings under our senior credit facility will provide sufficient cash availability to cover our anticipated working capital needs and capital expenditures for the next twelve months. We used the proceeds from the sale of Taco Cabana to repay the outstanding term loan under our senior credit facility in the third quarter of 2021. Operating Activities. Net cash provided by operating activities in the first nine months of 2021 and 2020 was$19.8 million and$47.0 million , respectively. The decrease in net cash provided by operating activities in the nine months endedOctober 3, 2021 was primarily driven by the timing of payments, including the impact of vendor and landlord payment term renegotiations in 2020. Investing Activities. Net cash provided by investing activities in the first nine months of 2021 was$63.8 million compared to net cash used in investing activities in the same period of 2020 of$2.8 million . Capital expenditures are generally the largest component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling/reimaging, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems. 34
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Table of Contents The following table sets forth our capital expenditures from continuing operations for the periods presented (dollars in thousands).
Pollo Continuing Tropical Other Operations Nine Months EndedOctober 3, 2021 : New restaurant development $ - $ - $ - Restaurant remodeling 737 - 737 Other restaurant capital expenditures(1) 6,798 - 6,798 Corporate and restaurant information systems 883 593 1,476 Total capital expenditures$ 8,418 $ 593 $ 9,011 Number of new restaurant openings - - Nine Months EndedSeptember 27, 2020 : New restaurant development$ 992 $ -$ 992 Restaurant remodeling 357 - 357 Other restaurant capital expenditures(1) 3,226 - 3,226 Corporate and restaurant information systems 926 1,071 1,997 Total capital expenditures$ 5,501 $ 1,071 $ 6,572 Number of new restaurant openings - - (1) Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our unaudited condensed consolidated financial statements. For the nine months endedOctober 3, 2021 andSeptember 27, 2020 , total restaurant repair and maintenance expenses were approximately$8.6 million and$6.6 million , respectively.
The following table sets forth our capital expenditures from discontinued operations for the periods presented (dollars in thousands).
Taco Cabana Nine Months EndedOctober 3, 2021 : New restaurant development $ - Restaurant remodeling 1,283
Other restaurant capital expenditures(1) 5,050 Corporate and restaurant information systems 169 Total capital expenditures
$ 6,502 Number of new restaurant openings - Nine Months EndedSeptember 27, 2020 : New restaurant development$ 854 Restaurant remodeling 730
Other restaurant capital expenditures(1) 2,621 Corporate and restaurant information systems 1,139 Total capital expenditures
$ 5,344 Number of new restaurant openings 1 (1) Excludes restaurant repair and maintenance expenses included in discontinued operations in our unaudited condensed consolidated financial statements. For the nine months endedOctober 3, 2021 andSeptember 27, 2020 , total restaurant repair and maintenance expenses from discontinued operations were approximately$5.5 million and$6.2 million , respectively. For the nine months endedOctober 3, 2021 , costs associated with repairs from Winter Storm Uri were approximately$1.5 million . Net cash used in investing activities from continuing operations in the first nine months of 2020 included net proceeds of$6.3 million from the sale-leaseback of two restaurant properties and$1.7 million from the sale of an additional restaurant property. 35 -------------------------------------------------------------------------------- Table of Contents Net cash provided by investing activities from discontinued operations in the first nine months of 2021 included net proceeds of$74.9 million from the sale of Taco Cabana,$3.1 million from the sale-leaseback of two restaurant properties and$1.3 million from the sale of an additional restaurant property. Net cash used in investing activities from discontinued operations in the first nine months of 2020 included net proceeds of$1.2 million from the sale of one restaurant property. Total capital expenditures in 2021 are expected to be between$25.0 million and 30.0 million, including approximately$6.5 million related to Taco Cabana prior to the sale onAugust 16, 2021 . Financing Activities. Net cash used in financing activities in the first nine months of 2021 was$81.4 million and included term loan borrowing repayments under our new senior credit facility of$75.0 million ,$3.9 million in payments to repurchase our common stock, and a$2.2 million payment for a premium associated with extinguishment of the term loan under our new senior credit facility. Net cash used in financing activities in the first nine months of 2020 included net revolving credit borrowing repayments under our former senior credit facility of$35.1 million and$3.7 million in payments to repurchase our common stock, as well as borrowings and subsequent repayment of funds pursuant to the Paycheck Protection Program under the CARES