TM Fiesta Restaurant Group, Inc. 2019 Annual Report Dear Fellow Shareholders: TM In 2019, we made progress on a number of strategic initiatives and established top line traction at Pollo Tropical. As measured by BlackBox, Pollo gained market share on a full-year basis on both a comparable sales and transaction basis. In addition, Pollo achieved positive comparable restaurant sales and traffic in the fourth quarter and through February of 2020. We positioned both brands for future growth by building infrastructure and eliminating barriers across all channels so that our customers can enjoy our brands everywhere including dine-in, catering, online and delivery. We also made significant improvements in building a very strong senior leadership team that we believe will accelerate our momentum. The recent events surrounding the COVID-19 outbreak have disrupted operations at all of our Pollo Tropical and Taco Cabana restaurants in Texas and Florida and will clearly impact our 2020 growth plans. Consequently, we have closed all of our dining room seating areas in all of our Pollo Tropical and Taco Cabana restaurants in Florida and Texas, but we are continuing to serve our guests through take-out, drive-thru and delivery operations. We are principally focused on the well-being and safety of our guests, restaurant associates, franchisees, and all other employees. Since the situation around the COVID-19 virus is constantly changing, we may implement additional measures to ensure the safety of our team members and guests over time, and this may include other changes to our menu and service model. In addition to closing dining room seating areas at all of our Pollo Tropical and Taco Cabana restaurants in Florida and Texas, we have taken the following preventive measures: • • • • • • • Heightened our sanitation procedures regarding restaurant cleanliness, with additional emphasis on high traffic areas in restaurants; Stocked our restaurants with effective disinfectants and sanitation products, including hand sanitizer in our dining room and back of the house; Increased handwashing protocols for all team members; Reinforced our stringent policy on sick employees not working at any level of the organization; Providing sauces and salsas in pre-packaged containers; Ramped up our online and delivery procedures to make it easier for our guests; including working with our delivery partners to offer contactless delivery options; and Modified restaurant hours in accordance with federal, state and local mandates. While we have suspended our full year 2020 outlook as communicated in our February 26, 2020 earnings release as we cannot reasonably estimate the impact of COVID-19 on our business at this time, we believe that when we emerge from the current crisis we will be in position to capitalize on the progress we made in 2019. We will continue to focus on the long-term while managing our way through the current environment. We believe that the key to our future will be nurturing our existing Pollo Tropical business as our top priority and positioning it to achieve its full potential while stabilizing the Taco Cabana business and improving its margins so that it can return to growth. We will continue to monitor conditions and, when appropriate, look to improve our menu, marketing and promotion innovation with traffic drivers and check builders that balance value, premium-priced products and upsell items. We will also further leverage our growing ‘My Pollo’ and ‘My TC’ loyalty programs and at Taco Cabana, seek to continue to improve customer satisfaction through improved execution. Given our low penetration of off premise sales relative to key competitors, we believe Fiesta has upside potential for growth in online ordering, catering, and delivery incremental to our broader business. We are streamlining the online ordering process to improve ease of access and have installed rapid pickup stations at high volume restaurants. Our catering platform infrastructure is now completed which includes salespeople, delivery vehicles, and online order capability — all supported by incremental marketing when conditions are appropriate. Although catering activity has diminished during this crisis, we believe that our efforts in adding several leading service providers maximizes our exposure and will support our sales during the current period and longer-term. We will leverage available resources in technology and infrastructure to improve guest satisfaction and to remove barriers that prevent our customers from accessing our brands, however, whenever, and wherever they want. In addition, we are in the process of enhancing the design and making the digital ordering experience near frictionless across all platforms including our mobile app and loyalty program. In challenging times such as these it is important that, as a management team, we pull together for our entire Fiesta family. We will continue to evaluate the evolving economic and social climate and adjust our operating model accordingly. We believe we also have a conservative balance sheet that will enable us to better manage through this difficult period. Sincerely, Richard ‘‘Rich’’ Stockinger, President and Chief Executive Officer Fiesta Restaurant Group, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ______________________ FORM 10-K ______________________ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 29, 2019 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 001-35373 ______________________ FIESTA RESTAURANT GROUP, INC. (Exact name of Registrant as specified in its charter) ______________________ Delaware (State or other jurisdiction of incorporation or organization) 14800 Landmark Boulevard, Suite 500 Dallas TX (Address of principal executive office) 90-0712224 (I.R.S. Employer Identification No.) 75254 (Zip Code) Registrant’s telephone number, including area code: (972) 702-9300 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Common Stock, par value $.01 per share Trading Symbol FRGI ______________________ Securities registered pursuant to Section 12(g) of the Act: None Name on each exchange on which registered: NASDAQ Global Select Market Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes No 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, a 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. (Check one): Large Accelerated Filer Non-accelerated Filer 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. 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 February 21, 2020, Fiesta Restaurant Group, Inc. had 25,960,757 shares of its common stock, $.01 par value, outstanding. The aggregate market value of the common stock held by non-affiliates as of June 30, 2019, of Fiesta Restaurant Group, Inc. was $283,559,216. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive Proxy Statement for Fiesta Restaurant Group, Inc.’s 2020 Annual Meeting of Stockholders, which is expected to be filed pursuant to Regulation 14A no later than 120 days after the conclusion of Fiesta Restaurant Group, Inc.’s fiscal year ended December 29, 2019, are incorporated by reference into Part III of this annual report. [THIS PAGE INTENTIONALLY LEFT BLANK.] FIESTA RESTAURANT GROUP, INC. FORM 10-K YEAR ENDED DECEMBER 29, 2019 PART I Item 1 Item 1A Item 1B Item 2 Item 3 Item 4 PART II Item 5 Item 6 Item 7 Item 7A Item 8 Item 9 Item 9A Item 9B PART III Item 10 Item 11 Item 12 Item 13 Item 14 PART IV Item 15 Item 16 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 3 14 25 25 25 25 26 28 32 53 54 54 54 57 58 58 58 58 58 59 61 i [THIS PAGE INTENTIONALLY LEFT BLANK.] Presentation of Information PART I Throughout this Annual Report on Form 10-K, we refer to Fiesta Restaurant Group, Inc. as “Fiesta Restaurant Group” or “Fiesta” and, together with its consolidated subsidiaries, as “we,” “our” and “us” unless otherwise indicated or the context otherwise requires. Any reference to restaurants refers to company-owned restaurants unless otherwise indicated. We own, operate and franchise two fast-casual restaurant brands, Pollo Tropical® and Taco Cabana®, through our wholly-owned subsidiaries Pollo Operations, Inc. and its subsidiaries, and Pollo Franchise, Inc., (collectively “Pollo Tropical”) and Taco Cabana, Inc. and its subsidiaries (collectively “Taco Cabana”). Our common stock is traded on The NASDAQ Global Select Market under the symbol “FRGI”. We use a 52- or 53-week fiscal year ending on the Sunday closest to December 31. The fiscal years ended January 1, 2017, December 31, 2017, December 30, 2018 and December 29, 2019 each contained 52 weeks. The fiscal year ended January 3, 2016 contained 53 weeks. The fiscal year ending January 3, 2021 will contain 53 weeks. Use of Non-GAAP Financial Measures Consolidated Adjusted EBITDA and margin and Restaurant-level Adjusted EBITDA and margin are non-GAAP financial measures. We use these non-GAAP financial measures in addition to net income and income from operations to assess our performance, and we believe it is important for investors to be able to evaluate us using the same measures used by management. We believe these measures are important indicators of our operational strength and the performance of our business. These non-GAAP financial measures as calculated by us are not necessarily comparable to similarly titled measures reported by other companies and should not be considered as an alternative to net income (loss), earnings (loss) per share, cash flows from operating activities or other financial information determined under GAAP. Prior to the second quarter of 2017, Adjusted EBITDA and Consolidated Adjusted EBITDA were defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other expense (income), net. In 2017, our board of directors appointed a new Chief Executive Officer who initiated the Strategic Renewal Plan (the “Plan”) and uses an Adjusted EBITDA measure for the purpose of assessing performance and allocating resources to our segments. The Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants. Beginning in the second quarter of 2017, the primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is now defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants as set forth in the reconciliation table below. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, construction and other administrative functions. See Note 11 to the Consolidated Financial Statements included in this Annual Report on Form 10-K. Consolidated Adjusted EBITDA margin and Adjusted EBITDA margin are derived by dividing Consolidated Adjusted EBITDA and Adjusted EBITDA by total revenues and segment revenues, respectively. Restaurant-level Adjusted EBITDA is defined as Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-level Adjusted EBITDA margin is derived by dividing Restaurant-level Adjusted EBITDA by restaurant sales. Management believes that such financial measures, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance 1 of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies. All such financial measures have important limitations as analytical tools. These limitations include the following: • • • • such financial information does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment; such financial information does not reflect interest expense or the cash requirements necessary to service payments on our debt; although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and such financial information does not reflect the cash required to fund such replacements; and such financial information does not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges and gains (such as impairment and other lease charges, closed restaurant rent expense, net of sublease income, other income and expense and stock-based compensation expense) have recurred and may recur. See Item 6, “Selected Financial Data” for a quantitative reconciliation from net income (loss), which we believe is the most directly comparable GAAP financial performance measure to Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA. Forward-Looking Statements Matters discussed in this report and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, expressed or implied, regarding our intention to repurchase shares from time to time under the share repurchase program and the source of funding of such repurchases, our anticipated growth, operating results, future earnings per share, plans, objectives, and the impact of our investments in our Plan and other business initiatives on future sales and earnings, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These statements are often identified by the words “believe,” “positioned,” “estimate,” “project,” “plan,” “goal,” “target,” “assumption,” “continue,” “intend,” “expect,” “future,” “anticipate,” and other similar expressions, whether in the negative or the affirmative, that are not statements of historical fact. These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict, and you should not place undue reliance on our forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this report and in our other public filings with the United States Securities and Exchange Commission (“SEC”). All forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this report or other periodic reports represent our estimates as of the date made and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. 2 ITEM 1. BUSINESS Overview Our Company We own, operate and franchise two restaurant brands, Pollo Tropical® and Taco Cabana®, which recently celebrated 30th and 40th anniversaries, respectively, of operating history and loyal customer bases. Our Pollo Tropical restaurants feature fire-grilled and crispy citrus marinated chicken and other freshly prepared tropical-inspired menu items, while our Taco Cabana restaurants specialize in Mexican-inspired food made fresh by hand. We believe that both brands offer distinct and unique flavors with broad appeal at a compelling value, which differentiates them in the competitive fast-casual and quick-service restaurant segments. Nearly all of our restaurants offer the convenience of drive-thru windows. For the fiscal year ended December 29, 2019, average annual sales per restaurant was approximately $2.6 million for our Pollo Tropical restaurants and approximately $1.8 million for our Taco Cabana restaurants. As of December 29, 2019, we owned and operated 142 Pollo Tropical restaurants in Florida and 164 Taco Cabana restaurants in Texas for a total of 306 restaurants. We franchise our Pollo Tropical restaurants primarily in international markets, and as of December 29, 2019, had 25 franchised Pollo Tropical restaurants outside the United States. In addition, as of December 29, 2019, we had six domestic non-traditional Pollo Tropical licensed locations on college campuses and one location in a hospital in Florida. As of December 29, 2019, we had six Taco Cabana franchised restaurants in New Mexico and two domestic non-traditional Taco Cabana licensed locations on college campuses in Texas. For the fiscal year ended December 29, 2019, we generated consolidated revenues of $660.9 million, and comparable restaurant sales decreased 1.8% and 4.1% for Pollo Tropical and Taco Cabana, respectively. Other Events In response to decreases in the market price of Fiesta’s common stock and lower than expected profitability, we performed interim impairment tests of goodwill as of June 30, 2019 and September 29, 2019. Based on these interim impairment tests, we recorded non-cash impairment charges to write down the value of goodwill for the Taco Cabana reporting unit totaling $67.9 million, of which $9.1 million was tax deductible, in 2019. Additionally, based on a review of our restaurant portfolio, we closed 19 Taco Cabana restaurants in January 2020. For the twelve months ended December 29, 2019, the 19 closed Taco Cabana restaurants contributed approximately $24.5 million in restaurant sales and an estimated $4.2 million in restaurant-level pre-tax operating losses, including $2.0 million in depreciation expense. During the twelve months ended December 29, 2019, we recognized $13.1 million in impairment and other lease charges including impairment charges of $14.0 million, primarily related to the 19 Taco Cabana restaurants closed in January 2020, five of which were initially impaired in prior years, as well as previously closed Pollo Tropical restaurants and underperforming Taco Cabana restaurants that we continue to operate, and lease charge recoveries primarily related to lease terminations for previously closed restaurants. Our Brands Our restaurants operate in the fast-casual and quick-service restaurant segments and feature fresh-made cooking, drive-thru service and catering. Pollo Tropical. Our Pollo Tropical restaurants feature fresh chicken marinated in a proprietary blend of tropical fruit juices and spices, crispy or fire-grilled, boneless and bone-in. Other favorite menu items include Mojo Roast Pork and TropiChops® (a create your own bowl of fire-grilled chicken breast or Crispy Pollo Bites™, roast pork or grilled vegetables served over white, brown or yellow rice, red or black beans, or mac and cheese, and topped with vegetables including tomatoes, kernel corn, peppers and sautéed onions), sandwiches, wraps and salads. Side dishes include rice, beans, french fries, and balsamic tomatoes. The menu’s emphasis is on freshness and quality. We also offer a wide selection of salsas, sauces, cilantro, onions and other items which allow our guests to further customize their orders. Dessert offerings include key lime pie, cuatro leches cake, flan and cheesecake, and beverages include fountain soft drinks, flavored brewed teas, and other bottled drinks. Most menu items are prepared daily in each of 3 our restaurants, which feature open display cooking on large, open-flame grills. We offer both individual and family meal-sized portions which enable us to provide a home meal replacement for our guests and catering for parties and corporate events. Our Pollo Tropical restaurant dining areas are designed to create an inviting, festive and tropical atmosphere. We also provide our guests the option of take-out, including the ability to order online in advance, and nearly all of our restaurants provide the convenience of drive-thru windows. Delivery is available through third-party partnerships at all Pollo Tropical locations. Our Pollo Tropical restaurants are generally open for lunch, dinner, and late night seven days a week. As of December 29, 2019, substantially all of our Pollo Tropical restaurants were freestanding buildings. Our typical freestanding Pollo Tropical restaurant ranges from 2,800 to 3,700 square feet and provides interior seating for approximately 70 to 90 guests. For the year ended December 29, 2019, the average sales transaction at our Pollo Tropical restaurants was $11.71, with sales at dinner and lunch representing 52.6% and 47.4%, respectively. For the year ended December 29, 2019, our Pollo Tropical brand generated total revenues of $363.5 million and Adjusted EBITDA of $50.6 million. Pollo Tropical opened its first restaurant in 1988 in Miami, Florida. As of December 29, 2019, we owned and operated a total of 142 Pollo Tropical restaurants, all located in Florida. We continue to reimage existing Pollo Tropical restaurants to update both the exterior and interior of the restaurants to the latest standard. We are franchising and licensing our Pollo Tropical restaurants internationally and in non-traditional domestic locations. As of December 29, 2019, we had 25 franchised Pollo Tropical restaurants located in Puerto Rico, Panama, Guyana, Ecuador, and the Bahamas, and six non-traditional licensed locations on college campuses and one located in a hospital in Florida. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets. Taco Cabana. Our Taco Cabana restaurants serve fresh, Mexican-inspired food that feature loaded tacos, steak and chicken fajitas, quesadillas, flautas, enchiladas, burritos, and customizable Cabana Bowls®. We also offer freshly made flour tortillas, shareable appetizers and our popular breakfast tacos and dozen taco boxes. Our self-service salsa bar includes a wide selection of freshly made salsas, sauces, sliced jalapeños, chopped cilantro, chopped onions and other items which allow our guests to further customize their orders. We also offer desserts such as sopapillas, peach empanadas and chocolate cake, as well as beverages including fountain soft drinks, our signature frozen margaritas, draft beer and sangria. Approximately 75 locations also serve an expanded alcohol program. Most menu items are freshly-prepared at each restaurant daily. Taco Cabana restaurants feature open display cooking that enables guests to observe fajitas cooking on an open grill, a tortilla machine pressing and grilling fresh flour tortillas and the fresh preparation of other menu items. Our Taco Cabana restaurants feature interior dining areas as well as semi-enclosed and outdoor patio areas, which provide a vibrant decor and relaxing atmosphere. Many locations also have live entertainment at select times. We offer both individual and family meal-sized portions, which enable us to provide a home meal replacement for our guests and catering for parties and corporate events. Additionally, we provide our guests the option to order online in advance, as well as the convenience of drive-thru windows. Delivery is available through third-party partnerships at all locations. Our typical freestanding Taco Cabana restaurants average approximately 3,500 square feet (exclusive of the exterior dining area) and provide seating for approximately 80 guests, with additional outside patio seating for approximately 50 guests. As of December 29, 2019, substantially all of our Taco Cabana restaurants were freestanding buildings. Taco Cabana pioneered the Mexican patio cafe concept with its first restaurant in San Antonio, Texas in 1978. As of December 29, 2019, we owned and operated 164 Taco Cabana restaurants, all located in Texas. As of December 29, 2019, we also had six Taco Cabana franchised restaurants located in New Mexico and two non-traditional Taco Cabana licensed locations located on college campuses in Texas. Hours of operation vary by location, and some restaurants operate 24 hours a day. For the year ended December 29, 2019, sales at dinner, lunch and breakfast represented 24.9%, 22.3% and 23.6%, respectively, and the average sales transaction at our Taco Cabana restaurants was $10.70. For the year ended December 29, 2019, our Taco Cabana brand generated total revenues of $297.5 million and Adjusted EBITDA of $7.9 million. 