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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-33174
CARROLS RESTAURANT GROUP, INC.
(Exact name of Registrant as specified in its charter)
 
 
Delaware
83-3804854
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
968 James Street
Syracuse, New York
13203
(Address of principal executive office)
(Zip Code)
Registrant’s telephone number, including area code: (315) 424-0513 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $.01 per share
 
TAST
 
The NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
o
 
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
o
 
Smaller reporting company
o
 
 
Emerging growth company
o
 
 
 
 
 
If an emerging growth company, indicate by check mark if the to use the extended transition period for complying with any new or revised financial accounting registrant has elected not standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of August 5, 2019, Carrols Restaurant Group, Inc. had 44,371,515 shares of its common stock, $.01 par value, outstanding.


Table of Contents

CARROLS RESTAURANT GROUP, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2019
 
 
 
Page
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
 
 
 
Item 1
 
 
 
Item 1A
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
Item 5
 
 
 
Item 6

2

Table of Contents

PART I—FINANCIAL INFORMATION
ITEM 1—INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
June 30, 2019
 
December 30, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,412

 
$
4,014

Trade and other receivables
13,148

 
11,693

Inventories
12,393

 
10,396

Prepaid rent
3,563

 
1,880

Prepaid expenses and other current assets
10,113

 
6,695

Total current assets
42,629

 
34,678

Property and equipment, net of accumulated depreciation of $353,094 and $328,873, respectively
353,735

 
289,817

Franchise rights, net of accumulated amortization of $112,093 and $108,021, respectively (Note 3)
325,173

 
175,897

Goodwill (Note 3)
106,163

 
38,469

Franchise agreements, at cost less accumulated amortization of $12,039 and $12,022, respectively
32,407

 
24,414

Operating right-of-use assets, net
785,000

 

Deferred income taxes (Note 8)
34,692

 
28,291

Other assets
9,868

 
8,685

Total assets
$
1,689,667

 
$
600,251

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and finance lease liabilities (Notes 6 and 7)
$
6,512

 
$
1,948

Current portion of operating lease liabilities
39,715

 

Accounts payable
29,652

 
29,143

Accrued interest
221

 
3,818

Accrued payroll, related taxes and benefits
29,567

 
28,719

Accrued real estate taxes
7,608

 
5,910

Other liabilities
21,336

 
12,601

Total current liabilities
134,611

 
82,139

Long-term debt and finance lease liabilities, net of current portion (Notes 6 and 7)
436,541

 
276,823

Lease financing obligations
1,195

 
1,196

Operating lease liabilities
777,054

 

Deferred income—sale-leaseback of real estate

 
10,073

Accrued postretirement benefits
4,387

 
4,320

Other liabilities (Note 5)
9,895

 
40,160

Total liabilities
1,363,683

 
414,711

Commitments and contingencies (Note 10)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $.01; authorized 20,000,000 shares, issued and outstanding—10,100 shares

 

Voting common stock, par value $.01; authorized—100,000,000 shares, issued—44,371,515 and 36,583,903 shares, respectively, and outstanding—43,481,142 and 35,742,427 shares, respectively
435

 
357

Additional paid-in capital
298,381

 
150,459

Retained earnings
27,814

 
35,511

Accumulated other comprehensive loss
(646
)
 
(646
)
Treasury stock, at cost

 
(141
)
Total stockholders’ equity
325,984

 
185,540

Total liabilities and stockholders’ equity
$
1,689,667

 
$
600,251


See accompanying notes to unaudited condensed consolidated financial statements.
3

Table of Contents

CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except share and per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Restaurant sales
$
368,559

 
$
303,050

 
$
659,348

 
$
574,636

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
109,157

 
81,917

 
191,732

 
154,922

Restaurant wages and related expenses
121,140

 
96,954

 
221,332

 
188,098

Restaurant rent expense
26,690

 
19,879

 
48,606

 
39,853

Other restaurant operating expenses
56,308

 
44,589

 
101,913

 
87,428

Advertising expense
14,677

 
12,356

 
26,549

 
23,621

General and administrative (including stock-based compensation expense of $1,282, $1,385, $2,808 and $2,970 respectively)
20,620

 
16,020

 
40,344

 
32,156

Depreciation and amortization
17,121

 
14,621

 
32,413

 
28,871

Impairment and other lease charges (Note 4)
367

 
2,881

 
1,277

 
3,190

Other expense (income), net
376

 

 
(1,753
)
 

Total operating expenses
366,456

 
289,217

 
662,413

 
558,139

Income (loss) from operations
2,103

 
13,833

 
(3,065
)
 
16,497

Loss on extinguishment of debt
7,443

 

 
7,443

 

Interest expense
6,900

 
5,917

 
12,847

 
11,843

Gain on bargain purchase (Note 2)

 
(208
)
 

 
(230
)
Income (loss) before income taxes
(12,240
)
 
8,124

 
(23,355
)
 
4,884

Provision (benefit) for income taxes (Note 8)
(8,508
)
 
336

 
(8,154
)
 
198

Net income (loss)
$
(3,732
)
 
$
7,788

 
$
(15,201
)
 
$
4,686

Basic and diluted net income (loss) per share (Note 13)
$
(0.09
)
 
$
0.17

 
$
(0.39
)
 
$
0.10

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
41,051,354

 
35,720,243

 
38,548,246

 
35,693,027

Diluted
41,051,354

 
45,201,266

 
38,548,246

 
45,234,604

Comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net income (loss)
$
(3,732
)
 
$
7,788

 
$
(15,201
)
 
$
4,686

Other comprehensive income

 

 

 

Comprehensive income (loss)
$
(3,732
)
 
$
7,788

 
$
(15,201
)
 
$
4,686


See accompanying notes to unaudited condensed consolidated financial statements.
4

Table of Contents

CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
(Unaudited)


 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
Total
 
Common Stock
 
Preferred Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Treasury
 
Stockholders'
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Stock
 
Equity
Balance, December 31, 2018
35,742,427

 
$
357

 
100

 
$

 
$
150,459

 
$
35,511

 
$
(646
)
 
$
(141
)
 
$
185,540

Stock-based compensation

 

 

 

 
1,526

 

 

 

 
1,526

Vesting of non-vested shares
371,824

 
4

 

 

 
(4
)
 

 

 

 

Net loss

 

 

 

 

 
(11,469
)
 

 

 
(11,469
)
Adoption of ASC 842, net of taxes (Note 6)

 

 

 

 

 
7,504

 

 

 
7,504

Balance, March 31, 2019
36,114,251

 
$
361

 
100

 
$

 
$
151,981

 
$
31,546

 
$
(646
)
 
$
(141
)
 
$
183,101

Stock-based compensation

 

 

 

 
1,282

 

 

 

 
1,282

Vesting of non-vested shares
2,478

 

 

 

 

 

 

 

 

Issuance of common and preferred stock
7,364,413

 
74

 
10,000

 

 
145,259

 

 

 

 
145,333

Retirement of treasury stock

 

 

 

 
(141
)
 

 

 
141

 

Net loss

 

 

 

 

 
(3,732
)
 

 

 
(3,732
)
Balance, June 30, 2019
43,481,142

 
$
435

 
10,100

 
$

 
$
298,381

 
$
27,814

 
$
(646
)
 
$

 
$
325,984

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
35,436,252

 
$
354

 
100

 
$

 
$
144,650

 
$
25,407

 
$
(1,210
)
 
$
(141
)
 
$
169,060

Stock-based compensation

 

 

 

 
1,585

 

 

 

 
1,585

Vesting of non-vested shares
283,248

 
3

 

 

 
(3
)
 

 

 

 

Net loss

 

 

 

 

 
(3,102
)
 

 

 
(3,102
)
Balance, April 1, 2018
35,719,500

 
$
357

 
100

 
$

 
$
146,232

 
$
22,305

 
$
(1,210
)
 
$
(141
)
 
$
167,543

Stock-based compensation

 

 

 

 
1,385

 

 

 

 
1,385

Vesting of non-vested shares
3,338

 
1

 

 

 
(1
)
 

 

 

 

Net income

 

 

 

 

 
7,788

 

 

 
7,788

Balance, July 1, 2018
35,722,838

 
$
358

 
100

 
$

 
$
147,616

 
$
30,093

 
$
(1,210
)
 
$
(141
)
 
$
176,716

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes to unaudited condensed consolidated financial statements.
5

Table of Contents
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except share and per share amounts)


CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
Six Months Ended
 
June 30, 2019
 
July 1, 2018
Cash flows provided by operating activities:
 
 
 
Net income (loss)
$
(15,201
)
 
$
4,686

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Loss on disposals of property and equipment
508

 
209

Stock-based compensation
2,808

 
2,970

Gain on bargain purchase (Note 2)

 
(230
)
Gain on settlement agreement (Note 14)
(1,913
)
 

Impairment and other lease charges
1,277

 
3,190

Depreciation and amortization
32,413

 
28,871

Amortization of deferred financing costs
719

 
601

Amortization of bond premium and discount on debt
(264
)
 
(449
)
Amortization of deferred gains from sale-leaseback transactions

 
(790
)
Deferred income taxes
(8,219
)
 
38

Change in refundable income taxes
(41
)
 

Loss on extinguishment of debt - non-cash
129

 

Changes in other operating assets and liabilities
(1,384
)
 
(269
)
Net cash provided by operating activities
10,832

 
38,827

Cash flows used for investing activities:
 
 
 
Capital expenditures:
 
 
 
New restaurant development
(19,120
)
 
(12,157
)
Restaurant remodeling
(12,990
)
 
(10,995
)
Other restaurant capital expenditures
(8,784
)
 
(7,973
)
Corporate and restaurant information systems
(2,198
)
 
(1,338
)
Total capital expenditures
(43,092
)
 
(32,463
)
Acquisition of restaurants, net of cash acquired (Note 2)
(127,980
)
 