Act. New Senior Credit Facility. OnNovember 23, 2020 , we terminated our former amended senior secured revolving credit facility, referred to as the "former senior credit facility," and entered into a new senior secured credit facility, which is referred to as the "new senior credit facility." The new senior credit facility is comprised of a term loan facility (the "term loan facility") of$75.0 million and a revolving credit facility (the "revolving credit facility") of up to$10.0 million and matures onNovember 23, 2025 . The new senior credit facility also provides for potential incremental term loan borrowing increases of up to$37.5 million in the aggregate, subject to, among other items, compliance with a minimum Total Leverage Ratio and other terms specified in the new senior credit facility. As required by the terms of the new senior credit facility, the proceeds from the sale of Taco Cabana were used to fully repay our outstanding term loan borrowings onAugust 16, 2021 . The early repayment was subject to a 103% loan prepayment premium. The new senior credit facility provides that we must maintain minimum Liquidity (as defined in the new senior credit facility) of$20.0 million (the "Liquidity Threshold") untilJanuary 3, 2022 . The new senior credit facility also provides that we are not required to be in compliance with the Total Leverage Ratio under the new senior credit facility until the earlier ofJanuary 3, 2022 , or the date on which Liquidity is less than the Liquidity Threshold. We will be permitted to exercise equity cure rights with respect to compliance with the Total LeverageRatio subject to certain restrictions as set forth in the new senior credit facility. Borrowings under the new senior credit facility bear interest at a rate per annum, at our option, equal to either (all terms as defined in the new senior credit facility): 1) the Base Rate plus the Applicable Margin of 6.75% with a minimum Base Rate of 2.00%, or 2) the LIBOR (or Benchmark Replacement) Rate plus the Applicable Margin of 7.75%, with a minimum LIBOR (or Benchmark Replacement) Rate of 1.00%. In addition, the new senior credit facility requires us to pay a commitment fee of 0.50% per annum on the daily amount of the unused portion of the revolving credit facility. The outstanding borrowings under the revolving credit facility are prepayable without penalty or premium (other than customary breakage costs). The outstanding borrowings under the term loan facility were voluntarily prepayable by us, and the term loan facility provided that each of the following required a mandatory prepayment of outstanding term loan borrowings by us as follows: (i) 100% of any cash Net Proceeds (as defined in the new senior credit facility) in excess of$2.0 million individually or in the aggregate over the term of the new senior credit facility in respect of any Casualty Event (as defined in the new senior credit facility) affecting collateral provided that we were permitted to reinvest such Net Proceeds in accordance with the new senior credit facility, (ii) 100% of any Net Proceeds of a Specified Equity Contribution (as defined in the new senior credit facility), (iii) 100% of any cash Net Proceeds from the issuance of debt issued by us or our subsidiaries other than Permitted Debt (as defined in the new senior credit facility), (iv) 100% of any Net Proceeds from the Disposition (as defined in the new senior credit facility) of certain assets individually, or in the aggregate, in excess of$2.0 million in any fiscal year provided that we were permitted to reinvest such Net Proceeds in accordance with the new senior credit facility and (v) beginning with the fiscal year endingJanuary 2, 2022 , an amount equal to the Excess Cash Flow (as defined in the new senior credit facility) in accordance with the new senior credit facility. Our new senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of our indebtedness having an outstanding principal amount in excess of$5.0 million which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. 36 -------------------------------------------------------------------------------- Table of Contents The new senior credit facility contains certain covenants, including, without limitation, those limiting our ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of our business in any material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. Our obligations under the new senior credit facility are secured by all of our and our subsidiaries' assets (including a pledge of all of the capital stock and equity interests of our subsidiaries). Under the new senior credit facility, the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include, without limitation, payment default, covenant defaults, bankruptcy type defaults, defaults on other indebtedness, certain judgments or upon the occurrence of a change of control (as specified in the new senior credit facility). As ofOctober 3, 2021 , we were in compliance with the financial covenants under our new senior credit facility. AtOctober 3, 2021 ,$10.0 million was available for borrowing under the revolving credit facility. Former Senior Credit Facility. OnJuly 