SEC Filing | Carrols Restaurant Group, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 27, 2020


☐			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 ☒ 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 ☒ 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

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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 ☒

As of November 4, 2020, Carrols Restaurant Group, Inc. had 52,091,534 shares of its common stock, $.01 par value, outstanding.

Table of Contents

CARROLS RESTAURANT GROUP, INC.

FORM 10-Q

QUARTER ENDED SEPTEMBER 27, 2020


		Page
PART I FINANCIAL INFORMATION

Item 1	Interim Condensed Consolidated Financial Statements (Unaudited):

	Consolidated Balance Sheets	3

	Consolidated Statements of Comprehensive Income (Loss)	4

	Consolidated Statements of Changes in Stockholders' Equity	5

	Consolidated Statements of Cash Flows	6

	Notes to Unaudited Interim Condensed Consolidated Financial Statements	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4	Controls and Procedures	52

PART II OTHER INFORMATION

Item 1	Legal Proceedings	53

Item 1A	Risk Factors	53

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 3	Defaults Upon Senior Securities	55

Item 4	Mine Safety Disclosures	55

Item 5	Other Information	55

Item 6	Exhibits	56

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 27, 2020		December 29, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	67,762	$	2,974
Trade and other receivables	17,570		13,445
Inventories	11,466		13,334

Prepaid expenses and other current assets	9,543		9,748
Refundable income taxes	279		284

Total current assets	106,620		39,785

Property and equipment, net of accumulated depreciation of $424,344 and $377,810, respectively	355,225		385,578
Franchise rights, net of accumulated amortization of $130,001 and $119,288, respectively (Note 3)	338,229		348,941
Goodwill (Note 3)	122,619		122,619
Franchise agreements, at cost less accumulated amortization of $14,275 and $13,365, respectively	32,130		32,690

Operating right-of-use assets, net (Note 6)	810,560		811,016


Other assets	10,782		10,831
Total assets	$	1,776,165	$	1,751,460
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and finance lease liabilities (Notes 6 and 7)	$	4,795	$	5,866
Current portion of operating lease liabilities (Note 6)	41,258		40,805
Accounts payable	27,022		45,780


Accrued payroll, related taxes and benefits	33,699		31,314
Accrued real estate taxes	9,250		8,139
Other liabilities	31,991		17,421
Total current liabilities	148,015		149,325
Long-term debt and finance lease liabilities, net of current portion (Notes 6 and 7)	477,450		455,565
Lease financing obligations	1,192		1,194
Operating lease liabilities (Note 6)	818,514		808,292

Deferred income taxes, net (Note 8)	—		6,983
Accrued postretirement benefits	2,424		2,555

Other liabilities (Note 5)	33,672		18,084
Total liabilities	1,481,267		1,441,998
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—52,653,964 and 51,840,200 shares, respectively, and outstanding—50,923,686 and 50,496,265 shares, respectively	515		510
Additional paid-in capital	304,790		301,251
Retained earnings	260		11,096
Accumulated other comprehensive income (loss)	(6,596)		622
Treasury stock, at cost	(4,071)		(4,017)
Total stockholders’ equity	294,898		309,462
Total liabilities and stockholders’ equity	$	1,776,165	$	1,751,460

See accompanying notes to unaudited condensed consolidated financial statements.

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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 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
Revenue:
Restaurant sales	$	407,036	$	398,414	$	1,126,972	$	1,054,877
Other revenue	—		3,931		—		6,816
Total revenue	407,036		402,345		1,126,972		1,061,693
Operating expenses:
Cost of sales	121,228		121,283		328,858		313,015
Restaurant wages and related expenses	126,040		131,070		362,503		352,402
Restaurant rent expense	30,536		29,300		88,974		77,906
Other restaurant operating expenses	60,486		62,710		172,774		164,623
Advertising expense	15,989		16,052		44,281		42,601
General and administrative (including stock-based compensation expense of $1,303, $1,707, $3,543 and $4,515 respectively)	20,440		21,365		59,808		61,709
Depreciation and amortization	19,620		21,200		60,947		53,613
Impairment and other lease charges (Note 4)	1,954		500		7,776		1,777
Other expense (income), net (Note 14)	515		(20)		(1,432)		(1,773)
Total operating expenses	396,808		403,460		1,124,489		1,065,873
Income (loss) from operations	10,228		(1,115)		2,483		(4,180)
Loss on extinguishment of debt	—		—		—		7,443
Interest expense	6,649		7,578		20,159		20,425

