SEC Filing - Carrols Restaurant Group, Inc.

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Table of Contents

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 July 4, 2021


☐			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 August 9, 2021, Carrols Restaurant Group, Inc. had 51,273,538 shares of its common stock, $.01 par value, outstanding.

Table of Contents

CARROLS RESTAURANT GROUP, INC.

FORM 10-Q

QUARTER ENDED JULY 4, 2021


		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	26

Item 3	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4	Controls and Procedures	46

PART II OTHER INFORMATION

Item 1	Legal Proceedings	48

Item 1A	Risk Factors	48

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3	Defaults Upon Senior Securities	48

Item 4	Mine Safety Disclosures	48

Item 5	Other Information	48

Item 6	Exhibits	49

PART I—FINANCIAL INFORMATION

ITEM 1—INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CARROLS RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	July 4, 2021		January 3, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	56,187	$	64,964
Trade and other receivables	20,990		19,862
Inventories	13,322		11,595
Prepaid rent	8,359		8,046
Prepaid expenses and other current assets	10,373		7,309
Refundable income taxes	185		169

Total current assets	109,416		111,945

Property and equipment, net of accumulated depreciation of $460,962 and $434,328, respectively	365,161		349,555
Franchise rights, net of accumulated amortization of $140,515 and $133,632, respectively (Note 3)	334,327		334,597
Goodwill (Note 3)	123,248		122,619
Franchise agreements, at cost less accumulated amortization of $13,754 and $14,653, respectively	32,129		31,584

Operating right-of-use assets, net (Note 6)	794,544		799,962


Other assets	7,593		6,823
Total assets	$	1,766,418	$	1,757,085
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and finance lease liabilities (Notes 6 and 7)	$	4,996	$	5,525
Current portion of operating lease liabilities (Note 6)	43,222		41,815
Accounts payable	32,509		27,596


Accrued payroll, related taxes and benefits	44,178		49,417
Accrued real estate taxes	8,085		7,774
Other liabilities	21,932		24,214
Total current liabilities	154,922		156,341
Long-term debt and finance lease liabilities, net of current portion (Notes 6 and 7)	508,787		475,695

Operating lease liabilities (Note 6)	804,661		809,969

Deferred income taxes, net (Note 8)	9,431		11,362
Accrued postretirement benefits	1,358		1,523

Other liabilities (Note 5)	26,773		30,663
Total liabilities	1,505,932		1,485,553
Commitments and contingencies (Note 10)
Stockholders’ equity (Note 12):
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—53,628,491 and 52,653,964 shares, respectively, and outstanding—49,927,583 and 49,389,382 shares, respectively	520		515
Additional paid-in capital	309,547		306,469
Accumulated deficit	(35,094)		(18,367)
Accumulated other comprehensive loss	(360)		(3,015)
Treasury stock, at cost	(14,127)		(14,070)
Total stockholders’ equity	260,486		271,532
Total liabilities and stockholders’ equity	$	1,766,418	$	1,757,085

See notes to unaudited condensed consolidated financial statements.

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CARROLS RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended				Six Months Ended
	July 4, 2021		June 28, 2020		July 4, 2021		June 28, 2020
Restaurant sales	424,541		368,418		$	814,534	$	719,936
Operating expenses:
Food, beverage and packaging costs	126,424		104,703		240,214		207,630
Restaurant wages and related expenses	137,592		111,888		267,238		236,463
Restaurant rent expense	30,591		28,984		60,905		58,438
Other restaurant operating expenses	65,128		54,310		126,547		112,288
Advertising expense	16,939		14,416		32,308		28,292
General and administrative expenses (including stock-based compensation of $1,614, $1,109, $3,083 and $2,241 respectively)	20,698		18,581		42,067		39,368
Depreciation and amortization	20,421		20,296		41,030		41,327
Impairment and other lease charges (Note 4)	144		2,941		497		5,822
Other expense (income), net	715		(2,003)		942		(1,947)
Total operating expenses	418,652		354,116		811,748		727,681
Income (loss) from operations	5,889		14,302		2,786		(7,745)
Loss on extinguishment of debt	8,538		—		8,538		—
Interest expense	6,942		6,370		13,668		13,510
Income (loss) before income taxes	(9,591)		7,932		(19,420)		(21,255)
Provision (benefit) for income taxes (Note 8)	(32)		90		(2,693)		(6,888)
Net income (loss)	$	(9,559)	$	7,842	$	(16,727)	$	(14,367)
Basic and diluted net income (loss) per share (Note 13)	$	(0.19)	$	0.13	$	(0.34)	$	(0.28)
Shares used in computing net income (loss) per share:
Weighted average common shares outstanding:
Basic weighted average common shares outstanding	49,917,296		50,916,758		49,870,718		50,868,929
Diluted weighted average common shares outstanding	49,917,296		60,331,817		49,870,718		50,868,929
Comprehensive income (loss), net of tax:
Net income (loss)	$	(9,559)	$	7,842	$	(16,727)	$	(14,367)
Change in valuation of interest rate swap (Notes 5 and 7)	(504)		(2,178)		2,655		(7,387)
Comprehensive income (loss)	$	(10,063)	$	5,664	$	(14,072)	$	(21,754)

See notes to unaudited condensed consolidated financial statements.