4 Our Competitive Strengths We believe our competitive strengths include the following key attributes: Well Positioned and Differentiated in the Fast-Casual and Quick-Service Segments. As of December 29, 2019, we owned, operated and franchised 346 fast-casual restaurants under our Pollo Tropical and Taco Cabana brands which have over 30 and 40 years, respectively, of operating history. In addition, at $2.6 million and $1.8 million, respectively, for 2019, we believe Pollo Tropical and Taco Cabana have compelling average annual sales per restaurant within the fast-casual and quick-service segments. We believe our brands are well positioned in the industry due to our high quality, freshly-prepared food, value and differentiation of flavor profiles. Two Leading, Differentiated Brands Serving Fresh, High Quality Foods with Broad Appeal and a Compelling Value Proposition. Our Pollo Tropical and Taco Cabana brands are differentiated from other dining options and offer distinct flavor profiles and healthy menu choices at affordable prices that we believe have broad consumer appeal, provide guests with a compelling value proposition, attract a diverse customer base and drive guest frequency and loyalty. Pollo Tropical and Taco Cabana are committed to serving freshly-prepared food using quality ingredients that are made-to-order and customized for each guest. Both of our brands offer a wide range of menu offerings and home meal replacement options in generous portion sizes and at affordable price points which appeal to a broad customer base. Our open display kitchen format allows guests to view and experience our food being freshly-prepared and cooked to order. We have refined our menus, including some seasonal offerings at our Pollo Tropical and Taco Cabana restaurants, in order to provide variety to our guests, address changes in consumer preferences, and maintain a speed of service that appeals to our customers. We also selectively use promotions and limited time offers which are intended to reinforce our value proposition and to introduce new products. Additionally, we offer our guests the convenience of drive-thru service, online ordering and delivery through third-party delivery services in order to provide a viable option for home meal replacement and family meals. Compelling Business Model. We enjoy significant brand recognition due to high market penetration of our restaurants in our core markets which provides operating, marketing and distribution efficiencies and convenience for our guests. Both of our brands have strong brand affinity in our core markets as evidenced by fast-casual and quick-service segment-leading average annual sales volumes, as noted above. Pollo Tropical produces high restaurant-level operating margins and, with sales stabilization and growth and effective cost management, we anticipate Taco Cabana will produce higher restaurant-level operating margins in the future. Growth Strategies Our long-term strategy is focused on profitably building our base business, growing new distribution channels, including catering, delivery, licensed and franchised locations, and development of new restaurants. Our strategies for growth primarily include: Increase Comparable Restaurant Sales. We experienced a decrease in comparable restaurant sales in 2019 which we believe is attributable to a decline in comparable restaurant transactions due in part to challenging market and industry conditions, discounted pricing and, for Pollo Tropical, the negative impact of Hurricane Dorian, partially offset by menu price increases and the introduction of higher priced shareables in 2019. We simplified the Taco Cabana menu in the fourth quarter of 2019 to improve execution. The menu simplification efforts included removal of certain menu items and limited other items to certain dayparts. While the menu simplification improved guest satisfaction and reduced order cycle times, the reduced menu resulted in a greater than anticipated transaction decline. We intend to carefully re-introduce select items to the menu and expand dayparts in 2020 to increase sales while maintaining the operational improvements provided by the menu simplification. We experienced an increase in comparable restaurant sales in 2018 which we believe is attributable to the Plan, pricing, and the comparison to 2017 which included the negative impact related to Hurricanes Harvey and Irma (the “Hurricanes”), partially offset by market and industry conditions and, in the case of Taco Cabana, a transitioning guest base due to the repositioning of the brand with higher quality offerings at reasonable prices and the elimination of deep discounting. We experienced a decline in comparable restaurant sales in 2016 and 2017 which we believe was attributable to challenging market and industry conditions and opportunities for improvement at both brands that were addressed as part of the Plan. In addition, 2017 was further negatively impacted by reduced media over several consecutive months while we implemented key aspects of the Plan as well as the impact of the Hurricanes. We experienced an increase in comparable restaurant sales at each brand 5 in 2011 through 2015 and we are focused on increasing comparable restaurant sales in the future by attracting new customers and increasing guest frequency through the following strategies: • • • • • Focus on consistency of operations and food quality: We believe high quality food and hospitality, a comfortable ambience, and reasonable prices result in an enjoyable guest experience, which drives loyalty and guest frequency. We have improved systems, processes and equipment, added incremental labor in our restaurants, implemented tighter management spans of control and enhanced our field leadership teams, and we continue to focus on improving systems and processes to ensure consistency of operations at both brands. During 2017, we improved over 90 percent of our recipes with higher quality, fresh ingredients. In addition, supply chain and food preparation processes have been implemented at both brands to ensure high quality, freshness and consistency of our food, which we believe are critical components to the continued success of our brands. New product innovation: Across both brands, our menus are centered on freshly prepared, quality food offerings that we believe have both broad appeal and provide everyday value. Pollo Tropical and Taco Cabana each have separate teams of product research and development professionals that enables us to continually refine our menu offerings and develop new products, several of which are validated by consumer research. Maintaining a strong product pipeline is critical to keeping our offerings compelling, and we intend to introduce innovative new menu items and enhancements to existing menu favorites throughout the year to drive further guest traffic and maximize guest frequency. Focus on effective advertising to highlight our everyday value proposition: Pollo Tropical and Taco Cabana utilize an integrated, multi-level marketing approach that includes periodic system-wide promotions, outdoor marketing including billboards, in-restaurant promotions, local trade area marketing, social media, digital and web-based marketing and other strategies, including the use of radio and television advertising and limited-time offer menu item and value promotions. In 2019, we hired our first Fiesta Chief Marketing Officer to continue refining our advertising and media strategies to reinforce the key attributes of our brands which include high quality, freshly-prepared food, an enhanced guest experience, everyday value, convenience and new limited time menu offerings. In addition, we introduced new email and app-based loyalty programs at Pollo Tropical (My Pollo™) and Taco Cabana (My TC™) in 2018 to further connect with our guests to build affinity and frequency. As a percentage of Pollo Tropical restaurant sales, Pollo Tropical’s advertising expenditures were 3.4% in 2019, 3.5% in 2018 and 4.4% in 2017. As a percentage of Taco Cabana restaurant sales, Taco Cabana’s advertising expenditures were 3.6% in 2019, 3.4% in 2018 and 3.3% in 2017. Grow our off-premise sales: The inclusion of portable menu items, such as wraps, sandwiches, bowls and salads, as well as home meal replacement and family meals, and an increased focus on catering and delivery will continue to be a key focus for both brands as we look to capture more off-premise meal occasions which we believe may be significant. In 2018, we invested in catering resources utilizing dedicated leadership and enhanced digital capabilities, enhanced online ordering, and smart phone apps. In late 2018, we began deploying our portable point-of-sale tablets which accept payment to improve speed of service and throughput in our drive-thru lanes. We recently began working with a third party to improve our mobile apps and enhance our digital connections and interactions to grow our digital business and create experiences that minimize friction within our digital platforms including creating state of the art mobile apps. In 2019, we invested in our catering business by adding dedicated catering sales managers and catering online ordering capabilities, we partnered with a third-party delivery partner to provide delivery services, and we created Rapid Pickup for online orders at Pollo Tropical. We intend to expand our third-party delivery partnerships to include delivery through multiple delivery service providers for both brands and enhance our online ordering capabilities in 2020. Continue our reimage program: We believe ensuring a high-quality restaurant environment that complements our quality focus on food and hospitality will further drive incremental sales and profitability. We continue to implement restaurant enhancement initiatives to ensure safe, consistent and appealing environments at our Pollo Tropical and Taco Cabana restaurants. In addition, we are continuing to gradually update the exterior and interior elements of our restaurants to the current standard so that we are more relevant to our guests. We expect that these enhancements will improve our brands’ positioning in the marketplace and offer a consistent, quality experience. 6 Non-Traditional License and International Franchise Development. We are updating our Pollo Tropical franchise disclosure documents each year to support potential franchise growth in the future. We are currently primarily focused on growing non-traditional domestic licensed locations on university campuses and non-traditional licensed locations in airports and highway rest stops, while modestly growing international locations with quality operators. Improve Profitability and Optimize Our Infrastructure. We believe that our large restaurant base, skilled management team, operating systems, technology initiatives and training and development programs support our strategy of enhancing operating efficiencies while prudently growing our restaurant base. We continue to focus on maximizing cost efficiencies, including, among other things, implementing profit enhancement initiatives focused on food and labor costs, leveraging our purchasing power and enhancing our supply chain to optimize costs while delivering a high-quality guest experience with consistency. Our restaurant-level profitability at Pollo Tropical is very competitive within the restaurant industry segments in which we compete. We believe Taco Cabana will become more competitive within the restaurant industry segments in which we compete over time through growing comparable restaurant sales and traffic, other margin improvement initiatives, simplifying our operating platform and improved execution. Develop New Restaurants. We believe that we have opportunities to develop additional Pollo Tropical and Taco Cabana restaurants in Florida and Texas, respectively, as well as potential future expansion opportunities in other regions of the United States that match our site selection criteria. Our development plans for Pollo Tropical in 2020 will be focused on a small number of company-owned high return opportunities in core Florida markets and franchised non-traditional new units through third-party service partners. During 2020, we plan to complete brand repositioning and operating model refinements for Pollo Tropical that we believe will enable future geographic expansion through both company-owned and franchised locations. We will open one new Taco Cabana restaurant in 2020 (for which construction started in 2019), although our primary focus in 2020 will be on improving existing unit AUV’s and margins and simplifying the operating model for Taco Cabana. We plan to re-evaluate future development efforts for Taco Cabana in 2021. We target opening freestanding restaurants in order to provide drive-thru service which is an important convenience and sales component for our brands. The location of our restaurants is a critical component of each restaurant’s success. We evaluate potential new sites on many criteria including accessibility, visibility, costs, surrounding traffic patterns, competition and demographic characteristics. Our senior management team determines the acceptability of all new sites based upon site visits, analyses prepared by our real estate, financial and operations professionals, and third-party proprietary location research and analysis. Historically, this process has typically resulted in entering into a long-term lease for the land followed by construction of the building or the conversion of an existing building using cash generated from our operations or with borrowings under our senior credit facility. The following table includes the recent historical initial interior cost (including equipment, seating, signage and other interior costs) of a typical new or converted freestanding restaurant, as well as the historical exterior cost (including building and site improvements). Interior costs and signage Exterior costs Pollo Tropical Taco Cabana $0.6 million to $0.9 million $0.4 million to $0.6 million $1.2 million to $1.6 million $0.6 million to $1.4 million The cost of building and equipping new restaurants can vary significantly and depends on a number of factors, including the local economic conditions, geographic considerations, the size of the restaurant, the characteristics of a particular site, and whether we are constructing a new building or converting an existing building. Accordingly, the cost of opening new restaurants in the future may differ substantially from the historical cost of restaurants previously opened. Competition The restaurant industry is highly competitive with respect to price, service, location and food quality. In each of our markets, our restaurants compete with many national and regional quick service, fast casual, and in some cases casual dining restaurant chains, as well as locally owned restaurants. We also compete with delivered meal solutions, convenience stores, grocery stores and other restaurant retailers. 7 We believe that: • • • • • • • • • product quality and taste; brand differentiation and recognition; convenience of location; speed of service; menu variety; value perception; ambiance; cleanliness; and hospitality are among the important competitive factors in the fast-casual and quick-service restaurant segments and that our two concepts effectively compete against those categories. Pollo Tropical’s competitors include national and regional chicken-based concepts, as well as other concepts. Taco Cabana’s competitors include other Mexican-inspired concepts as well as other concepts. Restaurant Operating Data Selected restaurant operating data for our two restaurant concepts is as follows: December 29, 2019 Year Ended December 30, 2018 December 31, 2017 Pollo Tropical: Average annual sales per company-owned restaurant (in thousands)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Average sales transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Drive-through sales as a percentage of total sales . . . . . . . . . . Day-part sales percentages: $ $ 2,576 11.71 46.8% $ $ 2,521 11.63 47.6% Lunch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dinner and late night . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47.4% 52.6% 47.1% 52.9% Taco Cabana: Average annual sales per company-owned restaurant (in thousands)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Average sales transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Drive-through sales as a percentage of total sales . . . . . . . . . . Day-part sales percentages: Breakfast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lunch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dinner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Late night (9pm to midnight) . . . . . . . . . . . . . . . . . . . . . . . . Afternoon (2pm to 5pm) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overnight (midnight to 6am) . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1,812 10.70 55.1% $ $ 1,846 10.47 55.7% 23.6% 22.3% 24.9% 11.6% 13.4% 4.2% 23.4% 22.3% 24.9% 11.8% 13.1% 4.5% 2,331 11.16 47.9% 47.2% 52.8% 1,760 9.43 56.4% 23.5% 21.8% 24.7% 11.4% 12.7% 5.9% (1) Average annual sales for company-owned restaurants are derived by dividing restaurant sales for such year for the applicable segment by the average number of company-owned restaurants for the applicable segment for such year. For comparative purposes, the calculation of average annual sales per company-owned restaurant is based on a 52-week fiscal year. 8 Seasonality Our business is marginally seasonal due to regional weather conditions. Sales from our restaurants located in South Florida are generally higher during the winter months than during the summer months, while sales from our restaurants located in Texas, Central Florida, and North Florida are generally higher during the summer months than the winter months. In addition, we have outdoor seating at many of our restaurants and the effects of adverse weather may impact the use of these areas and may negatively impact our restaurant sales. Operations Management Structure We conduct substantially all of our operations, training, marketing, real estate, facilities and culinary research and development support functions from our Pollo Tropical division headquarters in Miami, Florida, and our Taco Cabana division headquarters in San Antonio, Texas. The management structure of Pollo Tropical consists of our President of Pollo Tropical, Richard Stockinger, who also serves as our President and Chief Executive Officer of Fiesta, and has over 30 years of experience in the restaurant industry, and one Senior Vice President of Operations who is supported by five Regional Directors and 19 District Managers. The management structure of Taco Cabana consists of a President of Taco Cabana, a position which is currently open, and one Vice President of Operations who is supported by five Regional Directors and 23 District Managers. We have initiated an external search to fill the vacancy created following the recent departure of Taco Cabana’s President announced on February 26, 2020. The Pollo Tropical and Taco Cabana Presidents are supported by a number of divisional and corporate executives with responsibility for operations, marketing, guest engagement, product development, purchasing, human resources, training, real estate and finance. For each of our brands, a district manager is responsible for the direct oversight of the day-to-day operations of an average of approximately seven restaurants. Typically, district managers have previously served as restaurant managers at one of our restaurants or held an equivalent position to district manager at a competing restaurant concept. District managers and restaurant managers are compensated with a fixed salary plus an incentive bonus based upon the performance of the restaurants under their supervision. Typically, our restaurants are staffed with hourly employees who are supervised by a salaried restaurant or general manager and one to three salaried assistant managers and one to eight hourly shift leaders. Our executive management functions are primarily conducted from our offices in Dallas, Texas and Miami, Florida. Our management team is led by Richard Stockinger, who serves as our President and Chief Executive Officer, Dirk Montgomery serves as our Senior Vice President, Chief Financial Officer and Treasurer, Louis DiPietro serves as our Senior Vice President, Chief Legal Officer and Corporate Secretary, Anthony Dinkins serves as our Senior Vice President, Chief Human Resources Officer, Hope Diaz serves as our Senior Vice President and Chief Marketing Officer, Patricia Lopez Calleja serves as our Senior Vice President of Guest Engagement, and Eladio “Willie” Romeo serves as our Senior Vice President of Restaurant Operations for Pollo Tropical. Training We maintain a comprehensive training and development program for all our restaurant personnel and provide both classroom and in-restaurant training for our salaried and hourly team members. Technology enhancements, expansion of leadership development curriculum and newly designed e-learning courses complement the recent introduction of a new Learning Management System platform to focus our team members on system-wide operating procedures by position, food preparation methods and guest service standards. The onboarding period for new managers is spent initially in a comprehensive management training program supervised by a dedicated field training manager. This period covers basic shift control and restaurant operations, team member supervision, procedural and technical skills and management development. This training is complemented by active coaching and a limited span of control. Thereafter, we customize an intensive, self-paced ongoing development program designed to prepare each employee for the next level of management. The onboarding period also includes robust classroom training with an emphasis on skill and competency building. Our training process for new restaurant openings has been developed over the last five years as we expanded into new territory. Dedicated trainers, a new restaurant opening support team and a well-documented training and logistics process is in place to assist us in ensuring consistent execution of the brand standards as new restaurants open. The process consists of courses delivered both digitally and in the classroom, hands-on training and role-playing to 9 ensure we transfer knowledge of our menu authenticity, knowledge and passion for our food and a culture of caring, which are strengths in our traditional markets. Our opening processes and training programs are designed to effectively instill these values along with our operating standards to our teams in new markets. Management Information Systems Our management information systems provide us the ability to efficiently and effectively manage our restaurants and to ensure consistent application of operating controls at our restaurants. In all corporate-owned restaurants, we use computerized management information systems, which we believe are scalable to support potential future growth plans. We use touch-screen point-of-sale (POS) systems designed specifically for the restaurant industry that facilitate accuracy and speed of order taking, are user-friendly, require limited cashier training, improve speed-of-service through the use of conversational order-taking techniques, and provide appropriate audit trails. The POS systems are integrated with above-store enterprise applications that are designed to facilitate financial and management control of our restaurant operations. All products sold and related prices at our restaurants are programmed into the system from our central support office. We provide in-store access to enterprise systems that assist in labor scheduling and food cost management, allow online ordering from distributors, and reduce managers’ administrative time. Critical information from such systems is available in near real-time to our restaurant managers, who are expected to react quickly to trends or situations in their restaurant. Our district managers also receive near real-time information from all restaurants under their control and have access to key operating data on a remote basis. Management personnel at all levels, from the restaurant manager through senior management, utilize key restaurant performance indicators to manage our business. These enterprise systems provide daily tracking and reporting of traffic counts, menu item sales, labor and food data including