FIESTA RESTAURANT GROUP, INC. 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 audited consolidated financial statements and the accompanying notes. Any reference to restaurants refers to company-owned restaurants unless otherwise indicated.
We use a 52- or 53-week fiscal year ending on the Sunday closest toDecember 31 . The fiscal years endedJanuary 1, 2023 andJanuary 2, 2022 each contained 52 weeks. The fiscal year endedJanuary 3, 2021 contained 53 weeks. The next fiscal year to contain 53 weeks will be the fiscal year endingJanuary 3, 2027 . 28
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Company Overview
We own, operate and franchise the restaurant brand Pollo Tropical®, which has nearly 35 years of operating history and a loyal customer base. Our Pollo Tropical restaurants feature fire-grilled and crispy citrus marinated chicken and other freshly prepared menu items. We believe the brand offers a distinct and unique flavor with broad appeal at a compelling value, which differentiates it in the competitive fast-casual and quick-service restaurant segments. All but one of our restaurants offer the convenience of drive-thru windows. As ofJanuary 1, 2023 , we had 137 Company-owned Pollo Tropical restaurants, all of which are located inFlorida . We franchise our Pollo Tropical restaurants primarily in international markets, and as ofJanuary 1, 2023 , we had 23 franchised Pollo Tropical restaurants located inPuerto Rico ,Panama ,Guyana ,Ecuador , and theBahamas , six on college campuses inFlorida and locations at a hospital and two sports and entertainment stadiums inFlorida . We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets.
Events Affecting Our Results of Operations
Hurricanes Ian and
During the second half of 2022,Florida was struck by Hurricanes Ian andNicole (the "Hurricanes"). In an effort to ensure the safety of our team members, select Pollo Tropical restaurants in the storm's path were closed in preparation and as a result of these Hurricanes. There was no significant facilities damage to Company-owned restaurants and we expect to file insurance claims upon completion of the final assessment of damages and losses. Due to the business disruption related to the Hurricanes, the Company incurred expenses totaling$0.5 million for spoiled inventory and for incremental labor costs from paying hourly employees for scheduled time not worked due to temporary restaurant closures. We estimate that the Hurricanes negatively impacted loss from operations by approximately$1.8 million and negatively impacted comparable restaurant sales and transactions by approximately 0.8% and 0.6%, respectively, for the year endedJanuary 1, 2023 .
Labor Challenges and Inflationary Factors
Throughout much of 2022, labor supply shortages impacted the entire restaurant industry as well as our operations. Hours of operations were limited across multiple channels due to labor shortages. In response to this challenge, we increased recruiting resources and offered additional payment incentives at the most affected locations as well as new hire sign-on bonuses. In addition, we benchmark our operations team wage rates and benefits on an ongoing basis to ensure our total compensation is market-competitive and the 2022 and 2023 hourly wage rates are above the required minimum levels for theState of Florida . As a result of our efforts and as overall labor supply improved, our staffing levels improved and stabilized during the second half of 2022 which enabled an increase in operating hours across all channels. Overall staffing levels at the end of the fourth quarter of 2022 recovered to the approximate staffing levels experienced in the first half of 2021 prior to the labor supply issues, although a small number of select locations continue to experience labor shortages. As a result of the improved staffing levels, the remaining payment incentives are targeted to be phased out in the first quarter of 2023. Inflationary factors have been experienced primarily in food costs and other operating costs categories. Commodity costs as a percentage of net sales increased 4.9% in the year endedJanuary 1, 2023 compared to the year endedJanuary 2, 2022 . Utilities costs as a percentage of net sales also increased 0.4% in 2022 compared to 2021 primarily due to higher energy prices in 2022. Pricing action has been taken to offset labor, food and other operating cost increases. In order to maintain value perceptions with our customers, we implemented a phased approach to menu price increases and took lower pricing increases on items purchased by value-conscious customers including our "Pollo Time" promotional items. Price increases include a 5.0% increase inMarch 2022 , a 1.4% increase inJune 2022 , and a 4.0% increase inSeptember 2022 . As a result of this phased approach to menu price increases, margin improvement is trailing the impact of cost increases noted above, with improved margins expected in future quarters compared to the year endedJanuary 1, 2023 , barring unforeseen changes in our cost structure and operating environment. 29
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COVID-19 Pandemic
The novel coronavirus (COVID-19) pandemic has affected and may continue to affect the restaurant industry and the economy. The impacts were most severe in 2020 and have improved over 2021 and 2022. Based on current conditions, we do not expect sales trends to significantly deteriorate further as a direct result of COVID-19. However, labor shortages may negatively impact sales trends and there can be no assurance that sales trends will not deteriorate further. We have implemented measures to control costs to mitigate any negative impact from the COVID-19 pandemic and labor shortages.
Executive Summary-Consolidated Operating Performance for the Year Ended
Our fiscal year 2022 results include the following:
•We recognized net loss of$(14.6) million , or$(0.58) per diluted share, in 2022 compared to net income of$10.4 million , or$0.40 per diluted share in 2021, due primarily to the impact of income from discontinued operations of$18.5 million in 2021 compared to$1.1 million in 2022. The loss in 2022 was primarily the result of higher cost of sales, restaurant operating expenses and general and administrative expenses. Higher Pollo Tropical commodity costs, labor costs, insurance costs, utilities costs, general and administrative expenses, and repair and maintenance costs in 2022 were partially offset by increased comparable restaurant sales at Pollo Tropical. •We recognized a loss from continuing operations of$(15.7) million , or$(0.62) per diluted share, in 2022 compared to a loss from continuing operations of$(8.1) million , or$(0.31) per diluted share, in 2021 primarily as a result of the foregoing. •Total revenues increased 8.4% in 2022 to$387.4 million from$357.3 million in 2021, driven primarily by an increase in comparable restaurant sales at Pollo Tropical. Comparable restaurant sales increased 9.1% for our Pollo Tropical restaurants resulting from an increase in the net impact of product/channel mix and pricing of 15.2%, partially offset by a decrease in comparable restaurant transactions of 6.1%. •Consolidated Adjusted EBITDA decreased$3.2 million for the year endedJanuary 1, 2023 to$21.8 million compared to$25.0 million for the year endedJanuary 2, 2022 , driven primarily by higher commodity costs, labor costs, insurance costs, utilities costs, general and administrative expenses, and repair and maintenance costs, partially offset by higher restaurant sales. Consolidated Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see "Management's Use of Non-GAAP Financial Measures." •Income from discontinued operations decreased$17.4 million for the year endedJanuary 1, 2023 to$1.1 million compared to$18.5 million for the year endedJanuary 2, 2022 , driven primarily by the impact of the gain on the sale ofTaco Cabana and related costs in 2021. Income from discontinued operations for the year endedJanuary 1, 2023 was primarily due to insurance proceeds received, partially offset by workers compensation and general liability claims.