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CARROLS RESTAURANT GROUP, INC.

CONDENSED 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, January 3, 2021	51,486,116	$	515	100	$	—	$	306,469	$	(18,367)	$	(3,015)	(2,096,734)	$	(14,070)	$	271,532
Stock-based compensation	—	—		—	—		1,469		—		—		—	—		1,469
Vesting of non-vested shares and RSUs	522,406	5		—	—		(5)		—		—		—	—		—
Net loss	—	—		—	—		—		(7,168)		—		—	—		(7,168)
Purchase of treasury stock	—	—		—	—		—		—		—		(8,219)	(57)		(57)
Change in valuation of interest rate swap, net of income taxes of $1,046 (Note 7)	—	—		—	—		—		—		3,159		—	—		3,159
Balance, April 4, 2021	52,008,522	$	520	100	$	—	$	307,933	$	(25,535)	$	144	(2,104,953)	$	(14,127)	$	268,935
Stock-based compensation	—	—		—	—		1,614		—		—		—	—		1,614
Vesting of non-vested shares	24,014	—		—	—		—		—		—		—	—		—
Net loss	—	—		—	—		—		(9,559)		—		—	—		(9,559)
Change in valuation of interest rate swap, net of income taxes of $167 (Note 7)	—	—		—	—		—		—		(504)		—	—		(504)
Balance, July 4, 2021	52,032,536	$	520	100	$	—	$	309,547	$	(35,094)	$	(360)	(2,104,953)	$	(14,127)	$	260,486









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)
Purchase 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

See notes to unaudited condensed consolidated financial statements.

Table of Contents

CARROLS RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	July 4, 2021		June 28, 2020
Cash flows provided by operating activities:
Net loss	$	(16,727)	$	(14,367)
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss (gain) on disposals of property and equipment, including sale-leasebacks	930		(1,859)
Stock-based compensation	3,083		2,241
Impairment and other lease charges	497		5,822
Depreciation and amortization	41,030		41,327
Amortization of deferred financing costs	1,380		1,039
Amortization of discount on debt	404		146
Deferred income taxes	(2,677)		(6,983)
Non-cash loss on extinguishment of debt	8,538		—
Change in refundable income taxes	(16)		96
Changes in other operating assets and liabilities	(9,827)		20,430
Net cash provided by operating activities	26,615		47,892
Cash flows used for investing activities:
Capital expenditures:
New restaurant development	(2,615)		(13,952)
Restaurant remodeling	(6,854)		(7,349)
Other restaurant capital expenditures	(9,446)		(5,555)
Corporate and restaurant information systems	(7,560)		(6,288)
Total capital expenditures	(26,475)		(33,144)
Acquisition of restaurants, net of cash acquired (Note 2)	(30,819)		—

Properties purchased for sale-leaseback	—		(12,441)
Proceeds from sale-leaseback transactions	—		18,859
Proceeds from insurance recoveries	500		1,720
Net cash used for investing activities	(56,794)		(25,006)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of 5.875% Senior Notes due 2029	300,000		—
Principal payments on Term B and B-1 Loans	(319,250)		(2,125)
Proceeds from borrowing of Term B-1 Loans	—		71,250
Borrowings under revolving credit facility	46,000		150,000
Repayments under revolving credit facility	—		(195,750)

Payments on finance lease liabilities	(266)		(1,134)
Costs associated with issuance of long-term debt	(5,025)		(2,123)
Purchase of treasury shares	(57)		—
Net cash provided by financing activities	21,402		20,118
Net increase (decrease) in cash and cash equivalents	(8,777)		43,004
Cash and cash equivalents, beginning of period	64,964		2,974
Cash and cash equivalents, end of period	$	56,187	$	45,978
Supplemental disclosures:
Interest paid on long-term debt	$	11,761	$	12,363
Interest paid on lease financing obligations	52		52
Accruals for capital expenditures	2,514		3,405
Finance lease obligations incurred	804		—
Accruals for costs associated with issuance of long term debt	790		—

See 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 July 4, 2021, Carrols Restaurant Group, Inc. ("Carrols Restaurant Group") operated as a franchisee 1,027 Burger King® restaurants in 23 Northeastern, Midwestern, Southcentral and Southeastern states and 65 Popeyes® restaurants in seven Southeastern states.

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 wholly-owned subsidiary is Carrols LLC, a Delaware limited liability company. New CFH LLC's material direct and indirect wholly-owned subsidiaries include Frayser Quality, LLC and Nashville Quality, LLC (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 six months ended July 4, 2021 and June 28, 2020 each contained thirteen and twenty-six weeks, respectively. The 2021 fiscal year will end January 2, 2022 and will contain 52 weeks.