Properties purchased for sale-leaseback

 
(2,123
)
Proceeds from sale-leaseback transactions
4,637

 
2,862

Proceeds from insurance recoveries
123

 

Net cash used for investing activities
(166,312
)
 
(31,724
)
Cash flows provided by financing activities:
 
 
 
Proceeds from issuance of Term Loan B Facility
422,875

 

Retirement of 8% Senior Secured Second Lien Notes, premium and fees
(280,500
)
 

Borrowings under prior revolving credit facility

 
4,500

Repayments under prior revolving credit facility

 
(4,500
)
Borrowings under new revolving credit facility
175,750

 

Repayments under new revolving credit facility
(150,750
)
 

Proceeds from lease financing obligations

 
2,692

Payments on finance lease liabilities
(981
)
 
(888
)
Costs associated with financing long-term debt
(11,516
)
 
(154
)
Net cash provided by financing activities
154,878

 
1,650

Net increase (decrease) in cash and cash equivalents
(602
)
 
8,753

Cash and cash equivalents, beginning of period
4,014

 
29,412

Cash and cash equivalents, end of period
$
3,412

 
$
38,165

CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 30, 2019
 
July 1, 2018
Supplemental disclosures:
 
 
 
Interest paid on long-term debt
$
15,988

 
$
11,639

Interest paid on lease financing obligations
$
52

 
$
52

Accruals for capital expenditures
$
4,882

 
$
3,230

Common and preferred stock issued for consideration in acquisition
$
145,333

 
$

Income taxes paid
$
138

 
$
133

Lease assets obtained in exchange for new operating lease liabilities
$
36,124

 
$

Lease assets and liabilities resulting from lease modifications
$
10,255

 
$

Finance lease obligations acquired or incurred
$
518

 
$



See accompanying notes to unaudited condensed consolidated financial statements.
6

Table of Contents
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except share and per share amounts)



1. Basis of Presentation
Business Description. At June 30, 2019 Carrols Restaurant Group, Inc. ("Carrols Restaurant Group") operated, as franchisee, 1,023 Burger King® restaurants in 23 Northeastern, Midwestern and Southeastern states. At June 30, 2019, the Company also operated 58 Popeyes® in 7 Southeastern states.
Basis of Consolidation. Carrols Restaurant Group, Inc. is a holding company and conducts all of its operations through its wholly-owned subsidiaries Carrols Corporation (“Carrols”) and Carrols' wholly-owned subsidiary, Carrols LLC, a Delaware limited liability company, and Carrols LLC's wholly-owned subsidiary Republic Foods, Inc., a Maryland corporation ("Republic Foods"), and effective on April 30, 2019, New CFH, LLC and it's wholly-owned subsidiaries. New CFH's direct wholly-owned subsidiaries include Alabama Quality, LLC, Carolina Quality, LLC, Cambridge Quality Chicken, LLC, Frayser Holdings, LLC, Louisiana Quality, LLC, Cambridge Franchise Real Estate, LLC, Cambridge Real Estate Development, LLC, Carolina Quality Properties, LLC, CFH Real Estate, LLC, and Tennessee Quality, LLC. Unless the context otherwise requires, Carrols Restaurant Group and its wholly-owned subsidiaries are collectively referred to as the “Company.” All intercompany transactions have been eliminated in consolidation.
Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The three and six months ended June 30, 2019 and July 1, 2018 each contained thirteen and twenty-six weeks, respectively. The 2019 fiscal year will end December 29, 2019 and will contain 52 weeks.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2019 and July 1, 2018 have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such unaudited condensed consolidated financial statements have been included. The results of operations for the three and six months ended June 30, 2019 and July 1, 2018 are not necessarily indicative of the results to be expected for the full year.
These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 30, 2018. The December 30, 2018 consolidated balance sheet data is derived from those audited consolidated financial statements.
Use of Estimates. The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, evaluation for impairment of long-lived assets and franchise rights, lease accounting matters, the valuation of acquired assets and liabilities and the valuation of deferred income tax assets. Actual results could differ from those estimates.
Segment Information. Operating segments are components of an entity for which separate financial information is available and is regularly reviewed by the chief operating decision maker in order to allocate resources and assess performance. The Company's chief operating decision maker currently evaluates the Company's operations from a number of different operational perspectives; however resource allocation decisions are determined based on the chief operating decision maker's evaluation of the total Company operations. The Company derives all significant revenues from a single operating segment. Accordingly, the Company views the operating results of its restaurants as one reportable segment.


7


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


Business Combinations. In accordance with ASC 805, the Company allocates the purchase price of an acquired business to its net identifiable assets and liabilities based on the estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. The excess value of the net identifiable assets and liabilities acquired over the purchase price, if any, is recorded as a bargain purchase gain. The Company uses all available information to estimate fair values of identifiable intangible assets and property acquired. In making these determinations, the Company sometimes engages an independent third party valuation specialist to assist with the valuation of certain leasehold improvements, franchise rights and favorable and unfavorable leases.
The Company estimates that the seller's carrying value of acquired restaurant equipment, subject to certain adjustments, is equivalent to fair value of this equipment at the date of the acquisition. The fair values of assumed franchise agreements are valued as if the remaining term of the agreement is at the market rate. The fair values of acquired land, buildings, certain leasehold improvements and restaurant equipment subject to finance leases are determined using both the cost approach and market approach. The fair value of the favorable and unfavorable leases acquired, right-of-use assets, right-of-use liabilities, as well as the fair value of land, buildings, leasehold improvements and restaurant equipment subject to finance leases acquired is measured using significant inputs observable in the open market. The Company categorizes all such inputs as Level 2 inputs under ASC 820. The fair value of acquired franchise rights is primarily determined using the income approach, and unobservable inputs classified as Level 3 under ASC 820.

Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. At June 30, 2019, the Company did not have any cash invested in money market funds. At December 30, 2018, the Company had $2.3 million, invested in money market funds, which are classified as cash equivalents on the condensed consolidated balance sheet.
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect the Company's own assumptions. Financial instruments include cash and cash equivalents, trade and other receivables, accounts payable and long-term debt. The carrying amounts of cash and cash equivalents, trade and other receivables and accounts payable approximate fair value because of the short-term nature of these financial instruments. The carrying amount of the Term Loan B Credit Facility at June 30, 2019 approximate fair value because of its variable rate. The Carrols Restaurant Group 8.0% Senior Secured Second Lien Notes due 2022 were redeemed in full as of June 30, 2019. At December 30, 2018, the fair value of the of the 8.0% Senior Secured Second Lien Notes was based on a recent trading value, which is considered Level 2, and was approximately $277.1 million.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analysis of long-lived assets, goodwill and intangible assets. Long-lived assets and definite-lived intangible assets are measured at fair value on a nonrecurring basis using Level 3 inputs. As described in Note 4, the Company recorded long-lived asset impairment charges of $0.3 million and $1.1 million during the three and six months ended June 30, 2019, respectively, and $2.3 million and $2.4 million during the three and six months ended July 1, 2018.
Recently Issued Accounting Pronouncements Adopted. The Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) on December 31, 2018, the first day of fiscal 2019. The new standard requires a lessee to recognize a liability for lease obligations, representing the discounted obligation to make minimum lease payments, and a corresponding right-of-use asset on the balance sheet for all leases with a term longer than 12 months.
The Company elected the optional transition method to initially apply the new lease standard at the adoption date and accordingly, financial information for periods prior to the date of initial application have not been adjusted. The Company has elected the package of practical expedients, which permits the Company to not reassess its prior conclusions regarding lease identification, lease classification and initial direct costs. The Company did not elect to

8


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


use the allowed expedient that permitted the use of hindsight or the expedient in determining lease term or impairment of right-of-use assets. In addition, the Company elected a short-term lease exemption policy that permits the Company to not apply the recognition requirements of the new lease standard to leases with a term of 12 months or less. The Company also elected an accounting policy to not separate lease and non-lease components for certain classes of leases.
Upon adoption of this ASU, the Company recognized lease liabilities of approximately $542.9 million, based on the present value of remaining minimum rental payments discounted at the Company's incremental borrowing rate and right-of-use assets of approximately $517.6 million. The difference between the right-of-use assets and operating lease liabilities is related to prepaid and deferred non-level rents, unamortized lease acquisition costs and unamortized favorable and unfavorable lease balances. The Company has recognized an adjustment to retained earnings upon adoption of $7.5 million, net of the deferred tax impact, to eliminate the historical deferred gains on qualified sale-leaseback transactions. Adoption of this ASU did not materially impact the condensed consolidated statements of cash flows or any covenant related to the Company's long-term debt.
Recently Issued Accounting Standards Not Yet Adopted. In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill by eliminating step 2 from the goodwill impairment test. Under the new ASU, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized for the amount by which the carrying amount exceeds its fair value. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company believes that this pronouncement will have no impact on its consolidated financial statements and related disclosures.
Subsequent events. The Company reviewed and evaluated subsequent events through the issuance date of the Company’s unaudited condensed consolidated financial statements.
2. Acquisitions
In 2012, as part of an acquisition of restaurants from Burger King Corporation ("BKC"), the Company was assigned BKC's right of first refusal on the sale of franchisee-operated restaurants in 20 states (the "ROFR"). Since the beginning of 2018, the Company has acquired an aggregate of 222 Burger King restaurants and 55 Popeyes restaurants from other franchisees in the following transactions, some of which were acquired pursuant to the exercise of the ROFR (in thousands, except number of restaurants):
Closing Date
 
Number of Restaurants
 
Purchase Price
 
Market Location
2018 Acquisitions:
 
 
 
 
 
 
February 13, 2018
(1)
1

 
$


New York
August 21, 2018
(2)
2

 
1,666

 
Detroit, Michigan
September 5, 2018
(2)
31

 
25,930

 
Western Virginia
October 2, 2018
 
10

 
10,506

 
South Carolina and Georgia

 
44

 
38,102

 
 
2019 Acquisitions:
 
 
 
 
 
 
April 30, 2019
(3)
220

 
257,525

 
Southeastern states
June 11, 2019
 
13

 
15,788

 
Baltimore, Maryland
Total 2018 and 2019 Acquisitions
 
277

 
$
311,415

 
 
(1)
The Company recorded a bargain purchase gain because the fair value of assets acquired, largely representing a franchise right asset of $0.3 million, exceeded the total fair value of consideration paid by $0.2 million.
(2)
Acquisitions resulting from the exercise of the ROFR with Burger King.

