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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 September 29, 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 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 registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange 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 November 7, 2019, Carrols Restaurant Group, Inc. had 51,847,700 shares of its common stock, $.01 par value, outstanding.


Table of Contents

CARROLS RESTAURANT GROUP, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 29, 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)
 
September 29, 2019
 
December 30, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,961

 
$
4,014

Trade and other receivables
15,810

 
11,693

Inventories
12,815

 
10,396

Prepaid rent
1,742

 
1,880

Prepaid expenses and other current assets
9,639

 
6,695

Refundable income taxes
176

 

Total current assets
43,143

 
34,678

Property and equipment, net of accumulated depreciation of $364,823 and $328,873, respectively
393,900

 
289,817

Franchise rights, net of accumulated amortization of $116,027 and $108,021, respectively (Note 3)
322,199

 
175,897

Goodwill (Note 3)
143,568

 
38,469

Franchise agreements, at cost less accumulated amortization of $12,717 and $12,022, respectively
32,676

 
24,414

Operating right-of-use assets, net (Note 6)
787,410

 

Deferred income taxes (Note 8)
535

 
28,291

Other assets
10,698

 
8,685

Total assets
$
1,734,129

 
$
600,251

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and finance lease liabilities (Notes 6 and 7)
$
6,276

 
$
1,948

Current portion of operating lease liabilities (Note 6)
40,210

 

Accounts payable
40,079

 
29,143

Accrued interest
1,118

 
3,818

Accrued payroll, related taxes and benefits
28,915

 
28,719

Accrued real estate taxes
8,541

 
5,910

Other liabilities
24,368

 
12,601

Total current liabilities
149,507

 
82,139

Long-term debt and finance lease liabilities, net of current portion (Notes 6 and 7)
470,098

 
276,823

Lease financing obligations
1,194

 
1,196

Operating lease liabilities (Note 6)
779,456

 

Deferred income—sale-leaseback of real estate

 
10,073

Accrued postretirement benefits
4,417

 
4,320

Other liabilities (Note 5)
10,586

 
40,160

Total liabilities
1,415,258

 
414,711

Commitments and contingencies (Note 10)

 

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

 

Voting common stock, par value $.01; authorized—100,000,000 shares, issued—51,847,700 and 36,583,903 shares, respectively, and outstanding—51,049,376 and 35,742,427 shares, respectively
510

 
357

Additional paid-in capital
300,013

 
150,459

Retained earnings
21,002

 
35,511

Accumulated other comprehensive loss
(646
)
 
(646
)
Treasury stock, at cost
(2,008
)
 
(141
)
Total stockholders’ equity
318,871

 
185,540

Total liabilities and stockholders’ equity
$
1,734,129

 
$
600,251


See accompanying notes to unaudited condensed consolidated financial statements.
3

Table of Contents

CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
 
September 29, 2019
 
September 30, 2018
Revenue
 
 
 
 
 
 
 
Restaurant sales
$
398,414

 
$
296,917

 
$
1,054,877

 
$
871,553

Other revenue
3,931

 

 
6,816

 

Total revenue
402,345

 
296,917

 
1,061,693

 
871,553

Operating expenses:
 
 
 
 
 
 
 
Cost of sales
121,283

 
82,082

 
313,015

 
237,004

Restaurant wages and related expenses
131,070

 
95,391

 
352,402

 
283,489

Restaurant rent expense
29,300

 
20,259

 
77,906

 
60,112

Other restaurant operating expenses
62,710

 
45,510

 
164,623

 
132,938

Advertising expense
16,052

 
12,120

 
42,601

 
35,741

General and administrative (including stock-based compensation expense of $1,707, $1,531, $4,515 and $4,501 respectively)
21,365

 
17,602

 
61,709

 
49,758

Depreciation and amortization
21,200

 
14,555

 
53,613

 
43,426

Impairment and other lease charges (Note 4)
500

 
164

 
1,777

 
3,354

Other income, net
(20
)
 
(434
)
 
(1,773
)
 
(434
)
Total operating expenses
403,460

 
287,249

 
1,065,873

 
845,388

Income (loss) from operations
(1,115
)
 
9,668

 
(4,180
)
 
26,165

Loss on extinguishment of debt

 

 
7,443

 

Interest expense
7,578

 
5,909

 
20,425

 
17,752

Gain on bargain purchase (Note 2)

 

 

 
(230
)
Income (loss) before income taxes
(8,693
)
 
3,759

 
(32,048
)
 
8,643

Provision (benefit) for income taxes (Note 8)
(1,881
)
 