Basis of Presentation. The unaudited condensed consolidated financial statements as of and for the three and six months ended July 4, 2021 and June 28, 2020 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 footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such unaudited condensed consolidated financial statements have been included. The results of operations for the three and six months ended July 4, 2021 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 contained in the Company’s Annual Report on Form 10-K for the year ended January 3, 2021. The January 3, 2021 consolidated balance sheet data is derived from those audited consolidated financial statements.

Use of Estimates. The preparation of the 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, lease accounting matters, the valuation of acquired assets and liabilities, interest rate swap valuation, the valuation of deferred income tax assets and liabilities, and the evaluation for impairment of goodwill, long-lived assets and franchise rights. Actual results could differ from those estimates.

Segment Information. Operating segments are components of an entity for which discrete 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, our CEO, 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, its restaurant business. 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

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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 may engage 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 the 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 using significant inputs observable in the open market. The Company categorizes these inputs as Level 2 inputs under ASC 820. The fair value acquired franchise rights and favorable or unfavorable leases positions are determined using the income approach and include unobservable inputs. The Company categorizes these inputs as Level 3 inputs 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 July 4, 2021 and January 3, 2021, the Company did not have any cash invested in money market funds classified as cash equivalents on the condensed consolidated balance sheets.

Food, beverage and packaging costs. The Company includes food, beverage and packaging costs and delivery commissions, net of any vendor purchase discounts and rebates, as food, beverage, and packaging costs on the condensed consolidated statements of comprehensive income (loss).

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 B loans at July 4, 2021 approximate fair value because of their variable rates.

The Company recognizes its derivative arrangements 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. Accordingly, the effective portion of the changes in the fair value of this arrangement is 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 is immediately recognized in earnings as interest expense. The Company classifies cash inflows and outflows from derivatives within operating activities on the condensed consolidated statements 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 $0.1 million and $0.3 million during the three and six months ended July 4, 2021 and $2.7 million and $4.4 million during the three and six months ended June 28, 2020.

Recently Issued Accounting Pronouncements. In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04 (“ASU 2020-04”) and subsequently ASU No. 2021-01, Reference Rate Reform (Topic 848) in March 2020 and January 2021, respectively. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, including derivative instruments impacted by changes in the interest rates used for discounting cash flows for computing variable margin settlements, subject to meeting certain criteria, that reference the London

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Interbank Offered Rate (“LIBOR”) or other reference rates expected to be discontinued, in 2022 or potentially 2023 (pending possible extension). The ASUs establish certain contract modification principles that entities can apply in other areas that may be affected by reference rate reform and certain elective hedge accounting expedients and exceptions. The ASUs may be applied prospectively. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. Adoption of this guidance did not have a material impact the consolidated financial statements.

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 ASC 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 elected to apply this interpretive guidance to certain rent relief received in 2020 resulting directly from COVID-19, and has assumed that enforceable rights and obligations for those concessions exist in the lease contract. Accordingly, the Company recognized abatements in 2020 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 abatements or deferrals are in effect.

COVID-19. In March 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. 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. Over the course of the pandemic, each restaurant has operated according to its respective local governmental guidelines as well as safety procedures developed by Burger King and Popeyes. The COVID-19 pandemic and its impact on restaurants in communities in which the Company operates continues to evolve. During the second quarter of 2021, we saw a modest shift in guests returning to dining rooms, with take-out and dine-in representing approximately 14% of net sales in June of 2021, as compared to 10% of net sales in December of 2020 and 30% of net sales for all of 2019.

Subsequent events. The Company reviewed and evaluated subsequent events through the issuance date of the Company’s unaudited condensed consolidated financial statements (Note 15).

2. Acquisitions

In 2021, the Company acquired an aggregate of 19 Burger King restaurants from other franchisees in the following transactions (in thousands except number of restaurants):


Closing Date	Number of Restaurants	Purchase Price		Fee-Owned (1)	Market Location
June 17, 2021	14	$	27,603	12	Fort Wayne, Indiana
June 23, 2021	5	3,216		1	Battle Creek, Michigan
	19	$	30,819	13

(1) The 2021 acquisitions included the purchase of 13 fee-owned restaurants, of which 12 are expected to be sold in sale-leaseback transactions during 2021 for net proceeds of approximately $20.1 million, although there is no assurance we will complete such transactions during 2021 or at all.