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 of
2022 2021 2020
Owned Franchised Total Owned Franchised Total Owned Franchised Total
Beginning of year 138 31 169 138 29 167 142 32 174
New - 4 4 - 2 2 - 2 2
Closed (1) (3) (4) - - - (4) (5) (9)
End of year 137 32 169 138 31 169 138 29 167
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The following table sets forth, for the years endedJanuary 1, 2023 ,January 2, 2022 andJanuary 3, 2021 , selected operating results as a percentage of restaurant sales: Year Ended January 1, 2023 January 2, 2022 January 3, 2021 Costs and expenses: Cost of sales 32.3 % 30.5 % 31.9 % Restaurant wages and related expenses 25.3 % 25.8 % 23.7 % Restaurant rent expense 6.2 % 6.6 % 7.2 % Other restaurant operating expenses 17.5 % 16.2 % 15.2 % Advertising expense 3.3 % 3.2 % 2.7 % Revenues. Revenues include restaurant sales and franchise royalty revenues and fees. Restaurant sales consist of food and beverage sales, net of discounts, at our restaurants. Franchise royalty revenues and fees represent ongoing royalty payments that are determined based on a percentage of franchisee sales and the amortization of initial franchise fees and area development fees associated with the opening of new franchised restaurants. Restaurant sales are influenced by new restaurant openings, closures of restaurants and changes in comparable restaurant sales. Total revenues increased 8.4% to$387.4 million in 2022 from$357.3 million in 2021, while the 2021 total revenues represent an increase of 13.3% from$315.4 million in 2020. Restaurant sales increased 8.6% to$385.9 million in 2022 from$355.5 million in 2021, while 2021 restaurant sales represent an increase of 13.2% from$314.1 million in 2020.
The following table presents the primary drivers of the increase or decrease in restaurant sales for Pollo Tropical (in millions):
2022 vs. 2021 2021 vs. 2020
Increase in comparable restaurant sales $ 31.9
$ 48.7 Decrease in sales related to closed restaurants, including temporary and partial closures
(1.4) (1.5)
Additional week in 2020 - (5.8)
Total increase $ 30.5 $ 41.4
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.
For comparative purposes, the calculation of the changes in comparable
restaurant sales is based on a 52-week fiscal year. Restaurant sales for the
extra week in the fiscal year ended January 3, 2021 have been excluded for
purposes of calculating the change in comparable company-owned restaurant sales.
Comparable restaurant sales in 2020 were negatively impacted by governmental
restrictions, closed dining rooms, reductions in operating hours and reduced
staffing as a result of COVID-19. We believe our significant mix of dine-in
sales prior to the pandemic had a negative impact on comparable restaurant
sales.
Comparable restaurant sales increased 9.1% for Pollo Tropical restaurants in
2022. Increases or decreases in comparable restaurant sales result primarily
from an increase or decrease in comparable restaurant transactions and in
average check. Changes in average check are primarily driven by menu price
increases net of discounts and promotions and changes in sales channel and sales
mix.
An increase in the net impact of pricing and product/channel mix of 15.2% was
partially offset by a decrease in comparable restaurant transactions of 6.1% in
2022 compared to 2021. The increase in pricing and product/channel mix was
driven primarily by menu price increases of 14.4% and increases in dine-in and
delivery average check. We estimate that Hurricanes Ian and Nicole negatively
impacted comparable restaurant sales and transactions by approximately 0.8% and
0.6%, respectively, in 2022. We believe staffing challenges had a negative
impact on sales trends driven by reduced operating hours and sales channels in
2022. Comparable restaurant sales in 2022 were also negatively impacted by
remodels and refreshes that temporarily closed dine-in and counter take-out
operations.
Comparable restaurant sales increased 16.0% for Pollo Tropical in 2021. An
increase in the net impact of product/channel mix and pricing of 11.8% was
coupled with an increase in comparable restaurant transactions of 4.2% in 2021
compared to 2020. The increase in product/channel mix and pricing was driven
primarily by increases in delivery and drive-thru average
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check and sales channel penetration, and menu price increases of 4.6%. We believe restaurant sales were negatively impacted by staffing challenges and reduced operating hours and sales channels due to labor shortages in 2021. Comparable restaurant sales in adequately staffed markets increased 18.7% in 2021 compared to 2020. Franchise revenues decreased$0.4 million to$1.4 million in 2022 compared to 2021 due primarily to a temporary decrease in franchise royalty fees while a franchise agreement was being renegotiated. Franchise revenues increased$0.5 million to$1.8 million in 2021 compared to 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, are generally purchased under contracts for future periods of up to one year. Continuing inflation pressure is expected in 2023 compared to 2022 for certain food, packaging and utility costs and we are planning additional pricing measures to offset any ongoing inflationary cost increases. 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 from factors such as labor supply and changing market conditions, as well as 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.
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The following table presents the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical. All percentages are stated as a percentage of restaurant sales.