148

 
(10,035
)
 
346

Net income (loss)
$
(6,812
)
 
$
3,611

 
$
(22,013
)
 
$
8,297

Basic and diluted net income (loss) per share (Note 13)
$
(0.15
)
 
$
0.08

 
$
(0.54
)
 
$
0.18

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
45,947,413

 
35,735,680

 
41,014,635

 
35,707,245

Diluted
45,947,413

 
45,410,556

 
41,014,635

 
45,293,255

Comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net income (loss)
$
(6,812
)
 
$
3,611

 
$
(22,013
)
 
$
8,297

Other comprehensive income

 

 

 

Comprehensive income (loss)
$
(6,812
)
 
$
3,611

 
$
(22,013
)
 
$
8,297


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

Stock-based compensation

 

 

 

 
1,707

 

 

 

 
1,707

Vesting of non-vested shares
117,832

 

 

 

 

 

 

 

 

Repurchase of treasury stock

 

 

 

 

 

 

 
(2,008
)
 
(2,008
)
Conversion of preferred stock to common stock
7,450,402

 
75

 
(10,000
)
 

 
(75
)
 

 

 

 

Net loss

 

 

 

 

 
(6,812
)
 

 

 
(6,812
)
Balance, September 29, 2019
51,049,376

 
$
510

 
100

 
$

 
$
300,013

 
$
21,002

 
$
(646
)
 
$
(2,008
)
 
$
318,871

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Stock-based compensation

 

 

 

 
1,531

 

 

 

 
1,531

Vesting of non-vested shares
19,589

 
(1
)
 

 

 
1

 



 

 

Net income

 

 

 

 

 
3,611

 

 

 
3,611

Balance, September 30, 2018
35,742,427

 
$
357

 
100

 
$

 
$
149,148

 
$
33,704

 
$
(1,210
)
 
$
(141
)
 
$
181,858


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)
 
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
Cash flows provided by operating activities:
 
 
 
Net income (loss)
$
(22,013
)
 
$
8,297

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Loss on disposals of property and equipment
615

 
371

Stock-based compensation
4,515

 
4,501

Gain on bargain purchase (Note 2)

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

Impairment and other lease charges
1,777

 
3,354

Depreciation and amortization
53,613

 
43,426

Amortization of deferred financing costs
1,209

 
901

Amortization of bond premium and discount on debt
(175
)
 
(679
)
Amortization of deferred gains from sale-leaseback transactions

 
(1,186
)
Deferred income taxes
(10,052
)
 
184

Change in refundable income taxes
(176
)
 

Loss on extinguishment of debt - non-cash
129

 

Changes in other operating assets and liabilities
7,487

 
8,838

Net cash provided by operating activities
35,016

 
67,777

Cash flows used for investing activities:
 
 
 
Capital expenditures:
 
 
 
New restaurant development
(37,259
)
 
(17,753
)
Restaurant remodeling
(37,826
)
 
(21,505
)
Other restaurant capital expenditures
(15,643
)
 
(12,328
)
Corporate and restaurant information systems
(6,670
)
 
(2,661
)
Total capital expenditures
(97,398
)
 
(54,247
)
Acquisition of restaurants, net of cash acquired (Note 2)
(131,545
)
 
(27,595
)
Properties purchased for sale-leaseback

 
(2,123
)
Proceeds from sale-leaseback transactions
7,018

 
4,504

Proceeds from insurance recoveries
123

 
642

Net cash used for investing activities
(221,802
)
 
(78,819
)
Cash flows provided by financing activities:
 
 
 
Proceeds from issuance of Term Loan B Facility
422,875

 

Repayments of Term Loan B Facility
(1,063
)
 

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
312,500

 

Repayments under new revolving credit facility
(253,000
)
 

Proceeds from lease financing obligations

 
2,692

Payments on finance lease liabilities
(1,555
)
 
(1,345
)
Costs associated with financing long-term debt
(11,516
)
 
(154
)
Purchase of treasury shares
(2,008
)
 

Net cash provided by financing activities
185,733

 
1,193

Net decrease in cash and cash equivalents
(1,053
)
 
(9,849
)
Cash and cash equivalents, beginning of period
4,014

 
29,412

Cash and cash equivalents, end of period
$
2,961

 
$
19,563

CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(In thousands)
(Unaudited)
 
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
Supplemental disclosures:
 
 
 