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 2021 acquisitions at their estimated fair values. The following table summarizes the preliminary allocation of the aggregate purchase price for the 2021 acquisitions reflected in the condensed consolidated balance sheets as of July 4, 2021:


Inventory	$	229


Land and buildings	21,361
Restaurant equipment	850
Restaurant equipment - subject to finance leases	29
Right-of-use assets	2,997
Leasehold improvements	550
Franchise fees	411
Franchise rights	6,613

Deferred income taxes	106
Goodwill	629
Operating lease liabilities	(2,899)
Finance lease liabilities for restaurant equipment	(35)

Accounts payable	(22)

Net assets acquired	$	30,819

The values of certain assets and liabilities are preliminary in nature at July 4, 2021. The preliminary fair value of franchise rights and goodwill was estimated based on past history of purchase price allocations. When the fair value determination 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 land and buildings, franchise rights, goodwill, and the related deferred taxes.

Goodwill recorded in connection with the 2021 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 $0.6 million in 2021.

The results of operations for the restaurants acquired are included from the closing date of the respective acquisition. The 2021 acquired restaurants contributed restaurant sales of $1.0 million in the three and six months ended July 4, 2021. 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 2021 for the three and six months ended July 4, 2021 and June 28, 2020 are included below. The unaudited pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. The following table summarizes the Company's unaudited pro forma operating results:


	Three Months Ended				Six Months Ended
	July 4, 2021		June 28, 2020		July 4, 2021		June 28, 2020
Total revenue	$	430,017	$	374,489	$	826,024	$	730,929
Net income (loss)	$	(8,871)	$	8,315	$	(15,574)	$	(13,580)
Basic and diluted net loss per share	$	(0.18)	$	0.14	$	(0.31)	$	(0.27)

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

This unaudited pro forma financial information does not give effect to any anticipated synergies, operating efficiencies, cost savings or integration costs related to the acquired restaurants. The unaudited pro forma financial results exclude transaction costs recorded as general and administrative expenses of $0.3 million during the three and six months ended July 4, 2021.

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 six months ended July 4, 2021 or June 28, 2020. The change in goodwill for the six months ended July 4, 2021 is summarized below:


Balance at January 3, 2021	$	122,619
Acquisitions of restaurants (Note 2)	629
Balance at July 4, 2021	$	123,248

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 six months ended July 4, 2021 and June 28, 2020. The change in franchise rights for the six months ended July 4, 2021 is summarized below:


Balance at January 3, 2021	$	334,597
Acquisitions of restaurants (Note 2)	6,613
Amortization expense	(6,883)
Balance at July 4, 2021	$	334,327

Amortization expense related to franchise rights was $3.4 million for each of the three months ended July 4, 2021 and June 28, 2020, and $6.9 million and $7.3 million for the six months ended July 4, 2021 and June 28, 2020, respectively. The Company expects annual amortization expense to be $13.9 million in 2021 and $14.0 million in each of the following five years.

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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 July 4, 2021, the Company recorded impairment and other lease charges of $0.1 million due primarily to capital expenditures at previously impaired restaurants. During the six months ended July 4, 2021, the Company recorded impairment and other lease charges of $0.5 million due primarily to capital expenditures of $0.3 million at previously impaired restaurants and $0.2 million of other lease charges.

During the three months ended June 28, 2020, the Company recorded impairment and other lease charges of $2.9 million consisting of $2.6 million of initial impairment charges for six underperforming restaurants, capital expenditures of $0.1 million at underperforming restaurants, and $0.2 million of other lease charges. During the six months ended June 28, 2020, the Company recorded impairment and other lease charges of $5.8 million consisting of $4.1 million related to initial impairment charges for nine underperforming restaurants, capital expenditures of $0.3 million at previously impaired restaurants and $1.4 million of other lease charges primarily from nine restaurants closed during the first quarter of 2020.

5. Other Liabilities, Long-Term

Other liabilities, long-term, at July 4, 2021 and January 3, 2021 consisted of the following:


	July 4, 2021		January 3, 2021
Accrued occupancy costs	$	2,215	$	2,394
Accrued workers’ compensation and general liability claims	5,281		5,499
Interest rate swap (Note 7)	2,529		6,062
Deferred compensation	4,455		4,419
Deferred federal payroll taxes	10,808		10,808
Lease finance obligations	1,188		1,191
Other	297		290
	$	26,773	$	30,663

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 provided 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. In 2020, the Company deferred $21.6 million related to this provision. As of both July 4, 2021 and January 3, 2021, $10.8 million was recorded in accrued payroll, related taxes and benefits and $10.8 million was recorded in other liabilities, long-term in the condensed consolidated balance sheets.

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

6. Leases

The Company utilizes land and buildings in its operations under various lease agreements. The Company does not consider any one of these individual leases material to the Company's operations. Initial lease terms are generally for twenty years and, in many cases, provide for renewal options and in most cases rent escalations. The exercise of such renewal options is 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 variable 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.

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 market and term-specific incremental borrowing rates which consider the rate of interest it expects to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. ROU assets are also reduced by lease incentives, increased by initial direct costs and adjusted by favorable lease assets and unfavorable lease liabilities.

Variable lease components represent amounts that are contractually fixed as a 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 condensed consolidated balance sheets 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) separately from non-lease components (e.g. common area maintenance).

