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 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 to Fiesta
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 to December 31 . The
fiscal year ended January 3, 2021 contained 53 weeks. The three months ended
April 4, 2021 and March 29, 2020 each contained thirteen weeks. The fiscal year
ending January 2, 2022 will contain 52 weeks.
Company Overview
We own, operate and franchise 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 our
Taco Cabana restaurants specialize in Mexican-inspired food with most items made
fresh. We believe that both brands offer distinct and unique flavors with broad
appeal at a compelling value, which differentiates them in the competitive
fast-casual and quick-service restaurant segments. Nearly all of our restaurants
offer the convenience of drive-thru windows. As of April 4, 2021 , we owned and
operated 138 Pollo Tropical restaurants and 143 Taco Cabana restaurants.
We franchise our Pollo Tropical restaurants primarily internationally and as of
April 4, 2021 , we had 23 franchised Pollo Tropical restaurants located in Puerto
Rico , Panama , Guyana , Ecuador , and the Bahamas , and five on college campuses and
one at a hospital in Florida . We have agreements for the continued development
of franchised Pollo Tropical restaurants in certain of our existing franchised
markets.
As of April 4, 2021 , we had six franchised Taco Cabana restaurants located in
New Mexico .
Recent Events Affecting Our Results of Operations
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 Pollo Tropical and Taco Cabana restaurants, limiting service to
take-out, drive-thru, and delivery operations beginning in mid-March 2020 . We
re-opened certain dining rooms and patios with limited capacity and hours during
certain times in the second half of 2020. In 2021, we re-opened substantially
all remaining Pollo Tropical and Taco Cabana dining rooms with limited hours by
the end of February and March, respectively. Hours of operations at both brands
have been limited due to labor shortages which are affecting our brands and the
restaurant industry.
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 costs.
We incurred additional costs related to the COVID-19 pandemic totaling $0.5
million during the three months ended April 4, 2021 , including additional labor
costs such as quarantine pay, as well as COVID-19 testing costs.
Executive Summary-Consolidated Operating Performance for the Three Months Ended
April 4, 2021
Our first quarter 2021 results and highlights include the following:
•We recognized a net loss of $(2.1) million , or $(0.08) per diluted share, in
the first quarter of 2021 compared to a net loss of $(7.3) million , or $(0.29)
per diluted share, in the first quarter of 2020, due primarily to a net benefit
of $(0.1) million in impairment and other lease charges in the first quarter of
2021 compared to impairment and other lease charges of $4.2 million in the first
quarter of 2020 and increased comparable restaurant sales at Pollo Tropical,
partially offset by the impact of declines in comparable restaurant sales at
Taco Cabana, which were negatively impacted by Winter Storm Uri. In addition,
lower cost of sales, labor costs, and advertising expenses, as well as lower
costs related to closed restaurants, contributed to the increase in net income
(loss) in the first quarter of 2021 compared to the first quarter of 2020. This
increase was partially offset by higher delivery fees and the impact of an
out-of-period adjustment to increase our tax provision in the first quarter of
2021 compared to a tax benefit in the first quarter of 2020 related to carryback
provisions in the Coronavirus Aid, Relief and Economic Security Act (the "Cares
Act").
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•Total revenues decreased 1.3% in the first quarter of 2021 to $144.7 million
compared to $146.7 million in the first quarter of 2020, driven by a decrease in
comparable restaurant sales at Taco Cabana (including as a result of the
negative impact of Winter Storm Uri) and the impact of closing underperforming
restaurants in 2020, partially offset by an increase in comparable restaurant
sales at Pollo Tropical. Comparable restaurant sales increased 4.3% for our
Pollo Tropical restaurants resulting from an increase in the net impact of
product/channel mix and pricing of 13.4% partially offset by a decrease in
comparable restaurant transactions of 9.1%. Comparable restaurant sales
decreased 4.3% for our Taco Cabana restaurants resulting from a decrease in
comparable restaurant transactions of 15.9% partially offset by an increase in
the net impact of product/channel mix and pricing of 11.6%.