Interest paid on long-term debt
$
22,159

 
$
11,952

Interest paid on lease financing obligations
$
78

 
$
78

Accruals for capital expenditures
$
13,156

 
$
3,589

Common stock issued for consideration in acquisition
$
145,333

 
$

Income taxes paid
$
193

 
$
(211
)
Non-cash reduction of lease financing obligations
$

 
$
2,538

Lease assets obtained in exchange for new operating lease liabilities
$
49,119

 
$

Lease assets and liabilities resulting from lease modifications
$
11,185

 
$

Finance lease obligations acquired or incurred
$
754

 
$
24



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 September 29, 2019 Carrols Restaurant Group, Inc. ("Carrols Restaurant Group") operated, as franchisee, 1,028 Burger King® restaurants in 23 Northeastern, Midwestern and Southeastern states and 60 Popeyes® restaurants 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 LLC's direct wholly-owned subsidiaries include Alabama Quality, LLC, Carolina Quality, LLC, Cambridge Chicken Holdings, 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 nine months ended September 29, 2019 and September 30, 2018 each contained thirteen and thirty-nine 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 nine months ended September 29, 2019 and September 30, 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 nine months ended September 29, 2019 and September 30, 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 September 29, 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 Facility at September 29, 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 September 29, 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 $1.4 million during the three and nine months ended September 29, 2019, respectively, and $0.1 million and $2.5 million during the three and nine months ended September 30, 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

8


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


conclusions regarding lease identification, lease classification and initial direct costs. The Company did not elect to 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, to introduce new guidance for the accounting for credit losses on instruments within its scope. ASU 2016-13 requires among other things, the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. 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 the amendments will have no impact on its consolidated financial statements and related disclosures.
In January 2017, the 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.

9


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


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 223 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

 
259,801

 
Southeastern states, primarily TN, MS, LA
June 11, 2019
 
13

 
15,788

 
Baltimore, Maryland
August 20, 2019
(2)
1

 
1,108

 
Pennsylvania
Total 2018 and 2019 Acquisitions
 
278

 
$
314,799

 
 
(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.
(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 $259.8 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, which were converted into approximately 7.5 million shares of common stock on August 29, 2019, and (iii) the retirement of approximately $114.5 million of the indebtedness of Cambridge, net of cash acquired. 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 Franchise Holdings LLC ("Cambridge Holdings") 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. The purchase price allocation values the common stock at $145.3 million based on the $9.81 closing price of the Company's stock on the date of acquisition.
The Company has engaged a third party valuation specialist to assist with the valuation of assets acquired, and the values of certain assets and liabilities are preliminary in nature at September 29, 2019. 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. The preliminary fair value of the right-of-use liability is based upon the lease payments over the remaining lease term discounted by the Company's incremental

10


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


borrowing rate. 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 the excess of the purchase price over the aggregate fair value of net assets acquired and is related to the benefits expected as a result of the acquisition, including sales, operating synergies, development and growth opportunities. We believe that Cambridge's existing Burger King and Popeyes restaurant portfolios provide the Company with significant growth and development opportunities and due to the geographic location of the restaurants mitigate the dependence on the economic performance of any one particular geographic location or restaurant concept. Goodwill resulting from the purchase price allocation for the Cambridge Merger is not expected to be deductible for income tax purposes. An estimated deferred income tax liability of approximately $35.3 million was recorded during the three months ended September 29, 2019 representing book and tax differences primarily related to the estimated fair value of franchise rights.
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 September 29, 2019.
Inventory
$
2,915

Prepaid expenses
2,889

Other assets
2,877

Land and buildings
20,440

Restaurant equipment
24,584

Right-of-use assets
251,421

Leasehold improvements
3,941

Franchise fees
7,300

Franchise rights
144,499

Deferred income taxes
(35,264
)
Goodwill
104,996

Operating lease liabilities
(255,015
)
Accounts payable
(4,614
)
Accrued payroll, related taxes and benefits
(3,142
)
Other liabilities
(8,026
)
Net assets acquired
$
259,801


11


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


The Company allocated the aggregate purchase price for 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 September 29, 2019.
Inventory
$
158

Restaurant equipment
743

Restaurant equipment - subject to finance leases
150

Right-of-use assets
9,515

Leasehold improvements
6,205

Franchise fees
394

Franchise rights
9,809

Deferred income taxes
16

Goodwill
103

Operating lease liabilities
(9,968
)
Finance lease liabilities for restaurant equipment
(185
)
Accounts payable
(44
)
Net assets acquired
$
16,896