The Company also utilizes certain restaurant equipment under various finance lease agreements with initial terms of generally three to 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 index at lease inception and the subsequent fluctuations in that index 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 costs are incurred.

As a result of the COVID-19 pandemic and the resulting economic uncertainty in the restaurant industry in 2020, 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 that would otherwise have been due. 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 an extension of the existing lease term were accounted for as a lease modification under current U.S. GAAP guidance. The total rent that was or will be deferred as a result of requests for pandemic-related relief from our landlords other than Burger King Corporation ("BKC", see Note 11) was $5.8 million, of which $4.8 million has been or remains to be repaid over various schedules which began in the third quarter of 2020. As of July 4, 2021, $1.2 million remains to be repaid to landlords related to these deferrals.

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Lease Cost

The components and classification of lease expense for the three and six months ended July 4, 2021 and June 28, 2020 are as follows:


		Three Months Ended				Six Months Ended
Lease cost	Classification	July 4, 2021		June 28, 2020		July 4, 2021		June 28, 2020
Operating lease cost (1)	Restaurant rent expense	$	25,717	$	25,491	$	51,459	$	50,962
Operating lease cost (2)	General and administrative	224		167		480		265
Variable lease cost	Restaurant rent expense	4,907		3,599		9,505		7,704
Sublease income	Restaurant rent expense	(33)		(106)		(59)		(228)
Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization	177		437		309		882
Interest on lease liabilities	Interest expense	28		36		51		82
Total lease cost		$	31,020	$	29,624	$	61,745	$	59,667

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

(2)Represents operating lease costs for property and equipment not directly related to restaurant operations.

Other Information

Supplemental cash flow information related to leases for the six months ended July 4, 2021 and June 28, 2020 are as follows:


	Six Months Ended
	July 4, 2021		June 28, 2020
Gain on sale-leaseback transactions	$	—	$	567
Operating lease assets and liabilities resulting from lease modifications and new leases	17,632		39,953
Finance lease assets acquired through finance lease obligations	804		—
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows related to operating leases	50,352		49,143
Operating cash flows related to finance leases	28		36
Financing cash flows related to finance leases	266		1,134

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 July 4, 2021 and January 3, 2021 consisted of the following:


	July 4, 2021		January 3, 2021

Senior Credit Facility:
Term B Loans	$	174,000	$	419,375
Term B-1 Loans	—		73,875
Revolving credit borrowings	46,000		—
Senior Notes Due 2029	300,000		—
Finance lease liabilities	1,451		908
Total Funded debt	521,451		494,158
Less: current portion of long-term debt and finance lease liabilities	(4,996)		(5,525)
Less: unamortized debt issuance costs	(7,005)		(7,777)
Less: unamortized original issue discount	(663)		(5,161)
Total Long-term debt	$	508,787	$	475,695

Senior Credit Facility. On April 30, 2019, the Company entered into senior secured credit facilities 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, 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 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, among other things, (i) 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 $15.4 million to a total of $130.4 million, (ii) amended the definition of Applicable Margin (such definition and all other definitions used herein and otherwise not defined herein shall be the meanings set forth in the Senior Credit Facilities), (iii) provided for a commitment fee (the "Ticking Fee") beginning on the 180th day after the Second Amendment Effective Date and for so long as the Revolving Committed Amount remained greater than $115.0 million, and (iv) provided that the Company shall use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of $115.0 million solely for ongoing operations of the Company and its subsidiaries and shall not be held as cash on the balance sheet. The terms outlined as (ii), (iii) and (iv) were removed in the Sixth Amendment described below.

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

On April 8, 2020, the Company entered into the Third Amendment to its Senior Credit Facilities which increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility by $15.4 million to a total of $145.8 million.

On April 16, 2020, the Company entered into the Fourth Amendment to its Senior Credit Facilities (the "Fourth Amendment"). The Fourth Amendment permits the Company to incur and, if necessary, repay indebtedness incurred pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus Aid, Relief and Economic Security Act, as amended (the "CARES Act"). Subsequent to the Fourth Amendment, the Company withdrew its application for relief under the PPP and returned the funds upon receipt.