10, 2020 , we entered into the Second Amendment to Credit Agreement (as previously defined as the "former senior credit facility") among Fiesta and a syndicate of lenders. Pursuant to the former senior credit facility, the available revolving credit borrowings under the former senior credit facility were reduced from$150.0 million to$95.0 million in a phased reduction beginning with a$30.0 million permanent reduction that occurred onJuly 10, 2020 . The former senior secured credit facility was terminated onNovember 23, 2020 . Off-Balance Sheet Arrangements and Contractual Obligations We have no off-balance sheet arrangements. Except for the repayment of the outstanding term loan and removal of Taco Cabana lease obligations, there have been no significant changes outside the ordinary course of business to our contractual obligations sinceJanuary 3, 2021 . Information regarding our contractual obligations is included under "Contractual Obligations" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedJanuary 3, 2021 . Inflation The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses and energy costs. Labor costs in our restaurants are impacted by a number of factors such as labor supply and changing market conditions, as well as changes in the federal and state hourly minimum wage rates as well as changes in payroll related taxes, including federal and state unemployment taxes. Labor supply across other industries also negatively impacts the costs of supplies, commodities, logistics, and utilities. We typically attempt to mitigate the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to fully offset such inflationary cost increases in the future. Application of Critical Accounting Policies Our unaudited interim condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted 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 our consolidated financial statements for the year endedJanuary 3, 2021 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 for the nine months endedOctober 3, 2021 . 37 -------------------------------------------------------------------------------- Table of Contents Management's Use of Non-GAAP Financial Measures Consolidated Adjusted EBITDA (including Consolidated Continuing Operations Adjusted EBITDA, Continuing Operations Adjusted EBITDA, and Discontinued Operations Adjusted EBITDA) is a non-GAAP financial measure. We use Consolidated Adjusted EBITDA in addition to net income and income from operations to assess our performance, and we believe it is important for investors to be able to evaluate us using the same measures used by management. We believe this measure is an important indicator of our operational strength and the performance of our business and it provides a view of operations absent non-cash activity and items that are not related to the ongoing operation of our restaurants or affect comparability period over period. Consolidated Adjusted EBITDA as calculated by us is not necessarily comparable to similarly titled measures reported by other companies, and should not be considered as an alternative to net income (loss), earnings (loss) per share, cash flows from operating activities or other financial information determined under GAAP. The primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants as set forth in the reconciliation table below. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, construction and other administrative functions. See Note 7 to our unaudited condensed consolidated financial statements. We also use Restaurant-level Adjusted EBITDA as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Adjusted EBITDA for the applicable segment excluding franchise royalty revenues and fees, pre-opening costs, and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-level Adjusted EBITDA margin is derived by dividing Restaurant-level Adjusted EBITDA by restaurant sales. Restaurant-level Adjusted EBITDA is also a non-GAAP financial measure. Management believes that Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also these measures may not be comparable to similarly titled captions of other companies. All such financial measures have important limitations as analytical tools. These limitations include the following: •such financial information does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment; •such financial information does not reflect interest expense or the cash requirements necessary to service payments on our debt; •although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and such financial information does not reflect the cash required to fund such replacements; and •such financial information does not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges and gains (such as impairment and other lease charges, closed restaurant rent expense, net of sublease income, other income and expense and stock-based compensation expense) have recurred and may recur. 38
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Table of Contents A reconciliation from consolidated net loss to Continuing Operations Consolidated Adjusted EBITDA follows (in thousands). All amounts are from continuing operations unless otherwise indicated.