9


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


(3)
During the second quarter of 2019, the Company completed the merger with New CFH, LLC (“Cambridge”) and acquired 165 Burger King restaurants and 55 Popeyes restaurants. See further discussion below.
2019 Acquisitions
On April 30, 2019 the Company completed a merger with Cambridge ("the Cambridge Merger") for a purchase price of $257.5 million through the issuance of shares of stock which consisted of (i) approximately 7.4 million shares of common stock, (ii) 10,000 shares of the Company's newly designated Series C Convertible Preferred Stock, convertible into approximately 7.5 million shares of common stock, and (iii) the retirement of approximately $112.2 million of the outstanding indebtedness of Cambridge. The conversion of the Series C Preferred Stock will be subject to a vote of the Company's stockholders at the Company’s 2019 Annual Meeting of Stockholders to be held on August 29, 2019 (and to the extent not approved, at any stockholder meeting thereafter), and will automatically convert into the Company's common stock upon stockholder approval of such conversion. All shares issued are subject to a two year restriction on sale or transfer subject to certain limited exceptions. As part of the transaction, Cambridge has the right to designate up to two director nominees and two Cambridge Holdings executives joined the Company's Board of Directors on April 30, 2019.
Under the purchase method of accounting, the aggregate purchase price is allocated to the net tangible and intangible assets based on their estimated fair values on the acquisition date. For purposes of estimating the total purchase price in connection with the Cambridge merger, we have assumed the issuance of 14.9 million shares of common stock which includes the conversion of the Company's Series C Preferred Stock into common stock as the Company believes this is the most likely scenario. If the conversion does not occur at the 2019 Annual Meeting of Stockholders on August 29, 2019, the fair value of the Series C Preferred Stock could be adjusted; which would impact the allocation of the purchase price for the Cambridge Merger. The value for the common stock of $145.3 million was based on the $9.81 closing price of the Company's stock on the date of acquisition. See Note 12—Preferred Stock for further information.
The Company has engaged a third party valuation specialist to assist with the valuation of assets acquired. As the values of certain assets and liabilities are preliminary in nature, the fair values for the equity consideration, property and equipment, favorable and unfavorable leases which are an adjustment to the right-of-use assets under ASC 842, restaurant equipment, franchise rights and goodwill are subject to adjustment as additional information is obtained. The preliminary fair value of property and equipment, franchise agreements, and favorable and unfavorable lease value of the right-of-use assets was based on the assets carrying value due to recent valuations completed by Cambridge on the acquisition of 132 restaurants and construction of 33 new restaurants in the last three years. When the independent valuation is finalized, changes to the preliminary valuation of assets acquired or liabilities assumed may result in material adjustments to the estimated fair value of identifiable assets acquired, including franchise rights, goodwill, and the related deferred taxes.
Goodwill recorded in connection with the Cambridge Merger represents a preliminary assessment of costs in excess of fair values assigned to the underlying net assets of acquired restaurants. Goodwill is not expected to be deductible for income tax purposes for the Cambridge Merger.
The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the Cambridge Merger at their estimated fair values. The following table summarizes the preliminary allocation of the aggregate purchase price for the Cambridge Merger reflected in the condensed consolidated balance sheets as of June 30, 2019.

10


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


Inventory
$
2,865

Prepaid expenses
3,074

Other assets
2,230

Land and buildings
19,746

Restaurant equipment
26,729

Right-of-use assets
250,544

Leasehold improvements
3,941

Franchise fees
7,308

Franchise rights
144,499

Goodwill
67,639

Operating lease liabilities
(255,015
)
Accounts payable
(5,229
)
Accrued payroll, related taxes and benefits
(2,990
)
Other liabilities
(7,816
)
Net assets acquired
$
257,525

The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the 2019 acquisitions (other than the Cambridge Merger) at their estimated fair values. The following table summarizes the preliminary allocation of the aggregate purchase price for the 2019 acquisitions reflected in the condensed consolidated balance sheets as of June 30, 2019.
Inventory
$
147

Restaurant equipment
706

Restaurant equipment - subject to finance leases
150

Right-of-use assets
9,515

Leasehold improvements
6,205

Franchise fees
358

Franchise rights
8,849

Goodwill
55

Operating lease liabilities
(9,968
)
Finance lease liabilities for restaurant equipment
(185
)
Accounts payable
(44
)
Net assets acquired
$
15,788

Goodwill recorded in connection with the 2019 acquisitions represents costs in excess of fair values assigned to the underlying net assets of acquired restaurants. The Company is evaluating if goodwill will be deductible for income tax purposes for the 2019 acquisitions. Deferred income tax assets and liabilities are due primarily to the book and tax bases difference of franchise rights, property and equipment, net favorable and unfavorable leases.

11


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


2018 Acquisitions
The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the acquisitions at their estimated fair values. The following table summarizes the final allocation of the aggregate purchase price for the 2018 acquisitions reflected in the condensed consolidated balance sheets as of December 30, 2018.
Inventory
$
401

Restaurant equipment
2,092

Restaurant equipment - subject to finance leases
43

Leasehold improvements
1,329

Franchise fees
1,264

Franchise rights
31,275

Favorable leases
587

Deferred income taxes
346

Goodwill
1,677

Finance lease liabilities for restaurant equipment
(49
)
Unfavorable leases
(624
)
Accounts payable
(9
)
Net assets acquired
$
38,332


The results of operations for the restaurants acquired are included from the closing date of the respective acquisition. The 2018 and 2019 acquired restaurants contributed restaurant sales of $65.7 million and $78.6 million in the three and six months ended June 30, 2019, respectively, and contributed restaurant sales of $0.3 million and $0.4 million in the three and six months ended July 1, 2018, respectively. It is impracticable to disclose net earnings for the post-acquisition period for the acquired restaurants as net earnings of these restaurants were not tracked on a collective basis due to the integration of administrative functions, including field supervision.
The unaudited pro forma impact on the results of operations for the restaurants acquired in 2019 for the three and six months ended June 30, 2019 and July 1, 2018 is included below. The unaudited pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. The following table summarizes the Company's unaudited pro forma operating results:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Restaurant sales
$
397,213

 
$
394,283

 
$
764,014

 
$
750,412

Net income (loss)
$
(926
)
 
$
13,535

 
$
(8,440
)
 
$
14,655

Basic and diluted net income (loss) per share
$
(0.02
)
 
$
0.30

 
$
(0.22
)
 
$
0.32

This unaudited pro forma financial information does not give effect to any anticipated synergies, operating efficiencies, cost savings or any integration costs related to the acquired restaurants.
The unaudited pro forma financial results exclude transaction costs recorded as general and administrative expenses of $1.4 million and $4.0 million during the three and six months ended June 30, 2019 and $0.1 million and $0.2 million during the three and six months ended July 1, 2018.

12


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


3. Intangible Assets
Goodwill. The Company is required to review goodwill for impairment annually, or more frequently when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment as of the last day of its fiscal year and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess the value of its goodwill. There have been no recorded goodwill impairment losses during the six months ended June 30, 2019 or July 1, 2018. The change in goodwill for the six months ended June 30, 2019 is summarized below.
Balance at December 30, 2018
$
38,469

Acquisitions of restaurants (Note 2)
67,694

Balance at June 30, 2019
$
106,163

Franchise Rights. Amounts allocated to franchise rights for each acquisition of Burger King® and Popeyes® restaurants are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period.
The Company assesses the potential impairment of franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. No impairment charges were recorded related to the Company’s franchise rights for the three or six months ended June 30, 2019 and July 1, 2018. The change in franchise rights for the six months ended June 30, 2019 is summarized below:
Balance at December 30, 2018
$
175,897

Acquisitions of restaurants (Note 2)
153,348

Amortization expense
(4,072
)
Balance at June 30, 2019
$
325,173

Amortization expense related to franchise rights was $2.0 million and $1.8 million for the three months ended June 30, 2019 and July 1, 2018, respectively and $4.1 million and $3.6 million for the six months ended June 30, 2019 and July 1, 2018, respectively. The Company expects annual amortization expense to be $8.3 million in 2019 and $8.4 million in each of the following five years.
4. Impairment of Long-Lived Assets and Other Lease Charges
The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. If an indicator of impairment exists for any of its assets, an estimate of the undiscounted future cash flows over the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries.
The Company determines the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions and the Company’s history of transferring these assets in the operation of its business. The Company determines the fair value of right-of-use lease assets based on an assessment of market rents and a discounted future cash flow model. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy.