On June 23, 2020 (the "Fifth Amendment Effective Date"), the Company entered into the Fifth Amendment to its Senior Credit Facilities (the "Fifth Amendment"). The Fifth Amendment increased the Term Loan (as defined in the Senior Credit Facilities) borrowings in the aggregate principal amount of $75 million of Incremental Term B-1 Loans (as defined in the Senior Credit Facilities). The Incremental Term B-1 Loans constituted a new tranche of Term Loans ranking pari passu in right of payment and security with the Initial Term Loans for all purposes under the Senior Credit Facilities. The Incremental Term B-1 Loans had the same terms as outstanding borrowings under the Company's existing Term Loan B facility pursuant to and in accordance with the Senior Credit Facilities, provided that (i) borrowings under the Incremental Term B-1 Loans bore interest at a rate per annum, at the Company’s option, of (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus the applicable margin of 5.25% or (b) the LIBOR Rate (as defined in the Senior Credit Facilities) (which shall not be less than 1% for Incremental Term B-1 Loans) plus the applicable margin of 6.25% and (ii) certain prepayments of the Incremental Term B-1 Loans by the Company prior to the first anniversary of the Fifth Amendment Effective Date would be subject to a premium to the Administrative Agent (as defined in the Senior Credit Facilities), for the ratable account of each applicable Term Loan Lender (as defined in the Senior Credit Facilities) holding Incremental Term B-1 Loans on the date of such prepayment equal to the Applicable Make-Whole Amount (as defined in the Senior Credit Facilities) with respect to the principal amount of the Incremental Term B-1 Loans so prepaid. The principal amount of the Incremental Term B-1 Loans amortized in an aggregate annual amount equal to 1% of the original principal amount of the Incremental Term B-1 Loans and were repayable in consecutive quarterly installments on the last day of the Company's fiscal quarters beginning on the third fiscal quarter of 2020. The remaining outstanding principal amount of the Incremental Term B-1 Loan and all accrued but unpaid interest and other amounts payable with respect to the Incremental Term B-1 Loan would be due on April 30, 2026, which is the Term Loan Maturity Date (as defined in the Senior Credit Facilities). The net proceeds of the Incremental Term B-1 Loans were $71.3 million after original issue discount and were used for general corporate purposes, including repayment of the outstanding balance of the Revolving Credit Facility. The Term B-1 Loans were repaid in full on June 28, 2021.

On April 6, 2021, the Company entered into the Sixth Amendment to its Senior Credit Facilities (the "Sixth Amendment") which increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility by $29.2 million to a total of $175.0 million. The Sixth Amendment also amended the definitions in the Senior Credit Facilities of (i) Applicable Margin, to provide that the Applicable Margin for borrowings under the Revolving Credit Facility (including Letter of Credit Fees) shall be at a rate per annum equal to 3.25% for LIBOR Rate Loans and 2.25% for Alternate Base Rate Loans, and (ii) Revolving Maturity Date, to provide that the Revolving Maturity Date is extended to January 29, 2026. In addition, the Sixth Amendment amended the Senior Credit Facilities to remove the obligation by the Company to (i) pay a Ticking Fee pursuant to the Ticking Fee Rate and (ii) use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of $115.0 million solely for ongoing operations of the Company and its subsidiaries and not to hold as cash on the balance sheet.

On June 28, 2021, the Company entered into the Seventh Amendment to its Senior Credit Facilities (the "Seventh Amendment"). The Seventh Amendment revised (a) the initial amount for calculating the Available Amount (as defined in the Senior Credit Facilities) from $27.0 million to $50.0 million which is utilized, among other items, in determining the amount of Restricted Payments (as defined in the Senior Credit Facilities) and

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Permitted Investments (as defined in the Senior Credit Facilities), (b) the calculation of the Company's ability to incur an Incremental Term Loan (as defined in the Senior Credit Facilities) or an increase to the Revolving Committed Amount from $135.0 million to $180.0 million, and (c) the general basket for Restricted Payments, Permitted Investments and Restricted Junior Debt Payment (as defined in the Senior Credit Facilities) from an aggregate amount not to exceed the greater of (i) $27.0 million and (ii) 20% of Consolidated EBITDA (as defined in the Senior Credit Facilities) as of the most recently completed Reference Period (as defined in the Senior Credit Facilities) to (i) $50.0 million and (ii) 40% of Consolidated EBITDA as of the most recently completed Reference Period. In addition, the Seventh Amendment revises the Total Net Leverage Ratio required for the Company to make Restricted Payments or prepay Junior Debt (as defined in the Senior Credit Facilities) with unutilized Available Amount from 3.00 to 1.00 to 4.00 to 1.00. The Seventh Amendment also provided for affiliates of the Company to acquire up to 20% of the outstanding term loans pursuant to certain transactions.

The Company’s obligations under the Senior Credit Facilities are guaranteed by its subsidiaries and are secured by first priority liens on substantially all of the assets of the Company and its subsidiaries, including a pledge of all of the capital stock and equity interests of its subsidiaries.

Under the Senior Credit Facilities, the Company is required to make mandatory prepayments of borrowings in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions).

The Senior Credit Facilities contain certain covenants, including, without limitation, those limiting the Company’s and its subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in all material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. In addition, the Senior Credit Facilities require the Company to meet a First Lien Leverage Ratio (as defined in the Senior Credit Facilities) if revolving credit borrowings exceed 35% of the aggregate borrowing capacity, as described under the First Amendment above. As the $46.0 million borrowings under the Revolving Credit Facility at July 4, 2021 did not exceed 35% of the aggregate borrowing capacity, no First Lien Leverage Ratio calculation was required. The Company was in compliance with the covenants under its Senior Credit Facilities at July 4, 2021.