Goodwill recorded in connection with the 2019 acquisitions represents costs in excess of fair values assigned to the underlying net assets of acquired restaurants. Goodwill will not 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 differences of franchise rights, property and equipment, net favorable and unfavorable leases.
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 $89.6 million and $164.9 million in the three and nine months ended September 29, 2019, respectively, and contributed restaurant sales of $3.1 million

12


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


and $3.5 million in the three and nine months ended September 30, 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 2018 and 2019 for the three and nine months ended September 29, 2019 and September 30, 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
 
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
 
September 29, 2019
 
September 30, 2018
Total revenue
$
402,607

 
$
382,738

 
$
1,167,461

 
$
1,133,957

Net income (loss)
$
(6,785
)
 
$
11,313

 
$
(10,234
)
 
$
30,278

Basic and diluted net income (loss) per share
$
(0.15
)
 
$
0.25

 
$
(0.25
)
 
$
0.67

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 $4.0 million during the nine months ended September 29, 2019 and $0.8 million and $1.0 million during the three and nine months ended September 30, 2018.
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 nine months ended September 29, 2019 or September 30, 2018. The change in goodwill for the nine months ended September 29, 2019 is summarized below.
Balance at December 30, 2018
$
38,469

Acquisitions of restaurants (Note 2)
105,099

Balance at September 29, 2019
$
143,568

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.

13


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


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 nine months ended September 29, 2019 and September 30, 2018. The change in franchise rights for the nine months ended September 29, 2019 is summarized below:
Balance at December 30, 2018
$
175,897

Acquisitions of restaurants (Note 2)
154,308

Amortization expense
(8,006
)
Balance at September 29, 2019
$
322,199

Amortization expense related to franchise rights was $3.9 million and $1.8 million for the three months ended September 29, 2019 and September 30, 2018, respectively and $8.0 million and $5.4 million for the nine months ended September 29, 2019 and September 30, 2018, respectively. The Company expects annual amortization expense to be $10.4 million in 2019 and $12.8 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.
During the three months ended September 29, 2019, the Company recorded impairment and other lease charges of $0.5 million consisting of $0.3 million of initial impairment charges for two underperforming restaurants and $0.2 million of other lease charges primarily from one restaurant closed during the third quarter. During the nine months ended September 29, 2019, the Company recorded impairment and other lease charges of $1.8 million consisting of $1.1 million of initial impairment charges for five underperforming restaurants, capital expenditures of $0.3 million at underperforming restaurants and $0.4 million of other lease charges primarily due the closure of two restaurants and changes in estimates during the year.
During the three months ended September 30, 2018, the Company recorded impairment and other lease charges of $0.2 million consisting of a loss of $0.1 million associated with a sale-leaseback of a restaurant property and $0.1 million of capital expenditures at underperforming restaurants. During the nine months ended September 30, 2018, the Company recorded impairment and other lease charges of $3.4 million consisting of $0.6 million of capital expenditures at underperforming restaurants, losses of $0.7 million associated with sale-leaseback transactions of restaurant properties and $1.9 million related to the write-off of defective product holding unit kitchen equipment that was replaced.

14


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


The following table presents the activity in the accrual for closed restaurant locations:
 
Nine Months Ended
 
Year Ended
 
September 29, 2019
 
December 30, 2018
Balance, beginning of period
$
1,352

 
$
2,028

Provisions for closures
42

 
249

Changes in estimates of accrued costs
293

 
(147
)
Payments, net
(446
)
 
(889
)
Other adjustments, including the effect of discounting future obligations
685

 
111

Balance, end of period
$
1,926

 
$
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 September 29, 2019 and December 30, 2018 consisted of the following:
 
September 29, 2019
 
December 30, 2018
Deferred rent
$

 
$
16,610

Unfavorable leases, net

 
12,348

Accrued occupancy costs
860

 
3,074

Accrued workers’ compensation and general liability claims
5,495

 
4,398

Deferred compensation
3,941

 
3,610

Other
290

 
120

 
$
10,586

 
$
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 (included in accrued occupancy costs) of $2.6 million were reclassified to be included in the beginning balance of operating right-of-use assets.
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

15


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


lease liabilities. Variable lease components represent amounts that are contractually fixed percentage of sales 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 September 29, 2019, the Company had recorded operating lease liabilities of $8.2 million for leases that have not yet commenced. These leases will commence 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 nine months ended September 29, 2019 are as follows:
 
 
 
 
Three Months Ended
 
Nine Months Ended
Lease cost
 
Classification
 
September 29, 2019
 
September 29, 2019
Operating lease cost (1)
 
Restaurant rent expense
 
$
24,933

 
$
65,770

Operating lease cost
 
General and administrative
 
171

 
393

Variable lease cost
 
Restaurant rent expense
 
4,529

 
12,619

Sublease income
 
Restaurant rent expense
 
(162
)
 
(483
)
Finance lease cost:
 
 
 
 
 
 
Amortization of right-of-use assets
 
Depreciation and amortization
 
414

 
1,248

Interest on lease liabilities
 
Interest expense
 
69

 
204

Total lease cost
 
 
 
$
29,954

 
$
79,751

(1)
Includes short-term leases which are not material.