13


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


During the three months ended June 30, 2019, the Company recorded impairment and other lease charges of $0.4 million consisting of $0.2 million related to initial impairment charges for one underperforming restaurant, capital expenditures of $0.1 million at previously impaired restaurants, and $0.1 million associated with the closure of one underperforming restaurant. During the six months ended June 30, 2019, the Company also recorded impairment and other lease charges of $1.3 million consisting of $0.9 million related to initial impairment charges for three underperforming restaurants, capital expenditures of $0.2 million at underperforming restaurants and $0.2 million of other lease charges primarily due to the de-imaging of six restaurants closed during the first quarter.
During the three months ended July 1, 2018, the Company recorded impairment and other lease charges of $2.9 million which included $1.9 million related to the write-off of defective product holding unit kitchen equipment that was replaced, a loss of $0.6 million associated with a sale-leaseback of a restaurant property and $0.4 million of capital expenditures at underperforming restaurants. During the six months ended July 1, 2018, the company also recorded impairment and other lease charges of $0.1 million associated with the closure of two underperforming restaurants.
The following table presents the activity in the accrual for closed restaurant locations:
 
Six Months Ended
 
Year Ended
 
June 30, 2019
 
December 30, 2018
Balance, beginning of period
$
1,352

 
$
2,028

Provisions for closures
42

 
249

Changes in estimates of accrued costs
82

 
(147
)
Payments, net
(260
)
 
(889
)
Other adjustments, including the effect of discounting future obligations
575

 
111

Balance, end of period
$
1,791

 
$
1,352

Changes in estimates of accrued costs primarily relate to revisions or terminations of certain closed restaurant leases, changes in assumptions for sublease income and other costs. Other adjustments include the assumption of a $0.5 million liability for a closed restaurant acquired in the Cambridge merger.
5. Other Liabilities, Long-Term
Other liabilities, long-term, at June 30, 2019 and December 30, 2018 consisted of the following:
 
June 30, 2019
 
December 30, 2018
Deferred rent
$

 
$
16,610

Unfavorable leases, net

 
12,348

Accrual for closed restaurants, long-term
828

 
3,074

Accrued workers’ compensation and general liability claims
4,676

 
4,398

Deferred compensation
3,799

 
3,610

Other
592

 
120

 
$
9,895

 
$
40,160


In accordance with the adoption of ASC 842, as of December 31, 2018, the first day of fiscal 2019, unamortized unfavorable leases of $12.3 million, deferred rent balances of $16.6 million and unamortized lease incentives of $2.6 million were reclassified to adjust the beginning balance of operating right-of-use assets.

14


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


6. Leases

The Company utilizes land and buildings in its operations under various lease agreements. The Company does not consider any one of these individual leases material to the Company's operations. Initial lease terms are generally for twenty years and, in many cases, provide for renewal options and in most cases rent escalations. The exercise of such renewal options are generally at the Company’s sole discretion. The Company evaluates renewal options at lease commencement to determine if such options are reasonably certain to be exercised based on economic factors. Certain leases also require contingent rent, determined as a percentage of sales as defined by the terms of the applicable lease agreement. For most locations, the Company is obligated for occupancy related costs including payment of property taxes, insurance and utilities.

The right-of-use (“ROU”) lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments in exchange for that right of use. As the rate implicit within our leases is not readily determinable, the Company uses its incremental borrowing rate which considers the Company's debt issuances and lease term in determining the present value of future payments. The ROU asset is also reduced by lease incentives, initial direct costs and adjusted by favorable lease assets and unfavorable lease liabilities. Variable lease components represent amounts that are fixed in nature and are recognized in expense as incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term. The Company does not account for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the non-lease components.

As of June 30, 2019, the Company had additional leases that have not yet commenced of $9.7 million. These leases will commence during the remainder of fiscal 2019 or in 2020 with lease terms of 5 years to 20 years.

In addition, the Company utilizes certain restaurant equipment under various finance lease agreements with initial terms of generally eight years. The Company does not consider any one of these individual leases material to the Company's operations.

For certain leases where rent escalates based upon a change in a financial index, such as the Consumer Price Index, the difference between the rate at lease inception and the subsequent fluctuations in that rate are included in variable lease costs. Additionally, because the Company has elected to not separate lease and non-lease components, in limited instances, variable costs also include payments to the landlord for common area maintenance, real estate taxes, insurance and other operating expenses. Lease expense is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred.

Lease Cost

The components and classification of lease expense for the three and six months ended June 30, 2019 are as follows:

15


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


 
 
 
 
Three Months Ended
 
Six Months Ended
Lease cost
 
Classification
 
June 30, 2019
 
June 30, 2019
Operating lease cost (1)
 
Restaurant rent expense
 
$
22,543

 
$
40,837

Operating lease cost
 
General and administrative
 
148

 
222

Variable lease cost
 
Restaurant rent expense
 
4,290

 
8,090

Sublease income
 
Restaurant rent expense
 
(143
)
 
(321
)
Finance lease cost:
 
 
 
 
 
 
Amortization of right-of-use assets
 
Depreciation and amortization
 
523

 
999

Interest on lease liabilities
 
Interest expense
 
64

 
135

Total lease cost
 
 
 
$
27,425

 
$
49,962

(1)
Includes short-term leases which are not material.
Lease Position
Supplemental balance sheet information related to leases was as follows as of June 30, 2019:
 
 
 
 
As of
Leases
 
Classification
 
June 30, 2019
Assets
 
 
 
 
Operating leases
 
Operating right-of-use assets, net
 
$
785,000

Finance leases
 
Property and equipment, net
 
2,904

Total leased assets
 
 
 
$
787,904

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 
 
Operating leases
 
Current portion of operating lease liabilities
 
$
39,715

Finance leases
 
Current portion of long-term debt and finance lease liabilities
 
2,261

Long-term
 
 
 
 
Operating leases
 
Operating lease liabilities
 
777,054

Finance leases
 
Long-term debt and finance lease liabilities, net
 
1,393

Total lease liabilities
 
 
 
$
820,423

 
 
 
 
 
Weighted Average Remaining Lease Term
 
 
Operating leases
 
 
 
14.5 years

Finance leases
 
 
 
1.9 years

 
 
 
 
 
Weighted Average Discount Rate
 
 
Operating leases
 
 
 
7.0
%
Finance leases
 
 
 
8.0
%

Other Information
Supplemental cash flow information related to leases for the six months ended June 30, 2019 are as follows:

16


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


 
 
Six Months Ended
 
 
June 30, 2019
Gain on sale-leaseback transactions
 
$
105

Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
36,006

Operating cash flows from finance leases
 
$
135

Financing cash flows from finance leases
 
$
981

Future minimum lease payments under noncancelable lease at June 30, 2019 are as follows:
Fiscal year ending:
Operating Leases
 
Finance Leases
December 29, 2019
$
47,846

 
$
1,244

January 3, 2021
93,769

 
1,755

January 2, 2022
92,202

 
583

January 1, 2023
91,415

 
240

December 31, 2023
90,493

 
68

Thereafter
907,550

 
129

Total minimum lease payments
1,323,275

 
4,019

Less: imputed interest
(506,506
)
 
(365
)
Present value of lease liabilities
816,769

 
3,654

Less: current portion
(39,715
)
 
(2,261
)
Total long-term lease liabilities
$
777,054

 
$
1,393

Disclosures Related to Periods Prior to Adoption of the New Lease Standard
As previously disclosed in the Company's 2018 Annual Report on Form 10-K and under the previous lease accounting standard, the maturities of lease liabilities at December 30, 2018 were as follows:
Fiscal year ending:
Operating Leases
 
Capital Leases
December 29, 2019
$
73,304

 
$
2,180

January 3, 2021
71,764

 
1,454

January 2, 2022
70,607

 
345

January 1, 2023
70,160

 
190

December 31, 2023
69,221

 
68

Thereafter
640,793

 
129

Total minimum lease payments
$
995,849

 
4,366

     Less amount representing interest
 
 
(425
)
Total obligations under capital leases
 
 
3,941

     Less current portion
 
 
(1,948
)
Long-term obligations under capital leases
 
 
$
1,993



17


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


7. Long-Term Debt
Long-term debt at June 30, 2019 and December 30, 2018 consisted of the following:
 
June 30, 2019
 
December 30, 2018
Collateralized:
 
 
 
Term Loan B Facility
$
425,000

 
$

Senior Credit Facility - Revolving credit borrowings
25,000

 

Carrols Restaurant Group 8% Senior Secured Second Lien Notes

 
275,000

Finance lease liabilities
3,654

 
3,941

 
453,654

 
278,941

Less: current portion of long-term debt and finance lease liabilities
(6,512
)
 
(1,948
)
Less: unamortized debt issuance costs
(8,519
)
 
(3,673
)
Less: unamortized original issue discount
(2,082
)
 

Add: bond premium

 
3,503

Total Long-term debt
$
436,541

 
$
276,823

On April 30, 2019, the Company entered into a new senior secured credit facility in an aggregate principal amount of $550.0 million, consisting of (i) a Term Loan B Facility in an aggregate principal amount of $425.0 million (the “Term Loan B Facility”) maturing on April 30, 2026 and (ii) a new revolving credit facility (including a sub-facility for standby letters of credit) in an aggregate principal amount of $125.0 million maturing on April 30, 2024 (the “New Revolving Credit Facility” and, together with the Term Loan B Facility, the “New Senior Credit Facilities”).
The net proceeds of the Term Loan B Facility were $422.9 million after original issue discount and were used to (i) refinance the indebtedness of Carrols, including redemption of $275.0 million of 8.0% Senior Secured Second Lien Notes due 2022 and accrued interest thereon at a redemption price of 102%, and (ii) retirement of the indebtedness of Cambridge and (iii) the payment of fees and expenses in connection with the Cambridge Merger and New Senior Credit Facilities. The proceeds of the Revolving Credit Facility will finance ongoing working capital and other general corporate purposes, including permitted acquisitions and required expenditures under development agreements. In connection with these transactions, the Company recognized a loss of $7.4 million on the extinguishment of the 8% Senior Secured Second Lien Notes.
Borrowings under the New Senior Credit Facilities bear interest, at a rate per annum equal to (i) the Alternate Base Rate (as defined in the New Senior Credit Facilities) plus 2.25% or (b) LIBOR Rate (as defined in the New Senior Credit Facilities) plus 3.25%. At June 30, 2019 the Company's LIBOR Rate margin was 3.25% and the Alternate Base Rate margin was 2.25%.
The Term Loan B borrowings shall be due and payable in quarterly installments, beginning on September 30, 2019 as follows:
(i) twenty-seven quarterly installments of $1.1 million;
(ii) one final payment of $396.3 million on April 30, 2026.
As of June 30, 2019, there were $25.0 million of revolving credit borrowings outstanding and $11.7 million of letters of credit issued under the new revolving credit facility. After reserving for issued letters of credit and outstanding revolving credit borrowings, $88.3 million was available for revolving credit borrowings under the New Senior Credit Facilities at June 30, 2019.
The Company was in compliance with the financial covenants under its New Senior Credit Facilities at June 30, 2019.