Income (loss) before income taxes	3,579		(8,693)		(17,676)		(32,048)
Provision (benefit) for income taxes (Note 8)	48		(1,881)		(6,840)		(10,035)
Net income (loss)	$	3,531	$	(6,812)	$	(10,836)	$	(22,013)
Basic and diluted net income (loss) per share (Note 13)	$	0.06	$	(0.15)	$	(0.21)	$	(0.54)
Weighted average common shares outstanding:
Basic	50,923,686		45,947,413		50,887,182		41,014,635
Diluted	60,542,580		45,947,413		50,887,182		41,014,635
Comprehensive income (loss), net of tax:
Net income (loss)	$	3,531	$	(6,812)	$	(10,836)	$	(22,013)
Change in valuation of interest rate swap (Note 7)	169		—		(7,218)		—
Comprehensive income (loss)	$	3,700	$	(6,812)	$	(18,054)	$	(22,013)

See accompanying notes to unaudited condensed consolidated financial statements.

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CARROLS RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(In thousands, except share and per share amounts)

(Unaudited)


												Accumulated
							Additional		Retained			Other					Total
	Common Stock			Preferred Stock			Paid-In		Earnings			Comprehensive		Treasury Stock			Stockholders'
	Shares	Amount		Shares	Amount		Capital		(Deficit)			Income (Loss)		Shares	Amount		Equity
Balance, December 29, 2019	51,049,377	$	510	100	$	—	$	301,251	$	11,096		$	622	(553,112)	$	(4,017)	$	309,462
Stock-based compensation	—	—		—	—		1,132		—			—		—	—		1,132
Vesting of non-vested shares and RSUs	424,963	5		—	—		(5)		—			—		—	—		—
Net loss	—	—		—	—		—		(22,209)			—		—	—		(22,209)
Repurchase of treasury stock	—	—		—	—		—		—			—		(9,318)	(54)		(54)
Change in valuation of interest rate swap (Note 7)	—	—		—	—		—		—			(5,209)		—	—		(5,209)
Balance, March 29, 2020	51,474,340	$	515	100	$	—	$	302,378	$	(11,113)		$	(4,587)	(562,430)	$	(4,071)	$	283,122
Stock-based compensation	—	—		—	—		1,109		—			—		—	—		1,109
Vesting of non-vested shares	11,776	—		—	—		—		—			—		—	—		—
Net income	—	—		—	—		—		7,842			—		—	—		7,842
Change in valuation of interest rate swap (Note 7)	—	—		—	—		—		—			(2,178)		—	—		(2,178)
Balance, June 28, 2020	51,486,116	$	515	100	$	—	$	303,487	$	(3,271)		$	(6,765)	(562,430)	$	(4,071)	$	289,895
Stock-based compensation	—	—		—	—		1,303		—			—		—	—		1,303



Net income	—	—		—	—		—		3,531			—		—	—		3,531
Change in valuation of interest rate swap (Note 7)	—	—		—	—		—		—			169		—	—		169
Balance, September 27, 2020	51,486,116	$	515	100	$	—	$	304,790	$	260		$	(6,596)	(562,430)	$	(4,071)	$	294,898


Balance, December 30, 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 and RSUs	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	—	—		—	—		—		—			—		(283,069)	(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)	(283,069)	$	(2,008)	$	318,871

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

CARROLS RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended
	September 27, 2020		September 29, 2019
Cash flows provided by operating activities:
Net loss	$	(10,836)	$	(22,013)
Adjustments to reconcile net loss to net cash provided by operating activities:
(Gain) loss on disposals of property and equipment	(1,316)		615
Stock-based compensation	3,543		4,515

Gain on settlement agreement (Note 11)	—		(1,913)
Impairment and other lease charges	7,776		1,777
Depreciation and amortization	60,947		53,613
Amortization of deferred financing costs	1,600		1,209
Amortization of bond premium and discount on debt	342		(175)


Deferred income taxes	(6,983)		(10,052)
Change in refundable income taxes	6		(176)
Loss on extinguishment of debt non-cash	—		129
Changes in other operating assets and liabilities	25,699		7,487
Net cash provided by operating activities	80,778		35,016
Cash flows used for investing activities:
Capital expenditures:
New restaurant development	(15,694)		(37,259)
Restaurant remodeling	(11,615)		(37,826)
Other restaurant capital expenditures	(8,798)		(15,643)
Corporate and restaurant information systems	(6,714)		(6,670)
Total capital expenditures	(42,821)		(97,398)
Acquisition of restaurants, net of cash acquired (Note 2)	—		(131,545)