16


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


Lease Position
Supplemental balance sheet information related to leases was as follows as of September 29, 2019:
 
 
 
 
As of
Leases
 
Classification
 
September 29, 2019
Assets
 
 
 
 
Operating leases
 
Operating right-of-use assets, net
 
$
787,410

Finance leases
 
Property and equipment, net
 
2,407

Total leased assets
 
 
 
$
789,817

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 
 
Operating leases
 
Current portion of operating lease liabilities
 
$
40,210

Finance leases
 
Current portion of long-term debt and finance lease liabilities
 
2,026

Long-term
 
 
 
 
Operating leases
 
Operating lease liabilities
 
779,456

Finance leases
 
Long-term debt and finance lease liabilities, net
 
1,060

Total lease liabilities
 
 
 
$
822,752

 
 
 
 
 
Weighted Average Remaining Lease Term
 
 
Operating leases
 
 
 
14.4 years

Finance leases
 
 
 
2.1 years

 
 
 
 
 
Weighted Average Discount Rate
 
 
Operating leases
 
 
 
7.0
%
Finance leases
 
 
 
7.8
%
Other Information
Supplemental cash flow information related to leases for the nine months ended September 29, 2019 are as follows:
 
 
Nine Months Ended
 
 
September 29, 2019
Gain on sale-leaseback transactions
 
$
289

Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
62,986

Operating cash flows from finance leases
 
$
204

Financing cash flows from finance leases
 
$
1,555


17


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


Future minimum lease payments under noncancelable lease at September 29, 2019 are as follows:
Fiscal year ending:
Operating Leases
 
Finance Leases
Remaining amount for December 29, 2019
$
24,088

 
$
615

January 3, 2021
94,584

 
1,753

January 2, 2022
93,172

 
579

January 1, 2023
92,383

 
240

December 31, 2023
91,463

 
70

Thereafter
926,210

 
127

Total minimum lease payments
1,321,900

 
3,384

Less: imputed interest
(502,234
)
 
(298
)
Present value of lease liabilities
819,666

 
3,086

Less: current portion
(40,210
)
 
(2,026
)
Total long-term lease liabilities
$
779,456

 
$
1,060

Disclosures Related to Periods Prior to Adoption of the New Lease Standard
As previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2018 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


18


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 September 29, 2019 and December 30, 2018 consisted of the following:
 
September 29, 2019
 
December 30, 2018
Collateralized:
 
 
 
Senior Credit Facility:
 
 
 
Term Loan B Facility
$
423,937

 
$

Revolving credit borrowings
59,500

 

Carrols Restaurant Group 8% Senior Secured Second Lien Notes

 
275,000

Finance lease liabilities
3,086

 
3,941

 
486,523

 
278,941

Less: current portion of long-term debt and finance lease liabilities
(6,276
)
 
(1,948
)
Less: unamortized debt issuance costs
(8,133
)
 
(3,673
)
Less: unamortized original issue discount
(2,016
)
 

Add: bond premium

 
3,503

Total Long-term debt
$
470,098

 
$
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 of $35.0 million 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 (the "8% Notes") 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% 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%. Borrowings under the New Senior Credit Facilities at September 29, 2019 were at an effective interest rate of 5.4% per annum.
The Term Loan B Facility borrowings are 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 September 29, 2019, there were $59.5 million of revolving credit borrowings outstanding and $11.6 million of letters of credit issued under the New Revolving Credit Facility. After reserving for issued letters of credit and outstanding revolving credit borrowings, $53.9 million was available for revolving credit borrowings under the New Senior Credit Facilities at September 29, 2019.
The Company was in compliance with the financial covenants under its New Senior Credit Facilities at September 29, 2019.

19


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% Notes and on June 23, 2017, the Company issued an additional $75.0 million principal amount of 8.0% Notes. The 8% Notes were to 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).