18


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


8% Senior Secured Second Lien Notes due 2022. On April 29, 2015, the Company issued $200.0 million principal amount of 8.0% Senior Secured Second Lien Notes due 2022 and on June 23, 2017, the Company issued an additional $75.0 million principal amount of 8.0% Senior Secured Second Lien Notes due 2022 (the "8% Notes"). The 8% Notes mature and were payable on May 1, 2022. Interest was payable semi-annually on May 1 and November 1. The 8% Notes were guaranteed by the Company's subsidiaries and were secured by second-priority liens on substantially all of the Company's and its subsidiaries' assets (including a pledge of all of the capital stock and equity interests of its subsidiaries).
Prior Senior Credit Facility. The Company's prior senior credit facility provided for maximum revolving credit borrowings of up to $73.0 million (including $20.0 million available for letters of credit). Borrowings under the prior senior credit facility bore interest at a rate per annum, at the Company’s option, of:
(i) the Alternate Base Rate plus the applicable margin of 1.75% to 2.75% based on the Company’s Adjusted Leverage Ratio, or
(ii) the LIBOR Rate plus the applicable margin of 2.75% to 3.75% based on the Company’s Adjusted Leverage Ratio (all terms as defined under the prior senior credit facility).
The Company’s obligations under the prior senior credit facility were jointly and severally guaranteed by its subsidiaries and were secured by first priority liens on substantially all of the assets of the Company and its subsidiaries, including a pledge of all of the capital stock and equity interests of its subsidiaries.
Under the prior senior credit facility, the Company was required to make mandatory prepayments of borrowings in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions).
The prior senior credit facility contained certain covenants, including without limitation, those limiting the Company’s and its subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in all material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. In addition, the prior senior credit facility required the Company to meet certain financial ratios, including a Fixed Charge Coverage Ratio, Adjusted Leverage Ratio and First Lien Leverage Ratio (all as defined under the prior senior credit facility).
The prior senior credit facility contained customary default provisions, including that the lenders could 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 included, without limitation, payment default, covenant defaults, bankruptcy type defaults, cross-defaults on other indebtedness, judgments or upon the occurrence of a change of control.
8. Income Taxes
The provision (benefit) for income taxes for the three and six months ended June 30, 2019 and July 1, 2018 was comprised of the following:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Current
$
53

 
$
57

 
$
65

 
$
160

Deferred
(8,561
)
 
279

 
(8,219
)
 
38

Provision (benefit) for income taxes
$
(8,508
)
 
$
336

 
$
(8,154
)
 
$
198

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.

19


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


The benefit for income taxes for the three and six months ended June 30, 2019 was derived using an estimated effective annual income tax rate for all of 2019 of 35.1%, which excludes any discrete tax adjustments. The difference compared to the statutory rate for 2019 is attributed to approximately $3.0 million of non-deductible acquisition costs incurred during the year and the benefits of federal employment credits which are not directly related to the amount of pre-tax loss recorded in a period. Accordingly, in periods where recorded pre-tax income (loss) is relatively small, the proportional effect of these items on the effective tax rate may be significant. The income tax benefit for the six months ended June 30, 2019 contains net discrete tax adjustments of $0.1 million of tax expense.
The provision for income taxes for the three and six months ended July 1, 2018 was derived using an estimated effective annual income tax rate for all of 2018 of 1.5%, which excludes any discrete tax adjustments and was below the statutory rate due to the effect of fixed employment tax credits on taxable income. The income tax expense for the six months ended July 1, 2018 contains net discrete tax adjustments of $0.1 million of tax expense.
As of June 30, 2019, the Company had federal net operating loss carryforwards of approximately $89.6 million which expire beginning in 2033. The Company's state net operating loss carryforwards expire beginning in 2019 through 2038.
The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At June 30, 2019 and December 30, 2018, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions. The tax years 2013 - 2018 remain open to examination by the major taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to the uncertainties regarding the timing of examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.
9. Stock-Based Compensation
Stock-based compensation expense for the three months ended June 30, 2019 and July 1, 2018 was $1.3 million and $1.4 million, respectively and for the six months ended June 30, 2019 and July 1, 2018 was $2.8 million and $3.0 million, respectively. On January 15, 2019, the Company granted 417,500 non-vested restricted shares to certain employees and officers of the Company and 47,470 non-vested restricted shares to outside directors of the Company. These shares vest, become non-forfeitable and are being expensed over their three-year vesting period.
A summary of all non-vested shares activity for the six months ended June 30, 2019 was as follows:
 
Shares
 
Weighted Average Grant Date Price
Non-vested at December 30, 2018
796,476

 
$
13.12

Granted
468,199

 
$
9.48

Vested
(374,302
)
 
$
12.66

Non-vested at June 30, 2019
890,373

 
$
11.40

The fair value of non-vested shares is based on the closing price on the date of grant. As of June 30, 2019, the total non-vested unrecognized stock-based compensation expense was approximately $7.6 million and the remaining weighted average vesting period for non-vested shares was 1.9 years. The Company expects to record an additional $2.8 million in stock-based compensation expense related to the vesting of these awards for the remainder of 2019.
10. Commitments and Contingencies
Lease Guarantees. Fiesta Restaurant Group, Inc. ("Fiesta"), a former wholly-owned subsidiary of the Company, was spun-off in 2012 to the Company's stockholders. As of June 30, 2019, the Company is a guarantor under 27 Fiesta restaurant property leases, of which all except for one of those restaurants is still operating, with lease terms expiring on various dates through 2030, and is the primary lessee on five Fiesta restaurant property leases, which it subleases to Fiesta. The Company is fully liable for all obligations under the terms of the leases in the event that Fiesta fails to pay any sums due under the lease, subject to indemnification provisions of a Separation and Distribution Agreement entered into in connection with the spin-off of Fiesta.
The maximum potential amount of future undiscounted rental payments the Company could be required to make under these leases at June 30, 2019 was $13.8 million of which $0.4 million is included in operating lease liabilities in accordance with ASC 842. The obligations under these leases will generally continue to decrease over time as these operating leases expire. No payments related to these guarantees have been made by the Company to date and none are expected to be required to be made in the future. The Company has not recorded a liability for $13.4 million of these guarantees in accordance with ASC 460 - Guarantees as Fiesta has indemnified the Company for all such obligations and the Company did not believe it was probable it would be required to perform under any of the guarantees or direct obligations.
Litigation. The Company is a party to various litigation matters that arise in the ordinary course of business. The Company does not believe that the outcome of any of these other matters meet the disclosure or recognition standards, nor will they have a material adverse effect on its consolidated financial statements.
11. Transactions with Related Parties
In connection with an acquisition of restaurants from BKC in 2012, the Company issued to BKC 100 shares of Series A Convertible Preferred Stock, which was exchanged for 100 shares of newly issued Series B Convertible Preferred Stock in 2018, and as of June 30, 2019 is convertible into approximately 15.4% of the outstanding shares of the Company's common stock after giving effect to the conversion of the Series B and Series C Preferred Stock. Pursuant to the terms of the Series B Convertible Preferred Stock, BKC together with certain other entities that are both affiliates of BKC and either Restaurant Brands International or Restaurant Brands International Limited Partnership ("RBI") are entitled to elect two representatives on the Company's board of directors.
Each of the Company's restaurants operates under a separate franchise agreement with RBI. These franchise agreements generally provide for an initial term of twenty years and currently have an initial franchise fee of fifty thousand dollars. Any franchise agreement, including renewals, can be extended at the Company's discretion for an additional 20 year term, with RBI 's approval, provided that, among other things, the restaurant meets the current restaurant image standard and the Company is not in default under terms of the franchise agreement. In addition to the initial franchise fee, the Company generally pays BKC a monthly royalty at a rate of 4.5% of sales and Popeye's a weekly royalty at a rate of 5.0% of sales. Royalty expense was $15.6 million and $13.0 million in the three months ended June 30, 2019 and July 1, 2018, respectively and was $28.0 million and $24.5 million in the six months ended June 30, 2019 and July 1, 2018, respectively.
The Company is also generally required to contribute 4% of restaurant sales from its restaurants to an advertising fund utilized by RBI for its advertising, promotional programs and public relations activities, and additional amounts for additional local advertising in markets that approve such advertising. Advertising expense associated with these expenditures was $14.4 million and $12.1 million in the three months ended June 30, 2019 and July 1, 2018, respectively and was $25.8 million and $23.0 million in the six months ended June 30, 2019 and July 1, 2018, respectively.
As of June 30, 2019, the Company leased 249 of its restaurant locations from BKC and 115 of these locations are subleased by BKC from various third-party lessors. Aggregate rent under these BKC leases was $6.8 million for each of the three months ended June 30, 2019 and July 1, 2018, and was $13.6 million and $13.5 million in the six

20


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


months ended June 30, 2019 and July 1, 2018, respectively. The Company does not believe that such lease terms have been significantly affected by the fact that the Company and BKC are deemed to be related parties.