costs, and other key operating information for each restaurant. These systems also provide the ability to monitor labor utilization and sales trends on a real-time basis at each restaurant and provide analyses, reporting and tools to enable all levels of management to review a wide-range of financial, product mix and operational data. We use an integrated digital ordering system that is integrated with our POS system at each restaurant. Individual, group or catering orders placed on our website or that of our third-party delivery partners, mobile app or through our call center are transmitted electronically to the restaurants to provide a seamless ordering, payment and pickup or delivery experience for our guests. In 2019, we rolled out portable POS tablets with the ability to accept secure payments at both brands to improve speed of service. We also deployed catering to all Taco Cabana locations, allowing customers to place catering orders online. We implemented a number of investments in technology to improve speed of service and accuracy including kitchen display systems with larger screens and improved cooking workflow technology. Catering software was deployed to all Pollo Tropical locations in 2018. In 2018, we also implemented a new human capital management platform, and in 2019 we expanded the platform to include our financial system. We expect to continue making substantial investments in technology that we believe will drive sales and traffic, as well as improve margins. In 2020, we intend to focus on building a reusable set of interfaces that can be used to quickly implement new customer-facing technologies for mobile sales channels, delivery, and customer relationship management. Community Social Impact We are committed to being a deeply responsible company in the communities where we do business. Our focus is on serving high quality food to our guests and contributing positively to the communities where our restaurants are located. This is integral to our business strategy. Our initiatives include: • • Our chicken is free of hormones and trans-fats and our shrimp is Best Aquaculture certified; Our chicken is sourced from suppliers dedicated to uphold responsible animal welfare practices; • We continue to pursue finding more earth-friendly serving and packaging materials for our products including bags that are made from recycled material, are 100% recyclable and reusable and are Rainforest Alliance certified, paper drink cups that are Sustainable Forest Initiative certified and aluminum that contains postindustrial re-processed and post-consumer material; 10 • Military veterans are actively recruited to work at our restaurants; • We have military appreciation days and we provide discounts to military and first responders; • We assist, through our non-profit Fiesta Family Foundation, many of our employees who have personally suffered losses or other hardships; and • • In 2019, we provided monetary and food donations or volunteered to the following organizations: 88 Blessings, American Red Cross, Baytown Youth Fair and Livestock Association, Boys and Girls Club of America, The Children’s Hospital of San Antonio, Dallas Fire and Police Departments, Fundación Amigos Carlos Jimenez, Holocaust Museum Houston, Houston Children’s Charity, Houston Fire and Police Departments, Houston SAAFE House, Junior League of Miami, Meals on Wheels, Methodist Hospital and Healthcare San Antonio, Miami Lighthouse for the Blind, Miami Rescue Mission, National Kidney Foundation, Operation Stocking Stuffer, Parkland Buddy Sport, SAMMinistries, San Antonio Food Bank, Susan G. Komen, Voices for Children, and World Central Kitchen. In 2018, we provided monetary and food donations or volunteered to the following organizations: Susan G. Komen, Boys and Girls Club of America, Salvation Army, Sandra DeLucca Development Center, Juvenile Diabetes Research Foundation, Children’s Hospitals of Texas, Houston Food Bank, Austin Central Texas Food Bank, El Pasoans Fighting for Hunger Food Bank, San Antonio Food Bank, San Antonio Haven for Hope and Madison on Marsh Nursing Home; we provided hundreds of hot meals to local police, FBI, first responders and local residents in need after the Parkland, Florida shooting tragedy; hundreds of hot meals were provided to first responders, victims, elderly residents and others in Texas and in Florida in the aftermath of the Hurricanes. As a result of these initiatives, we believe we deliver benefits to our stakeholders, including employees, business partners, customers, suppliers, stockholders, community members, and others. Suppliers and Distributors For our Pollo Tropical and Taco Cabana restaurants, we have negotiated directly with local and national suppliers for the purchase of food and beverage products and supplies to ensure consistent quality and freshness and to obtain competitive prices. Food and supplies for both brands are ordered from approved suppliers and are shipped to the restaurants via distributors. Both brands are responsible for monitoring quality control, for the supervision of these suppliers and for conducting inspections to observe preparations and ensure the quality of products purchased. For both our Pollo Tropical and Taco Cabana restaurants, we have service agreements with our primary distributors of food and paper products. Performance Food Group, Inc., is our primary distributor of food and beverage products and supplies for both our Pollo Tropical and Taco Cabana restaurants under a distribution services agreement that expires on July 27, 2024. We also currently rely on six suppliers for chicken for our Pollo Tropical and Taco Cabana restaurants under agreements that expire on December 31, 2020. Quality Assurance Pollo Tropical and Taco Cabana are committed to obtaining quality ingredients and creating freshly-prepared food in a safe manner. In addition to operating in accordance with quality assurance and health standards mandated by federal, state and local governmental laws and regulations regarding minimum cooking times and temperatures, maximum time standards for holding prepared food, food handling guidelines and cleanliness, among other things, we have also developed our own internal quality control standards. We require our suppliers to adhere to our high quality control standards, and we regularly inspect their products and production and distribution facilities to ensure that they conform to those standards. In addition, we have implemented certain procedures to ensure that we serve safe, quality meals to our guests. As an example, we utilize the nationally-recognized ServSafe program to train our kitchen staff and managers on proper food handling and preparation techniques. In addition, we have hired a third party that conducts unscheduled food safety inspections of our restaurants, and restaurant managers conduct internal inspections for taste, quality, cleanliness and food safety on a regular basis. These third-party inspections are one of the metrics used in our restaurant-level incentive bonus programs. 11 In addition to food safety, our operational focus at each of our two concepts is closely monitored to achieve a high level of guest satisfaction via speed of service, order accuracy and quality of service. Our senior management and restaurant management staffs are principally responsible for ensuring compliance with our operating policies. We have uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the restaurants and employee conduct. In order to maintain compliance with these operating standards and specifications, we distribute to our restaurant operations management team detailed reports measuring compliance with various guest service standards and objectives, including feedback obtained directly from our guests. The guest feedback is monitored by an independent agency and by us and consists of evaluations of speed of service, quality of service, quality of our menu items and other operational objectives including the cleanliness of our restaurants. We also have in-house guest service representatives that manage guest feedback and inquiries. Trademarks We believe that our trademarks, service marks, trade dress, logos and other proprietary intellectual property are important to our success. We have registered the principal Pollo Tropical and Taco Cabana logos and designs with the U.S. Patent and Trademark Office on the Principal Register as a service mark for our restaurant services. We also have secured or have applied for state and federal registrations for several other advertising or promotional marks, including variations of the Pollo Tropical and Taco Cabana principal marks as well as those related to our core menu offerings. In connection with our current and potential international franchising activities, we have applied for or been granted registrations in foreign countries of the Pollo Tropical and Taco Cabana principal marks and several other marks. Other than the Pollo Tropical and Taco Cabana trademarks and the logo and trademark of Fiesta Restaurant Group (including Internet domain names and addresses) and proprietary rights relating to certain of our core menu offerings, we have no proprietary intellectual property. Continued Commitment to Strong Governance We declassified our board of directors so that beginning at our 2019 Annual Meeting of Stockholders, our entire board of directors stands for re-election for a one-year term. Additionally, in 2018, our board of directors adopted a mandatory maximum age of 75 for any director nominee. Government Regulation Various federal, state and local laws affect our business, including various health, sanitation, fire and safety standards. Restaurants to be constructed or reimaged are subject to state and local building code and zoning requirements. In connection with the development and reimaging of our restaurants, we may incur costs to meet certain federal, state and local regulations, including regulations promulgated under the Americans with Disabilities Act. We are subject to the federal Fair Labor Standards Act and various other federal and state laws governing employment matters. While we pay, on average, rates that are above the federal minimum wage, and where applicable, state minimum wage, increases in those minimum wages have in the past increased wage rates at our restaurants and in the future will affect our labor costs. We are also subject to provisions of the comprehensive federal health care reform law. We anticipate that a combination of labor management, cost reduction initiatives, technology and menu price increases can materially offset the potential increased costs associated with future regulations. Taco Cabana is subject to alcoholic beverage control regulations that require state, county or municipal licenses or permits to sell alcoholic beverages at each restaurant location that sells alcoholic beverages. Typically, licenses must be renewed every one to two years and may be revoked or suspended for cause at any time. Licensing entities, authorized with law enforcement authority, may issue violations and conduct audits and investigations of the restaurant’s records and procedures. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of our Taco Cabana restaurants including minimum age for consumption, certification requirements for employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. These regulations also prescribe certain required banking and accounting practices related to alcohol sales and purchasing. Our Taco Cabana restaurants are subject to state “dram-shop” laws. Dram-shop laws provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic 12 beverages to the intoxicated or minor patron. We have specific insurance that covers claims arising under dram-shop laws. However, we cannot ensure that this insurance will be adequate to cover any claims that may be instituted against us. In early 2017, we discontinued the sale of alcoholic beverages at Pollo Tropical restaurants. Employees As of December 29, 2019, we employed approximately 10,480 persons, of which approximately 210 were corporate and administrative personnel and approximately 10,270 were restaurant operations and other supervisory personnel. None of our employees are covered by collective bargaining agreements. We believe that overall relations with our employees are good. Availability of Information We file annual, quarterly and current reports and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov. We make available through our internet website (www.frgi.com) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with the SEC. The reference to our website address is a textual reference only, meaning that it does not constitute incorporation by reference of the information contained on the website and should not be considered part of this document. In addition, at our website you may also obtain, free of charge, copies of our corporate governance materials, including the charters for the committees of our board of directors and copies of various corporate policies including our Code of Business Ethics and Conduct, Code of Ethics for Executives and our “Whistle Blower” policy. 13 ITEM 1A. RISK FACTORS You should carefully consider the risks described below, as well as other information and data included in this Annual Report on Form 10-K. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties we face. Our business is also subject to general risks and uncertainties that affect many other companies, including overall economic and industry conditions. Additional risks and uncertainties not currently known to us or that we currently believe are not material also may impair our business, consolidated financial condition and results of operations. Risks Related to Our Business The market in which we compete is highly competitive, and we may not be able to compete effectively. The restaurant industry is highly competitive. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low- and medium-priced fare. We also compete with delivered meal solutions, convenience stores, grocery stores and other restaurant retailers. Pollo Tropical’s competitors include national and regional chicken-based concepts as well as other types of quick-service and fast-casual restaurants. Our Taco Cabana restaurants compete with Mexican concepts, including those in the quick-service, fast-casual and casual dining segments. Many of our competitors or potential competitors have greater financial and other resources than we do, which may allow them to react to changes in pricing, marketing, and trends in the restaurant industry more quickly or effectively than we can. Additionally, to remain competitive, we have increasingly offered selected food items and combination meals at discounted prices. These pricing and other marketing strategies have had, and in the future may have, a negative impact on our sales and earnings. Factors applicable to the quick-service and fast-casual restaurant segments may adversely affect our results of operations, which may cause a decrease in earnings and revenues. The quick-service and fast-casual restaurant segments are highly competitive and can be materially adversely affected by many factors, including: • • • • • • • • • • • • • • changes in local, regional or national economic conditions; changes in demographic trends; changes in consumer tastes; changes in traffic patterns; increases in fuel prices and utility costs; consumer concerns about health, diet and nutrition; instances of food-borne or localized illnesses or other food safety issues; increases in the number of, and particular locations of, competing restaurants; changes in discretionary consumer spending; inflation; availability of key commodities such as beef, chicken, eggs and produce; increases in the cost of key commodities, such as beef, chicken, eggs and produce as well as the cost of paper goods and packaging; the availability of hourly-paid employees and experienced restaurant managers including a decrease in the labor supply due to changes in immigration policy such as barriers for entry into, working in, or remaining in the United States; increased labor costs, including higher wages, unemployment insurance, minimum wage, unionization of restaurant employees and overtime requirements; 14 • • • increases in the cost of providing healthcare and related benefits to employees, including the impact of the Affordable Care Act; costs related to remaining competitive and current with regard to new technologies in our restaurants such as loyalty programs, gift cards, online ordering and credit card security; and regional weather conditions including hurricanes, windstorms and flooding, and other natural disasters. Our continued growth depends on our ability to open and operate new restaurants profitably, which in turn depends on our continued access to capital, and newly developed restaurants may not perform as we expect and there can be no assurance that our growth and development plans will be achieved. While we have decreased the number of new restaurants which we plan to open in the near term, our continued growth still depends on our ability to develop additional Pollo Tropical and Taco Cabana restaurants. Development involves substantial risks, including the following: • • • • • • • • • • developed restaurants that do not achieve desired revenue or cash flow levels or other operating and performance targets once opened; the inability to recruit and retain managers and other employees necessary to staff each new restaurant; incurring substantial unrecoverable costs in the event a development project is abandoned prior to completion or a new restaurant is closed due to poor financial performance; changes in general economic and business conditions; the inability to fund development; increasing development costs or development costs that exceed budgeted amounts; delays in completion of construction; the inability to obtain all necessary zoning and construction permits; the inability to identify, or the unavailability of, suitable sites on acceptable leasing or purchase terms; and changes in governmental rules and regulations or enforcement thereof. Our long-term development plans will require additional management, operational and financial resources. For example, we will be required to recruit managers and other personnel for each new restaurant. We cannot ensure that we will be able to manage our expanding operations effectively and our failure to do so could adversely affect our results of operations. In addition, our ability to open new restaurants and to grow, as well as our ability to meet other anticipated capital needs, may depend on our continued access to external financing, including borrowing under our senior secured revolving credit facility, which we refer to as the “senior credit facility.” There can be no assurance that we will have access to the capital we need at acceptable terms or at all, which could materially adversely affect our business. In addition, our need to manage our indebtedness levels to ensure continued compliance with financial leverage ratio covenants under our senior credit facility may reduce our ability to develop new restaurants. Customer preferences and traffic could be adversely impacted by health concerns about certain food products, reports of food-borne illnesses or food safety issues, any of which could result in a decrease in demand for our products. Customer preferences and traffic could be adversely impacted by health concerns or negative publicity about the consumption of particular food products, which could cause a decline in demand for those products and adversely impact our sales. Instances or reports, whether verified or not, of food-safety issues, such as food-borne illnesses, food tampering, food contamination or mislabeling, either during growing, manufacturing, packaging, storing or preparation, have in the past severely injured the reputations of companies in the food processing, grocery and quick-service and fast-casual restaurant sectors and could affect us as well. Any report linking us to food-borne illnesses or food tampering, contamination, mislabeling or other food-safety issues could damage our brand value and severely hurt sales of our food products and possibly lead to product liability claims, litigation (including class actions) or damages. 15 These problems, other food-borne illnesses (such as norovirus or hepatitis A), and injuries caused by the presence of foreign material could require us to temporarily close our restaurants. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and a decrease in customer traffic to our restaurants. Furthermore, any instances of food contamination, whether or not at our restaurants, could subject us or our suppliers to a food recall pursuant to the United States Food and Drug Administration’s recently enacted Food Safety Modernization Act. Changes in consumer tastes may reduce the frequency of their visits to our restaurants which could negatively impact our business. We obtain a significant portion of our revenues from the sale of foods that are characterized as tropical- and Mexican-inspired and if consumer preferences for these types of foods change, it could have a material adverse effect on our operating results. Additionally, numerous companies in the industry have introduced products positioned to capitalize on the growing consumer preference for food products that are, or are perceived to be, promoting good health, nutritious, fresh, local, clean and all-natural, free from artificial ingredients, minimally processed, low in calories and low in fat content. Our inability to continue to respond to customer demand or changes in customer taste and preferences could require us to change our pricing, marketing, or promotional strategies, which could materially and adversely affect our consolidated financial results or the brand identity that we have created. An increase in food costs could adversely affect our operating results. Our profitability and operating margins are dependent in part on our ability to anticipate and react to changes in food costs. Changes in the cost or availability of certain food products could affect our ability to offer a broad menu and maintain competitive prices and could materially adversely affect our profitability and reputation. The type, variety, quality and cost of produce, beef, poultry, cheese and other commodities can be subject to change and to factors beyond our control, including weather, governmental regulation, availability and seasonality, each of which may affect our food costs or cause a disruption in our supply. Although we utilize purchasing contracts to lock in the prices for a material portion of the food commodities used in our restaurants, some of the commodities used in our operations cannot be locked in for periods longer than one month. We do not use financial instruments to hedge our risk against market fluctuations in the price of commodities at this time. We may not be able to anticipate and react to changing food costs through our purchasing practices and menu price adjustments in the future, and failure to do so could negatively impact our revenues and results of operations. We could also be adversely affected by price increases specific to ingredients we have chosen due to their specific quality profile or related criteria, the markets for which are generally smaller and more concentrated than the markets for other commodity food products. If a significant disruption in service or supply by any of our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on our business. Our restaurants depend on frequent deliveries of ingredients and other products. For both our Pollo Tropical and Taco Cabana restaurants, we have service agreements with our primary distributors of food and paper products. Performance Food Group, Inc., is our primary distributor of food and beverage products and supplies for both our Pollo Tropical and Taco Cabana restaurants under a distribution services agreement that expires on July 27, 2024. We also currently rely on six suppliers for chicken for our Pollo Tropical restaurants under agreements that expire on December 31, 2020. There are many factors which could cause shortages or interruptions in the supply of our ingredients and products, including adverse weather, unanticipated demand, labor or distribution problems, food safety issues by our suppliers or distributors, cost, and the financial health of our suppliers. If we cannot replace or engage distributors or suppliers who meet our specifications in a short period of time, this could increase our expenses and cause shortages of food and other items at our restaurants, which could cause a restaurant to remove items from its menu. If such actions were to occur, customers could change their dining habits and affected restaurants could experience significant reductions in sales during the shortage or thereafter. A substantial portion of our senior management team is new, which may pose challenges, and our success may depend on the continued service and availability of key personnel. Dirk Montgomery and Hope Diaz joined us as Chief Financial Officer and Chief Marketing Officer, respectively, in September 2019, and we added a new Chief Information Officer, John Doyle in December 2019, and Louis DiPietro, 16 our General Counsel, in December 2018. This followed the hiring of our current Chief Executive Officer, Richard Stockinger, in March 2017. These officers have hired, and are expected in the future to hire, a number of new direct reports, and as a result, our senior management team is relatively new and may face challenges working together as a unit, aligning on strategic priorities and objectives, or integrating their new teams with one another. Failure to meet these challenges successfully may adversely impact our operations, business results or long-term growth prospects. If there is a lack of sufficient labor or labor costs increase, our operating results may be adversely affected. Labor is a primary component in the cost of operating our restaurants. If we face labor shortages or increased labor costs, because of increased competition for employees, a decrease in the labor supply to us or our key suppliers due to changes in immigration policy including barriers to immigrants entering, working in, or remaining in the United States, higher employee-turnover rates, unionization of restaurant workers, or increases in federal, state, or local minimum wages or in other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), this could have a material adverse effect on our operating results. If a significant portion of our employees were to become union organized, our labor costs could increase. Potential changes in labor laws could increase the likelihood of some or all of our employees being subjected to greater organized labor influence and could have an adverse effect on our business and financial results by imposing requirements that could potentially increase our costs. The success of our marketing programs and the impact of those of our competitors could have a material adverse effect on our results of operations and financial condition. If our competitors increase spending on advertising and promotions, or our advertising and other marketing programs do not result in increased net sales or if the costs of advertising, media, or marketing increase greater than expected, or are less effective than our competitors, our profitability could be materially adversely affected. Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse impact on our business. There has been a marked increase in the use of social media platforms and similar devices which allow individuals access to a broad audience of consumers and others. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects, or business. The harm may be immediate without affording us an opportunity for redress or correction. The dissemination of information online could harm our business, prospects, financial condition, and results of operations, regardless of the information’s accuracy. Many of our competitors are expanding their use of social media and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with guests and brand relevance. As part of our marketing efforts, going forward we expect to increasingly rely on social media platforms and search engine marketing to attract and retain guests. We will also increase our investment in other digital marketing initiatives that allow us to reach our guests across multiple digital channels and build their awareness of, engagement with, and loyalty to our brands. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues, increased employee engagement or brand recognition. In addition, a variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about us, exposure of personally identifiable information, fraud, or out-of-date information. The inappropriate use of social media vehicles by our guests or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation. Any material failure, interruption, or security breach in our systems could adversely affect our business. We rely heavily on information technology systems across our operations, including point-of-sale processing in our restaurants, gift and loyalty cards, online business, and various other processes and transactions. Our ability to effectively manage our business and coordinate the preparation and sale of our products depends significantly on the reliability and capacity of these systems. We expect to expand our utilization of technology throughout our business and the failure of these systems to operate effectively, problems with transitioning to upgraded or replacement 17 systems, or a breach in security of these systems could cause reduced efficiency of our operations, and significant capital investments could be required to remediate the problem. Security breaches of confidential guest information in connection with our electronic processing of credit and debit card transactions or security breaches of confidential employee information may adversely affect our business. A significant amount of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information of their guests has been stolen. We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our guests’ credit or debit card information. Any such claim or proceeding, or any adverse publicity resulting from these allegations, may have a material adverse effect on us and our restaurants. We also collect and maintain personal information about our employees and customers as part of some of our marketing and guest loyalty programs. The collection and use of such information is regulated at the federal and state levels, and the regulatory environment related to information security and privacy is increasingly demanding. We also rely increasingly on cloud computing and other technologies that result in third parties holding significant amounts of customer or employee information on our behalf. If the security and information systems of our outsourced third-party providers we use to store or process such information are compromised or if we or such third parties otherwise fail to comply with these laws and regulations, we could face litigation and the imposition of penalties, which could adversely affect our financial performance. Our reputation as a brand or as an employer could also be adversely affected, which could impair our sales or ability to attract and keep qualified employees. Our business is regional and we therefore face risks related to reliance on certain markets as well as risks for other unforeseen events. As of December 29, 2019, all of our Company-owned Pollo Tropical restaurants were located in Florida and all of our Company-owned Taco Cabana restaurants were located in Texas. Therefore, events and conditions specific to these regions, including economic conditions, state and local government regulations, weather conditions or other conditions affecting Florida and Texas, and the tourism industry in Florida, may have a material impact on the success of our restaurants in those locations. Adverse weather conditions can impact guest traffic at our restaurants, cause the temporary underutilization of outdoor patio seating and, in more severe cases such as hurricanes, tornadoes or other natural disasters, cause temporary closures, sometimes for prolonged periods, which would negatively impact our restaurant sales. Changes in weather could result in construction delays, interruptions to the availability of utilities, and shortages or interruptions in the supply of food items and other supplies, which could increase our costs. Some climatologists predict that the long-term effects of climate change and global warming may result in more severe, volatile weather or extended droughts, which could increase the frequency and duration of weather impacts on our operations. Economic downturns may adversely impact consumer spending patterns. Our business is dependent to a significant extent on national, regional and local economic conditions, particularly those that affect our guests that frequently patronize our restaurants. In particular, where our guests’ disposable income is reduced (such as by job losses, credit constraints and higher housing, tax, utility, gas, consumer credit or other costs) or where the perceived wealth of guests has decreased (because of circumstances such as lower residential real estate values, lower investment values, increased foreclosure rates, increased tax rates or other economic disruptions), our restaurants have in the past experienced, and may in the future experience, lower sales and guest traffic as guests choose lower-cost alternatives or choose alternatives to dining out. The resulting decrease in our guest traffic or average sales per transaction has had an adverse effect in the past, and could in the future have a material adverse effect, on our business. Our expansion into new markets may present increased risks due to a lack of market awareness of our brands. We have encountered and may continue to encounter difficulties developing restaurants outside of our more mature core markets. For example, we closed all Pollo Tropical restaurants in Texas, Tennessee and Georgia over the last three years. We may be unable to find attractive locations or successfully market our products as we attempt to expand beyond our existing markets, as the competitive circumstances and consumer characteristics in these new areas may differ substantially from those in areas in which we currently operate. It may be more challenging for us to attract guests to our restaurants in areas where there is a limited or a lack of market awareness of the Pollo Tropical 18 or Taco Cabana brand. Restaurants opened in new markets where we have not reached media efficiency may open at lower sales volumes than restaurants opened in more mature markets, and may have lower restaurant-level operating margins than more mature markets. Sales at restaurants opened in new markets that are not yet media efficient have taken and may continue to take longer to reach average restaurant sales volumes, if at all, thereby adversely affecting our operating results, including the recognition of future impairment charges. Opening new restaurants in areas in which potential guests may not be familiar with our restaurants may include costs related to the opening and marketing of those restaurants that are substantially greater than those incurred by our restaurants in other areas. Even though we may incur substantial additional costs with respect to these new restaurants, they may attract fewer guests than our more established restaurants in existing markets. We may also not open a sufficient number of restaurants in new markets to adequately leverage distribution, supervision and marketing costs. As a result of the foregoing, we cannot ensure that we will be able to successfully or profitably operate our new restaurants outside our existing markets. Changes in accounting standards or the recognition of impairment or other charges may adversely affect our future results of operations. New accounting standards or changes in financial reporting requirements, accounting principles or practices, including with respect to our critical accounting estimates, could adversely affect our future results. We may also be affected by the nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment or other charges that reduce our earnings. In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. These estimates are highly subjective and can be significantly impacted by many factors such as global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. If our estimates or underlying assumptions change in the future, we may be required to record impairment charges. If we experience any such changes, they could have a significant adverse effect on our reported results for the affected periods. Government regulation could adversely affect our financial condition and results of operations. In connection with the operation of our business, we are subject to extensive federal, state, local, and foreign laws and regulations that are complex and vary from location to location, including those related to: • • • • • franchise relationships; building construction and zoning requirements; nutritional content labeling and disclosure requirements; management and protection of the personal data of our employees and customers; and environmental matters. Our restaurants are licensed and subject to regulation under federal, state, local and foreign laws, including business, health, fire, sales of alcohol (with respect to our Taco Cabana restaurants) and safety codes. For example, we are subject to the U.S. Americans with Disabilities Act, or ADA, and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas. In addition, various federal, state, local and foreign labor laws govern our operations and our relationship with our employees, including minimum wage requirements, overtime, accommodation and working conditions, benefits, work authorization requirements, insurance matters, workers’ compensation, disability laws such as the ADA discussed above, child labor laws, and anti-discrimination laws. Although we believe that compliance with these laws has not had a material adverse effect on our operations to date, we may experience material difficulties or failures with respect to compliance with such laws in the future. Our failure to comply with these laws could result in required renovations to our facilities, litigation, fines, penalties, judgments, or other sanctions, including the temporary suspension of restaurant operations or a delay in construction or opening of a restaurant, any of which could adversely affect our business and our reputation. In addition, new government initiatives or changes to existing laws, such as the adoption and implementation of national, state, or local government proposals relating to increases in minimum wage rates, may increase our costs of doing business and adversely affect our results of operations. 19 Changes in employment laws may adversely affect our business. Various federal and state labor laws govern the relationship with our employees and affect operating costs. These laws include employee classification as exempt/non-exempt for overtime and other purposes, minimum wage requirements, unemployment tax rates, workers’ compensation rates, immigration status and other wage and benefit requirements. In addition, states in which we operate are considering or have already adopted new immigration laws or enforcement programs, and the U.S. Congress and Department of Homeland Security from time to time consider and may implement changes to federal immigration laws, regulations or enforcement programs as well. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. We currently participate in the E-Verify program, an Internet-based, free program run by the United States government to verify employment eligibility, in states in which participation is required. However, use of the E-Verify program does not guarantee that we will properly identify all applicants who are ineligible for employment. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized we could experience adverse publicity that negatively impacts our brand and may make it more difficult to hire and keep qualified employees. Termination of a significant number of employees who were unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws. These factors could materially adversely affect our business, financial condition and results of operations. If one of our employees sells alcoholic beverages to an intoxicated patron or to a minor, we may be liable to third parties for the acts of the patron or incur significant fines or penalties. We serve alcoholic beverages at our Taco Cabana restaurants and are subject to the “dram-shop” statutes of the jurisdictions in which we serve alcoholic beverages. “Dram-shop” statutes generally provide that serving alcohol to an intoxicated patron is a violation of the law. We discontinued the sale of alcoholic beverages at Pollo Tropical restaurants in early 2017. In most jurisdictions, if one of our employees sells alcoholic beverages to an intoxicated patron we may be liable to third parties for the acts of the patron. We cannot guarantee that those patrons will not be served or that we will not be subject to liability for their acts. Our liquor liability insurance coverage may not be adequate to cover any potential liability and insurance may not continue to be available on commercially acceptable terms or at all, or we may face increased deductibles on such insurance. A significant dram-shop claim or claims could have a material adverse effect on us as a result of the costs of defending against such claims; paying deductibles and increased insurance premium amounts; implementing improved training and heightened control procedures for our employees; and paying any damages or settlements on such claims. Additionally, we are subject to statutes of the jurisdictions in which we serve alcoholic beverages which prohibit us from selling or serving alcohol to minor patrons. These statutes generally provide that serving or selling alcohol to minors is a violation of the law, and will result in fines and other penalties including the suspension or loss of our license to sell alcohol in the future. If we were to incur a significant number of sale to minor violations the fines or penalties could have a material adverse effect on us. The effect of changes to U.S. health care laws may increase our health care costs and negatively impact our financial results. Under the comprehensive U.S. health care reform law, the Affordable Care Act, changes in the law including the employer mandate and employer penalties may increase our labor costs significantly. While changes in the law, including the imposition of a penalty on individuals who do not obtain health care coverage, have not resulted in significant numbers of additional employees electing to participate in our health care plans, there can be no assurance that this will not change in the future which may increase our health care costs. It is also possible that making changes or failing to make changes in the health care plans we offer will make us less attractive to our current or potential employees. The costs and other effects of these new health care requirements on future periods cannot be determined with certainty and could have a material adverse effect on our results of operations. 20 We may incur significant liability or reputational harm if claims are brought against us or against our franchisees. We or our franchisees may be subject to complaints, regulatory proceedings or litigation from guests or other persons alleging food-related illness, injuries suffered on our premises or other food quality, health or operational concerns, including environmental claims. In addition, in recent years a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging, among other things, violations of federal and state law regarding workplace and employment matters, discrimination, harassment, wrongful termination and wage, rest break, meal break and overtime compensation issues and, in the case of certain restaurants, alleging that they have failed to disclose the health risks associated with high-fat or high sodium foods and that their marketing practices have encouraged obesity. We may also be subject to litigation or other actions initiated by governmental authorities, our employees and our franchisees, among others, based upon these and other matters. Adverse publicity resulting from such allegations or occurrences or alleged discrimination or other operating issues stemming from one of our locations, a number of our locations or our franchisees could adversely affect our business, regardless of whether the allegations are true, or whether we are ultimately held liable. Any cases filed against us could materially adversely affect us if we lose such cases and have to pay substantial damages or if we settle such cases. In addition, any such cases may materially and adversely affect our operations by increasing our litigation costs and diverting our attention and resources to address such actions. In addition, if a claim is successful, our insurance coverage may not cover or be adequate to cover all liabilities or losses and we may not be able to continue to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all. If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover such loss, liability or loss of income, there could be a material adverse effect on our results of operations. Our franchisees could take actions that harm our reputation. As of December 29, 2019, a total of 40 Pollo Tropical and Taco Cabana restaurants were owned and operated by our franchisees. We do not exercise control of the day-to-day operations of our franchisees and the number of franchised restaurants may increase in the future. While we attempt to ensure that franchisee-owned restaurants maintain the same high operating standards as our Company-owned restaurants, one or more of these franchisees may fail to meet these standards. Any shortcomings at our franchisee-owned restaurants could be attributed to our company as a whole and could adversely affect our reputation and damage our brands. Our indebtedness could adversely affect our financial condition. As of December 29, 2019, we had $77.0 million of outstanding indebtedness comprised of $75.0 million of revolving credit borrowings under our senior credit facility and finance lease obligations of $2.0 million. As a result of our indebtedness, a portion of our operating cash flow will be required to make payments on our outstanding indebtedness. In addition, to the extent we significantly increase our borrowings and interest rates increase under our senior credit facility, we may not generate sufficient cash flow from operations to enable us to both repay our indebtedness and fund our other liquidity needs. Our indebtedness could have important consequences. For example, it could: • • • • • • • make it more difficult for us to satisfy our obligations with respect to our debt; increase our vulnerability to general adverse economic and industry conditions; require us to dedicate a portion of our cash flow from operations to payments on our indebtedness and related interest, including indebtedness we may incur in the future, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; increase our cost of borrowing; place us at a competitive disadvantage compared to our competitors that may have less debt; and limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or general corporate purposes. 