Properties purchased for sale-leaseback	(13,399)		—
Proceeds from sale-leaseback transactions	20,342		7,018
Proceeds from insurance recoveries	1,833		123
Net cash used for investing activities	(34,045)		(221,802)
Cash flows provided by financing activities:
Proceeds from issuance of Term Loan B Facility	71,250		422,875
Repayments of Term Loan B Facility	(3,188)		(1,063)
Retirement of 8% Senior Secured Second Lien Notes, premium and fees	—		(280,500)
Borrowings under prior revolving credit facility	—		312,500
Repayments under prior revolving credit facility	—		(253,000)
Borrowings under revolving credit facility	150,000		—
Repayments under revolving credit facility	(195,750)		—

Payments on finance lease liabilities	(1,464)		(1,555)
Costs associated with financing long-term debt	(2,793)		(11,516)
Purchase of treasury shares	—		(2,008)
Net cash provided by financing activities	18,055		185,733
Net increase (decrease) in cash and cash equivalents	64,788		(1,053)
Cash and cash equivalents, beginning of period	2,974		4,014
Cash and cash equivalents, end of period	$	67,762	$	2,961
Supplemental disclosures:
Interest paid on long-term debt	$	18,431	$	22,159
Interest paid on lease financing obligations	$	78	$	78
Accruals for capital expenditures	$	2,736	$	13,156

Income taxes paid	$	139	$	193

See accompanying notes to unaudited condensed consolidated financial statements.

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 27, 2020 Carrols Restaurant Group, Inc. ("Carrols Restaurant Group") operated as franchisee 1,023 Burger King® restaurants in 23 Northeastern, Midwestern and Southeastern states and 65 Popeyes® restaurants in seven Southeastern states.

In March 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic, which continues to spread throughout the United States. The COVID-19 pandemic has significantly impacted the communities the Company's restaurants operate in as federal, state and local governments have taken a series of actions to contain its spread. In March 2020, the Company closed its dining rooms in all restaurants and modified operating hours in line with local ordinances and day-part sales trends, and over the course of March and April of 2020, temporarily closed 46 restaurants that were geographically close to one of its other restaurants. These closures were in effect for most of the second quarter of 2020. Each restaurant operated according to their respective local governmental guidelines as well as safety procedures developed by Burger King and Popeyes. As individual states and local governments have allowed reopenings, the Company has evaluated the opportunity to re-open dining rooms. By the end of the third quarter of 2020, approximately 35% of dining rooms have reopened, however, eat-in sales represented approximately 1% of our total restaurant sales during the third quarter of 2020 as guests continue to rely on our drive-thru, carry-out and delivery service modes. Given sales improvements after the initial months of the pandemic, 40 of the temporarily closed restaurants had reopened by the end of the third quarter of 2020. Two of the restaurants temporarily closed in March will not be reopened.

Basis of Consolidation. Carrols Restaurant Group, Inc. is a holding company and conducts all of its operations through its direct and indirect wholly-owned subsidiaries Carrols Corporation and New CFH, LLC and their wholly-owned subsidiaries. Carrols Corporation's material direct and indirect wholly-owned subsidiaries (collectively, "Carrols") include its 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"). New CFH LLC's material direct and indirect wholly-owned subsidiaries include Alabama Quality, LLC, Carolina Quality, LLC, Frayser Quality, LLC, Nashville Quality, LLC, Frayser Holdings, LLC, Louisiana Quality, LLC, CFH Real Estate, LLC, Tennessee Quality, LLC, TQ Real Estate, LLC and Mirabile Investment Corporation (and together with New CFH, LLC's immaterial direct and indirect subsidiaries, collectively, "New CFH"). Unless the context otherwise requires, Carrols Restaurant Group and its direct and indirect 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 27, 2020 and September 29, 2019 each contained thirteen and thirty-nine weeks, respectively. The 2020 fiscal year will end January 3, 2021 and will contain 53 weeks.

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements as of and for the three and nine months ended September 27, 2020 and September 29, 2019 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 27, 2020 and September 29, 2019 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 29, 2019. The December 29, 2019 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

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular amounts in thousands, except share and per share amounts)

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, valuation of interest rate swap, 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.