The Company and BKC have entered into an Area Development and Remodeling Agreement ("Area Development Agreement") commencing on April 30, 2019 and ending on September 30, 2024, which supersedes the Operating Agreement dated as of May 30, 2012, as amended, between Carrols LLC and BKC. Pursuant to the Area Development Agreement, BKC assigned its right of first refusal under its franchise agreements with its franchisees to purchase all of the assets of a Burger King restaurant on the same terms proposed between such franchisee and a third party purchaser (the “ADA ROFR”), in 16 states and a limited number of counties in four additional states, and granted franchise pre-approval to acquire Burger King restaurants until the date that Carrols LLC has acquired more than an aggregate of 500 Burger King restaurants. The continued assignment of the ADA ROFR is subject to suspension or termination in the event of non-compliance by Carrols LLC with certain terms as set forth in the Area Development Agreement. Carrols LLC will pay BKC $3.0 million for the ADA ROFR in four equal installment payments over the course of one year. As of June 30, 2019, the Company owed BKC $1.5 million associated with its purchase of the ADA ROFR and $10.1 million related to the payment of advertising, royalties and rent, which is remitted on a monthly basis.

The Company has assumed Cambridge's development agreement for Popeyes®, which includes a right of first refusal for acquisitions in two southern states, as well as a development commitment for approximately 80 new Popeyes® restaurants over six years.
In addition, the Company received $1.9 million related to a settlement with BKC for their approval of new restaurant development by other franchisees which unfavorably impacted the Company's restaurants which was recorded as other income in the first quarter of 2019.
12. Preferred Stock

In connection with the Cambridge Merger, Cambridge was issued 10,000 shares of Series C Preferred Stock. The Series C Preferred Stock shall (i) accrue a dividend of 9% per annum that is payable by increasing the Stated Value (as defined in the Carrols Restaurant Group, Inc. Certificate of Designations of Series C Convertible Preferred Stock) per share of Series C Preferred Stock every six months from the date of issuance (ii) be subject to certain issuance restrictions and (iii) be initially convertible into 7.5 million of shares of the Company's common stock, subject to adjustment pursuant to certain anti-dilution provisions and (iv) be automatically convertible into shares of the Company's common stock upon the vote of the Company's stockholders at the Company's 2019 Annual Meeting of Stockholders to be held on August 29, 2019 (and to the extent not approved, at any stockholder meeting thereafter). Pursuant to the Merger Agreement, the Stockholder Approval will be voted upon at its next annual meeting of stockholders to be held after the closing of the Mergers. As of June 30, 2019 the 10,000 shares of Series C Preferred Stock, along with 7.4 million shares of common stock, constitutes approximately 24.2% of the Company's common stock after giving effect to the conversion of the Series B and Series C Preferred Stock.

13. Net Income (Loss) per Share
The Company applies the two-class method to calculate and present net income (loss) per share. The Company's non-vested share awards, Series B Convertible Preferred Stock issued to BKC and Series C Preferred Stock contain non-forfeitable rights to dividends and are considered participating securities for purposes of computing net income (loss) per share pursuant to the two-class method. Under the two-class method, net earnings are reduced by the amount of dividends declared (whether paid or unpaid) and the remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. As the Company incurred a net loss for the three months and six months ended June 30, 2019, and losses are not allocated to participating securities under the two-class method, such method is not applicable for the aforementioned interim reporting periods.
Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted net income

21


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


(loss) per share reflects additional shares of common stock outstanding, where applicable, calculated using the treasury stock method or the two-class method.
The following table sets forth the calculation of basic and diluted net income (loss) per share:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Basic net income (loss) per share:
 
 
 
 
 
 
 
Net income (loss)
$
(3,732
)
 
$
7,788

 
$
(15,201
)
 
$
4,686

Less: Income attributable to non-vested shares

 
(139
)
 

 
(83
)
Less: Income attributable to preferred stock

 
(1,596
)
 

 
(961
)
Net income (loss) available to common stockholders
$
(3,732
)
 
$
6,053

 
$
(15,201
)
 
$
3,642

Weighted average common shares outstanding
41,051,354

 
35,720,243

 
38,548,246

 
35,693,027

Basic net income (loss) per share
$
(0.09
)
 
$
0.17

 
$
(0.39
)
 
$
0.10

Diluted net income (loss) per share:
 
 
 
 
 
 
 
Net income (loss)
$
(3,732
)
 
$
7,788

 
$
(15,201
)
 
$
4,686

Shares used in computing basic net loss per share
41,051,354

 
35,720,243

 
38,548,246

 
35,693,027

Dilutive effect of preferred stock and non-vested shares

 
9,481,023

 

 
9,541,577

Shares used in computing diluted net loss per share
41,051,354

 
45,201,266

 
38,548,246

 
45,234,604

Diluted net income (loss) per share
$
(0.09
)
 
$
0.17

 
$
(0.39
)
 
$
0.10

Shares excluded from diluted net income (loss) per share computations (1)
17,755,355

 

 
17,755,355

 


(1) Shares issuable upon conversion of preferred stock and non-vested shares were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive.
14. Other Expense (Income)
In the three months ended June 30, 2019, the Company recorded other expense, net of $0.4 million consisting of a loss on the disposal of restaurant equipment of $0.5 million and a $0.1 million gain on a sale-leaseback transaction.

In the six months ended June 30, 2019, the Company recorded other income of $1.8 million which consisted of a $1.9 million gain from a settlement with BKC for their approval of new restaurant development by other franchisees which unfavorably impacted the Company's restaurants, a $0.1 million gain on two sale-leaseback transactions, a $0.1 million gain related to an insurance recovery from a fire at one of its restaurants in the prior year and a loss on a disposal of restaurant equipment of $0.5 million.

22


CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)


15. Subsequent Events
The Company reviewed and evaluated subsequent events through the issuance date of the Company’s unaudited condensed consolidated financial statements.
Stock Repurchase Program
On August 2, 2019, the Company's Board of Directors approved a stock repurchase plan ("Repurchase Program") under which the Company may repurchase up to $25 million of its outstanding common stock. The authorization is effective August 2, 2019, and will expire 24 months thereafter, unless terminated earlier by the Company's Board of Directors. Purchases under the Repurchase Program may be made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions (including, without limitation, the use of Rule 10b5-1 plans) in compliance with applicable federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The Company has no obligation to repurchase stock under the Repurchase Program, and the timing, actual number and value of shares purchased will depend on the Company's stock price, trading volume, general market and economic conditions, and other factors.
ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Carrols Restaurant Group, Inc. and its consolidated subsidiaries (collectively, "Carrols Restaurant Group", the "Company", “we”, “our” or “us”) operated, as franchisee, a total of 1,081 restaurants in 23 states as of June 30, 2019 under the trade names of Burger King® and Popeyes®. As of June 30, 2019, we operated, as franchisee, 1,023 Burger King restaurants restaurants in 23 Northeastern, Midwestern and Southeastern states and operated, as franchisee, 58 Popeyes restaurants in 7 Southeastern states.
    
Burger King restaurants are quick service restaurants that feature the popular flame-broiled Whopper® sandwich, as well as a variety of hamburgers, chicken and other specialty sandwiches, french fries, salads, breakfast items, snacks, soft drinks and other food offerings. Popeyes restaurants are quick service restaurants featuring a unique “Louisiana” style menu that includes fried chicken, chicken tenders, fried shrimp and other seafood, red beans and rice, and other regional items.

Any reference to “BKC” refers to Burger King Corporation and its parent company, Restaurant Brands International Inc. (“RBI”). Any reference to “PLK” refers to Popeyes Louisiana Kitchen, Inc. and its parent company, RBI.
We operate on a 52 or 53 week fiscal year ending on the Sunday closest to December 31. Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53 week year, which contains 14 weeks. Our fiscal years ending December 29, 2019 and December 30, 2018 each contain 52 weeks.
Introduction
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and the accompanying financial statement notes appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 30, 2018. The overview provides our perspective on the individual sections of MD&A, which include the following:
Company Overview—a general description of our business and our key financial measures.
Recent and Future Events Affecting Our Results of Operations—a description of recent events that affect, and future events that may affect, our results of operations.

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Table of Contents

Results from Operations—an analysis of our results of operations for the three and six months ended June 30, 2019 compared to the three and six months ended July 1, 2018 including a review of material items and known trends and uncertainties.
Liquidity and Capital Resources—an analysis of historical information regarding our sources of cash and capital expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion of cash flow items affecting liquidity.
Application of Critical Accounting Policies—an overview of accounting policies requiring critical judgments and estimates.
Effects of New Accounting Standards—a discussion of new accounting standards and any implications related to our financial statements.
Forward Looking Statements—cautionary information about forward-looking statements and a description of certain risks and projections.
Company Overview
We are one of the largest restaurant companies in the United States and have been operating restaurants for more than 55 years. We are the largest Burger King® franchisee in the United States, based on number of restaurants, and have operated Burger King® restaurants since 1976. As of June 30, 2019, our restaurant operations consisted of 1,023 franchised Burger King® restaurants in 23 states. Following the Cambridge Acquisition (as defined below) completed on April 30, 2019, we added the Popeyes® brand, operating 58 Popeyes restaurants as of June 30, 2019.
The following is an overview of the key financial measures discussed in our results of operations:
Restaurant sales consist of food and beverage sales at our restaurants, net of discounts and excluding sales tax collected. Restaurant sales are influenced by changes in comparable restaurant sales, menu price increases, new restaurant development, acquisition of restaurants, and the closure of restaurants. Comparable restaurant sales reflects the change in year-over-year sales for the comparable restaurant base. Newly opened restaurants (excluding restaurants acquired) are included in comparable restaurant sales after they have been open for 15 months to eliminate the impact of new restaurant openings in comparing the operations of existing restaurants, and all other restaurants (including restaurants acquired) are included in comparable restaurant sales after they have been operated for 12 months following an acquisition and immediately after they re-open following a remodel.
Cost of sales consists of food, paper and beverage costs including packaging costs, less purchase discounts and vendor rebates. Cost of sales is generally influenced by changes in commodity costs, the mix of items sold, the level of promotional discounting and the effectiveness of our restaurant-level controls to manage food and paper costs.
Restaurant wages and related expenses include all restaurant management and hourly productive labor costs and related benefits, employer payroll taxes and restaurant-level bonuses. Payroll and related benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers’ compensation insurance and federal and state unemployment insurance.
Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, and, in 2018, the amortization of favorable and unfavorable leases and deferred gains on sale-leaseback transactions.
Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses paid to BKC and PLK, utilities, repairs and maintenance, real estate taxes and credit card fees.