•Consolidated Adjusted EBITDA increased $5.0 million in the first quarter of
2021 to $12.9 million compared to $7.9 million in the first quarter of 2020,
driven primarily by lower cost of sales, labor costs, and advertising expenses,
partially offset by lower restaurant sales, including the negative impact of
Winter Storm Uri, and higher delivery fee expense. We estimate that Winter Storm
Uri negatively impacted Consolidated Adjusted EBITDA by approximately $1.9
million . 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 to Consolidated Adjusted EBITDA, see
"Management's Use of Non-GAAP Financial Measures."
Results of Operations
The following table summarizes the changes in the number and mix of
Pollo Tropical Taco Cabana
Owned Franchised Total Owned Franchised Total
January 3, 2021 138 29 167 143 6 149
New - - - - - -
Closed - - - - - -
April 4, 2021 138 29 167 143 6 149
December 29, 2019 142 32 174 164 8 172
New - 1 1 1 - 1
Closed (1) - (1) (19) - (19)
March 29, 2020 141 33 174 146 8 154
18-------------------------------------------------------------------------------- Table of Contents Three Months EndedApril 4, 2021 Compared to Three Months EndedMarch 29, 2020 The following table sets forth, for the three months endedApril 4, 2021 andMarch 29, 2020 , selected consolidated operating results as a percentage of consolidated restaurant sales and select segment operating results as a percentage of applicable segment restaurant sales. Three Months Ended March 29, March 29, April 4, 2021 2020 April 4, 2021 2020 April 4, 2021 March 29, 2020 Pollo Tropical Taco Cabana Consolidated Restaurant sales: Pollo Tropical 60.9 % 58.7 % Taco Cabana 39.1 % 41.3 % Consolidated restaurant sales 100.0 % 100.0 % Costs and expenses: Cost of sales 31.1 % 32.4 % 28.0 % 30.7 % 29.9 % 31.7 % Restaurant wages and related expenses 23.2 % 24.5 % 31.4 % 32.2 % 26.4 % 27.7 % Restaurant rent expense 6.7 % 6.6 % 10.2 % 9.4 % 8.1 % 7.8 % Other restaurant operating expenses 15.0 % 14.4 % 16.2 % 15.1 % 15.5 % 14.7 % Advertising expense 2.7 % 4.1 % 2.9 % 3.8 % 2.8 % 4.0 % Pre-opening costs - % - % - % 0.1 % - % - % Consolidated 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 decreased 1.3% to$144.7 million in the first quarter of 2021 from$146.7 million in the first quarter of 2020. Restaurant sales decreased 1.3% to$144.2 million in the first quarter of 2021 from$146.1 million in the first quarter of 2020. The following table presents the primary drivers of the changes in restaurant sales for both Pollo Tropical andTaco Cabana for the first quarter of 2021 compared to the first quarter of 2020 (in millions). Pollo Tropical: Increase in comparable restaurant sales $ 3.6 Decrease in sales related to closed restaurants, including a temporary closure (1.5) Total increase $ 2.1 Taco Cabana: Decrease in comparable restaurant sales$ (2.5) Decrease in sales related to closed restaurants, net of new restaurants (1.5) Total decrease$ (4.0) 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 endedApril 4, 2021 are not directly comparable on a calendar basis to the thirteen weeks endedMarch 29, 2020 . Comparable restaurant sales increased 4.3% for Pollo Tropical restaurants and decreased 4.3% forTaco Cabana restaurants in the first quarter of 2021 compared to the first 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 19 -------------------------------------------------------------------------------- Table of Contents 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 13.4% was partially offset by a decrease in comparable restaurant transactions of 9.1% in the first quarter of 2021 compared to the first quarter of 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 1.2%. Comparable restaurant sales in the first quarter of 2020 for Pollo Tropical were negatively impacted by governmental restrictions at the onset of the COVID-19 pandemic beginning in the last three weeks of March in 2020. Comparable restaurant sales for Pollo Tropical in the first quarter of 2021 decreased 3.3% compared to the same fiscal period in 2019. ForTaco Cabana , a decrease in comparable restaurant transactions of 