21 We expect to use cash flow from operations and revolving borrowings under our senior credit facility to meet our current and future financial obligations, including funding our operations, debt service and capital expenditures. Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future, which could result in our being unable to repay indebtedness, or to fund other liquidity needs. If we do not have enough money, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, including our senior credit facility, on or before maturity. We cannot make any assurances that we will be able to accomplish any of these alternatives on terms acceptable to us, or at all. In addition, the terms of existing or future indebtedness, including the agreements for our senior credit facility, may limit our ability to pursue any of these alternatives. Despite current indebtedness levels and restrictive covenants, we may still be able to incur more debt or make certain restricted payments, which could further exacerbate the risks described above. We and our subsidiaries may be able to incur additional debt in the future. Although our senior credit facility contains restrictions on our ability to incur indebtedness, those restrictions are subject to a number of exceptions. We may also consider investments in joint ventures or acquisitions, which may increase our indebtedness. Moreover, although our senior credit facility contains restrictions on our ability to make restricted payments, including the declaration and payment of dividends, we are able to make such restricted payments under certain circumstances. Adding new debt to current debt levels or making restricted payments could intensify the related risks that we and our subsidiaries now face. Our senior credit facility restricts our ability to engage in some business and financial transactions. Our senior credit facility restricts our ability in certain circumstances to, among other things: • • • • • • • incur additional debt; pay dividends and make other distributions on, redeem or repurchase, capital stock; make investments or other restricted payments; enter into transactions with affiliates; sell all, or substantially all, of our assets; create liens on assets to secure debt; or effect a consolidation or merger. These covenants limit our operational flexibility and could prevent us from taking advantage of business opportunities as they arise, growing our business or competing effectively. In addition, our senior credit facility requires us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we cannot ensure that we will meet these tests. Federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials could expose us to liabilities, which could adversely affect our results of operations. We are subject to a variety of federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous substances or other regulated materials, release of pollutants into the air, soil and water, and the remediation of contaminated sites. Failure to comply with environmental laws could result in the imposition of fines or penalties, restrictions on operations by governmental agencies or courts of law, as well as investigatory or remedial liabilities and claims for alleged personal injury or damages to property or natural resources. Some environmental laws impose strict, and under some circumstances joint and several, liability for costs of investigation and remediation of contaminated sites on current and prior owners or operators of the sites, as well as those entities that send regulated materials to the sites. We cannot ensure that we have been or will be at all times in complete compliance with such laws, regulations and permits. Therefore, our costs of complying with current and future environmental, health and safety laws could adversely affect our results of operations. 22 Major developments on trade relations could have a material adverse effect on our business. The current political climate has introduced uncertainty with respect to trade policies, tariffs and government regulations impacting trade between the United States and other countries. We source several of our ingredients, paper products and other materials used within our business from suppliers outside of the United States, including Asia, Central America and Mexico. Significant developments in trade relations, such as the imposition of tariffs on items imported by us, could increase our costs and materially and adversely affect our consolidated financial results. We are subject to all of the risks associated with leasing property subject to long-term non-cancelable leases. The leases for our restaurant locations generally have initial terms of 10 to 20 years, and typically provide for renewal options in five-year increments as well as for rent escalations. Generally, our leases are “net” leases, which require us to pay all of the costs of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. If an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be obligated to perform our monetary obligations under the applicable lease including, among other things, paying all amounts due for the balance of the lease term. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close restaurants in desirable locations. Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand. We own certain common law trademark rights and a number of federal and international trademark and service mark registrations, including the Pollo Tropical and Taco Cabana names and logos, and proprietary rights relating to certain of our core menu offerings. We believe that our trademarks, service marks, trade dress and other proprietary rights are important to our success and our competitive position. We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights. If our efforts to protect our intellectual property are inadequate or if any third party misappropriates or infringes on our intellectual property either in print or on the internet, the value of our brands may be harmed which could have a material adverse effect on our business. We are aware of restaurants in foreign jurisdictions using menu items, logos or branding that we believe are based on our intellectual property and our ability to prevent these restaurants from using these elements may be limited in jurisdictions in which we are not operating. This could have an adverse impact on our ability to expand into other jurisdictions in the future. We are not aware of any assertions that our trademarks or menu offerings infringe upon the proprietary rights of third parties, but we cannot ensure that third parties will not claim infringement by us in the future. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items in the future or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition. Risks Related to Our Common Stock We do not expect to pay any cash dividends for the foreseeable future, and our senior credit facility limits our ability to pay dividends to our stockholders. We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. The absence of a dividend on our common stock may increase the volatility of the market price of our common stock or make it more likely that the market price of our common stock will decrease in the event of adverse economic conditions or adverse developments affecting our company. Our senior credit facility limits, and the debt instruments that we and our subsidiaries may enter into in the future may limit, our ability to pay dividends to our stockholders. If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline. The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We cannot ensure that these analysts will publish research or reports about us or that any analysts that do so will not discontinue publishing research or reports about us in the future. If one or more 23 analysts who cover us downgrade our stock, our stock price could decline rapidly. If analysts do not publish reports about us or if one or more analyst ceases coverage of our stock, we could lose visibility in the market, which in turn could cause our stock price to decline. Percentage ownership of our common stock may be diluted in the future. Percentage ownership of our common stock may be diluted in the future because of equity awards that we expect will be granted to our directors, officers and employees. The Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock options, and other equity-based awards to our directors, officers and other employees, advisors and consultants. In addition, in the future we may also issue common stock or other securities to raise additional capital. Any new shares issued would dilute our existing shareholders. Proxy contests threatened or commenced against us could be disruptive and costly, and adversely affect our business, operation results and financial condition. Stockholders may from time to time attempt to effect changes, engage in proxy solicitations or advance stockholder proposals. Responding to proxy contests and related actions by activist stockholders can be costly and time-consuming, disrupt our operations, and divert the attention of our management and employees away from their regular duties and the pursuit of our business strategies, which could materially and adversely affect our business, operating results and financial conditions. Perceived uncertainties as to our future direction as a result of proxy contests and related actions by activist stockholders may lead to the perception of a change in the direction of our business, instability or lack of continuity. This may affect our relationship with current or potential suppliers, vendors, and other third parties, and make it more difficult to attract and retain management employees and executives which could adversely affect our business, operating results and financial condition. Further, proxy contests and related actions by activist stockholders could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. Provisions in our restated certificate of incorporation and amended and restated bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock. Delaware corporate law and our restated certificate of incorporation and amended and restated bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions: • • • • • • require that special meetings of our stockholders be called only by our board of directors or certain of our officers, thus prohibiting our stockholders from calling special meetings; deny holders of our common stock cumulative voting rights in the election of directors, meaning that stockholders owning a majority of our outstanding common stock will be able to elect all of our directors; authorize the issuance of “blank check” preferred stock that our board could issue to dilute the voting and economic rights of our common stock and to discourage a takeover attempt; provide the approval of our board of directors or a supermajority of stockholders is necessary to make, alter or repeal our amended and restated bylaws and that approval of a supermajority of stockholders is necessary to amend, alter or change certain provisions of our restated certificate of incorporation; establish advance notice requirements for stockholder nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing. 24 ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES As of December 29, 2019, we owned or leased the following operating restaurant properties: Restaurants: Pollo Tropical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taco Cabana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating restaurants . . . . . . . . . . . . . . . . . . . . . . . . 6 6 12 136 158 294 142 164 306 Owned Leased(1) Total(2) (1) (2) Includes eleven restaurants located in in-line or storefront locations. Excludes restaurants operated by our Pollo Tropical and Taco Cabana franchisees. As of December 29, 2019, we leased 96% of our Pollo Tropical restaurants and 96% of our Taco Cabana restaurants. We typically enter into leases (including renewal options) ranging from 35 to 45 years. The average remaining term for all leases for operating restaurant properties, including renewal options, was approximately 32 years as of December 29, 2019. Generally, we have been able to renew leases, upon or prior to their expiration, at the prevailing market rates, although there can be no assurance that this will continue to occur. Most leases require us to pay utility and water charges and real estate taxes. Certain leases also require contingent rentals based upon a percentage of gross sales of the particular restaurant that exceed specified minimums. In some of our mall locations, we are also required to pay certain other charges such as a pro-rata share of the mall’s common area maintenance costs, insurance and security costs. As of December 29, 2019, we had one restaurant under development, 29 closed properties subleased to third parties, 17 closed properties available for sublease, and four owned and closed restaurant properties, of which one has been leased to a third party and three were available for lease (two of which were also available for sale). In addition to the restaurant locations, we lease approximately 21,000 square feet at 14800 Landmark Boulevard, Suite 500, Dallas, Texas which houses some of our executive offices and certain of our administrative functions. We also lease approximately 19,500 square feet at 7255 Corporate Center Drive, Miami, Florida, which house some of our executive offices and administrative operations for our Pollo Tropical restaurants. Additionally, we lease approximately 10,300 square feet of office space at 1077 Central Parkway South, Suite 600, San Antonio, Texas, which houses most of our administrative operations for our Taco Cabana restaurants. In addition, we lease an office facility located at 3220 Keller Springs Road, Suite 108, Carrollton, Texas, which is subleased to a third party and an office building at 8918 Tesoro Drive, Suite 200, San Antonio Texas, that is available for sublease. ITEM 3. LEGAL PROCEEDINGS We are a party to various litigation matters incidental to the conduct of business. We do not believe that the outcome of any of these matters will have a material adverse effect on our business, results of operations or financial condition. ITEM 4. MINE SAFETY DISCLOSURES None. 25 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock trades on The NASDAQ Global Select Market under the symbol “FRGI”. On February 21, 2020, shares of our common stock outstanding were held by 457 holders of record. This excludes persons whose shares are held by a brokerage house or clearing agency. Dividends We did not pay any cash dividends during 2019 or 2018. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain the majority of available funds to fund the development and growth of our business or to use for other corporate related purposes such as the repayment of revolving credit borrowings under our senior credit facility. In addition, we are a holding company and conduct all of our operations through our direct and indirect subsidiaries. As a result, for us to pay dividends, we need to rely on dividends and distributions to us from our subsidiaries. Our senior credit facility limits — and debt instruments that we and our subsidiaries may enter into in the future may limit — our ability to pay dividends to our stockholders. Issuer Purchases of Equity Securities During the years ended December 30, 2018, and December 29, 2019, our board of directors authorized the repurchase of an aggregate 3.0 million shares of our common stock through the following actions: • • • 1.5 million shares of common stock were authorized for repurchase on February 26, 2018; an additional 0.5 million shares of common stock were authorized for repurchase on August 7, 2019; and an additional 1.0 million shares of common stock were authorized for repurchase on November 5, 2019. Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume, general market and economic conditions, and other corporate considerations. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by our board of directors. The following table sets forth information with respect to the Company’s repurchases of common stock during the quarter ended December 29, 2019: Total Number of Shares Purchased(1) Average Price Paid per Share — 9.15 9.49 9.22 — $ 250,000 66,600 316,600 $ Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs — 250,000 66,600 316,600 1,823,105 1,573,105 1,506,505 Period September 30, 2019 to November 3, 2019 . . . November 4, 2019 to December 1, 2019 . . . . . . . . December 2, 2019 to December 29, 2019 . . . . . . . . Total (1) Shares purchased in open market transactions. Stock Performance Graph The following performance graph compares our cumulative total stockholder return on our common stock with the cumulative total returns of The NASDAQ Composite Index and a peer group, The S&P Small Cap 600 Restaurant Index. We have elected to use the S&P Small Cap 600 Restaurant Index in compiling our stock performance graph because we believe that index represents a comparison to competitors with similar market capitalization as us. The graph assumes that $100 was invested on December 28, 2014, with dividends reinvested quarterly. 26 The trading price of our common stock on December 28, 2014, was $58.32 and the closing price of our common stock on December 27, 2019, the last trading day before our fiscal year end date of December 29, 2019, was $9.48. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Fiesta Restaurant Group, the NASDAQ Composite Index, and S&P SmallCap 600 Restaurants $250 $200 $150 $100 $50 $0 12/28/14 1/3/16 1/1/17 12/31/17 12/30/18 12/29/19 Fiesta Restaurant Group NASDAQ Composite S&P SmallCap 600 Restaurants *$100 invested on 12/28/14 in stock or index, including reinvestment of dividends. Fiscal year ending December 29. Copyright© 2020 Standard & Poor’s, a division of S&P Global. All rights reserved. Total Cumulative Shareholder Returns 12/28/2014 1/3/2016 1/1/2017 12/31/2017 12/30/2018 Fiesta Restaurant Group, Inc. . . . . . $ NASDAQ Composite . . . . . . . . . . . . . . S&P Small Cap 600 Restaurants. . . . . . 100.00 $ 100.00 100.00 57.61 $ 51.18 $ 32.58 $ 26.13 $ 105.40 86.38 114.75 92.26 148.76 92.27 143.41 96.25 12/29/2019 16.26 198.30 108.93 The graph and table above provide the cumulative change of $100.00 invested on December 28, 2014, including reinvestment of dividends, if applicable, for the periods indicated. 27 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth our selected consolidated financial data derived from our audited consolidated financial statements for each of the years ended December 29, 2019; December 30, 2018; December 31, 2017; January 1, 2017; and January 3, 2016. The information in the following table should be read together with our audited consolidated financial statements and accompanying notes as of December 29, 2019, and December 30, 2018, and for the years ended December 29, 2019; December 30, 2018; and December 31, 2017, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of this Annual Report on Form 10-K. These historical results are not necessarily indicative of the results to be expected in the future. Our fiscal years ended December 29, 2019; December 30, 2018; December 31, 2017; and January 1, 2017, each contained 52 weeks. The fiscal year ended January 3, 2016, contained 53 weeks. (Dollars in thousands, except share and per share data) Statement of operations data: Revenues: December 29, 2019 December 30, 2018 Year Ended December 31, 2017 January 1, 2017 January 3, 2016 Restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Franchise royalty revenues and fees . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 658,263 2,680 660,943 $ $ 685,925 2,672 688,597 $ 666,584 2,548 669,132 $ 708,956 2,814 711,770 684,584 2,808 687,392 Costs and expenses: Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant wages and related expenses (including stock-based compensation expense of $195, $90, $52, $142, and $156, respectively) . . . . . . Restaurant rent expense(1) . . . . . . . . . . . . . . . . . . . Other restaurant operating expenses(1) . . . . . . . . . . Advertising expense . . . . . . . . . . . . . . . . . . . . . . . General and administrative (including stock-based compensation expense of $2,649, $3,379, $3,493, $3,141, and $4,137, respectively) . . . . Depreciation and amortization . . . . . . . . . . . . . . . Pre-opening costs. . . . . . . . . . . . . . . . . . . . . . . . . . Impairment and other lease charges(2) . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . Closed restaurant rent expense, net of sublease income(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expense (income), net(4) . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . Income (loss) from operations . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes. . . . . . . . . . . . . . . Provision for (benefit from) income taxes . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Per share data: Earnings (loss) per common share – basic. . . . . . . . . $ Earnings (loss) per common share – diluted . . . . . . . Weighted average shares outstanding: Weighted average common shares outstanding – 207,453 218,946 202,888 214,609 217,328 179,178 47,805 91,897 23,179 56,195 39,195 972 13,101 67,909 4,163 1,041 732,088 (71,145) 3,872 (75,017) 9,369 (84,386) $ 188,131 36,034 100,828 23,695 54,525 37,604 1,716 21,144 — — (3,007) 679,616 8,981 3,966 5,015 (2,772) 7,787 (3.18) $ (3.18) 0.29 0.29 $ $ 184,742 36,936 98,927 26,091 59,633 34,957 2,118 61,760 — — 2,190 710,242 (41,110) 2,877 (43,987) (7,755) (36,232) $ 185,305 37,493 96,457 26,800 54,826 36,776 5,511 25,644 — — 1,130 684,551 27,219 2,171 25,048 8,336 16,712 (1.35) $ (1.35) 0.62 0.62 $ $ 174,222 33,103 87,285 21,617 54,156 30,575 4,567 2,382 — — (314) 624,921 62,471 1,889 60,582 22,046 38,536 1.44 1.44 basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,500,356 26,890,577 26,821,471 26,682,227 26,515,029 Weighted average common shares outstanding – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,500,356 26,894,083 26,821,471 26,689,179 26,522,196 Other financial data: Net cash provided by operating activities . . . . . . . . . $ Net cash used for investing activities. . . . . . . . . . . . . Net cash provided by (used in) financing activities. . Total capital expenditures . . . . . . . . . . . . . . . . . . . . . $ 65,032 (39,431) (17,446) (41,247) $ 53,803 (52,124) (20) (57,850) $ 50,820 (55,492) 4,075 (55,866) $ 80,679 (81,160) (604) (82,365) 81,352 (87,671) 6,513 (87,570) 28 (Dollars in thousands) Balance sheet data: December 29, 2019 December 30, 2018 Year Ended December 31, 2017 January 1, 2017 January 3, 2016 Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 568,641 Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,337) Long-term debt:. . . . . . . . . . . . . . . . . . . . . . . . . . . Revolving credit facility . . . . . . . . . . . . . . . . . . Lease financing obligations . . . . . . . . . . . . . . . Finance and capital leases . . . . . . . . . . . . . . . . . 