The Senior Credit Facilities contain customary default provisions, including that the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary events of default which include, without limitation, payment default, covenant default, bankruptcy default, cross-default on other indebtedness, judgment default and the occurrence of a change of control.

The Term Loan B Facility requires quarterly installment payments, which began on September 30, 2019. Amounts outstanding at July 4, 2021 are due and payable as follows:

(i) nineteen remaining quarterly installments of $1.1 million;

(ii) one final payment of $153.8 million on April 30, 2026.

At July 4, 2021, borrowings under the Senior Credit Facilities bore interest as follows (subject to interest rate swap as described below):

(i) Revolving Credit Facility: at a rate per annum equal to (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus 2.50% or (b) LIBOR Rate (as defined in the Senior Credit Facilities) plus 3.50%.

(ii) Term Loan B Facility: at a rate per annum equal to (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus 2.25% or (b) LIBOR Rate (as defined in the Senior Credit Facilities) plus 3.25%.

The weighted average interest rate for borrowings on long-term debt balances were 4.4% for both the three and six months ended July 4, 2021 and 4.3% and 4.6% for the three and six months ended June 28, 2020, respectively.

As of July 4, 2021, there were $46.0 million revolving credit borrowings outstanding and $9.0 million of letters of credit issued under the Revolving Credit Facility. After reserving for issued letters of credit and

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

outstanding revolving credit borrowings, $120.0 million was available for revolving credit borrowings under the Senior Credit Facilities at July 4, 2021.

Senior Notes due 2029. On June 28, 2021, the Company issued $300.0 million principal amount of 5.875% Senior Notes due 2029 (the "Notes") in a private placement. The proceeds of the offering, together with $46.0 million of revolving credit borrowings under the Senior Credit Facilities, were used to (i) repay $74.4 million of outstanding term B-1 loans and $243.6 million of outstanding term B loans under the Senior Credit Facilities (which included scheduled principal payments), (ii) to pay fees and expenses related to the offering of the Notes and the Seventh Amendment and (iii) for working capital and general corporate purposes, including for possible future repurchases of its common stock and/or a dividend payment and/or payments on its common stock.

Carrols Restaurant Group and certain of its subsidiaries (the "Guarantors") entered into the Indenture (the "Indenture") dated as of June 28, 2021 with the Bank of New York Mellon Trust Company governing the Notes. The Indenture provides that the Notes will mature on July 1, 2029 and will bear interest at the rate of 5.875% per annum, payable semi-annually on July 1 and January 1 of each year, beginning on January 1, 2022. The entire principal amount of the Notes will be due and payable in full on the maturity date. The Indenture further provides that the Company (i) may redeem some or all of the Notes at any time after July 1, 2024 at the redemption prices described therein, (ii) may redeem up to 40% of the Notes using the proceeds of certain equity offerings completed before July 1, 2024 and (iii) must offer to purchase the Notes if it sells certain of its assets or if specific kinds of changes in control occur, all as set forth in the Indenture. The Notes are senior unsecured obligations of Carrols Restaurant Group and are guaranteed on an unsecured basis by the Guarantors. The Indenture contains certain covenants that limit the ability of Carrols Restaurant Group and the Guarantors to, among other things: incur indebtedness or issue preferred stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments; sell assets; agree to payment restrictions affecting Restricted Subsidiaries (as defined in the Indenture); enter into transaction with affiliates; or merge, consolidate or sell substantially all of the assets. Such restrictions are subject to certain exceptions and qualifications all as set forth in the Indenture. The Company was in compliance with all such covenants as of July 4, 2021.

Interest Rate Swap. In March 2020, the Company entered into an interest rate swap agreement with certain of its lenders under the Senior Credit Facilities to mitigate the risk of increases in the variable interest rate related to term loan borrowings under the Senior Credit Facilities. The interest rate swap fixes the interest rate on $220.0 million of outstanding borrowings under the Senior Credit Facilities at 0.915% plus the applicable margin in its Senior Credit Facilities. The agreement matures on February 28, 2025 and has a notional amount of $220.0 million. The differences between the variable LIBOR rate and the interest rate swap rate of 0.915% are settled monthly. The Company made additional interest payments due the interest rate swap of $0.4 million and $0.9 million during the three and six months ended July 4, 2021, respectively, and received payments of $0.03 million due the interest rate swap during the three and six months ended June 28, 2020. The fair value of the Company's interest rate swap agreement was a liability of $2.5 million as of July 4, 2021 and is included in long-term other liabilities in the accompanying condensed consolidated balance sheets. Changes in the valuation of the Company's interest rate swap were included as a component of other comprehensive income and will be reclassified to earnings as the losses are realized. The Company expects to reclassify net losses totaling $1.7 million into earnings in the next twelve months.