2022 vs. 2021 2021 vs. 2020
Cost of sales:
Higher commodity costs 4.9 % 0.4 %
Sales mix 1.5 % (0.3) %
Higher (lower) promotions and discounts 0.2 % (0.5) %
Menu price increases (4.5) % (0.9) %
Operating inefficiencies (efficiencies) (0.7) % 0.1 %
Other(1) 0.4 % (0.2) %
Net increase (decrease) in cost of sales as a percentage of restaurant sales
1.8 % (1.4) %
Restaurant wages and related expenses: Higher (lower) labor costs including special incentive pay and sign-on bonuses in 2021(2)
(0.8) % 0.4 %
Higher (lower) incentive bonus(3) (0.2) % 0.3 %
Lower medical benefits costs (0.2) % (0.3) %
Higher payroll taxes and workers' compensation costs - % 0.3 %
Higher labor costs due to higher wage rates and overtime partially offset by the impact of higher restaurant sales(4)
0.8 % 1.3 %
Other(1) (0.1) % 0.1 %
Net increase (decrease) in restaurant wages and related expenses as a percentage of restaurant sales
(0.5) % 2.1 %
Other operating expenses:
Higher repairs and maintenance costs 0.6 % 0.6 %
Higher insurance costs 0.4 % - %
Higher utilities costs in 2022 and impact of higher restaurant sales in 2021 vs. 2020
0.4 % (0.3) %
Higher delivery fee expense due to higher delivery channel sales
0.1 % 0.7 %
Other(1) (0.2) % - %
Net increase in other restaurant operating expenses as a percentage of restaurant sales
1.3 % 1.0 % Advertising expense: Increased advertising 0.1 % 0.5 %
Net increase in advertising expense as a percentage of restaurant sales
0.1 % 0.5 %
(1) Other consists of any other driver with an impact of less than 20 basis
points.
(2) Change in 2022 compared to 2021 and 2021 compared to 2020 primarily
includes the impact of special incentive pay offered in 2021.
(3) Primarily due to guaranteed bonus payments due to staffing challenges.
Guaranteed bonus payments, which were lower in 2020, are included in other labor
costs in 2020.
(4) Higher wage rates and overtime pay due in part to labor shortages in 2022
and 2021.
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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 6.2% in 2022 from 6.6% in 2021, due primarily to the impact of higher comparable restaurant sales which were partially offset by higher rental costs related to renewed leases. Restaurant rent expense, as a percentage of total restaurant sales, was 6.6% in 2021 compared to 7.2% in 2020, due primarily to the impact of higher comparable restaurant sales which were partially offset by higher rental costs related to sale-leasebacks and lease renewals. General and Administrative Expenses. General and administrative expenses are comprised primarily of (1) salaries and expenses associated with the development and support of our Company and brand and the management oversight of the operation of our restaurants; and (2) legal, auditing and other professional fees, corporate system costs, and stock-based compensation expense. General and administrative expenses increased to$52.3 million in 2022 from$45.5 million in 2021, and as a percentage of total revenues, were 13.5% in 2022 and 12.7% in 2021 due primarily to increased professional fees, higher employee costs and other support costs, partially offset by higher total revenue. General and administrative expenses include$7.3 million in non-recurring expenses comprised of$2.7 million of general and administrative efficiency initiative costs, which includes$1.6 million related to the acceleration and write-off of costs related to an accounting system implementation,$2.0 million of professional fees,$1.4 million of restructuring costs primarily related to the departure of our former CEO, and$1.2 million of digital platform costs. General and administrative expenses increased to$45.5 million in 2021 from$39.8 million in 2020, and as a percentage of total revenues, were 12.7% in 2021 and 12.6% in 2020 due primarily to higher digital platform costs, higher continuing mobile app development and maintenance costs and higher incentive and other support center costs including additional costs related to the sale ofTaco Cabana , partially offset by higher total revenues. General and administrative expenses include corporate overhead costs allocated toTaco Cabana that are not included in discontinued operations. General and administrative expenses in 2021 also included$3.3 million related to digital platform costs. General and administrative expense in 2020 included$0.7 million related to severance costs associated with positions eliminated in response to the COVID-19 pandemic,$0.4 million related to digital and brand repositioning costs, and$0.1 million related to search fees for senior executive positions. Consolidated Adjusted EBITDA. Consolidated Adjusted EBITDA, a non-GAAP financial measure, is the primary measure of profit or loss used by our chief operating decision maker for purposes of assessing performance and is defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges (recoveries), goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants. Consolidated Adjusted EBITDA may not necessarily be comparable to other similarly titled captions of other companies due to differences in methods of calculation. Consolidated Adjusted EBITDA includes an allocation of certain 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. For a discussion of our use of Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see the heading titled "Management's Use of Non-GAAP Financial Measures." Consolidated Adjusted EBITDA decreased to$21.8 million , or 5.6% of total revenues, in 2022 from$25.0 million , or 7.0% of total revenues, in 2021 due primarily to higher commodity costs and sales mix within cost of sales, repair and maintenance costs, insurance costs, and utilities costs, partially offset by the impact of menu price increases and higher restaurant sales. Consolidated Adjusted EBITDA decreased to$25.0 million , or 7.0% of total revenues, in 2021 from$26.0 million , or 8.2% of total revenues, in 2020 due primarily to the impact of higher restaurant sales and improved cost of sales margins, partially offset by higher labor costs, delivery fees, repair and maintenance costs, advertising and general and administrative costs, and the impact of the extra week in 2020. Restaurant-level Operating Profit. We also use Restaurant-level Operating Profit (previously presented as Restaurant-level Adjusted EBITDA), a non-GAAP financial measure, as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Consolidated Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs and general and administrative expenses (including corporate-level general and administrative expenses).