15.9% was partially offset by an increase in the net impact of product/channel mix and pricing of 11.6% in the first quarter of 2021 compared to the first quarter of 2020. The increase in product/channel mix and pricing was driven primarily by increases in drive-thru and delivery sales channel penetration and growth in average check for drive-thru compared to last year due in part to an increase in transactions that include alcohol, and menu price increases of 2.1%. Comparable restaurant sales in the first quarter of 2020 forTaco Cabana were negatively impacted by governmental restrictions at the onset of the COVID-19 pandemic beginning in the last three weeks of March in 2020. Comparable restaurant sales in the first quarter of 2021 were negatively impacted by Winter Storm Uri. We estimate that Winter Storm Uri negatively impacted comparable restaurant sales by approximately 4.8% in the first quarter of 2021. Comparable restaurant sales forTaco Cabana in the first quarter of 2021 decreased 17.1% compared to the same fiscal period in 2019. Franchise revenues remained flat at$0.6 million in the first quarter of 2021 compared to the first quarter of 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. 20 -------------------------------------------------------------------------------- Table of Contents The following tables present the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical andTaco Cabana for the first quarter of 2021 compared to the first quarter of 2020. All percentages are stated as a percentage of applicable segment restaurant sales: Pollo Tropical: Cost of sales: Operating efficiency (0.7) % Lower promotions and discounts (0.6) % Menu price increases (0.3) % Lower commodity costs (0.2) % Lower rebates and discounts 0.4 % Other 0.1 %
Net decrease in cost of sales as a percentage of restaurant sales
(1.3) %
Restaurant wages and related expenses: Lower labor costs due to labor efficiencies and labor shortages (1.3) % Lower medical benefits costs (0.6) % Higher incentive bonus(1) 0.6 %
Net decrease in restaurant wages and related costs as a percentage of restaurant sales
(1.3) %
Other operating expenses: Higher delivery fee expense due to increased delivery channel sales 1.4 % Lower utilities costs (0.5) % Other (0.3) % Net increase in other restaurant operating expenses as a percentage of restaurant sales 0.6 % Advertising expense: Reduced advertising (1.4) % Net decrease in advertising expense as a percentage of restaurant sales
(1.4) %
Pre-opening costs:
Net change in pre-opening costs as a percentage of restaurant sales
- %
(1) Primarily due to improved achievement of bonus metrics.
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--------------------------------------------------------------------------------Table of ContentsTaco Cabana : Cost of sales: Operating efficiency (1.2) % Lower commodity costs (1.1) % Lower promotions and discounts (0.7) % Menu price increases (0.6) % Sales mix 0.7 % Lower rebates and discounts 0.4 % Other (0.2) %
Net decrease in cost of sales as a percentage of restaurant sales
(2.7) %
Restaurant wages and related expenses:
Lower labor costs due to labor efficiencies and labor shortages (3.1) %
Lower payroll taxes (0.2) %
Higher incentive bonus(1) 1.3 %
Higher medical benefits costs 0.8 %
Higher labor costs due to special incentive pay(2) 0.5 %
Other (0.1) %
Net decrease in restaurant wages and related costs as a percentage of restaurant sales
(0.8) %
Other operating expenses:
Higher delivery fee expense due to increased delivery channel sales 1.2 %
Higher storm costs(3) 0.9 %
Lower other repair and maintenance costs (0.7) %
Lower restaurant entertainment costs (0.2) %
Other (0.1) %
Net increase in other restaurant operating expenses as a percentage of
restaurant sales 1.1 %
Advertising expense:
Reduced advertising (0.9) %Net decrease in advertising expense as a percentage of restaurant sales
(0.9) %
Pre-opening costs:
Decrease in the number of restaurant openings (0.1) %
Net decrease in pre-opening costs as a percentage of restaurant sales
(0.1) %
(1) Primarily due to improved achievement of bonus metrics.