The Company's counterparties under this arrangement provided the Company with quarterly statements of the market values of these instruments based on significant inputs that were observable or could be derived principally from, or corroborated by, observable market data for substantially the full term of the asset or liability. The Company classified this within Level 2 of the valuation hierarchy described in Note 1. The impact on the derivative liabilities for the Company and the counterparties' non-performance risk to the derivative trades was considered when measuring the fair value of derivative liabilities.

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

8. Income Taxes

The provision (benefit) for income taxes for the three and six months ended July 4, 2021 and June 28, 2020 was comprised of the following:


	Three Months Ended				Six Months Ended
	July 4, 2021		June 28, 2020		July 4, 2021		June 28, 2020
Current	$	(16)	$	90	$	(16)	$	95
Deferred	(2,572)		1,789		(5,233)		(7,342)
Change in valuation allowance	2,556		(1,789)		2,556		359
Provision (benefit) for income taxes	$	(32)	$	90	$	(2,693)	$	(6,888)

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 six months ended July 4, 2021 was derived using an estimated effective annual income tax rate for all of 2021 of 11.0%, which reflects the change in valuation allowance on our deferred tax assets and excludes other discrete tax adjustments. The difference compared to the statutory rate for 2021 is attributed to various nondeductible tax expenses. There were no net discrete tax adjustments during the three months ended July 4, 2021. The six months ended July 4, 2021 contained $0.7 million of tax benefit from net discrete tax adjustments.

The provision (benefit) for income taxes for the three and six months ended June 28, 2020 was derived using an estimated effective annual income tax rate for all of 2020 of 36.7%, which excludes any discrete tax adjustments. The difference compared to the statutory rate for 2020 is attributed to 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. There were no discrete items for the three and six months ended June 28, 2020.

As of July 4, 2021, the Company had federal net operating loss carryforwards of approximately $136.7 million which expire beginning in 2033. The Company's state net operating loss carryforwards expire beginning in 2021 through 2038.

On March 27, 2020, the United States enacted the CARES Act as a response to the economic uncertainty resulting from the COVID-19 pandemic. The CARES Act includes modifications for net operating loss carryovers and carrybacks, limitations of business interest expense for tax, immediate refund of alternative minimum tax (AMT) credit carryovers as well as a technical correction to the Tax Cuts and Jobs Act of 2017, for qualified improvement property. As of July 4, 2021, the Company expects that the carryback of net operation losses will not have an impact on its current tax attributes.

The Company has performed an assessment of positive and negative evidence regarding the realization of its deferred income tax assets at July 4, 2021 as required by ASC 740. Under ASC 740, the weight given to negative and positive evidence is commensurate only to the extent that such evidence can be objectively verified. ASC 740 also prescribes that objective evidence, in particular the Company’s three-year cumulative loss position at July 4, 2021, be given greater weight than subjective evidence, such as the Company’s forecasts of future taxable income, which include assumptions that cannot be objectively verified. The Company considers all available positive and negative evidence regarding the estimated future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, historical taxable income in prior carryback periods if carryback is permitted, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused, and determines, based on the required weight of the evidence under ASC 740, whether a valuation allowance is necessary for any of its deferred tax assets at each reporting period. The future reversals of existing temporary differences and the ability to carryback are considered verifiable evidence. At January 4, 2021, the Company determined that a valuation allowance was needed for certain federal income tax credits in the amount of $13.1 million as they may expire prior to their utilization by the Company. As of July 4, 2021, the Company determined an additional amount of $3.0 million in Federal tax

CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

credits may expire prior to their utilization due to an increase in projected tax loss for the year as a result of the loss on debt extinguishment in the second quarter of 2021. A charge of $2.6 million was recorded in the three months ended July 4, 2021 related to this assessment. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as projections for growth. As of July 4, 2021, the Company has a valuation allowance recorded as a component of its deferred income taxes in the amount of $15.7 million.

The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At July 4, 2021 and January 3, 2021, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions. The tax years 2015 - 2020 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 July 4, 2021 and June 28, 2020 was $1.6 million and $1.1 million, respectively and for the six months ended July 4, 2021 and June 28, 2020 was $3.1 million and $2.2 million, respectively.

As of July 4, 2021, the total unrecognized stock-based compensation expense relating to non-vested shares and stock options was approximately $11.2 million and the Company expects to record an additional $3.0 million in stock-based compensation expense related to the vesting of these awards in the remainder of 2021. The remaining weighted average vesting period for stock options and non-vested shares was 2.1 years.

Non-vested Shares

During the six months ended July 4, 2021, the Company granted 895,000 non-vested restricted shares to certain employees and officers of the Company and 92,744 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.

The following is a summary of all non-vested shares activity for the six months ended July 4, 2021:


	Shares	Weighted Average Grant Date Price
Non-vested at January 3, 2021	1,167,848	$	7.02
Granted	987,744	$	6.94
Vested	(526,462)	$	7.95
Forfeited	(33,175)	$	6.50
Non-vested at July 4, 2021	1,595,955	$	6.67