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 both September 27, 2020 and December 29, 2019, the Company did not have any cash invested in money market funds 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 and B-1 Facilities at September 27, 2020 approximate fair value because of their variable rates.

The Company recognizes derivatives on the balance sheet at fair value, which is considered Level 2. The Company’s only derivative is an interest rate swap which is designated as a cash flow hedge; therefore, the effective

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular amounts in thousands, except share and per share amounts)

portion of the changes in the fair value of this arrangement are recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of the changes in the fair value of this arrangement are immediately recognized in earnings as interest expense. The Company classifies cash inflows and outflows from derivatives within operating activities on the statement of cash flows.

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 $1.0 million and $5.4 million during the three and nine months ended September 27, 2020, respectively, and $0.3 million and $1.4 million during the three and nine months ended September 29, 2019, respectively.

Recently Issued Accounting Pronouncements. 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 was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company adopted this ASU in the first quarter of 2020 and there was 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 was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company adopted this ASU in the first quarter of 2020 and there was no impact on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement benefits (Topic 715-20). This ASU amends ASC 715 to add certain relevant disclosures, remove certain disclosures no longer considered to be cost beneficial, and clarify specific disclosure requirements related to defined benefit pension and other postretirement plans. This ASU is effective for fiscal years ending after December 15, 2020 and requires application on a retrospective basis. The Company does not expect adoption of this guidance will have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04 (“ASU 2020-04”), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”). This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the effect adoption of this guidance will have on its consolidated financial statements and related disclosures.

In April 2020, the FASB staff issued interpretive guidance that indicated it would be acceptable for entities to make an election to account for lease concessions related to the COVID-19 pandemic consistent with how those concessions would be accounted for under ACS Topic 842, Leases ("ASC 842"), as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract). Consequently, for concessions related to the effects of the COVID-19 pandemic, an entity will not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance in Topic 842 to those contracts. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. The Company has made the policy election to apply this interpretive guidance to certain rent relief resulting directly from COVID-19,

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular amounts in thousands, except share and per share amounts)

and has assumed that enforceable rights and obligations for those concessions exist in the lease contract. Accordingly, the Company recognized abatements that did not result in an extension of lease term as reductions in variable lease payments, and deferrals that did not result in an extension of lease term as an increase in other current liabilities. This election will continue while these abatement or deferrals are in effect.

Subsequent events. The Company reviewed and evaluated subsequent events through the issuance date of the Company’s unaudited condensed consolidated financial statements.

2. Acquisitions

Since 2012, the Company has been assigned Burger King Corporation's ("BKC") right of first refusal on the sale of franchisee-operated restaurants in 20 states (the "ROFR"). In 2019, the Company acquired an aggregate of 179 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
April 30, 2019	(1)	220	$	259,083	Southeastern states, primarily TN, MS, LA
June 11, 2019		13	15,788		Baltimore, Maryland
August 20, 2019	(2)	1	1,108		Pennsylvania
		234	$	275,979

(1)During the second quarter of 2019, the Company completed its merger with New CFH, LLC (“Cambridge”) and acquired 165 Burger King restaurants and 55 Popeyes restaurants.

(2)Acquisitions resulting from the exercise of the ROFR with Burger King.

On April 30, 2019 the Company completed a merger with Cambridge ("the Cambridge Merger") for a purchase price of $259.1 million through the issuance to Cambridge Franchise Holdings LLC ("Cambridge Holdings") 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 $113.8 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 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 common stock on the date of acquisition.

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 Company engaged a third party valuation specialist to assist with the valuation of franchise rights, leasehold improvements and favorable and unfavorable leases included in the operating right-to-use assets acquired. The fair value of other property and equipment and franchise agreements was based on the carrying value of the respective assets given that in the three years prior to the Cambridge Merger, Cambridge had completed valuations in connection with its own acquisition of 132 restaurants and also recently constructed 33 new restaurants. The 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 borrowing rate.

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 merger, including sales, operating synergies, development and growth opportunities. Cambridge's existing Burger King and Popeyes restaurant portfolios provides the Company with significant growth and development opportunities and,

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular amounts in thousands, except share and per share amounts)

due to the geographic location of the restaurants, mitigates the dependence on the economic performance of any one particular geographic location or restaurant concept. A deferred income tax liability of approximately $44.3 million was recorded representing book and tax differences primarily related to the fair value of the acquired franchise rights.