(2) Primarily due to special incentive payments to employees related to Winter
Storm Uri.
(3) Primarily repair costs due to the impact of Winter Storm Uri.
Consolidated 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, increased to 8.1% in the first quarter of
2021 from 7.8% in the first quarter of 2020 due primarily to the impact of lower
restaurant sales and higher rental costs related to sale-leasebacks and renewed
leases.
Consolidated 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 brands 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.
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General and administrative expenses were $14.6 million for the first quarter of
2021 and $14.4 million for the first quarter of 2020, and as a percentage of
total revenues, general and administrative expenses increased to 10.1% in the
first quarter of 2021 compared to 9.8% in the first quarter of 2020, due
primarily to the impact of lower total revenues and higher incentive costs,
partially offset by lower management support costs primarily as a result of
headcount reductions in the second quarter of 2020. General and administrative
expenses for the first quarter of 2021 included $0.6 million related to digital
and brand repositioning costs. General and administrative expenses for the first
quarter of 2020 included $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 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 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, 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 for Pollo Tropical increased to $12.2 million , or 13.8% of total
revenues, in the first quarter of 2021 from $8.8 million , or 10.2% of total
revenues, in the first quarter of 2020 due primarily to the impact of higher
restaurant sales, improved cost of sales margins, lower restaurant wages and
related expenses as a percentage of restaurant sales, and lower advertising
expenses, partially offset by higher delivery fee expense. Adjusted EBITDA for
Taco Cabana increased to $0.7 million , or 1.2% of total revenues, in the first
quarter of 2021 from $(0.9) million , or (1.5)% of total revenues, in the first
quarter of 2020 due primarily to lower cost of sales and labor costs as a
percentage of restaurant sales, lower advertising costs and general and
administrative expenses, and the impact of the closure of unprofitable
restaurants in the first quarter of 2020, partially offset by lower restaurant
sales, including the impact of Winter Storm Uri, and higher delivery fee
expense. We estimate that Winter Storm Uri negatively impacted Adjusted EBITDA
for Taco Cabana and Consolidated Adjusted EBITDA by approximately $1.9 million .
Consolidated Adjusted EBITDA increased to $12.9 million in the first quarter of
2021 from $7.9 million in the first quarter of 2020.
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 increased to $18.8 million ,
or 21.4% of restaurant sales, in the first quarter of 2021 from $15.4 million ,
or 18.0% of restaurant sales, in the first quarter of 2020 primarily due to the
foregoing. Restaurant-level Adjusted EBITDA for Taco Cabana increased to $6.4
million , or 11.3% of restaurant sales, in the first quarter of 2021 from $5.3
million , or 8.8% of restaurant sales, in the first quarter of 2020 primarily as
a result of the foregoing and despite the estimated negative impact of Winter
Storm Uri to Adjusted EBITDA of approximately $1.9 million . 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 $8.9 million in the first quarter of 2021 from $9.4 million in the first
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 first quarter of 2020.
Impairment and Other Lease Charges. Impairment and other lease charges decreased
to $(0.1) million in the first quarter of 2021 from $4.2 million in the first
quarter of 2020.
Impairment and other lease charges for the three months ended April 4, 2021 for
Pollo Tropical include impairment charges of $0.1 million related primarily to
equipment from previously impaired and closed restaurants. Impairment and other
lease charges for the three months ended April 4, 2021 for Taco Cabana include
gains from lease terminations of $(0.2) million .
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Impairment and other lease charges for the three months ended March 29, 2020 for
Pollo Tropical include impairment charges of $3.7 million related primarily to
assets for three underperforming Pollo Tropical restaurants, two of which we
closed in the third quarter of 2020. Impairment and other lease charges for the
three months ended March 29, 2020 for Taco Cabana include impairment charges of
$0.5 million related primarily to assets for two underperforming restaurants
that we continued to operate.