Restaurant-level Operating Profit was
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had a$2.0 million unfavorable impact on Restaurant-level Operating Profit in 2021 compared to 2020. For a reconciliation from loss from operations to Restaurant-level Operating Profit, see the heading titled "Management's Use of Non-GAAP Financial Measures." Depreciation and Amortization. Depreciation and amortization expense decreased to$20.1 million in 2022 from$20.6 million in 2021 due primarily to decreased depreciation related to impairment of assets from underperforming restaurants that have been made since 2021, partially offset by an increase in depreciation related to ongoing reinvestment and enhancements to our restaurants. Depreciation and amortization expense decreased to$20.6 million in 2021 from$22.0 million in 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.
Impairment and Other Lease Charges (Recoveries). Impairment and other lease
charges (recoveries) decreased to
Impairment and other lease charges (recoveries) in 2022 include impairment charges of$2.3 million related primarily to the impairment of assets from eight underperforming Pollo Tropical restaurants, partially offset by net gains from lease terminations and a lease term reassessment of$(0.9) million . Impairment and other lease charges (recoveries) decreased to$1.5 million in 2021 from$8.0 million in 2020. Impairment and other lease charges in 2021 include impairment charges of$2.1 million related primarily to the impairment of assets from five underperforming Pollo Tropical restaurants and impairment of equipment from previously closed restaurants, partially offset by net gains form lease terminations$(0.6) million . Impairment and other lease charges (recoveries) in 2020 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 saucing islands and self-service soda machines that were removed from dining rooms as a result of COVID-19 and the write-down of assets held for sale to their fair value less costs to sell, and lease termination charges of$0.9 million for restaurant locations we decided not to develop, net of a gain from lease terminations of$(0.2) million . 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.
For two Pollo Tropical restaurants with combined carrying values (excluding
right-of-use lease assets) of
Closed Restaurant Rent Expense, Net of Sublease Income. Closed restaurant rent expense, net of sublease income was$1.9 million in 2022 and consisted of closed restaurant rent and ancillary lease costs of$8.5 million net of sublease income of$(6.5) million .
Closed restaurant rent expense, net of sublease income was
Closed restaurant rent expense, net of sublease income was
Other (Income) Expense, Net. Other (income) expense, net, was$(0.6) million in 2022 and primarily consisted of net proceeds from a legal settlement of$(0.8) million , partially offset by other closed restaurant related costs. Other expense (income), net, was$0.5 million in 2021 and primarily consisted of costs for the removal, transfer and storage of equipment from closed restaurants. Other (income) expense, net, in 2020 primarily consisted of total gains of$(3.3) million on the sale-leaseback of five restaurant properties and the sale of three restaurant properties, partially offset by$0.5 million in costs for the 35
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removal, transfer and storage of equipment from closed restaurants and other closed restaurant costs and$0.7 million for the write-off of site development costs. Loss from Operations. As a result of the foregoing, we had a loss from operations of$(14.4) million , or (3.7)% of restaurant sales, in 2022 compared to a loss from operations of$(6.6) million , or (1.9)% of restaurant sales, in 2021 and a loss from operations of$(10.1) million , or (3.2)% of restaurant sales, in 2020. Interest Expense. Interest expense decreased$0.1 million to$0.3 million in 2022 from 2021. Interest expense increased$0.1 million to$0.4 million in 2021 from 2020. Interest charges related to our senior credit facility and former amended senior credit facility are included in discontinued operations for 2021 and 2020. In 2022, interest charges related to our undrawn revolving credit facility are included in continuing operations. Provision for (Benefit from) Income Taxes. The effective tax rate was (6.6)% for the year endedJanuary 1, 2023 , and (15.5)% for the year endedJanuary 2, 2022 . The provision for income taxes for 2022 includes changes in the valuation allowance as a result of originating temporary differences during the year. The effective tax rate was (15.5)% for 2021 and 67.5% for 2020. The provision for income taxes for 2021 includes changes in the valuation allowance as a result of originating temporary differences during the year and a reserve for unrecognized tax benefits. The benefit from income taxes for 2020 includes a benefit related to the carryback of net operating losses and 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, as well as a decrease to the valuation allowance on our deferred tax assets related to changes in our deferred tax assets and liabilities. The CARES Act, which was signed into law onMarch 27, 2020 , includes provisions that 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 (Loss) from Discontinued Operations, Net of Tax. All revenues, costs and expenses and income taxes attributable toTaco Cabana have been aggregated within income (loss) from discontinued operations, net of tax, in the consolidated statements of operations for all periods presented. Income from discontinued operations, net of tax, was$1.1 million in 2022 compared to$18.5 million in 2021 and a loss from discontinued operations, net of tax, of$(6.8) million in 2020. Income from discontinued operations, net of tax, for the year endedJanuary 1, 2023 was primarily due to insurance proceeds received, partially offset by workers compensation and general liability claims.Taco Cabana results of operations are included throughAugust 15, 2021 for the year endedJanuary 2, 2022 compared to a full year in 2020 due to the sale ofTaco Cabana onAugust 16, 2021 .
A gain of
Net (Loss) Income. As a result of the foregoing, we had a net loss of$(14.6) million , or (3.8)% of total revenue, in 2022 compared to net income of$10.4 million , or 2.9% of total revenue, in 2021 and a net loss of$(10.2) million , or (3.2)% of total revenue, in 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 atJanuary 1, 2023 , 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.
Operating Activities. Net cash provided by operating activities for 2022, 2021, and 2020 was$15.4 million ,$14.1 million and$40.3 million , respectively. The$1.4 million increase in net cash provided by operating activities in 2022 compared to 2021 was primarily driven by timing of payments, partially offset by a decrease in Consolidated Adjusted EBITDA, 36
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contributions from discontinued operations in 2021, and the receipt of income tax refunds in 2021. The$26.2 million decrease in net cash provided by operating activities in 2021 compared to 2020 was driven primarily by the timing of payments, including the impact of the timing of payments related toTaco Cabana and vendor and landlord payment term renegotiations in 2020, and a decrease in Consolidated Adjusted EBITDA. The impact of extended vendor payment terms in 2020 was partially offset by the payment ofJanuary 2021 rent in fiscal 2020 as a result of the 53rd week in fiscal 2020. Investing Activities. Net cash used in investing activities in 2022 was$19.1 million . Net cash provided by investing activities and 2021 and 2020 was$59.8 million and$8.4 million , respectively. Capital expenditures are typically 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.