75,000 — 2,035 Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 77,035 Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . $ 158,236 $ 418,659 (2,162) $ 423,313 (18,796) $ 441,565 (19,827) $ 415,645 (15,067) 78,000 — 1,744 $ 79,744 $ 240,059 75,000 — 1,523 $ 76,523 $ 231,516 69,900 1,664 1,612 $ 73,176 $ 264,175 71,000 1,663 1,681 $ 74,344 $ 243,982 Operating statistics: Consolidated: Restaurant-level Adjusted EBITDA(5) . . . . . . . . . . $ 108,946 Restaurant-level Adjusted EBITDA margin(5) . . . . Adjusted EBITDA(5) . . . . . . . . . . . . . . . . . . . . . . . Adjusted EBITDA margin(5) . . . . . . . . . . . . . . . . . Total company-owned restaurants (at end of 58,449 16.6% 8.8% $ 118,381 $ 117,462 $ 148,434 $ 151,185 17.3% 67,962 9.9% 17.6% 67,445 10.1% 20.9% 96,567 13.6% 22.1% 101,040 14.7% period) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 301 312 Pollo Tropical: Company-owned restaurants (at end of period). . . Average number of company-owned restaurants. . Revenues: 142 140.4 139 148.5 146 159.7 343 177 169.8 317 155 138.5 Restaurant sales. . . . . . . . . . . . . . . . . . . . . . . . . $ 361,693 1,780 Franchise royalty revenues and fees . . . . . . . . . 363,473 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 374,381 1,815 376,196 $ 372,328 1,787 374,115 $ 399,736 2,062 401,798 $ 364,544 2,197 366,741 Average annual sales per company-owned restaurant(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant-level Adjusted EBITDA(5) . . . . . . . . . . Restaurant-level Adjusted EBITDA margin(5) . . . . Adjusted EBITDA(5) . . . . . . . . . . . . . . . . . . . . . . . Adjusted EBITDA margin(5) . . . . . . . . . . . . . . . . . Change in comparable company-owned restaurant sales(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Dollars in thousands) Taco Cabana: Company-owned restaurants (at end of period). . . Average number of company-owned restaurants. . Revenues: 2,576 77,560 21.4% 50,560 13.9% 2,521 82,066 21.9% 54,903 14.6% 2,331 78,371 21.0% 50,937 13.6% 2,354 90,294 22.6% 58,286 14.5% 2,585 90,374 24.8% 61,265 16.7% (1.8)% 2.2% (6.5)% (1.6)% 3.8% December 29, 2019 December 30, 2018 Year Ended December 31, 2017 January 1, 2017 January 3, 2016 164 163.7 162 168.8 166 167.2 166 163.3 162 163.9 Restaurant sales. . . . . . . . . . . . . . . . . . . . . . . . . $ 296,570 900 Franchise royalty revenues and fees . . . . . . . . . 297,470 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 311,544 857 312,401 $ 294,256 761 295,017 $ 309,220 752 309,972 $ 320,040 611 320,651 Average annual sales per company-owned restaurant(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant-level Adjusted EBITDA(5) . . . . . . . . . . Restaurant-level Adjusted EBITDA margin(5) . . . . Adjusted EBITDA(5) . . . . . . . . . . . . . . . . . . . . . . . Adjusted EBITDA margin(5) . . . . . . . . . . . . . . . . . Change in comparable company-owned restaurant 1,812 31,386 10.6% 7,889 2.7% 1,846 36,315 11.7% 13,059 4.2% 1,760 39,091 13.3% 16,508 5.6% 1,894 58,140 18.8% 38,281 12.3% 1,920 60,811 19.0% 39,775 12.4% sales(7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.1)% 4.5% (7.3)% (2.5)% 4.4% (1) Due to the adoption of ASC 842, real estate taxes and fixed common area maintenance expenses for leased properties are included in restaurant rent expense for the year ended December 29, 2019 and in other restaurant operating expenses for the year ended December 30, 2018 and prior years. 29 (2) Impairment and other lease charges for the year ended December 29, 2019, primarily include impairment charges for 19 Taco Cabana restaurants that were subsequently closed in January 2020, five of which were initially impaired in prior years, as well as previously closed Pollo Tropical restaurants and other underperforming Taco Cabana restaurants that we continue to operate. Net lease charge recoveries for the year ended December 29, 2019, were primarily related to lease terminations for previously closed restaurants. Impairment charges for the year ended December 30, 2018, primarily include impairment charges for 14 Pollo Tropical restaurants that were closed in 2018, two of which were initially impaired in 2017, nine Taco Cabana locations that were closed in 2018, one of which was initially impaired in 2017, and one Pollo Tropical and six Taco Cabana locations that we continued to operate. Other lease charges, net of recoveries, for the year ended December 30, 2018, were primarily related to restaurants that closed in 2018 and net recoveries related to restaurants and an office location that closed in prior years. Impairment charges for the year ended December 31, 2017, primarily include impairment charges for 40 Pollo Tropical restaurants that were closed in 2017, seven of which were initially impaired in 2016, six Taco Cabana restaurants that were closed in 2017, four of which were initially impaired in 2016, two Pollo Tropical restaurants and five Taco Cabana restaurants which we continued to operate and an office location that was closed in December 2017. Other lease charges, net of recoveries, for the year ended December 31, 2017, were related primarily to restaurants and an office location that were closed in 2017 as well as previously closed restaurants. Impairment and other lease charges for the year ended January 1, 2017, primarily include impairment charges for 17 Pollo Tropical restaurants that were closed in 2016 and 2017, and seven Taco Cabana restaurants, four of which were subsequently closed in 2017 and three of which we continued to operate. Other lease charges, net of recoveries, for the year ended January 1, 2017, were related to restaurants closed in 2016 as well as previously closed restaurants. Impairment and other lease charges for the year ended January 3, 2016, primarily include charges related to the closure of two restaurants as well as previously closed restaurants. (3) Closed restaurant rent expense, net of sublease income for the year ended December 29, 2019, primarily includes closed restaurant lease costs of $8.2 million partially offset by sublease income of $(4.0) million. As a result of adopting ASC 842, lease costs related to closed restaurants are recorded as closed restaurant rent. These costs were previously recorded as lease charges within impairment and other lease charges when a restaurant closed. (4) Other expense (income), net for the year ended December 29, 2019, primarily includes costs for the removal, transfer and storage of equipment from closed restaurants of $0.8 million and the write-off of site development costs of $0.1 million. Other expense (income), net for the year ended December 30, 2018, primarily includes $(3.5) million in insurance recoveries related to the Hurricanes and total gains of $(1.2) million on the sale of three restaurant properties, partially offset by the write-off of site development costs of $0.6 million and severance related to the closure of restaurants and costs for the removal, transfer and storage of equipment from closed restaurants of $1.1 million. Other expense (income), net for the year ended December 31, 2017, primarily includes $2.1 million in costs for the removal of signs and equipment and equipment transfers and storage related to the closure of restaurants and severance for closed restaurant employees, and $0.5 million in food donated to charitable organizations, partially offset by $(0.4) million in additional proceeds received related to two Taco Cabana locations as a result of eminent domain proceedings, $(0.3) million in expected insurance proceeds related to a Taco Cabana restaurant that was temporarily closed due to a fire, and $(0.2) million in estimated insurance recoveries related to a restaurant closed due to Hurricane Harvey damage. Other expense (income), net for the year ended January 1, 2017, includes costs for the removal of signs and equipment related to the closure of 10 Pollo Tropical restaurants in the fourth quarter of 2016 partially offset by additional proceeds related to a location that closed in 2015 as a result of an eminent domain proceeding. Other expense (income), net for the year ended January 3, 2016, consisted primarily of a previously deferred gain of $(0.4) million from a sale-leaseback transaction that was recognized upon termination of the lease as a result of an eminent domain proceeding and expected business interruption proceeds of $(0.3) million related to a Pollo Tropical that was temporarily closed due to a fire partially offset by the write-off of site development costs of $0.4 million. (5) Consolidated Adjusted EBITDA and margin and Restaurant-level Adjusted EBITDA and margin, are non-GAAP financial measures. Prior to the second quarter of 2017, Adjusted EBITDA and Consolidated Adjusted EBITDA were defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense, and other expense (income), net. In 2017, our board of directors appointed a new Chief Executive Officer who initiated the Plan and uses an Adjusted EBITDA measure for the purpose of assessing performance and allocating resources to segments. The new Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants. Beginning in the second quarter of 2017, the primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is now defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items for each segment that are related to strategic changes and/or are not related to the ongoing operation of our restaurants as set forth in the reconciliation table below. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, construction and other administrative functions. Consolidated Adjusted EBITDA margin and Adjusted EBITDA margin are derived by dividing Consolidated Adjusted EBITDA and Adjusted EBITDA by total revenues and segment revenues, respectively. 30 Restaurant-level Adjusted EBITDA is defined as Adjusted EBITDA for the applicable segment excluding franchise royalty revenue and fees, pre-opening costs, and general and administrative expense (including corporate-level general and administrative expenses). Restaurant-level Adjusted EBITDA margin is derived by dividing Restaurant-level Adjusted EBITDA by restaurant sales. Management believes that such non-GAAP financial measures, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance of our business, and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies. A reconciliation from consolidated net income (loss) to Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA is presented below: (Dollars in thousands) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . Income (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: December 29, 2019 (84,386) $ 9,369 (75,017) Non-general and administrative expense adjustments: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . Impairment and other lease charges . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Closed restaurant rent expense, net of sublease income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation expense in restaurant wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unused pre-production costs in advertising expense(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-general and administrative expense 39,195 13,101 67,909 3,872 4,163 1,041 195 — 7,787 (2,772) 5,015 37,604 21,144 — 3,966 — (3,007) 90 — December 30, 2018 January 1, 2017 January 3, 2016 Year Ended December 31, 2017 (36,232) $ (7,755) (43,987) $ $ 16,712 8,336 25,048 38,536 22,046 60,582 36,776 25,644 — 2,171 — 1,130 142 — 30,575 2,382 — 1,889 — (314) 156 — 34,957 61,760 — 2,877 — 2,190 52 410 adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,476 59,797 102,246 65,863 34,688 General and administrative expense adjustments: Stock-based compensation expense . . . . . . . . . . . . . . . . Terminated capital project(b) . . . . . . . . . . . . . . . . . . . . . . Board and shareholder matter costs(c) . . . . . . . . . . . . . . . Restructuring costs and retention bonuses(d) . . . . . . . . . . Office restructuring and relocation costs(e) . . . . . . . . . . . Legal settlements and related costs(f). . . . . . . . . . . . . . . . Digital and brand repositioning costs(g). . . . . . . . . . . . . . Total general and administrative expense adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . Add: Pre-opening costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative(h) . . . . . . . . . . . . . . . . . . . . . . . . Less: 2,649 — — 964 — — 377 3,990 58,449 972 52,205 3,379 — (597) 545 — (177) — 3,150 67,962 1,716 51,375 3,493 849 3,049 2,420 (152) (473) — 9,186 67,445 2,118 50,447 3,141 — 1,580 86 539 310 — 5,656 96,567 5,511 49,170 4,137 — — — — 1,633 — 5,770 101,040 4,567 48,386 Franchise royalty revenue and fees . . . . . . . . . . . . . . . . . . . 2,680 2,672 2,548 2,814 2,808 Restaurant-level Adjusted EBITDA: Pollo Tropical. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Taco Cabana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,560 31,386 108,946 $ $ 82,066 36,315 118,381 $ 78,371 39,091 117,462 $ 90,294 58,140 148,434 90,374 60,811 151,185 (a) Unused pre-production costs for the year ended December 31, 2017, include costs for advertising pre-production that will not be used. 31 (b) Terminated capital project costs for the year ended December 31, 2017, include costs related to the write-off of a capital project that was terminated in the first quarter of 2017. (c) Board and shareholder matter costs for the twelve months ended December 30, 2018, include fee reductions and final insurance recoveries related to 2017 shareholder activism costs. Board and shareholder matter costs for the year ended December 31, 2017, include fees related to shareholder activism and CEO and board member searches. Board and shareholder matter costs for the year ended January 1, 2017, primarily include fees related to the previously proposed and terminated separation transaction, and costs related to shareholder activism. (d) Restructuring costs and retention bonuses for the years ended December 29, 2019, and January 1, 2017, include severance related to eliminated positions. Restructuring costs and retention bonuses for the years ended December 30, 2018, and December 31, 2017, include severance related to the Strategic Renewal Plan and reduction in force and bonuses paid to certain employees for retention purposes. (e) Office restructuring and relocation costs for the years ended December 31, 2017, and January 1, 2017, include severance and relocation adjustments and costs associated with the prior-year restructuring of Pollo Tropical brand and corporate offices. Legal settlements and related costs for the year ended December 30, 2018, include reductions to final settlement amounts related to litigation matters. Legal settlements and related costs for the years ended December 31, 2017; January 1, 2017; and January 3, 2016, include benefits or costs related to litigation matters. (f) (g) Digital and brand repositioning costs for the year ended December 29, 2019, include consulting costs related to repositioning the digital experience for our customers. Excludes general and administrative adjustments included in Adjusted EBITDA (h) (6) Average annual sales per company-owned restaurant are derived by dividing restaurant sales for the applicable segment by the average number of company-owned and operated restaurants. For comparative purposes, the calculation of average annual sales per company-owned restaurant is based on a 52-week fiscal year. Restaurant sales data for the extra week in the fiscal year ended January 3, 2016, have been excluded for purposes of calculating average annual sales per company-owned restaurant. (7) Restaurants are included in comparable restaurant sales after they have been open for 18 months. For comparative purposes, the calculation of the changes in comparable restaurant sales is based on a 52-week fiscal year. Restaurant sales for the extra week in the fiscal year ended January 3, 2016, have been excluded for purposes of calculating the change in comparable company-owned restaurant sales. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of financial condition and results of operations (“MD&A”) is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes. Any reference to restaurants refers to company-owned restaurants unless otherwise indicated. We use a 52–53 week fiscal year ending on the Sunday closest to December 31. The fiscal years ended December 29, 2019; December 30, 2018; and December 31, 2017, each contained 52 weeks. Company Overview We own, operate and franchise two restaurant brands, Pollo Tropical® and Taco Cabana®, which recently celebrated 30th and 40th anniversaries, respectively, of operating history and loyal customer bases. Our Pollo Tropical restaurants feature fire-grilled and crispy citrus marinated chicken and other freshly prepared tropical-inspired menu items, while our Taco Cabana restaurants specialize in Mexican-inspired food made fresh by hand. We believe that both brands offer distinct and unique flavors with broad appeal at a compelling value, which differentiates them in the competitive fast-casual and quick-service restaurant segments. Nearly all of our restaurants offer the convenience of drive-thru windows. As of December 29, 2019, our restaurants included 142 Pollo Tropical restaurants in Florida and 164 Taco Cabana restaurants in Texas for a total of 306 restaurants. We franchise our Pollo Tropical restaurants primarily in international markets, and as of December 29, 2019, we had 25 franchised Pollo Tropical restaurants located in Puerto Rico, Panama, Guyana, Ecuador, and the Bahamas, and six on college campuses and one at a hospital in Florida. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets. As of December 29, 2019, we had six franchised Taco Cabana restaurants located in New Mexico and two non-traditional Taco Cabana licensed locations on college campuses in Texas. 32 Events Affecting Our Results of Operations New Lease Accounting Standard On December 31, 2018, we adopted Financial Accounting Standard Board (“FASB”) Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842) (“ASC 842”), which requires lessee recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The new lease accounting standard, ASC 842, had a significant impact on our results of operations because we had $18.6 million in sale leaseback gains that we no longer receive a benefit to rent expense from and we have a significant number of closed restaurants for which we had previous closed restaurant rent reserves and would not have recognized current period expense under the previous accounting standard. As a result of adopting this standard, substantially all previously deferred gains on sale-leaseback transactions were recognized as an adjustment to retained earnings and we will no longer receive the benefit to rent expense from amortizing these gains resulting in higher rent expense being recognized each period over the life of the respective leases. Additionally, prior to the adoption of ASC 842, we recorded closed restaurant reserves representing future minimum lease payments and ancillary costs from the date of the restaurant closure to the end of the remaining lease term net of estimated sublease recoveries when a restaurant closed, recorded expense related to accretion of the reserve each period, and recorded subsequent changes in the assumptions related to the sublease income to expense in the period in which the assumption changed. The subsequent closed restaurant rent payments were recorded as a reduction to the closed restaurant reserves, with no rent related expense being recorded in the period. As a result of adopting ASC 842, accrued rent included in these closed restaurant reserves was recorded as a reduction to operating lease right-of-use assets, and rent expense (the straight-line amortization of the right-of-use assets and accretion of the lease liability) related to closed restaurants is now included within closed restaurant rent expense, net of sublease income in the consolidated statement of operations each period. The comparative period information has not been restated and continues to be reported under the accounting standard in effect for that period. For the twelve months ended December 29, 2019, the adoption of ASC 842 had the following impact: • • • • Reduced both Adjusted EBITDA and Restaurant-level Adjusted EBITDA (a non-GAAP financial measure) for Pollo Tropical by $1.5 million; and Reduced both Adjusted EBITDA and Restaurant-level Adjusted EBITDA (a non-GAAP financial measure) for Taco Cabana by $1.9 million. Resulted in the recognition of additional rent related expense for closed restaurant locations of approximately $1.6 million for Pollo Tropical. Resulted in the recognition of additional rent related expense for closed restaurant locations of approximately $0.4 million for Taco Cabana. We recognized closed restaurant rent expense, net of sublease income, for the twelve months ended December 29, 2019, of approximately $3.3 million and $0.9 million for Pollo Tropical and Taco Cabana, respectively. However, we did not recognize lease charges for subsequent changes in assumptions related to the timing of future sublease income. Taco Cabana Goodwill Impairment As of June 30, 2019, the sustained decrease in the market price of Fiesta’s common stock was determined to be a triggering event requiring an interim impairment test of goodwill. In addition, in response to a further decrease in the market price of Fiesta’s common stock and lower than expected profitability in the third quarter of 2019, we also performed an interim impairment test of goodwill as of September 29, 2019. Based on these interim impairment tests, we recorded non-cash impairment charges to write down the value of goodwill for the Taco Cabana reporting unit in the amount of $46.5 million, which was not tax deductible, in the second quarter of 2019 and $21.4 million, of which $9.1 million was tax deductible, in the third quarter of 2019. Restaurant Closures and Impairment As a result of restaurant portfolio reviews, we closed all Pollo Tropical locations outside of Florida and other underperforming Pollo Tropical and Taco Cabana restaurants in Florida and Texas during the past three years as well as an additional 19 underperforming Taco Cabana restaurants in January 2020. 