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. Our current estimates assume that changes related
to COVID-19 will continue to have an impact through the first half of 2021.
For three Pollo Tropical restaurants and three Taco Cabana restaurants with
combined carrying values (excluding right-of-use lease assets) of $1.9 million
and $1.2 million , respectively, projected cash flows are not substantially in
excess of their carrying values. In addition, one Pollo Tropical restaurant with
a carrying value (excluding right-of-use lease assets) of $1.8 million has
initial sales volumes lower than expected but does not have significant
operating history to form a good basis for future projections. 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.
Closed Restaurant Rent Expense, Net of Sublease Income. Closed restaurant rent
expense, net of sublease income was $1.1 million for the first quarter of 2021
and consisted of closed restaurant rent and ancillary lease costs of $1.8
million and $1.0 million net of sublease income of $(1.5) million and $(0.2)
million for Pollo Tropical and Taco Cabana , respectively. Closed restaurant rent
expense, net of sublease income was $1.6 million for the first quarter of 2020
and consisted of closed restaurant rent and ancillary lease costs of $1.7
million and $1.2 million net of sublease income of $(1.1) million and $(0.1)
million for Pollo Tropical and Taco Cabana , respectively.
Other Expense (Income), Net. Other expense (income), net for the first quarter
of 2021 primarily consisted of total gains of $(0.3) million on the
sale-leaseback of two restaurant properties, partially offset by costs for the
removal, transfer, and storage of equipment from closed restaurants and other
closed restaurant related costs of $0.2 million . Other expense, net was $0.9
million for the first quarter of 2020 and primarily consisted of costs for the
removal, transfer, and storage of equipment from closed restaurants and other
closed restaurant related costs.
Interest Expense. Interest expense increased to $2.0 million in the first
quarter of 2021 compared to $1.0 million in the first quarter of 2020 due
primarily to higher interest rates under the term loan in our new senior credit
facility compared to our former senior credit facility in 2020.
Provision for (Benefit from) Income Taxes. The effective tax rate was (176.3)%
and 29.1% for the first quarter of 2021 and 2020, respectively. The provision
for income taxes for the first quarter of 2021 was derived using an estimated
annual effective tax rate of 50.93%, which includes changes in the valuation
allowance as a result of originating temporary differences during the year and
excludes the discrete impact of a tax deficiency from the vesting of restricted
shares of $0.3 million and a $1.5 million out-of-period adjustment that
increased our income tax provision. See Note 1 to our unaudited condensed
consolidated financial statements for additional information on the
out-of-period adjustment. The benefit from income taxes for the first quarter of
2020 was derived using the actual effective tax rate for the year to date
period, which included a benefit of $1.8 million related to the carryback of net
operating losses as a result of the CARES Act and a tax deficiency of $0.3
million from the vesting of restricted shares.
The CARES Act 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.
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Net Loss. As a result of the foregoing, we had a net loss of $2.1 million in the
first quarter of 2021 compared to a net loss of $7.3 million in the first
quarter of 2020.
Liquidity and Capital Resources
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 at April 4, 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, capital expenditures and debt service
requirements for the next twelve months.
Operating Activities. Net cash provided by operating activities in the first
three months of 2021 and 2020 was $9.5 million and $4.5 million , respectively.
The increase in net cash provided by operating activities in the three months
ended April 4, 2021 was primarily driven by an increase in Adjusted EBITDA and
the receipt of income tax refunds, partially offset by the timing of payments.
Investing Activities. For the three months ended April 4, 2021 , we had
offsetting sources and uses of cash in investing activities. Net cash used in
investing activities in the first three months of 2020 was $6.1 million . Capital
expenditures are 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 for the periods
presented (dollars in thousands).