8. Income Taxes
The provision (benefit) for income taxes for the three and nine months ended September 29, 2019 and September 30, 2018 was comprised of the following:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
 
September 29, 2019
 
September 30, 2018
Current
$
(48
)
 
$
2

 
$
17

 
$
162

Deferred
(1,833
)
 
146

 
(10,052
)
 
184

Provision (benefit) for income taxes
$
(1,881
)
 
$
148

 
$
(10,035
)
 
$
346

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.
The benefit for income taxes for the three and nine months ended September 29, 2019 was derived using an estimated effective annual income tax rate for all of 2019 of 31.5%, 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 nine months ended September 29, 2019 contains net discrete tax adjustments of $0.1 million of tax expense.
The provision for income taxes for the three and nine months ended September 30, 2018 was derived using an estimated effective annual income tax rate for all of 2018 of 4.5%, 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 benefits of federal employment credits are not directly related to the amount of pre-tax income recorded in a period. Accordingly, in periods where recorded pre-tax income is relatively small, the proportional effect of these items on the effective tax rate may be significant. There were no discrete adjustments for the three months ended September 30, 2018.
As of September 29, 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 2021 through 2038.
The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At September 29, 2019 and December 30, 2018, the Company had no unrecognized tax benefits and no

20


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


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 September 29, 2019 and September 30, 2018 was $1.7 million and $1.5 million, respectively and for the nine months ended September 29, 2019 and September 30, 2018 was $4.5 million and $4.5 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.
On September 16, 2019, the Company granted 10,000 non-vested restricted shares to the Interim Vice President-Chief Financial Officer and Treasurer, which vest upon the later of the first anniversary of the start date or the date on which the Company has completed the transition period to a new Chief Financial Officer.
A summary of all non-vested shares activity for the nine months ended September 29, 2019 was as follows:
 
Shares
 
Weighted Average Grant Date Price
Non-vested at December 30, 2018
796,476

 
$
13.12

Granted
474,970

 
$
9.47

Vested
(473,123
)
 
$
12.48

Non-vested at September 29, 2019
798,323

 
$
11.33

The fair value of non-vested shares is based on the closing price on the date of grant. As of September 29, 2019, the total non-vested unrecognized stock-based compensation expense was approximately $5.8 million and the remaining weighted average vesting period for non-vested shares was 1.6 years. The Company expects to record an additional $1.3 million in stock-based compensation expense related to the vesting of these awards for the remainder of 2019.
During the nine months ended September 29, 2019, the Company granted restricted stock units (“RSUs”) on 67,452 shares of the Company's common shares to eligible employees. The RSUs generally vest in equal installments over three years. During the nine months ended September 29, 2019, 19,011 RSUs vested at a weighted average price of $8.59 per share into shares of the Company's common stock.
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 September 29, 2019, the Company is a guarantor under 27 Fiesta restaurant property leases, of which all except for one 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 September 29, 2019 was $12.6 million of which $0.2 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

21


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


date and none are expected to be required to be made in the future. The Company has not recorded a liability for $12.4 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 ("Series B Preferred Stock") in 2018, and as of September 29, 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 Preferred Stock. Pursuant to the terms of the Series B 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 (collectively "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 Burger King sales and Popeyes a weekly royalty at a rate of 5.0% of Popeyes sales. Royalty expense was $17.1 million and $12.8 million in the three months ended September 29, 2019 and September 30, 2018, respectively and was $45.0 million and $37.3 million in the nine months ended September 29, 2019 and September 30, 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 $15.6 million and $11.8 million in the three months ended September 29, 2019 and September 30, 2018, respectively and was $41.4 million and $34.8 million in the nine months ended September 29, 2019 and September 30, 2018, respectively.
As of September 29, 2019, the Company leased 248 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 $6.9 million and $6.8 million for the three months ended September 29, 2019 and September 30, 2018, respectively and $20.6 million and $20.3 million in the nine months ended September 29, 2019 and September 30, 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 an additional 500 Burger King restaurants excluding those restaurants the Company acquired in the Cambridge Merger. The continued assignment of the ADA ROFR is subject to suspension or termination in the event of non-compliance

22


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


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 September 29, 2019, the Company owed BKC $1.5 million associated with its purchase of the ADA ROFR and $12.1 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 to open, build and operate 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. Stockholders' Equity

Preferred Stock

In connection with the Cambridge Merger, Cambridge Holdings was issued 10,000 shares of Series C Preferred Stock that were automatically converted during the third quarter of 2019 into approximately 7.5 million shares of the Company's common stock when such conversion was approved by the Company's stockholders at the Company's annual stockholders meeting. With the conversion of the Series C Preferred Stock in the third quarter of 2019, Cambridge Holdings beneficially owns approximately 24.2% of the Company's common stock after giving effect to the conversion of the Series B Preferred Stock.