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Table of Contents

Advertising expense includes advertising payments to BKC and PLK based on a percentage of sales as required under our franchise and operating agreements and additional marketing and promotional expenses in certain of our markets.
General and administrative expenses are comprised primarily of salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, legal, auditing and other professional fees, acquisition costs and stock-based compensation expense.
EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss). EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) are non-GAAP financial measures. EBITDA represents net income or loss, before provision or benefit for income taxes, interest expense, and depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude impairment and other lease charges, acquisition and integration costs, stock compensation expense, loss on extinguishment of debt, and other non-recurring income or expense. Restaurant-Level EBITDA represents income or loss from operations adjusted to exclude general and administrative expenses, depreciation and amortization, impairment, integration costs and other lease charges and other income or expense. Adjusted net income (loss) represents net income (loss) adjusted to exclude impairment and other lease charges, acquisition and integration costs, loss on extinguishment of debt, and other non-recurring income and expense and the related income tax effect of these adjustments.
We are presenting Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) because we believe that they provide a more meaningful comparison than EBITDA and net income (loss) of our core business operating results, as well as with those of other similar companies. Additionally, we present Restaurant-Level EBITDA because it excludes the impact of general and administrative expenses and other income or expense, which are not directly related to restaurant-level operations. Management believes that Adjusted EBITDA and Restaurant-Level EBITDA, when viewed with our results of operations in accordance with GAAP and the accompanying reconciliations on page 36, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA and Restaurant-Level EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.
However, EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income (loss), income (loss) from operations or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies. For the reconciliation between net income (loss) to EBITDA, Adjusted EBITDA and Adjusted net income (loss) and the reconciliation of income (loss) from operations to Restaurant-Level EBITDA, see page 36.
EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) have important limitations as analytical tools.  These limitations include the following:
EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;
EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect the interest expense or the cash requirements necessary to service principal or interest payments on our debt;
Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect the cash required to fund such replacements; and
EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) exclude the effect of earnings or charges resulting from matters that our management does not consider to be indicative of

25

Table of Contents

our ongoing operations. However, some of these charges (such as impairment and other lease charges and acquisition or integration costs) have recurred and may reoccur.
Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants, the amortization of franchise rights from our acquisitions and the amortization of franchise fees paid to BKC and PLK.
Impairment and other lease charges are determined through our assessment of the recoverability of property and equipment and intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. A potential impairment charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Losses on sale-leaseback transactions are recognized when they are incurred. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries.
Interest expense consists of interest expense associated with our $425.0 million Term Loan B, amortization of deferred financing costs, amortization of bond premium, interest on revolving credit borrowings and through April 30, 2019, interest on the $275.0 million of 8% Senior Secured Second Lien Notes due 2022 (the "8% Notes") and unamortized bond premium.
Recent and Future Events Affecting our Results of Operations
Cambridge Merger
On April 30, 2019, we completed the merger with Cambridge Franchise Holdings, LLC ("Cambridge") and acquired 165 Burger King® restaurants, 55 Popeyes® restaurants and six convenience stores (the "Cambridge Acquisition"). Cambridge received approximately 7.4 million shares of the Company's common stock, and at closing owned approximately 16.6% of our outstanding common stock. Cambridge also received 10,000 shares of Series C Preferred Stock of the Company which accrues a 9% dividend per annum, payable semi-annually in shares of our common stock and is convertible into approximately 7.5 million shares of Carrols common stock. The conversion of the Series C Preferred Stock received by Cambridge will be subject to a vote of our stockholders which will occur at our 2019 Annual Meeting of Stockholders (or at any future meeting of our stockholders to the extent such conversion is not previously approved), and will automatically convert into our common stock upon stockholder approval of such conversion. All shares issued or issuable to Cambridge are subject to a two year restriction on sale or transfer subject to certain limited exceptions.
Area Development and Remodeling Agreement
The Company, Carrols, Carrols LLC, and BKC have entered into the Area Development Agreement commencing on April 30, 2019 and ending on September 30, 2024, which supersedes the Operating Agreement dated as of May 30, 2012, as amended, between Carrols LLC and BKC. Pursuant to the Area Development Agreement, BKC assigned the ADA ROFR to Carrols LLC, in 16 states and a limited number of counties in four additional states, and granted franchise pre-approval to acquire Burger King restaurants until the date that we have acquired more than an aggregate of 500 Burger King restaurants. The continued assignment of the ADA ROFR is subject to suspension or termination in the event of non-compliance by Carrols LLC with certain terms as set forth in the Area Development Agreement. Carrols LLC will pay BKC $3.0 million for the ADA ROFR in four equal installment payments over the course of one year.
Pursuant to the Area Development Agreement, we agreed to open, build and operate 200 new Burger King restaurants and remodel or upgrade 748 Burger King restaurants to BKC’s Burger King of Tomorrow restaurant image over the term of the Area Development Agreement. BKC agreed to contribute $10 million to $12 million for upgrades of approximately 50 to 60 Burger King restaurants in 2019 and 2020, most of which have already been remodeled to the 20/20 image and where BKC is the landlord on the lease for such Burger King restaurants owned and operated by Carrols LLC or an affiliate.
Through the Cambridge Acquisition, we have also assumed a development agreement for Popeyes®, which includes an assignment by PLK of its right of first refusal under its franchise agreements with its franchisees for acquisitions in two southern states, as well as, a development commitment for approximately 80 new Popeyes® restaurants over six years.

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Table of Contents

Restaurant Acquisitions
From the beginning of 2018 through June 30, 2019, we acquired 277 restaurants (including the Cambridge Acquisition) from other franchisees in the following transactions (in thousands, except number of restaurants):
Closing Date
 
Number of Restaurants
 
Purchase Price
 
Market Location
2018 Acquisitions:
 
 
 
 
 
 
February 13, 2018
(1)
1

 

 
New York
August 21, 2018
(2)
2

 
1,666

 
Detroit, Michigan
September 5, 2018
(2)
31

 
25,930

 
Western Virginia
October 2, 2018
 
10

 
10,506

 
South Carolina and Georgia
 
 
44

 
$
38,102

 
 
 
 
 
 
 
 
 
2019 Acquisitions:
 
 
 
 
 
 
April 30, 2019
(3)
220

 
257,525

 
Southeastern states
June 11, 2019
 
13

 
15,788

 
Baltimore, Maryland
Total 2018 and 2019 Acquisitions
 
277

 
$
311,415

 
 
(1)
The Company recorded a bargain purchase gain because the fair value of assets acquired, largely representing a franchise right asset of $0.3 million, exceeded the total fair value of consideration paid by $0.2 million.
(2)
Acquisitions resulting from the exercise of our ROFR.
(3)
During the second quarter of 2019, the Company completed the Cambridge Acquisition and acquired 165 Burger King restaurants and 55 Popeyes restaurants.
The unaudited pro forma impact on the results of operations for the 2019 acquisitions is included below. The unaudited pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. This unaudited pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings or any transaction costs related to the 2018 acquired restaurants.
The following table summarizes certain unaudited pro forma financial information related to our operating results for the three and six months ended June 30, 2019 and July 1, 2018:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Restaurant sales
$
397,213

 
$
394,283

 
$
764,014

 
$
750,412

Income from operations
$
5,845

 
$
21,496

 
$
5,950

 
$
29,789

Adjusted EBITDA
$
27,277

 
$
43,419

 
$
43,150

 
$
70,657

Capital Expenditures
We expect that for 2019 capital expenditures before discretionary growth-related expenditures (i.e. acquisitions) will be $120 million to $130 million, including $50 million to $60 million for construction of 20 to 25 new Burger King® restaurants and 5 to 7 new Popeyes® restaurants, and $35 million to $40 million for remodels and upgrades.
Refinancing of Indebtedness and New Senior Credit Facilities
On April 30, 2019, the Company entered into a new senior secured credit facility which provides for senior secured credit facilities in an aggregate principal amount of $550.0 million (the "New Senior Credit Facilities"), consisting of (i) a term loan B facility in an aggregate principal amount of $425.0 million (the “Term Loan B Facility”), the entire amount of which was borrowed by the Company on April 30, 2019 and (ii) a revolving credit facility (including a sub-

27

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facility for standby letters of credit) in an aggregate principal amount of $125.0 million, which was undrawn as of April 30, 2019. Borrowings under the Term Loan B Facility and the Revolving Credit Facility bear interest at a rate per annum, at the Company's option, of (i) the Alternate Base Rate (as defined in the New Senior Credit Facilities) plus the applicable margin of 2.25% or (ii) the LIBOR Rate (as defined in the New Senior Credit Facilities) plus the applicable margin of 3.25%.
The Term Loan B Facility matures on April 30, 2026 and the Revolving Credit Facility matures on April 30, 2024. The Company used borrowings under the Term Loan B Facility to refinance the existing indebtedness of (i) the Company, including redemption of the $275.0 million 8% Notes at a redemption price equal to 102% of the principal amount of such notes plus accrued interest, and (ii) Cambridge and the payment of fees and expenses in connection with the transactions. The proceeds of the Revolving Credit Facility will be used to finance ongoing working capital and for other general corporate purposes of the Company and its subsidiaries, including permitted acquisitions and required expenditures under development agreements.
As of June 30, 2019, there were $25.0 million of revolving credit borrowings outstanding and $11.7 million of letters of credit were issued under the New Senior Credit Facilities. After reserving for issued letters of credit and outstanding revolving credit borrowings, $88.3 million was available for revolving credit borrowings under the New Senior Credit Facilities at June 30, 2019.
Future Restaurant Closures
We evaluate the performance of our restaurants on an ongoing basis including an assessment of the current and future operating results of the restaurant in relation to its cash flow and future occupancy costs, and with regard to franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on these evaluations.
In 2018, excluding one restaurant relocated within its trade area, we closed nine restaurants. We currently anticipate closing a total of 10 to 15 restaurants in 2019, of which eight have already closed, excluding two restaurants relocated within its trade area during the first six months of 2019. Anticipated closings exclude any restaurants being relocated within their trade area, at the end of their respective lease term.
Our determination of whether to close restaurants in the future is subject to further evaluation and may change. We may incur lease charges in the future from closures of underperforming restaurants prior to the expiration of their contractual lease term. We do not believe that the future impact on our results of operations due to restaurant closures will be material, although there can be no assurance in this regard.
Transition to New Lease Accounting Standard
We transitioned to Accounting Standards Codification Topic 842, Leases (“ASC 842”), effective December 31, 2018. Our consolidated financial statements reflect the application of ASC 842 guidance beginning in 2019, while our consolidated financial statements for prior periods were prepared under the guidance of a previously applicable accounting standard. The most significant effect of this transition that affects comparability of our results of operations between 2019 and 2018 including the increase in rent expense due to the elimination of deferred gain amortization from sale-leaseback transactions.