The following table sets forth our capital expenditures from continuing operations for the periods presented (dollars in thousands):
Pollo Continuing
Tropical Other Operations
Year ended January 1, 2023 :
New restaurant development $ - $ - $ -
Restaurant remodeling 8,760 - 8,760
Other restaurant capital expenditures(1) 7,820 - 7,820
Corporate and restaurant information systems 2,759 90 2,849
Total capital expenditures $ 19,339 $ 90 $ 19,429
Number of new restaurant openings - -
Year ended January 2, 2022 :
New restaurant development $ - $ - $ -
Restaurant remodeling 1,097 - 1,097
Other restaurant capital expenditures(1) 9,682 - 9,682
Corporate and restaurant information systems 1,645 602 2,247
Total capital expenditures $ 12,424 $ 602 $ 13,026
Number of new restaurant openings - -
Year ended January 3, 2021 :
New restaurant development $ 1,009 $ - $ 1,009
Restaurant remodeling 358 - 358
Other restaurant capital expenditures(1) 6,542 - 6,542
Corporate and restaurant information systems 1,254 1,320 2,574
Total capital expenditures $ 9,163 $ 1,320 $ 10,483
Number of new restaurant openings - -
(1)Excludes restaurant repair and maintenance expenses included in other
restaurant operating expenses in our consolidated financial statements. For the
years ended January 1, 2023 , January 2, 2022 and January 3, 2021 , total
restaurant repair and maintenance expenses were approximately $15.5 million ,
$12.5 million , and $9.3 million , respectively.
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The following table sets forth our capital expenditures from discontinued operations for the periods presented (dollars in thousands):
Taco
Cabana
Year ended January 2, 2022 :
New restaurant development $ -
Restaurant remodeling 1,283Other restaurant capital expenditures(1) 5,050 Corporate and restaurant information systems 169 Total capital expenditures
$ 6,502 Number of new restaurant openings - Year endedJanuary 3, 2021 : New restaurant development$ 854 Restaurant remodeling 745
Other restaurant capital expenditures(1) 4,728 Corporate and restaurant information systems 1,559 Total capital expenditures
$ 7,886 Number of new restaurant openings 1 (1)Excludes restaurant repair and maintenance expenses included in income (loss) from discontinued operations in our consolidated financial statements. For the years endedJanuary 2, 2022 andJanuary 3, 2021 , total restaurant repair and maintenance expenses were approximately$5.5 million and$8.1 million , respectively.
Cash provided by investing activities from continuing operations in 2020
included net proceeds of
Cash provided by investing activities from discontinued operations in 2022 included net proceeds from insurance recoveries of$0.3 million . Net cash provided by investing activities from discontinued operations in 2021 included net proceeds of$74.9 million from the sale ofTaco 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 provided by investing activities from discontinued operations in 2020 included net proceeds of$4.0 million from the sale-leaseback of two restaurant properties and$4.3 million from the sale of an additional three restaurant properties.
Total capital expenditures in 2023 are expected to be between
Financing Activities. Net cash used in financing activities in 2022 was$1.2 million and primarily consisted of payments to repurchase our common stock of$0.9 million and payments of tax withholdings related to net share settlements of$0.2 million . Net cash used in financing activities in 2021 included term loan borrowing repayments under our senior credit facility of$75.0 million ,$9.4 million in payments to repurchase our common stock, a$2.2 million payment for a premium associated with extinguishment of the term loan under our senior credit facility and$0.2 million in principal payments on finance leases. Net cash used in financing activities in 2020 included net revolving credit borrowing repayments under our former amended senior credit facility of$75.0 million ,$3.0 million in payment of debt issuance costs associated with our former amended senior credit facility and senior credit facility combined with$3.7 million in payments to repurchase our common stock, partially offset by proceeds of$73.5 million under our senior credit facility. 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 "senior credit facility." The senior credit facility was 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 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 senior credit facility. As required by the terms of the senior credit facility, the proceeds from the sale ofTaco 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. 38
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The senior credit facility provides that we must maintain minimum Liquidity (as defined in the senior credit facility) of$20.0 million (the "Liquidity Threshold") untilJanuary 3, 2022 . The senior credit facility also provides that we are not required to be in compliance with the Total Leverage Ratio under the senior credit facility until the earlier ofJanuary 3, 2022 , or the date in which Liquidity is less than the Liquidity Threshold. We will be permitted to exercise equity cure rights with respect to compliance with the Total Leverage Ratio subject to certain restrictions as set forth in the senior credit facility.
Borrowings under the senior credit facility bear interest at a rate per annum, at our option, equal to either (all terms as defined in the senior credit facility):
1) the Base Rate plus the Applicable Margin of 6.75% with a minimum Base Rate of 2.00%, or
2) the LIBOR (or Benchmark Replacement) Rate plus the Applicable Margin of 7.75%, with a minimum LIBOR (or Benchmark Replacement) Rate of 1.00%.
In addition, the senior credit facility requires us to pay a commitment fee of 0.50% per annum on the daily amount of the unused portion of the revolving credit facility.