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 became 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.
During the three months ended September 29, 2019, the Company repurchased in open market transactions 283,069 shares at an average share price of $7.10 for a total cost of $2.0 million under the Repurchase Program. At September 29, 2019, $23.0 million was available to repurchase shares under the Repurchase Program. Shares repurchased are being held in treasury until they are retired at the discretion of the Board of Directors.

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 and Series B Preferred Stock issued to BKC 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 nine months ended September 29, 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.

23


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


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 (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
 
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
 
September 29, 2019
 
September 30, 2018
Basic net income (loss) per share:
 
 
 
 
 
 
 
Net income (loss)
$
(6,812
)
 
$
3,611

 
$
(22,013
)
 
$
8,297

Less: Income attributable to non-vested shares

 
(63
)
 

 
(147
)
Less: Income attributable to preferred stock

 
(740
)
 

 
(1,701
)
Net income (loss) available to common stockholders
$
(6,812
)
 
$
2,808

 
$
(22,013
)
 
$
6,449

Weighted average common shares outstanding
45,947,413

 
35,735,680

 
41,014,635

 
35,707,245

Basic net income (loss) per share
$
(0.15
)
 
$
0.08

 
$
(0.54
)
 
$
0.18

Diluted net income (loss) per share:
 
 
 
 
 
 
 
Net income (loss)
$
(6,812
)
 
$
3,611

 
$
(22,013
)
 
$
8,297

Shares used in computing basic net loss per share
45,947,413

 
35,735,680

 
41,014,635

 
35,707,245

Dilutive effect of preferred stock and non-vested shares

 
9,674,876

 

 
9,586,010

Shares used in computing diluted net loss per share
45,947,413

 
45,410,556

 
41,014,635

 
45,293,255

Diluted net income (loss) per share
$
(0.15
)
 
$
0.08

 
$
(0.54
)
 
$
0.18

Shares excluded from diluted net income (loss) per share computations (1)
9,665,597

 

 
12,138,687

 


(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 Income
In the nine months ended September 29, 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 $0.3 million gain on three 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 $0.6 million.

In both the three and nine months ended September 30, 2018, the Company recorded a gain of $0.4 million related to an insurance recovery from a restaurant fire.


24

Table of Contents

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 1,088 restaurants in 23 states as of September 29, 2019 under the trade names of Burger King® and Popeyes®. As of September 29, 2019, we operated, as franchisee, 1,028 Burger King restaurants in 23 Northeastern, Midwestern and Southeastern states and operated, as franchisee, 60 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 ended December 30, 2018 and ending December 29, 2019 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.
Results from Operations—an analysis of our results of operations for the three and nine months ended September 29, 2019 compared to the three and nine months ended September 30, 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.

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Table of Contents

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 September 29, 2019, our restaurant operations consisted of 1,028 franchised Burger King® restaurants in 23 states. Following the Cambridge Acquisition (as defined below) completed on April 30, 2019, we added the Popeyes® brand, and we operated 60 Popeyes restaurants as of September 29, 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.
Other revenue consists of fuel sales, food sales and sales of convenience merchandise and services from the six convenience stores acquired as part of the Cambridge Merger.
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. Cost of sales also includes low margin fuel costs for the six convenience stores acquired as part of the Cambridge Acquisition.
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.
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, restaurant pre-opening costs, non-recurring litigation costs and other non-recurring income or expense.

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Restaurant-Level EBITDA represents income or loss from operations adjusted to exclude general and administrative expenses, depreciation and amortization, impairment and other lease charges, integration costs, restaurant pre-opening costs 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, pre-opening costs, non-recurring litigation 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 such as salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, legal, auditing and other professional fees, acquisition costs, restaurant pre-opening costs and stock-based compensation expense. Although these costs are not directly related to restaurant-level operations, these expenses are necessary for the profitability of our restaurants. Additionally, this financial measure may not be comparable to a similarly titled caption for other companies.
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 37, 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 37.
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 our ongoing operations. However, some of these charges (such as impairment and other lease charges, restaurant pre-opening costs 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

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charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries.
Interest expense consists of interest expense associated with our $425.0 million Term Loan B Facility, amortization of deferred financing costs, amortization of original issue discount, 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 14.9 million shares of the Company's common stock, after conversion of the 10,000 shares of Series C Preferred Stock on August 29, 2019. 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 ("ADA") 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 ADA, BKC assigned to Carrols LLC, for a cost of $3.0 million, the right of first refusal on the sale of franchisee-operated restaurants in 16 states and a limited number of counties in four additional states, and granted franchise pre-approval to acquire Burger King restaurants until the date that we have acquired more than an aggregate of an additional 500 Burger King restaurants excluding those restaurants we acquired in the Cambridge Acquisition ("ADA ROFR"). 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.
Pursuant to the ADA, 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 ADA. 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 to open, build and operate approximately 80 new Popeyes® restaurants over six years.