Three Months Ended Nine Months Ended September 27, September 27, October 3, 2021 2020 October 3, 2021 2020 Net income (loss)$ 17,262 $ 4,593 $ 15,090 $ (11,067) Loss (income) from discontinued operations, net of tax (20,493) (181) (16,336) 5,164 Provision for (benefit from) income taxes (763) (4,382) 1,473 (7,494) Income (loss) from continuing operations before income taxes (3,994) 30 227 (13,397)
Add:
Non-general and administrative adjustments: Depreciation and amortization 5,328 5,425 15,291 16,373 Impairment and other lease charges 30 2,395 (224) 8,023 Interest expense 160 83 282 209 Closed restaurant rent expense, net of sublease income 710 934 2,426 3,315 Other expense (income), net 138 (1,353) 431 (426) Stock-based compensation expense 13 15 44 53 Total non-general and administrative adjustments 6,379 7,499 18,250 27,547 General and administrative adjustments: Stock-based compensation expense 1,097 486 3,137 1,834 Restructuring costs and retention bonuses(1) - 101 18 686 Digital and brand repositioning costs(2) 193 54 844 246 Total general and administrative adjustments 1,290 641 3,999 2,766 Continuing Operations Consolidated Adjusted EBITDA$ 3,675 $ 8,170 $ 22,476 $ 16,916 Total revenues$ 88,592 $ 77,940 $ 267,962 $ 227,503 Continuing Operations Consolidated Adjusted EBITDA as a percentage of total revenues 4.1 % 10.5 % 8.4 % 7.4 % (1) Restructuring costs and retention bonuses for the three and nine months endedSeptember 27, 2020 include severance costs related to terminations in response to the COVID-19 pandemic. (2) Digital and brand repositioning costs for the three and nine months endedOctober 3, 2021 andSeptember 27, 2020 include consulting costs related to repositioning the digital experience for our customers. 39
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Table of Contents A reconciliation from Adjusted EBITDA to Restaurant-level Adjusted EBITDA follows (in thousands): Continuing Three Months Ended Pollo Tropical Other OperationsOctober 3, 2021 : Adjusted EBITDA(1)$ 6,324 $ (2,649) $ 3,675 Restaurant-level adjustments: Add: Other general and administrative expense(2) 7,297 2,580 9,877 Less: Franchise royalty revenue and fees 578 - 578 Restaurant-level Adjusted EBITDA(1)$ 13,043 $ (69) $ 12,974 Restaurant sales$ 88,014 $ 90,764 Restaurant-level Adjusted EBITDA as a percentage of restaurant sales 14.8 % 14.7 % September 27, 2020: Adjusted EBITDA(1)$ 10,621 $ (2,451) $ 8,170 Restaurant-level adjustments: Add: Pre-opening costs - - - Add: Other general and administrative expense(2) 6,145 2,348 8,493 Less: Franchise royalty revenue and fees 336 - 336 Restaurant-level Adjusted EBITDA(1)$ 16,430 $ (103) $ 16,327 Restaurant sales$ 77,604 $ 77,604 Restaurant-level Adjusted EBITDA as a percentage of restaurant sales 21.2 % 21.0 % Continuing Nine Months Ended Pollo Tropical Other Operations October 3, 2021: Adjusted EBITDA(1)(3)$ 30,620 $ (8,144) $ 22,476 Restaurant-level adjustments: Add: Pre-opening costs - - - Add: Other general and administrative expense(2) 21,045 7,839 28,884 Less: Franchise royalty revenue and fees 1,344 - 1,344 Restaurant-level Adjusted EBITDA(1)(3)$ 50,321 $ (305) $ 50,016 Restaurant sales$ 266,618 $ 266,618 Restaurant-level Adjusted EBITDA as a percentage of restaurant sales 18.9 % 18.8 % September 27, 2020: Adjusted EBITDA(1)$ 24,394 $ (7,478) $ 16,916 Restaurant-level adjustments: Add: Pre-opening costs - - - Add: Other general and administrative expense(2) 18,694 7,132 25,826 Less: Franchise royalty revenue and fees 886 - 886 Restaurant-level Adjusted EBITDA(1)$ 42,202 $ (346) $ 41,856 Restaurant sales$ 226,617 $ 226,617
Restaurant-level Adjusted EBITDA as a percentage of restaurant sales
18.6 % 18.5 %
(1) Corporate overhead that was previously allocated to Taco Cabana is now included within "Other" because it is not a component of discontinued operations. (2) Excludes general and administrative adjustments included in Adjusted EBITDA.
40 -------------------------------------------------------------------------------- Table of Contents Forward Looking Statements Matters discussed in this report and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, express or implied, regarding our anticipated growth, operating results, future earnings per share, plans, objectives, the impact of our other business initiatives, the impact of our initiatives designed to strengthen our liquidity and cash position, including those related to working capital efficiency initiatives and sales of real property and the impact of the COVID-19 pandemic and our initiatives designed to respond to the COVID-19 pandemic on future sales, margins, earnings and liquidity, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). These statements are often identified by the words "believe," "positioned," "estimate," "project," "plan," "goal," "target," "assumption," "continue," "intend," "expect," "future," "anticipate," and other similar expressions, whether in the negative or the affirmative, that are not statements of historical fact. These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict, and you should not place undue reliance on our forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this report and in our other public filings with theUnited States Securities and Exchange Commission ("SEC"). All forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this report or other periodic reports represent our estimates as of the date made and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. 41
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