33 Impairment and other lease charges for the twelve months ended December 29, 2019, were $13.1 million and included impairment charges of $14.0 million and net lease charge recoveries of $(0.9) million. The impairment charges were primarily with respect to 19 Taco Cabana restaurants that were subsequently closed in January 2020, five of which were initially impaired in prior years, as well as previously closed Pollo Tropical restaurants and other underperforming Taco Cabana restaurants that we continue to operate, while the net lease charge recoveries were primarily related to lease terminations for previously closed restaurants. Impairment and other lease charges for the twelve months ended December 30, 2018, were $21.1 million and included (i) impairment charges of $17.1 million and lease and other charges of $2.1 million primarily with respect to the 14 Pollo Tropical and nine Taco Cabana restaurants that were closed in the fourth quarter of 2018, three of which were initially impaired in 2017, and adjustments to estimates of future lease costs for certain previously closed restaurants, and (ii) impairment charges of $1.9 million related to seven underperforming Pollo Tropical and Taco Cabana restaurants that we continued to operate. Impairment and other lease charges for the twelve months ended December 31, 2017, were $61.8 million and included impairment charges of $54.2 million and lease and other charges of $7.5 million primarily with respect to the 40 Pollo Tropical and six Taco Cabana restaurants that were closed in 2017, an office location that was closed in 2017, and two Pollo Tropical restaurants and five Taco Cabana restaurants that we continued to operate. For the twelve months ended December 29, 2019, the 19 closed Taco Cabana restaurants contributed approximately $24.5 million in restaurant sales and an estimated $4.2 million in restaurant-level pre-tax operating losses, including $2.0 million in depreciation expense, and negatively impacted comparable restaurants sales by 0.4%. Deferred Income Tax Valuation Allowance Accounting Standards Codification Topic 740 Accounting for Income Taxes requires a valuation allowance on deferred tax assets if it is more likely than not that the deferred tax assets will not be realized based on all available positive and negative evidence. In 2019, we established a valuation allowance against our deferred tax assets, which resulted in a $13.5 million charge to the provision for income taxes. Executive Summary — Consolidated Operating Performance for the Year Ended December 29, 2019 Our fiscal year 2019 results include the following: • We recognized a net loss of $(84.4) million in 2019, or $(3.18) per diluted share, compared to net income of $7.8 million, or $0.29 per diluted share in 2018, due to a $67.9 million goodwill impairment charge for the Taco Cabana reporting unit, a $13.5 million valuation allowance on our deferred income tax assets, the adoption of ASC 842 discussed above, and higher depreciation and amortization and general and administrative expenses, partially offset by lower cost of sales, restaurant wages and related expenses and restaurant impairment and other lease charges in 2019. In addition, the impact of declines in comparable restaurant sales at both brands, including the impact of Hurricane Dorian at Pollo Tropical, contributed to the decrease in net income in 2019 while net income in 2018 included the benefit of $3.5 million in insurance recoveries related to 2017 Hurricanes Harvey and Irma (“the Hurricanes”), total gains of $1.2 million on the sale of three restaurants and a $4.0 million incremental tax benefit which was primarily the result of changing the depreciation method for certain assets for federal income tax purposes in 2018. • Total revenues decreased 4.0% in 2019 to $660.9 million from $688.6 million in 2018, driven primarily by a decrease in comparable restaurant sales at both brands, and the net impact of opening new restaurants and closing 14 underperforming Pollo Tropical restaurants and 11 underperforming Taco Cabana restaurants in 2018. Comparable restaurant sales decreased 1.8% for our Pollo Tropical restaurants resulting from a decrease in comparable restaurant transactions of 2.4% partially offset by an increase in average check of 0.6%. We estimate that Hurricane Dorian, which resulted in temporary restaurant closures, negatively impacted comparable restaurant sales for Pollo Tropical by approximately 0.4%. Comparable restaurant sales decreased 4.1% for our Taco Cabana restaurants resulting from a decrease in comparable restaurant transactions of 5.7% partially offset by an increase in average check of 1.6%. • During 2019, we opened three new Pollo Tropical restaurants and three new Taco Cabana restaurants and permanently closed one Taco Cabana restaurant. 34 • Consolidated Adjusted EBITDA decreased $9.5 million (which includes the negative impact of a $3.3 million increase in rent expense as a result of adopting ASC 842) for the twelve months ended December 29, 2019, to $58.4 million compared to $68.0 million for the twelve months ended December 30, 2018, driven primarily by lower restaurant sales, including the impact of Hurricane Dorian, higher rent expense as a result of adopting ASC 842, higher delivery fees, and higher general and administrative expenses (including executive search fees of $0.5 million), partially offset by improved restaurant operating margins related to lower cost of sales and restaurant wages. We estimate that Hurricane Dorian, which resulted in temporary restaurant closures, negatively affected Pollo Tropical and Consolidated Adjusted EBITDA by approximately $0.6 million. Consolidated Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see “Management’s Use of Non-GAAP Financial Measures.” Results of Operations The following table summarizes the changes in the number and mix of Pollo Tropical and Taco Cabana Company-owned and franchised restaurants in each fiscal year: Owned 2019 Franchised Total Owned 2018 Franchised Total Owned 2017 Franchised Total Pollo Tropical: Beginning of year. . . . New . . . . . . . . . . . . Closed . . . . . . . . . . End of year . . . . . . . . . Taco Cabana: Beginning of year. . . . New . . . . . . . . . . . . Closed . . . . . . . . . . End of year . . . . . . . . . 139 3 — 142 162 3 (1) 164 30 2 — 32 8 — — 8 169 5 — 174 170 3 (1) 172 146 7 (14) 139 166 7 (11) 162 31 — (1) 30 7 1 — 8 177 7 (15) 169 173 8 (11) 170 177 9 (40) 146 166 6 (6) 166 35 3 (7) 31 7 — — 7 212 12 (47) 177 173 6 (6) 173 The following table sets forth, for the years ended December 29, 2019; December 30, 2018; and December 31, 2017, selected consolidated operating results as a percentage of consolidated restaurant sales and selected segment operating results as a percentage of applicable segment restaurant sales: December 29, 2019 December 30, 2018 December 31, 2017 December 29, 2019 December 30, 2018 December 31, 2017 December 29, 2019 December 30, 2018 December 31, 2017 Pollo Tropical Taco Cabana Consolidated Year Ended Restaurant sales: Pollo Tropical . . Taco Cabana . . . Consolidated restaurant sales . . . . . . . Costs and expenses: Cost of sales . . . Restaurant wages and related expenses . . . . Restaurant rent expense. . . . . Other restaurant operating expenses . . . . Advertising expense. . . . . Pre-opening costs . . . . . . . 54.95% 45.05% 54.58% 45.42% 55.86% 44.14% 100.0% 100.0% 100.0% 31.8% 32.9% 31.6% 31.1% 30.8% 29.0% 31.5% 31.9% 30.4% 23.5% 23.2% 23.8% 31.8% 32.5% 32.7% 27.2% 27.4% 27.7% 6.1% 4.7% 5.1% 8.7% 6.0% 6.1% 7.3% 5.3% 5.5% 13.8% 13.8% 14.2% 14.2% 15.8% 15.7% 14.0% 14.7% 14.8% 3.4% 0.1% 3.5% 0.2% 4.4% 0.3% 3.6% 0.2% 35 3.4% 0.3% 3.3% 0.3% 3.5% 0.1% 3.5% 0.3% 3.9% 0.3% Consolidated Revenues. Revenues include restaurant sales and franchise royalty revenues and fees. Restaurant sales consist of food and beverage sales, net of discounts, at our restaurants. Franchise royalty revenues and fees represent ongoing royalty payments that are determined based on a percentage of franchisee sales and the amortization of initial franchise fees and area development fees associated with the opening of new franchised restaurants. Restaurant sales are influenced by new restaurant openings, closures of restaurants and changes in comparable restaurant sales. Total revenues decreased 4.0% to $660.9 million in 2019 from $688.6 million in 2018, while the 2018 total revenues represent an increase of 2.9% from $669.1 million in 2017. Restaurant sales also decreased 4.0% to $658.3 million in 2019 from $685.9 million in 2018, while 2018 restaurant sales represent an increase of 2.9% from $666.6 million in 2017. The following table presents the primary drivers of the increase or decrease in restaurant sales for both Pollo Tropical and Taco Cabana (in millions): 2019 vs. 2018 2018 vs. 2017 Pollo Tropical: Increase (decrease) in comparable restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . $ Decrease in sales related to closed restaurants, net of new restaurants . . . . . . . . . . Total increase (decrease) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Taco Cabana: Increase (decrease) in comparable restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . $ Increase (decrease) in sales related to closed restaurants, net of new restaurants . . Total increase (decrease) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6.3) $ (6.4) (12.7) $ (12.0) $ (3.0) (15.0) $ 7.6 (5.5) 2.1 12.7 4.6 17.3 Restaurants are included in comparable restaurant sales after they have been open for 18 months. Comparable restaurant sales in 2017 for both brands were negatively impacted by the Hurricanes. Comparable restaurant sales decreased 1.8% and 4.1% for Pollo Tropical and Taco Cabana restaurants, respectively, in 2019. Increases or decreases in comparable restaurant sales result primarily from an increase or decrease in comparable restaurant transactions and in average check. Changes in average check are primarily driven by menu price increases net of discounts and promotions and sales mix. For Pollo Tropical, a decrease in comparable restaurant transactions of 2.4% was partially offset by an increase in average check of 0.6% in 2019 compared to 2018. The increase in average check was driven primarily by menu price increases of 1.6%, partially offset by discounted pricing for Pollo Time. As a result of new restaurant openings, sales cannibalization of existing restaurants negatively impacted comparable restaurant sales for Pollo Tropical by 0.9% in 2019 compared to 2018. In addition, we estimate that Hurricane Dorian negatively impacted comparable restaurant sales for Pollo Tropical by approximately 0.4%. For Taco Cabana, a decrease in comparable restaurant transactions of 5.7% was partially offset by an increase in average check of 1.6% in 2019 compared to 2018. The increase in average check was driven primarily by menu price increases of 2.0% and the introduction of higher priced shareables in 2019 partially offset by sales mix. We simplified the Taco Cabana menu in the fourth quarter of 2019 to improve execution. The menu simplification efforts included removal of certain menu items and limited other items to certain dayparts. While the menu simplification improved guest satisfaction and reduced order cycle times, the reduced menu resulted in a greater than anticipated transaction decline. We intend to carefully re-introduce select items to the menu and expand dayparts in the first quarter of 2020 to increase sales while maintaining the operational improvements provided by the menu simplification. We believe comparable sales at both brands were impacted by challenging industry and market conditions in the markets in which we operate. Comparable restaurant sales increased 2.2% and 4.5% for Pollo Tropical and Taco Cabana restaurants, respectively, in 2018. In 2017, Florida and Texas were struck by the Hurricanes. We estimate that the Hurricanes negatively impacted comparable restaurant sales and transactions by approximately 1.0% to 2.0% for Pollo Tropical, and approximately 0.5% to 1.0% for Taco Cabana for the twelve months ended December 31, 2017. The effect of the Hurricanes in 2017 had a positive impact on 2018 comparable restaurant sales increases, which did not include a significant hurricane impact. 36 For Pollo Tropical, an increase in average check of 4.3% was partially offset by a decrease in comparable restaurant transactions of 2.1% in 2018 compared to 2017. The increase in average check was driven primarily by menu price increases of 4.2%. As a result of new restaurant openings, sales cannibalization of existing restaurants negatively impacted comparable restaurant sales for Pollo Tropical by 0.4% in 2018. For Taco Cabana, an increase in average check of 10.4% was partially offset by a decrease in comparable restaurant transactions of 5.9% in 2018 compared to 2017. The increase in average check was driven primarily by menu price increases of 6.7% and positive sales mix associated with higher priced promotions and new menu items related to brand repositioning. Franchise revenues remained flat in 2019 compared to 2018. Franchise revenues increased by $0.1 million to $2.7 million in 2018 compared to 2017 due to higher sales at franchised restaurants in 2018. Operating costs and expenses. Operating costs and expenses include cost of sales, restaurant wages and related expenses, other restaurant expenses and advertising expenses. Cost of sales consists of food, paper and beverage costs including packaging costs, less rebates and purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities, including chicken and beef, are generally purchased under contracts for future periods of up to one year. Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related taxes and benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers’ compensation insurance and state unemployment insurance. Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are utilities, repairs and maintenance, general liability insurance, sanitation, supplies and credit card and delivery fees. In addition, for periods prior to December 31, 2018, other restaurant operating expenses include real estate taxes related to our leases characterized as operating leases. Advertising expense includes all promotional expenses including television, radio, billboards and other sponsorships and promotional activities and agency fees. Pre-opening costs include costs incurred prior to opening a restaurant, including restaurant employee wages and related expenses, travel expenditures, recruiting, training, promotional costs associated with the restaurant opening and rent, including any non-cash rent expense recognized during the construction period. Pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening. 37 The following tables present the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical and Taco Cabana. All percentages are stated as a percentage of applicable segment restaurant sales. 2019 vs. 2018 2018 vs. 2017 Pollo Tropical: Cost of sales(1): Menu offering improvement and impact of commodity costs . . . . . . . . . . . . . . . . . Operating (efficiencies) inefficiencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Menu price increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Higher promotions and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (decrease) increase in cost of sales as a percentage of restaurant sales . . . . Restaurant wages and related expenses: Higher labor costs for comparable restaurants(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . Lower labor costs due to restaurant closures, net of new restaurants(3) . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in restaurant wages and related expenses as a (1.5)% (0.6)% (0.5)% 1.1% 0.4% —% (1.1)% 0.7% (0.5)% 0.1% percentage of restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3% Other operating expenses: Real estate tax classification(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contracted cleaning services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Higher delivery fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hurricane preparation and repair cost recovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . Lower real estate taxes(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change (decrease) in other restaurant operating expenses as a percentage of restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising expense: Decreased advertising(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net decrease in advertising expense as a percentage of restaurant sales . . . . . . . Pre-opening costs: Decrease in number of restaurant openings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net decrease in pre-opening costs as a percentage of restaurant sales . . . . . . . . (1.0)% 0.5% 0.4% —% —% 0.1% —% (0.1)% (0.1)% (0.1)% (0.1)% 1.2% 0.3% (1.4)% 1.1% —% 0.1% 1.3% 0.3% (0.8)% (0.1)% (0.6)% —% —% —% (0.2)% (0.1)% (0.1)% (0.4)% (0.9)% (0.9)% (0.1)% (0.1)% Includes costs related to the Plan in 2018 and 2017. Includes the impact of higher wage rates and overtime due to labor shortages. Includes the impact of restaurant closures in 2018 compared to 2017. (1) (2) (3) (4) Due to the adoption of ASC 842, real estate taxes are included in rent expense in 2019 and in other operating expenses in 2018. Includes the impact of a one-time write-off of unused pre-production costs in 2017. (5) 38 Taco Cabana: Cost of sales(1): Menu offering improvement and higher commodity costs . . . . . . . . . . . . . . . . . . . . Higher (lower) promotions and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Menu price increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating inefficiencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lower rebates and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in cost of sales as a percentage of restaurant sales . . . . . . . . . . . . . . Restaurant wages and related expenses: (Lower) higher incentive bonus costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lower labor costs(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of higher sales at comparable restaurants(3) . . . . . . . . . . . . . . . . . . . . . . . . . . Higher medical benefit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net decrease in restaurant wages and related expenses as a percentage of 2019 vs. 2018 2018 vs. 2017 1.0% 0.5% (0.6)% (0.5)% —% —% (0.1)% 0.3% (0.4)% (0.2)% —% —% (0.1)% 2.5% (0.2)% (2.2)% 0.8% 0.6% 0.2% 0.1% 1.8% 0.3% —% (0.5)% 0.1% (0.1)% restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.7)% (0.2)% Other operating expenses: Real estate tax classification(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lower security costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lower utility costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Higher repairs and maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Higher delivery fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lower insurance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Higher real estate taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Higher operating supplies(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (decrease) increase in other restaurant operating expenses as a percentage (1.7)% (0.2)% (0.1)% 0.3% 0.2% —% —% —% (0.1)% —% —% (0.2)% —% —% (0.1)% 0.1% 0.2% 0.1% of restaurant sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.6)% 0.1% Advertising expense: Increased advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in advertising expense as a percentage of restaurant sales . . . . . . . . Pre-opening costs: Decrease in number of restaurant openings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in pre-opening costs as a percentage of restaurant sales. . . . . . . . . . . 0.2% 0.2% (0.1)% (0.1)% 0.1% 0.1% —% —% (1) (2) Includes costs related to the Plan in 2018 and 2017. Improved staffing utilization, partially offset by higher wage rates and overtime due to labor shortages and the impact of closed restaurants net of new restaurant openings in 2019. Includes the impact of higher wage rates and an increase in overtime hours in 2018. (3) (4) Due to the adoption of ASC 842, real estate taxes are included in rent expense in 2019 and in other operating expenses in 2018. Consolidated Restaurant Rent Expense. Beginning December 31, 2018, restaurant rent expense includes base rent, contingent rent and common area maintenance and property taxes related to our leases characterized as operating leases. For periods prior to the adoption of ASC 842 on December 31, 2018, restaurant rent expense included base rent and contingent rent on our leases characterized as operating leases, reduced by amortization of gains on sale-leaseback transactions. Restaurant rent expense, as a percentage of total restaurant sales, increased to 7.3% in 2019 from 5.3% in 2018, due primarily to a $3.3 million increase in rent expense as a result of no longer amortizing gains on sale-leaseback transactions, the inclusion of property taxes and common area maintenance costs related to our 39 leases characterized as operating leases, and the impact of lower comparable restaurant sales. Restaurant rent expense, as a percentage of total restaurant sales, was 5.3% in 2018 compared to 5.5% in 2017, due primarily to the closure of underperforming restaurants in 2017, which generally had higher rent and lower sales and the impact of higher comparable restaurant sales. Consolidated General and Administrative Expenses. General and administrative expenses are comprised primarily of (1) salaries and expenses associated with the development and support of our company and brands and the management oversight of the operation of our restaurants; and (2) legal, auditing and other professional fees and stock-based compensation expense. General and administrative expenses increased to $56.2 million in 2019 from $54.5 million in 2018, and as a percentage of total revenues, were 8.5% in 2019 and 7.9% in 2018 due primarily to the impact of lower total revenues on higher general and administrative expenses including investments in off-premise support in 2019. General and administrative expense in 2019 also included $1.0 million related to restructuring costs due to eliminated or relocated positions, $0.4 million related to digital and brand repositioning costs and $0.5 million related to search fees for senior executive positions. General and administrative expenses in 2018 included $0.5 million related to Plan restructuring costs and retention bonuses, $0.4 million related to discontinuing certain services, $1.0 million related to system implementation and project-oriented advisory services and $1.0 million related to severance costs and executive and board member searches, partially offset by the benefit of fee reductions and final insurance recoveries totaling $0.6 million related to 2017 shareholder activism matters and reductions to final settlement amounts related to a litigation matter of $0.2 million. General and administrative expenses decreased to $54.5 million in 2018 from $59.6 million in 2017, and as a percentage of total revenues, were 7.9% in 2018 and 8.9% in 2017 due primarily to lower board and shareholder matter costs, incentive compensation and Plan restructuring costs and retention bonuses. General and administrative expenses in 2017 included $3.0 million of costs related to shareholder activism matters and Chief Executive Officer and board member searches, $2.4 million related to Plan restructuring costs and retention bonuses, and $0.8 million in charges for terminated capital projects, partially offset by a benefit of $0.5 million related to litigation matters and a $0.2 million favorable adjustment related to costs associated with the prior-year restructuring of Pollo Tropical brand and corporate offices. Adjusted EBITDA. Adjusted EBITDA, which is the primary measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance, is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment and other lease charges, goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense and other expense (income), net and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants. Adjusted EBITDA may not necessarily be comparable to other similarly titled captions of other companies due to differences in methods of calculation Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, development and other administrative functions. Consolidated Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Adjusted EBITDA and Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see the heading entitled “Management’s Use of Non-GAAP Financial Measures.” Adjusted EBITDA for Pollo Tropical restaurants decreased to $50.6 million (which includes the negative impact of a $1.5 million increase in rent expense as a result of adopting ASC 842 and the estimated negative impact of Hurricane Dorian of $0.6 million) in 2019 from $54.9 million in 2018 due primarily to the impact of lower restaurant sales, including the impact of Hurricane Dorian, and higher rent expense, contracted cleaning services, delivery fees and general and administrative expenses, partially offset by lower cost of sales as a percentage of restaurant sales. Adjusted EBITDA for our Taco Cabana restaurants decreased to $7.9 million (which includes the negative impact of a $1.9 million increase in rent expense as a result of adopting ASC 842) in 2019 from $13.1 million in 2018 due primarily to the impact of lower restaurant sales and higher rent expense, cost of sales as a percentage of restaurant sales, delivery fees, and general and administrative expenses, partially offset by lower restaurant wages and related expenses as a percentage of restaurant sales. 