The outstanding borrowings under the revolving credit facility are prepayable without penalty or premium (other than customary breakage costs). The outstanding borrowings under the term loan facility were voluntarily prepayable by us, and the term loan facility provided that each of the following required a mandatory prepayment of outstanding term loan borrowings by us as follows: (i) 100% of any cash Net Proceeds (as defined in the senior credit facility) in excess of$2.0 million individually or in the aggregate over the term of the senior credit facility in respect of any Casualty Event (as defined in the senior credit facility) affecting collateral provided that we were permitted to reinvest such Net Proceeds in accordance with the senior credit facility, (ii) 100% of any Net Proceeds of a Specified Equity Contribution (as defined in the senior credit facility), (iii) 100% of any cash Net Proceeds from the issuance of debt issued by us or our subsidiaries other than Permitted Debt (as defined in the senior credit facility), (iv) 100% of any Net Proceeds from the Disposition (as defined in the senior credit facility) of certain assets individually, or in the aggregate, in excess of$2.0 million in any fiscal year provided that we were permitted to reinvest such Net Proceeds in accordance with the senior credit facility and (v) beginning with the fiscal year endingJanuary 2, 2022 , an amount equal to the Excess Cash Flow (as defined in the senior credit facility) in accordance with the senior credit facility. Our senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of our indebtedness having an outstanding principal amount in excess of$5.0 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. The senior credit facility contains certain covenants, including, without limitation, those limiting our ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of our business in any material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. Our obligations under the senior credit facility are secured by all of our and our subsidiaries' assets (including a pledge of all of the capital stock and equity interests of our subsidiaries). Under the senior credit facility, the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include, without limitation, payment default, covenant defaults, bankruptcy type defaults, defaults on other indebtedness, certain judgments or upon the occurrence of a change of control (as specified in the senior credit facility). As ofJanuary 1, 2023 , we were in compliance with the financial covenants under our senior credit facility. AtJanuary 1, 2023 ,$10.0 million was available for borrowing under the revolving credit facility.
Share Repurchase Plan
In 2018, our board of directors approved a share repurchase program for up to
1.5 million shares of our common stock. In 2019, our board of directors approved
increases to the share repurchase program of an additional 1.5 million shares of
our common stock. Under the share repurchase program, shares may be repurchased
from time to time in open market transactions at prevailing market prices, in
privately negotiated transactions or by other means in accordance with federal
securities laws, including Rule 10b-18 under the Securities Exchange Act of
1934, as amended. The number of shares repurchased and the timing of repurchases
will depend on a number of factors, including, but not limited to, stock price,
trading volume, general market and economic conditions, and other corporate
considerations. The share repurchase program has no time limit and may be
modified, suspended, superseded or terminated at any time by our board of
directors.
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Cash Requirements
Our significant cash requirements within the next twelve months include working capital requirements, operating lease obligations and capital expenditures, as well as purchase obligations and insurance liabilities. We believe our cash reserves, cash generated from our operations, and availability of borrowings under our senior credit facility will provide sufficient cash availability to cover our anticipated working capital needs and capital expenditures for the next twelve months. We used the net proceeds from the sale ofTaco Cabana to repay all of the outstanding term loan borrowings under our senior credit facility in 2021.
Our significant cash requirements under our various contractual obligations and commitments include:
• Operating Lease Obligations. See Note 8 of the Notes to our Consolidated Financial Statements for information on our operating and finance lease obligations and the amount and timing of future payments.
•Capital Expenditures. See Investing Activities subsection in this MD&A under the heading titled Liquidity and Capital Resources.
• Insurance Liabilities. Insurance liabilities include obligations associated with employee health care, workers' compensation claims and general liability claims, all of which have some inherent uncertainty as to the amount and timing of payments and were reflected on our Consolidated Balance Sheet as ofJanuary 1, 2023 . See Note 7 of the Notes to our Consolidated Financial Statements for more information about our insurance liabilities.
•Purchase Obligations. Purchase obligations include agreements to purchase goods or services that are legally binding on us and that specify all significant terms.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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 offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to fully offset such inflationary cost increases in the future.
Critical Accounting Estimates
Our 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 Note 1-Basis of Presentation in the Notes to our Consolidated Financial Statements. Critical accounting estimates are those that require application of management's most difficult, subjective, or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. These estimates involve a significant level of estimation uncertainty and are reasonably likely to have a material impact of the financial condition or results of operations. Sales recognition at our restaurants is straightforward as customers pay for products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 60 days. The earnings reporting process is covered by our system of internal controls and generally does not require significant management estimates and judgments. However, critical accounting estimates and judgments, as noted below, are inherent in the assessment and recording of insurance liabilities, the valuation of goodwill for impairment, assessing impairment of long-lived assets, lease accounting matters and the valuation of deferred income tax assets. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. Insurance Liabilities. We are insured for workers' compensation, general liability and medical insurance claims under policies where we pay all claims, subject to annual stop-loss limitations both for individual claims and for general liability, medical insurance and certain workers' compensation claims in the aggregate. AtJanuary 1, 2023 andJanuary 2, 2022 , we had$8.8 million and$9.5 million , respectively, accrued for these insurance claims. We record insurance liabilities based on historical and industry trends, which are continually monitored, with the assistance of actuaries, and adjust accruals as 40