Pollo Taco
Tropical Cabana Other Consolidated
Three Months Ended April 4, 2021 :
New restaurant development $ - $ - $ - $ -
Restaurant remodeling 162 500 - 662
Other restaurant capital expenditures(1) 514 1,458 - 1,972
Corporate and restaurant information systems 33 73 356 462
Total capital expenditures $ 709 $ 2,031 $ 356 $ 3,096
Number of new restaurant openings - - -
Three Months Ended March 29, 2020 :
New restaurant development $ 825 $ 765 $ - $ 1,590
Restaurant remodeling 356 669 - 1,025
Other restaurant capital expenditures(1) 1,632 904
- 2,536
Corporate and restaurant information systems 468 262 202
932
Total capital expenditures $ 3,281 $ 2,600 $ 202 $ 6,083
Number of new restaurant openings - 1 1
(1) Excludes restaurant repair and maintenance expenses included in other
restaurant operating expenses in our unaudited condensed consolidated financial
statements. For the three months ended April 4, 2021 and March 29, 2020 , total
restaurant repair and maintenance expenses were approximately $4.2 million and
$4.9 million , respectively. For the three months ended April 4, 2021 , costs
associated with repairs from Winter Storm Uri were approximately $0.5 million .
Cash used in investing activities in the first three months of 2021 included net
proceeds of $3.1 million from the sale-leaseback of two restaurant properties.
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Total capital expenditures in 2021 are expected to be between $33.0 million and
$38.0 million including $12.0 million to $15.0 million for digital platforms and
technology enhancements.
Financing Activities. Net cash used in financing activities in the first three
months of 2021 was $0.3 million and included term loan borrowing repayments
under our new senior credit facility of $0.2 million and $0.1 million in
principal payments on finance leases. Net cash used in financing activities in
the first three months of 2020 included net revolving credit borrowing
repayments under our former senior credit facility of $4.0 million combined with
$3.7 million in payments to repurchase our common stock.
New Senior Credit Facility. On November 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 on November 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. On April 4, 2021 , there were $74.8 million in
outstanding borrowings, subject to an original issue discount, under the term
loan facility and no outstanding borrowings under the revolving credit facility.
Under the new senior credit facility, we must repay the unpaid principal amount
of the term loan facility quarterly which commenced on March 31, 2021 , in an
amount equal to 0.25% of the aggregate principal amount of the term loan
facility on the effective date of the new senior credit facility, resulting in
annual mandatory repayments of $0.8 million .
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") until January 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 of January 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 Leverage
Ratio 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 are voluntarily prepayable
by us, and the term loan facility provides that each of the following shall
require 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
are 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 are permitted to reinvest
such Net Proceeds in accordance with the new senior credit facility and (v)
beginning with the fiscal year ending January 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.
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
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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 of April 4, 2021 , we were in compliance with the financial covenants under
our new senior credit facility. At April 4, 2021 , $10.0 million was available
for borrowing under the revolving credit facility.
Former Senior Credit Facility. On July 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 on July 10, 2020 . The former senior secured credit facility was
terminated on November 23, 2020 .
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements.
There have been no significant changes outside the ordinary course of business
to our contractual obligations since January 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 ended
January 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
changes in the federal and state hourly minimum wage rates as well as changes in
payroll related taxes, including federal and state unemployment taxes. 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.
Application of Critical Accounting Policies
Our unaudited interim condensed consolidated financial statements and
accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States of America . Preparing consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue and expenses. These
estimates and assumptions are affected by the application of our accounting
policies. Our significant accounting policies are described in the "Basis of
Presentation" footnote in the notes to our consolidated financial statements for
the year ended January 3, 2021 included in our Annual Report on Form 10-K for
the fiscal year ended January 3, 2021 . Critical accounting estimates are those
that require application of management's most difficult, subjective or complex
judgments, often as a result of matters that are inherently uncertain and may
change in subsequent periods. There have been no material changes affecting our
critical accounting policies for the three months ended April 4, 2021 .
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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 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 6 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.
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