Please refer to Note 6, Leases, to the accompanying unaudited condensed consolidated financial statements for further details of the effects of this change in accounting principle.

Effect of Minimum Wage Increases

Certain of the states and municipalities in which we operate have increased their minimum wage rates for 2019 and in many cases have also approved additional increases for future periods. Most notably, New York State has increased the minimum wage applicable to our business to $12.75 an hour in 2019 (from $11.75 per hour in 2018) with subsequent annual increases reaching $15.00 an hour by July 1, 2021. Since 2015 we have been receiving New York State minimum wage tax credits totaling approximately $500,000 per year that partially offset these additional labor costs. However, the New York State minimum wage tax credits expired in the beginning in 2019. We had 128 restaurants in New York State at June 30, 2019. We typically attempt to offset the effects of wage inflation, at least in

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part, through periodic menu price increases. However, no assurance can be given that we will be able to offset these wage increases in the future.
Stock Repurchase Program
On August 2, 2019, our Board of Directors approved a stock repurchase plan ("Repurchase Program") under which we may repurchase up to $25 million of our outstanding common stock. The authorization is effective August 2, 2019, and will expire 24 months thereafter, unless terminated earlier by the Board of Directors. Purchases under the Repurchase Program may be made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions (including, without limitation, the use of Rule 10b5-1 plans) in compliance with applicable federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. We have no obligation to repurchase stock under the Repurchase Program, and the timing, actual number and value of shares purchased will depend on our stock price, trading volume, general market and economic conditions, and other factors.


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Results of Operations
Three and Six Months Ended June 30, 2019 Compared to Three and Six Months Ended July 1, 2018
    
The following table highlights the key components of sales and the number of restaurants in operation for the three and six month period ended June 30, 2019 as compared to the three and six month period ended July 1, 2018 (dollars in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Restaurant Sales:
 
$
368,559

 
$
303,050

 
$
659,348

 
$
574,636

Change in Comparable Restaurant Sales %
 
0.1
%
 
5.0
%
 
1.2
%
 
5.6
%
 
 
 
 
 
 
 
 
 
Burger King Restaurants operating at beginning of period:
 
845

 
807

 
849

 
807

New restaurants opened, including relocations
(1)
4

 
2

 
6

 
4

Restaurants acquired
 
178

 

 
178

 
1

Restaurants closed
(1)
(4
)
 
(2
)
 
(10
)
 
(5
)
Restaurants operating at end of period
 
1,023

 
807

 
1,023

 
807

 
 
 
 
 
 
 
 
 
Popeyes Restaurants operating at beginning of period:
 

 

 

 

New restaurants opened
 
3

 

 
3

 

Restaurants acquired
 
55

 

 
55

 

Restaurants operating at end of period
 
58

 

 
58

 

(1) In the three and six months ended June 30, 2019, new restaurants opened and restaurants closed include one restaurant relocated within its market area and two restaurants closed as a result of relocations.
Restaurant Sales. Comparable restaurant sales increased 0.1% in the second quarter of 2019 consisting of an increase in average check of 0.4%, including a 0.9% effect of menu price increases since the beginning of the first quarter of 2019 which has been partially offset by a decrease in customer traffic of 0.3%. Restaurant sales also reflected the acquisition of 276 restaurants which contributed $65.7 million in sales, including $2.9 million of sales at six convenience stores in the second quarter of 2019 and the opening of 10 new restaurants since the beginning of the second quarter of 2018.

For the six months ended June 30, 2019, comparable restaurant sales increased 1.2% due to an increase in average check of 0.3% and an increase in customer traffic of 0.9%. The effect in the first six months of 2019 from menu price increases taken since the beginning of 2018 was approximately 1.1%. Restaurant sales also increased due to the 277 restaurants acquired since the beginning of 2018 which added $78.6 million of sales, including $2.9 million of sales at six convenience stores acquired for the six months ended June 30, 2019.

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Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales). The following table sets forth, for the three and six months ended June 30, 2019 and July 1, 2018, selected operating results as a percentage of total restaurant sales:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Costs and expenses (all restaurants):
 
 
 
 
 
 
 
Cost of sales
29.6
%
 
27.0
%
 
29.1
%
 
27.0
%
Restaurant wages and related expenses
32.9
%
 
32.0
%
 
33.6
%
 
32.7
%
Restaurant rent expense
7.2
%
 
6.6
%
 
7.4
%
 
6.9
%
Other restaurant operating expenses
15.3
%
 
14.7
%
 
15.5
%
 
15.2
%
Advertising expense
4.0
%
 
4.1
%
 
4.0
%
 
4.1
%
General and administrative
5.6
%
 
5.3
%
 
6.1
%
 
5.6
%
Cost of sales increased to 29.6% in the second quarter of 2019 from 27.0% in the second quarter of 2018 due primarily to an increase in commodity costs (1.0%) at Burger King restaurants which included a 4.4% increase in beef costs and an increase in pork and potato costs compared to the prior year period, higher promotional discounting (0.6%) at Burger King restaurants, lower beverage rebates (0.2%), higher costs at the Popeyes acquired restaurants and operating inefficiencies both at the Burger King and Popeyes restaurants acquired from Cambridge.
Cost of sales increased to 29.1% in the first six months of 2019 from 27.0% in the first six months of 2018 as a result of higher promotional discounting (0.9%) at Burger King restaurants, an increase in commodity costs (0.6%) for Burger King restaurants, higher costs at the Popeyes acquired restaurants and operating inefficiencies at the Burger King and Popeyes restaurants acquired from Cambridge.
Restaurant wages and related expenses were 32.9% in the second quarter of 2019 and 32.0% in the second quarter of 2018, and in the first six months of 2019, increased to 33.6% from 32.7% in the first six months of 2018 due to an increase in team member wages (0.8%) at comparable restaurants and higher medical insurance costs (0.2%) partially offset by the lower wage rates at both the Burger King and Popeyes restaurants acquired from Cambridge.
Other restaurant operating expenses increased to 15.3% in the second quarter of 2019 from 14.7% in the second quarter of 2018, and in the first six months of 2019 increased to 15.5% from 15.2% in the first six months of 2018 due primarily to higher expenses for repair and maintenance and operating supplies (0.6%) in the second quarter of 2019 and (0.3%) in the first six months of 2019 at the Burger King and Popeyes restaurants acquired from Cambridge.
Restaurant rent expense increased to 7.2% in the second quarter of 2019 from 6.6% in the second quarter of 2018, and increased to 7.4% in the first six months of 2019 from 6.9% in the first six months of 2018 due to 0.1% from impact of deferred gains on sale-leaseback transactions no longer recognized in 2019 as a result of adoption of the new lease accounting standard, 0.2% due to higher rent on restaurants acquired in 2019 and increases in fixed base rentals.
Advertising expense decreased to 4.0% in both the second quarter and first six months of 2019 from 4.1% in both the second quarter of and first six months of 2018 primarily due to the impact of advertising rate reductions on remodeled restaurants combined with lower contractual advertising rates on the acquired Cambridge restaurants.
Restaurant-Level EBITDA. As a result of the factors discussed above, Restaurant-Level EBITDA decreased $6.4 million, or 13.4%, to $41.0 million in the second quarter of 2019, and as a percentage of total restaurant sales, decreased to 11.1% in the second quarter of 2019 from 15.6% in the prior year period. Restaurant-Level EBITDA decreased $11.1 million or 13.7% to $69.6 million in the first six months of 2019, and as a percentage of total restaurant sales, decreased to 10.6% in the first six months of 2019 from 14.0% in the prior year period. For a reconciliation between Restaurant-Level EBITDA and income from operations see page 36.
General and Administrative Expenses. General and administrative expenses increased $4.6 million in the second quarter of 2019 to $20.6 million, and as a percentage of total restaurant sales, increased to 5.6% from 5.3% in the second quarter of 2018. The increase in general and administrative expenses were primarily from $1.3 million of

31


higher acquisition costs due to the Cambridge Acquisition and $0.8 million of additional training costs and regional and district manager salaries related to the 2018 acquisitions, and $2.8 million of restaurant and corporate administrative costs from the Cambridge Acquisition offset in part by lower administrative bonus accruals.
In the first six months of 2019, general and administrative expenses increased $8.2 million to $40.3 million and, as a percentage of total restaurant sales, increased to 6.1% from 5.6% in the first six months of 2019. The increase in total general and administrative expenses was due primarily to $3.8 million of higher acquisition costs due to the Cambridge Acquisition, $2.8 million of restaurant and corporate administrative expenses from the Cambridge Acquisition and additional training costs and regional and district manager salaries related to the 2018 acquisitions.
Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA decreased to $23.8 million in the second quarter of