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warranted by changing circumstances. Since there are estimates and assumptions inherent in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on historical trends or the severity of the claims, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities and those adjustments could be material. Evaluation ofGoodwill . We must evaluate our recorded goodwill for impairment annually or more frequently when events and circumstances indicate that the carrying amount may be impaired. We have elected to conduct our annual impairment review of goodwill assets as of the last day of our fiscal year. We may first qualitatively assess goodwill impairment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This qualitative analysis is performed by examining key events and circumstances affecting fair value. If it is determined it is more likely than not that the reporting unit's fair value is not greater than its carrying amount, we perform a quantitative assessment. We adopted ASU No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04") in 2019, which eliminates the requirement to calculate the implied fair value of goodwill if the fair value of a reporting unit is less than the carrying amount of the reporting unit. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. In performing a quantitative assessment for impairment, we compare the net book value of our reporting unit to its estimated fair value. In determining the estimated fair value of the reporting unit, we employ a combination of a discounted cash flow analysis based on management's best estimates of future cash flows and one or two market-based approaches. The results of these analyses are corroborated with other value indicators where available, such as comparable company earnings multiples. This evaluation of goodwill requires us to make estimates and assumptions to determine the fair value of our reporting unit including projections regarding future operating results, anticipated growth rates, the weighted average cost of capital used to discount projected cash flows, and market multiples. We performed a qualitative assessment, which included examining key events and circumstances affecting fair value, for our annual impairment review as ofJanuary 1, 2023 , and determined it was more likely than not that the Pollo Tropical reporting unit's fair value was greater than its carrying amount. As ofJanuary 1, 2023 , our Pollo Tropical reporting unit goodwill has a carrying value of$56.3 million . See Note 5 of the Notes to our Consolidated Financial Statements. We estimate the fair value of the Pollo Tropical reporting unit significantly exceeds its carrying value as ofJanuary 1, 2023 . The estimates and assumptions used to determine and assess fair value may differ from actual future events and if these estimates or related projections change significantly in the future, we may be required to record material impairment charges for goodwill assets. Impairment of Long-lived Assets. We assess the potential impairment of long-lived assets, principally property and equipment and operating lease right-of-use assets, whenever events or changes in circumstances indicate that the carrying value of the restaurant asset group may not be recoverable. In addition to considering management's plans, known regulatory/governmental actions and damage due to acts of God (hurricanes, tornadoes, etc.), we consider an event indicating that the carrying value may not be recoverable to have occurred related to a specific restaurant if the restaurant's cash flows for the last twelve months are less than a minimum threshold or if consistent levels of cash flows for the remaining lease period are less than the carrying value of the restaurant's assets. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values. We have elected to exclude operating lease payments and liabilities from future cash flows and carrying values, respectively, in the comparison. 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. Our estimates of future cash flows are highly subjective judgments based on internal projections and knowledge of our operations, historical performance and current trends in sales and restaurant operating costs. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset 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 estimates or assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material. For two Pollo Tropical restaurants with combined carrying values (excluding right-of-use lease assets) of$1.1 million , projected cash flows are not substantially in excess of their carrying values. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material. See Note 6 of the Notes to our Consolidated Financial Statements. 41
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Lease Accounting. Judgments made by management for our lease obligations include the determination of our incremental borrowing rate, the determination of standalone selling prices used to allocate the consideration in the contract, and the length of the lease term, which includes the determination of renewal options that are reasonably assured. The lease term can affect the classification of a lease as finance or operating for accounting purposes, the amount of the lease liability and corresponding right-of-use lease asset recognized, the term over which related leasehold improvements for each restaurant are amortized and any rent holidays and/or changes in rental amounts for recognizing rent expense over the term of the lease. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used. We use our estimated incremental borrowing rate in determining the present value of lease payments for purposes of determining lease classification and recording lease liabilities and lease assets on our consolidated balance sheet. Our incremental borrowing rate is determined based on a synthetic credit rating, determined using a valuation model, adjusted to reflect a secured credit rating and a developed spread curve, if applicable, applied to a risk-free rate yield curve. If the estimate of our incremental borrowing rate was changed, our operating lease assets and liabilities could differ materially. Changes in the determination of our incremental borrowing rate could also have an impact on the depreciation and interest expense recognized for finance leases. See Note 8 of the Notes to our Consolidated Financial Statements. Valuation of Deferred Income Tax Assets. Deferred tax assets and liabilities, which represent temporary differences between the financial statement and tax basis of assets and liabilities, are measured using enacted tax rates expected to apply to the years in which those differences are expected to be recovered or settled. Deferred tax assets are recognized to the extent we believe these assets will more likely than not be realized. A valuation allowance is established to reduce the carrying amount of deferred tax assets if we believe it is more likely than not that a portion or all of the tax benefit from these deferred tax assets will not be realized. The realization of a deferred tax asset is dependent on the generation of sufficient taxable income in future periods, and the reversal of existing taxable temporary differences in the applicable periods. In evaluating the realizability of our deferred tax assets, we perform an assessment of positive and negative evidence. The weight given to negative and positive evidence is commensurate only to the extent that such evidence can be objectively verified. Objective historical evidence is given greater weight than subjective evidence such as forecasts of future taxable income. We considered three years of cumulative operating income (loss) in evaluating the objective evidence that historical results provide. Objective negative evidence limits our ability to consider other subjective evidence, such as our future earnings projections. Based on our evaluation of all available positive and negative evidence, and placing greater weight on the objective evidence, we determined that it is more likely than not that our deferred tax assets will not be fully realized in future periods. In 2019, we determined that it was more likely than not that the deferred tax assets would not be fully realized and established a valuation allowance against federal and state deferred tax assets. Based on changes in our deferred tax assets and liabilities in 2020, adjustments to our valuation allowance totaling$0.4 million were recorded in 2020 resulting in a valuation allowance of$9.7 million as ofJanuary 3, 2021 . Based on changes in our deferred tax assets and liabilities in 2021, adjustments to our valuation allowance totaling$0.2 million were recorded in 2021 resulting in a valuation allowance of$9.9 million as ofJanuary 2, 2022 . Based on changes in our deferred tax assets and liabilities in 2022, adjustments to our valuation allowance totaling$6.4 million were recorded in 2022 resulting in a valuation allowance of$16.3 million as ofJanuary 1, 2023 . If we generate sufficient taxable income in the future to fully utilize the tax benefits of the deferred tax assets on which a valuation allowance was recorded, a portion or all of the valuation allowance could be reversed, which would decrease our tax expense in the period or periods in which the valuation allowance is reversed. We will continue to monitor and evaluate the positive and negative evidence considered in arriving at the above conclusion in order to assess whether such conclusion remains appropriate in future periods. Separate valuation allowances, not subject to the critical accounting estimates, for the income tax capital loss generated on the sale ofTaco Cabana in 2021 and a foreign tax credit have been established as we do not expect to generate sufficient future taxable income related to those tax attributes. See Note 10 of the Notes to our Consolidated Financial Statements.