The following table summarizes the final allocation of the aggregate purchase price for the Cambridge Merger reflected in the condensed consolidated balance sheets as of December 29, 2019:


Inventory	$	2,839
Prepaid expenses	2,947
Other assets	1,846
Land and buildings	21,257
Restaurant equipment	25,358
Restaurant equipment - subject to finance leases	488
Right-of-use assets	251,431
Leasehold improvements	3,498
Franchise fees	7,300
Franchise rights	174,500
Deferred income taxes	(44,292)
Goodwill	84,060
Finance lease obligations for restaurant equipment	(568)
Operating lease liabilities	(255,897)
Accounts payable	(8,014)
Accrued payroll, related taxes and benefits	(3,133)

Other liabilities	(4,537)
Net assets acquired	$	259,083

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 December 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	29
Goodwill	86
Operating lease liabilities	(9,968)
Finance lease liabilities for restaurant equipment	(185)

Accounts payable	(40)



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. Acquired goodwill that is expected to be deductible for income tax purposes was $47.2 million in 2019. 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.

The results of operations for the restaurants acquired are included from the closing date of the respective acquisition. The 2019 acquired restaurants contributed restaurant sales of $73.3 million and $210.6 million in the three and nine months ended September 27, 2020, respectively. It is impracticable to disclose net earnings for the post-acquisition period for the acquired restaurants as net earnings of these restaurants were not tracked on a collective basis due to the integration of administrative functions, including field supervision.

The unaudited pro forma impact on the results of operations for the restaurants acquired in 2019 for the nine months ended September 29, 2019 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:


	Nine Months Ended
	September 29, 2019
Total revenue	$	1,167,461
Net loss	$	(15,744)
Basic and diluted net loss per share	$	(0.38)

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.

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular amounts in thousands, except share and per share amounts)

3. Intangible Assets

Goodwill. The Company is required to review goodwill for impairment annually, or more frequently when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment as of the last day of its fiscal year and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess the value of its goodwill. There were no recorded goodwill impairment losses during the three and nine months ended September 27, 2020 or September 29, 2019.

Franchise Rights. Amounts allocated to franchise rights for each acquisition of Burger King® and Popeyes® restaurants are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period.

The Company assesses the potential impairment of franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. No impairment charges were recorded related to the Company’s franchise rights for the three and nine months ended September 27, 2020 and September 29, 2019. The change in franchise rights for the nine months ended September 27, 2020 is summarized below:


Balance at December 29, 2019	$	348,941

Amortization expense	(10,712)
Balance at September 27, 2020	$	338,229

Amortization expense related to franchise rights was $3.4 million and $3.9 million for the three months ended September 27, 2020 and September 29, 2019, respectively and $10.7 million and $8.0 million for the nine months ended September 27, 2020 and September 29, 2019, respectively. The Company expects annual amortization expense to be $14.3 million in 2020 and $13.7 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 determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions. 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 27, 2020, the Company recorded impairment and other lease charges of $2.0 million consisting of $0.7 million of initial impairment charges for four underperforming restaurants, capital expenditures of $0.2 million at underperforming restaurants, and $1.0 million of other lease charges primarily for three restaurants closed in the third quarter of 2020. During the nine months ended September 27, 2020, the Company recorded impairment and other lease charges of $7.8 million consisting of $4.9 million related to initial impairment charges for thirteen underperforming restaurants, capital expenditures

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular amounts in thousands, except share and per share amounts)

of $0.5 million at previously impaired restaurants and $2.4 million of other lease charges primarily from nine restaurants closed during the first quarter of 2020 and three restaurants closed in the third quarter of 2020.

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 of 2019. 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 related to 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 to the closure of two restaurants and changes in estimates during the year.

5. Other Liabilities, Long-Term

Other liabilities, long-term, at September 27, 2020 and December 29, 2019 consisted of the following:


	September 27, 2020		December 29, 2019
Accrued occupancy costs	$	2,123	$	8,523
Accrued workers’ compensation and general liability claims	5,566		5,370
Interest rate swap	7,218		—
Deferred compensation	4,212		3,902
Deferred federal payroll taxes	14,267		—
Other	286		289
	$	33,672	$	18,084

On March 27, 2020, the United States enacted the CARES Act as a response to the economic uncertainty resulting from COVID-19. The CARES Act provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022.