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Table of Contents

Restaurant Acquisitions
From the beginning of 2018 through September 29, 2019, we acquired 278 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

 
259,801

 
Southeastern states, primarily TN, MS, LA
June 11, 2019
 
13

 
15,788

 
Baltimore, Maryland
August 20, 2019
(2)
1

 
1,108

 
Pennsylvania
Total 2018 and 2019 Acquisitions
 
278

 
$
314,799

 
 
(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 2018 and 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 and 2019 acquired restaurants.
The following table summarizes certain unaudited pro forma financial information related to our operating results for the three and nine months ended September 29, 2019 and September 30, 2018:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
 
September 29, 2019
 
September 30, 2018
Total revenue
$
402,607

 
$
382,738

 
$
1,167,461

 
$
1,133,957

Income from operations
$
(1,079
)
 
$
19,937

 
$
11,525

 
$
55,473

Adjusted EBITDA
$
25,689

 
$
34,496

 
$
71,438

 
$
103,453


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Capital Expenditures
We expect that 2019 capital expenditures excluding acquisitions will be $145 million to $155 million, which includes $55 million to $65 million for construction of 22 to 24 new Burger King® restaurants and 9 to 11 new Popeyes® restaurants and remodeling approximately 92 Burger King restaurants and four Popeyes restaurants. We will receive approximately $8.0 million of landlord contributions for certain of the 2019 Burger King remodels in 2020.
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-facility of $35.0 million for standby letters of credit) in an aggregate principal amount of $125.0 million (the "Revolving Credit Facility"). 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 plus the applicable margin of 2.25% or (ii) the LIBOR Rate plus the applicable margin of 3.25% (as defined in the New Senior Credit Facilities).
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 (iii) 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 September 29, 2019, there were $59.5 million of revolving credit borrowings outstanding and $11.6 million of letters of credit were issued under the Revolving Credit Facility. After reserving for issued letters of credit and outstanding revolving credit borrowings, $53.9 million was available for revolving credit borrowings under the New Senior Credit Facilities at September 29, 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 13 Burger King restaurants in 2019, of which 11 have already closed as of September 29, 2019, excluding two restaurants relocated within their trade areas during the first nine 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 effects of this transition that affects comparability of our results of operations between 2019 and 2018 include the immediate recognition of gains from sale-leaseback transactions and 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.

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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, to $13.75 an hour in 2020 and reaching $15.00 an hour by July 1, 2021. Since 2018 we have received 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 at the beginning in 2019. We had 128 restaurants in New York State at September 29, 2019. We typically attempt to offset the effects of wage inflation, at least in part, through periodic menu price increases. However, no assurance can be given that we will be able to offset these wage increases in the future.
Stock Repurchase Program
On August 2, 2019, our Board of Directors approved a stock repurchase plan (the "Repurchase Program") under which we may repurchase up to $25 million of our outstanding common stock. The authorization became 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.
During the three months ended September 29, 2019, we repurchased in open market transactions 283,069 shares at an average share price of $7.10 for a total cost of $2.0 million under the Repurchase Program. At September 29, 2019, $23.0 million remains available under the Repurchase Program. We have no obligation to repurchase additional shares of stock under the Repurchase Program, and the timing, actual number and value of shares purchased will depend on our stock price, trading volume, general market and economic conditions, and other factors.


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Table of Contents

Results of Operations
Three and Nine Months Ended September 29, 2019 Compared to Three and Nine Months Ended September 30, 2018
    
The following table highlights the key components of sales and the number of restaurants in operation for the three and nine month period ended September 29, 2019 as compared to the three and nine month period ended September 30, 2018 (dollars in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 29, 2019
 
September 30, 2018
 
September 29, 2019
 
September 30, 2018
Restaurant Sales:
 
$
398,414

 
$
296,917

 
$
1,054,877

 
$
871,553

Change in Comparable Restaurant Sales %
 
4.5
%
 
1.6
%