New Accounting Pronouncements
See Note 1 of the Notes to our Consolidated Financial Statements for a discussion of recently issued and adopted accounting standards.
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Management's Use of Non-GAAP Financial Measures
Consolidated Adjusted EBITDA is a non-GAAP financial measure. We use Consolidated Adjusted EBITDA in addition to net income (loss) and income (loss) from operations to assess our performance, and we believe it is important for investors to be able to evaluate us using the same measures used by management. We believe this measure is an important indicator of our operational strength and the performance of our business and it provides a view of operations absent non-cash activity and items that are not related to the ongoing operation of our restaurants or affect comparability period over period. Consolidated Adjusted EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges (recoveries), goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants as set forth in the reconciliation table below. Consolidated Adjusted EBITDA as calculated by us is not necessarily comparable to similarly titled measures reported by other companies and should not be considered as an alternative to net income (loss), earnings (loss) per share, cash flows from operating activities or other financial information determined under GAAP. We also use Restaurant-level Operating Profit (previously presented as Restaurant-level Adjusted EBITDA) as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Consolidated Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs, and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-level Operating Profit margin is derived by dividing Restaurant-level Operating Profit by restaurant sales. Restaurant-level Operating Profit is also a non-GAAP financial measure. Management believes that Consolidated Adjusted EBITDA and Restaurant-level Operating Profit, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and reconciliation of income (loss) from operations to Restaurant-level Operating Profit (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 (recoveries), closed restaurant rent expense,
net of sublease income, other income and expense, and stock-based compensation
expense) have recurred and may recur.
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A reconciliation from consolidated net income (loss) to Consolidated Adjusted
EBITDA follows (in thousands). All amounts are from continuing operations unless
otherwise indicated.
Year Ended
January 1, 2023 January 2, 2022 January 3, 2021
Net (loss) income $
(14,559)
(1,102) (18,455) 6,825
Provision for (benefit from) income taxes 968 1,083 (7,044)
Loss from continuing operations before taxes (14,693) (7,002) (10,430)
Add:
Non-general and administrative adjustments: Depreciation and amortization 20,053 20,574 22,009 Impairment and other lease charges (recoveries) 1,414 1,538 8,023 Interest expense 336 374 292 Closed restaurant rent expense, net of sublease income(1) 1,928 2,999 4,331 Other (income) expense, net (591) 478 (2,098) Stock-based compensation expense 22 53 73 Total non-general and administrative adjustments 23,162 26,016 32,630 General and administrative adjustments: Stock-based compensation expense 6,089 4,163 2,681 Non-recurring professional fees(2) 2,001 - - G&A efficiency initiatives(3) 2,690 - - Restructuring costs and retention bonuses(4) 1,410 18 686 Digital costs(5) 1,153 1,821 424 Total general and administrative adjustments 13,343 6,002 3,791 Consolidated Adjusted EBITDA$ 21,812 $ 25,016 $ 25,991 Total revenues$ 387,351 $ 357,277 $ 315,358 Net (loss) income as a percentage of total revenues (3.8) % 2.9 % (3.2) %
Consolidated Adjusted EBITDA as a percentage of total revenues
5.6 % 7.0 % 8.2 %
(1) Closed restaurant rent, net of sublease income, for the years ended
January 1, 2023 , January 2, 2022 and January 3, 2021 primarily consists of
closed restaurant lease costs of $8.5 million , $9.1 million and $9.2 million ,
respectively, partially offset by sublease income of $(6.5) million , $(6.1)
million and $(4.9) million , respectively.
(2) Non-recurring professional fees consist of costs related to growth
initiatives.
(3) G&A efficiency initiatives consist of non-recurring retention bonus costs
and costs related to the acceleration and write-off of costs related to
accounting system implementation.
(4) Restructuring costs and retention bonuses for the year ended January 1,
2023 include severance costs related to the departure of our former Chief
Executive Officer and eliminated positions related to the accounting
outsourcing. Restructuring costs and retention bonuses for the year ended
January 3, 2021 include severance costs related to eliminated positions related
to terminations in response to the COVID-19 pandemic.
(5) Digital costs for the years ended January 1, 2023, January 2, 2022 and
January 3, 2021 include costs related to enhancing the digital experience for
our customers.
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A reconciliation from income (loss) from operations to Restaurant-level Operating Profit follows (in thousands). All amounts are from continuing operations unless otherwise indicated.
Year Ended
January 1, 2023 January 2, 2022 January 3, 2021
January 1, 2023 :
Loss from operations $ (14,357) $ (6,628) $ (10,138)
Add:
Non-general and administrative adjustments:
Depreciation and amortization 20,053 20,574 22,009
Impairment and other lease charges (recoveries) 1,414 1,538 8,023
Closed restaurant rent expense, net of sublease
income 1,928 2,999 4,331
Other expense (income), net (591) 478 (2,098)
Stock-based compensation expense 22 53 73
Total non-general and administrative adjustments 22,826 25,642 32,338
General and administrative adjustments:
Stock-based compensation expense 6,089 4,163 2,681
Non-recurring professional fees 2,001 - -
G&A efficiency initiatives 2,690 - -
Restructuring costs and retention bonuses 1,410 18 686
Digital costs 1,153 1,821 424
Total general and administrative adjustments 13,343 6,002 3,791
Consolidated Adjusted EBITDA 21,812 25,016 25,991
Restaurant-level adjustments:
Add: Other general and administrative expense(1) 38,982 39,522 36,057
Less: Franchise royalty revenue and fees 1,407 1,785 1,246
Restaurant-level Operating Profit $ 59,387 $ 62,753 $ 60,802
Restaurant sales $ 385,944
(3.7) % (1.9) % (3.2) %
Restaurant-level Operating Profit as a percentage of restaurant sales
15.4 % 17.7 % 19.4 %
(1) Excludes general and administrative adjustments included in Consolidated Adjusted EBITDA.
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