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 and upon any lease amendments or remodeling activity 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.

As a result of the COVID-19 pandemic and the resulting economic uncertainty in the restaurant industry, the Company contacted each of its landlords to potentially negotiate accommodations to preserve cash. For certain leases the Company was able to modify existing payment terms, in some cases through deferral of existing payments until future periods and in some cases through a reduction in payments due during this period. The Company elected the practical expedient to not evaluate whether a deferral of rent within the current term is a lease modification. Any concessions which resulted in extension of the existing lease term were accounted for as a lease modification under the current GAAP guidance. The total rent that was or will be deferred as a result of requests for relief from our landlords other than BKC (see Note 11) was $5.8 million, of which $4.8 million was or is expected to be repaid over various periods beginning in the third quarter of 2020. As of September 27, 2020, $4.3 million remains to be repaid to landlords related to these deferrals.

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.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular amounts in thousands, except share and per share amounts)

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 and initial direct costs and is adjusted by favorable lease assets and unfavorable 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.

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 27, 2020 and September 29, 2019 are as follows:


		Three Months Ended				Nine Months Ended
Lease cost	Classification	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
Operating lease cost (1)	Restaurant rent expense	$	26,126	$	24,933	$	77,088	$	65,770
Operating lease cost	General and administrative	171		171		436		393
Variable lease cost	Restaurant rent expense	4,524		4,529		12,228		12,619
Sublease income	Restaurant rent expense	(114)		(162)		(342)		(483)
Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization	221		414		1,103		1,248
Interest on lease liabilities	Interest expense	26		69		108		204
Total lease cost		$	30,954	$	29,954	$	90,621	$	79,751

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

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular amounts in thousands, except share and per share amounts)

Other Information

Supplemental cash flow information related to leases for the nine months ended September 27, 2020 and September 29, 2019 are as follows:


	Nine Months Ended
	September 27, 2020		September 29, 2019
Gain on sale-leaseback transactions	$	226	$	289
Lease assets and liabilities resulting from lease modifications and new leases	$	47,209	$	49,097
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	73,749	$	62,986
Operating cash flows from finance leases	$	26	$	204
Financing cash flows from finance leases	$	1,464	$	1,555

7. Long-Term Debt

Long-term debt at September 27, 2020 and December 29, 2019 consisted of the following:


	September 27, 2020		December 29, 2019
Collateralized:
Senior Credit Facility:
Term Loan B borrowings	$	419,688	$	422,875
Term Loan B-1 borrowings	75,000		—
Revolving credit borrowings	—		45,750
Finance lease liabilities	1,060		2,524
	495,748		471,149
Less: current portion of long-term debt and finance lease liabilities	(4,795)		(5,866)
Less: unamortized debt issuance costs	(8,142)		(7,768)
Less: unamortized original issue discount	(5,361)		(1,950)
Total Long-term debt	$	477,450	$	455,565

On April 30, 2019, the Company entered into a 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 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 “Revolving Credit Facility” and, together with the Term Loan B Facility, (as amended, the “Senior Credit Facilities”).

On December 13, 2019, the Company entered into the First Amendment to Credit Agreement (the "First Amendment") which amended a financial covenant under the Senior Credit Facilities applicable solely with respect to the Revolving Credit Facility that previously required the Company to maintain quarterly a Total Net Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 4.75 to 1.00 (measured on a most recent four quarter basis), to now require that the Company maintain only a First Lien Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 5.75 to 1.00 (as measured on a most recent four quarter basis) if, and only if, on the last day of any fiscal quarter (beginning with the fiscal quarter ended December 29, 2019), the sum of the aggregate principal amount of outstanding revolving credit borrowings under the Revolving Credit Facility and the aggregate face amount of letters of credit issued under the Revolving Credit Facility (excluding undrawn letters of credit in an aggregate face amount up to $12.0 million) exceeds 35% of the aggregate amount of the maximum revolving credit borrowings under the Revolving Credit Facility. The First Amendment also reduced the aggregate

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Tabular amounts in thousands, except share and per share amounts)

maximum revolving credit borrowings under the Revolving Credit Facility by $10.0 million to a total of $115.0 million.

On March 25, 2020, the Company entered into the Second Amendment to its Senior Credit Facilities (the "Second Amendment"). The Second Amendment increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility (the "Revolving Committed Amount") by $