40 Adjusted EBITDA for Pollo Tropical restaurants increased to $54.9 million in 2018 from $50.9 million in 2017 due primarily to the impact of the Hurricanes (which we estimate negatively impacted 2017 Adjusted EBITDA by $2.5 million to $3.5 million for Pollo Tropical), higher advertising expenses during the relaunch as part of the Plan and closing unprofitable restaurants in 2017, and higher comparable restaurant sales, partially offset by an increase in cost of sales as a percentage of restaurant sales in 2018. Adjusted EBITDA for our Taco Cabana restaurants decreased to $13.1 million in 2018 from $16.5 million in 2017 due primarily to the impact of higher cost of sales as a percentage of restaurant sales and higher repair and maintenance costs primarily driven by the initiatives under the Plan, higher advertising expenses during the relaunch as part of the Plan, and higher operating supplies and real estate taxes, partially offset by higher comparable restaurant sales due in part to the Hurricanes (which we estimate negatively impacted 2017 Adjusted EBITDA by $0.5 million to $1.5 million for Taco Cabana). Restaurant-level Adjusted EBITDA. We also use Restaurant-level Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-level Adjusted EBITDA for Pollo Tropical was $77.6 million (which includes the negative impact of a $1.5 million increase in rent expense as a result of adopting ASC 842 and the estimated negative impact of Hurricane Dorian of $0.6 million), $82.1 million, and $78.4 million in 2019, 2018, and 2017, respectively. Restaurant-level Adjusted EBITDA for Taco Cabana was $31.4 million (which includes the negative impact of a $1.9 million increase in rent expense as a result of adopting ASC 842), $36.3 million, and $39.1 million in 2019, 2018, and 2017, respectively. The changes in Restaurant-level Adjusted EBITDA were primarily due to the foregoing. For a reconciliation from Adjusted EBITDA to Restaurant-level Adjusted EBITDA, see the heading entitled “Management’s Use of Non-GAAP Financial Measures.” Depreciation and Amortization. Depreciation and amortization expense increased to $39.2 million in 2019 from $37.6 million in 2018 primarily as a result of increased depreciation related to new restaurant openings and ongoing reinvestment and enhancements to our restaurants, partially offset by a decrease in depreciation as a result of impairing closed restaurant assets. Depreciation and amortization expense increased to $37.6 million in 2018 from $35.0 million in 2017 primarily as a result of increased depreciation related to new restaurant openings and ongoing reinvestment and enhancements to our restaurants, partially offset by a decrease in depreciation as a result of impairing closed restaurant assets. Impairment and Other Lease Charges. Impairment and other lease charges decreased to $13.1 million in 2019 from $21.1 million in 2018. Impairment and other lease charges in 2019 consisted of impairment charges for Pollo Tropical and Taco Cabana restaurants of $0.8 million and $13.2 million, respectively, and net lease charge recoveries for Pollo Tropical and Taco Cabana restaurants of $(0.8) million and $(0.1) million, respectively. Impairment charges in 2019 also included right-of-use assets and were related primarily to 19 Taco Cabana restaurants that were subsequently closed in January 2020, five of which were initially impaired in prior years, as well as previously closed Pollo Tropical restaurants and other underperforming Taco Cabana restaurants that we continue to operate, while the net lease charge recoveries were related primarily to lease terminations for previously closed restaurants. Impairment and other lease charges decreased to $21.1 million in 2018 from $61.8 million in 2017. Impairment and other lease charges in 2018 consisted of impairment charges for Pollo Tropical and Taco Cabana restaurants of $13.1 million and $6.0 million, respectively, and lease and other charges for Pollo Tropical and Taco Cabana restaurants (as well as a Taco Cabana office location) of $0.5 million and $1.6 million, respectively, net of recoveries. Impairment charges in 2018 were related primarily to 14 Pollo Tropical restaurants that were closed in 2018, two of which were initially impaired in 2017, nine Taco Cabana restaurants that were closed in 2018, one of which was initially impaired in 2017, and one Pollo Tropical restaurant and six Taco Cabana restaurants that we continue to operate. Other lease charges, net of recoveries, in 2018 were related primarily to restaurants and an office location that were closed in 2018 as well as previously closed restaurants. Impairment and other lease charges in 2017 consisted of impairment charges for Pollo Tropical and Taco Cabana restaurants and an office location of $52.1 million, $1.9 million, and $0.2 million, respectively, and lease and other charges for Pollo Tropical and Taco Cabana restaurants and an office location of $5.4 million, $1.6 million, and $0.5 million, respectively, net of recoveries. Impairment charges in 2017 were related primarily to 40 Pollo Tropical restaurants that were closed in 2017, seven of which were initially impaired in 2016, six Taco Cabana restaurants that were closed in 2017, four of which were initially impaired in 2016, and two Pollo Tropical restaurants and five Taco 41 Cabana restaurants which we continued to operate. Impairment charges in 2017 also included charges with respect to an office location that was closed in December 2017. Other lease charges, net of recoveries, in 2017 were related primarily to restaurants and an office location that were closed in 2017 as well as previously closed restaurants. Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related trailing twelve-month cash flows are below a certain threshold. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets, exclusive of operating lease payments, to their respective carrying values, excluding operating lease liabilities. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset group’s carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, and for right-of-use lease assets, current market lease rent and discount rates, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material. For one Pollo Tropical restaurant and four Taco Cabana restaurants with combined carrying values (excluding right-of-use lease assets) of $2.2 million and $0.9 million, respectively, projected cash flows are not substantially in excess of their carrying values. In addition, two Pollo Tropical restaurants and one Taco Cabana restaurant with combined carrying values (excluding right-of-use lease assets) of $3.4 million and $1.0 million, respectively, have initial sales volumes lower than expected, but do not have significant operating history to form a good basis for future projections. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material. Goodwill Impairment. Goodwill impairment was $67.9 million in 2019 and consisted of non-cash impairment charges to write down the value of goodwill for the Taco Cabana reporting unit. Closed Restaurant Rent Expense, Net of Sublease Income. Closed restaurant rent expense, net of sublease income was $4.2 million in 2019 and consisted of closed restaurant rent and ancillary lease costs of $6.8 million and $1.4 million net of sublease income of $3.4 million and $0.5 million for Pollo Tropical and Taco Cabana, respectively. Prior to the adoption of ASC 842, we recorded closed restaurant reserves representing future minimum lease payments and ancillary costs from the date of the restaurant closure to the end of the remaining lease term net of estimated sublease recoveries when a restaurant closed and recorded subsequent changes in the assumptions related to the sublease income to expense in the period in which the assumptions changed. The subsequent rent payments were recorded as a reduction to the closed restaurant reserves, with no rent expense being recorded in the period. See “New Lease Accounting Standard” under “Events Affecting Our Results of Operations.” Other Expense (Income), Net. Other expense (income), net was $1.0 million in 2019 and primarily consisted of $0.8 million in costs for the removal, transfer and storage of equipment from closed restaurants and $0.1 million for the write-off of site development costs. Other expense (income), net in 2018 consisted primarily of $(3.5) million in insurance recoveries related to the Hurricanes and total gains of $(1.2) million on the sale of three restaurant properties, partially offset by the write-off of site development costs of $0.6 million and severance costs related to the closure of restaurants and costs for the removal, transfer and storage of equipment from closed restaurants of $1.1 million. Other expense (income),net in 2017 consisted primarily of $2.1 million in costs for the removal of signs and equipment and equipment transfers and storage related to the closure of restaurants and severance for closed restaurant employees, and $0.5 million in food donated to charitable organizations, partially offset by $(0.4) million in additional proceeds received related to two Taco Cabana locations as a result of eminent domain proceedings, $(0.3) million in expected insurance proceeds related to a Taco Cabana restaurant that was temporarily closed due to a fire, and $(0.2) million in estimated insurance recoveries related to a Taco Cabana restaurant closed due to Hurricane Harvey damages. Interest Expense. Interest expense decreased $(0.1) million to $3.9 million in 2019 from 2018 due primarily to lower interest rates and a lower borrowing level under our senior credit facility in 2019. Interest expense increased $1.1 million to $4.0 million in 2018 from 2017 due primarily to higher interest rates and a higher borrowing level under our senior credit facility in 2018. 42 Provision for (Benefit from) Income Taxes. The effective tax rate was (12.5)% for the year ended December 29, 2019, and (55.3)% for the year ended December 30, 2018. The change in the effective tax rate is primarily the result of impairing non-deductible goodwill and establishing a valuation allowance on our deferred income tax assets in 2019 and changing the depreciation method for certain assets for federal income tax purposes to accelerate tax deductions in 2018 as well as the impact of lower pre-tax earnings (excluding non-deductible goodwill) in 2019. The effective tax rate for 2018 of (55.3)% decreased as compared to an effective tax rate for 2017 of 17.6%, due primarily to the change in the federal corporate income tax rate from 35.0% in 2017 to 21.0% in 2018, changing the depreciation method for certain assets for federal income tax purposes to accelerate tax deductions in 2018 and revaluing our net deferred income tax assets as a result of the Tax Cuts and Jobs Act in 2017. On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”), which includes a provision that reduces the federal corporate income tax rate from 35.0% to 21.0% effective January 1, 2018, was signed into law. In addition, the Act limits net operating loss deductions generated in 2018 and future years and modifies net operating loss carryover terms. In accordance with generally accepted accounting principles, the enactment of this new tax legislation required us to revalue our net deferred income tax assets at the new corporate statutory rate of 21.0% as of the enactment date in 2017, which resulted in a one-time adjustment to our deferred income taxes of $9.0 million with a corresponding non-cash increase to the provision for income taxes as a discrete item during the fourth quarter of 2017. The change in the corporate tax rate reduced the nominal value of our deferred tax assets, but it did not reduce the future tax deductions they represent. In 2018, in conjunction with a cost segregation study conducted prior to filing our 2017 federal income tax return, we changed the depreciation method for certain assets for federal income tax purposes to accelerate tax deductions. Changes in our 2017 federal income tax return from the amounts recorded as of December 31, 2017 were primarily the result of changing the depreciable lives of assets for federal income tax purposes. These changes allowed us to record an incremental benefit of $4.0 million for 2018. Net Income (Loss). As a result of the foregoing, we had net loss of $84.4 million in 2019 compared to net income of $7.8 million in 2018, and net loss of $36.2 million in 2017. Liquidity and Capital Resources We do not have significant receiva bles or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. We are able to operate with a substantial working capital deficit because: • • • restaurant operations are primarily conducted on a cash basis; rapid turnover results in a limited investment in inventories; and cash from sales is usually received before related liabilities for food, supplies and payroll become due. Capital expenditures and payments related to our lease obligations represent significant liquidity requirements for us. We believe cash generated from our operations and availability of borrowings under our senior credit facility will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months. Operating Activities. Net cash provided by operating activities for 2019, 2018, and 2017 was $65.0 million, $53.8 million and $50.8 million, respectively. The $11.2 million increase in net cash provided by operating activities in 2019 compared to 2018 was driven primarily by the receipt of a tax refund, partially offset by a decrease in Adjusted EBITDA and the timing of payments. The $3.0 million increase in net cash provided by operating activities in 2018 compared to 2017 was driven primarily by the increase in Adjusted EBITDA and timing of payments and receipts including the receipt of insurance proceeds related to the Hurricanes. Investing Activities. Net cash used in investing activities in 2019, 2018, and 2017 was $39.4 million, $52.1 million and $55.5 million, respectively. Capital expenditures are the largest component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling/ reimaging, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems. 43 The following table sets forth our capital expenditures for the periods presented (dollars in thousands): Pollo Tropical Taco Cabana Other Consolidated Year ended December 29, 2019: New restaurant development . . . . . . . . . . . . . . . . . . . $ Restaurant remodeling . . . . . . . . . . . . . . . . . . . . . . . . Other restaurant capital expenditures(1) . . . . . . . . . . . Corporate and restaurant information systems . . . . . Total capital expenditures . . . . . . . . . . . . . . . . . . . $ Number of new restaurant openings . . . . . . . . . . . . . Year ended December 30, 2018: New restaurant development . . . . . . . . . . . . . . . . . . . $ Restaurant remodeling . . . . . . . . . . . . . . . . . . . . . . . . Other restaurant capital expenditures(1) . . . . . . . . . . . Corporate and restaurant information systems . . . . . Total capital expenditures . . . . . . . . . . . . . . . . . . . $ Number of new restaurant openings . . . . . . . . . . . . . Year ended December 31, 2017: New restaurant development . . . . . . . . . . . . . . . . . . . $ Restaurant remodeling . . . . . . . . . . . . . . . . . . . . . . . . Other restaurant capital expenditures(1) . . . . . . . . . . . Corporate and restaurant information systems . . . . . Total capital expenditures . . . . . . . . . . . . . . . . . . . $ Number of new restaurant openings . . . . . . . . . . . . . 7,325 $ 1,654 10,069 2,873 21,921 $ 3 12,340 $ 51 12,157 3,119 27,667 $ 7 18,288 $ 2,919 8,335 2,244 31,786 $ 9 4,065 $ 919 9,266 3,773 18,023 $ 3 9,105 $ 531 15,307 3,943 28,886 $ 7 8,439 $ 101 9,075 3,166 20,781 $ 6 — $ — — 1,303 1,303 $ — $ — — 1,297 1,297 $ — $ — — 3,299 3,299 $ 11,390 2,573 19,335 7,949 41,247 6 21,445 582 27,464 8,359 57,850 14 26,727 3,020 17,410 8,709 55,866 15 (1) Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the years ended December 29, 2019; December 30, 2018; and December 31, 2017, total restaurant repair and maintenance expenses were approximately $23.1 million, $23.4 million, and $22.7 million, respectively. Cash used in investing activities in 2019 included net proceeds from the sale of one restaurant property of $1.8 million. Total capital expenditures in 2020 are expected to be below 2019 total capital expenditures of $41.2 million, including $5.0 million to $7.0 million for the development of new restaurants. In 2018, investing activities also included $4.7 million in additional proceeds received related to three restaurant properties and $1.0 million received related to a closed Taco Cabana restaurant that suffered flood damages due to Hurricane Harvey and a Taco Cabana restaurant that was temporarily closed due to a fire. In 2017, investing activities also included $0.4 million in additional proceeds received related to two Taco Cabana locations as a result of eminent domain proceedings. Financing Activities. Net cash used in financing activities in 2019 was $17.4 million and included $14.3 million in payments to repurchase our common stock combined with net revolving credit borrowing repayments under our senior credit facility of $3.0 million. Net cash used in financing activities in 2018 included $2.8 million in payments to repurchase our common stock and $0.2 million in payment of debt issuance costs associated with our new senior credit facility, offset by net borrowings under our senior credit facility of $3.0 million. Net cash provided by financing activities in 2017 included net borrowings under our senior credit facility of $5.1 million partially offset by $0.9 million in payment of debt issuance costs associated with our new senior credit facility. 44 Senior Credit Facility. In November 2017, we terminated our former senior credit facility and entered into a new senior credit facility (“senior credit facility”). The senior credit facility provides for aggregate revolving credit borrowings of up to $150 million (including up to $15.0 million available for letters of credit) and matures on November 30, 2022. The senior credit facility also provides for potential incremental increases of up to $50 million to the revolving credit borrowings available under the senior credit facility. On December 29, 2019, there were $75.0 million in outstanding revolving credit borrowings under our senior credit facility. Borrowings under the senior credit facility bear interest at a per annum rate, at our option, equal to either (all terms as defined in the senior credit facility): 1) 2) the Alternate Base Rate plus the applicable margin of 0.75% to 1.50% based on our Adjusted Leverage Ratio (with a margin of 1.25% as of December 29, 2019), or the LIBOR Rate plus the applicable margin of 1.75% to 2.50% based on our Adjusted Leverage Ratio (with a margin of 2.25% at December 29, 2019). In addition, the senior credit facility requires us to pay (i) a commitment fee based on the applicable Commitment Fee rate of 0.25% to 0.35%, based on our Adjusted Leverage Ratio, (with a rate of 0.30% at December 29, 2019) and the unused portion of the facility and (ii) a letter of credit participation fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit. All obligations under the senior credit facility are guaranteed by all of our material domestic subsidiaries. In general, our obligations under our senior credit facility and our subsidiaries’ obligations under the guarantees are secured by a first priority lien and security interest on substantially all of our assets and the assets of our material subsidiaries (including a pledge of all of the capital stock and equity interests of our material subsidiaries), other than certain specified assets, including real property owned by us or our subsidiaries. The outstanding borrowings under the senior credit facility are prepayable subject to breakage costs as defined in the senior credit facility agreement. The senior credit facility requires us to comply with customary affirmative, negative and financial covenants, including, without limitation, those limiting our and our subsidiaries’ ability to (i) incur indebtedness, (ii) incur liens, (iii) loan, advance, or make acquisitions and other investments or other commitments to construct, acquire or develop new restaurants (subject to certain exceptions), (iv) pay dividends, (v) redeem and repurchase equity interests (subject to certain exceptions), (vi) conduct asset and restaurant sales and other dispositions (subject to certain exceptions), (vii) conduct transactions with affiliates and (viii) change our business. In addition, the senior credit facility requires us to maintain certain financial ratios, including minimum Fixed Charge Coverage and maximum Adjusted Leverage Ratios (all as defined under the senior credit facility agreement). Our senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of our indebtedness having an outstanding principal amount of $5.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. As of December 29, 2019, we were in compliance with the covenants under our senior credit facility. After reserving $3.7 million for letters of credit issued under the senior credit facility, $71.3 million remained available for borrowing at December 29, 2019. Former Senior Credit Facility. We had a senior secured credit facility providing for aggregate revolving credit borrowings of up to $150 million (including $15 million available for letters of credit), which was terminated on November 30, 2017. Initial Share Repurchase Plan In 2018, our board of directors approved a share repurchase program for up to 1.5 million shares of our common stock. In 2019, our board of directors approved increases to the share repurchase program of an additional 1.5 million shares of our common stock. Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The 45 number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume, general market and economic conditions, and other corporate considerations. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by our board of directors. Contractual Obligations The following table summarizes our contractual obligations and commitments as of December 29, 2019 (in thousands): Contractual Obligations Credit facility debt obligations, Payments due by period Total Less than 1 Year 1 – 3 Years 3 – 5 Years More than 5 Years including interest(1) . . . . . . . . . . . . . . . $ 84,786 $ 3,403 $ 81,383 $ — $ — Finance lease obligations, including interest(2) . . . . . . . . . . . . . . . . . . . . . . . Operating lease obligations(3) . . . . . . . . . Purchase obligations(4) . . . . . . . . . . . . . . . Total contractual obligations . . . . . . . . . . $ 3,440 441,785 7,802 537,813 $ 434 42,479 3,019 49,335 $ 950 79,106 4,783 166,222 $ 778 68,223 — 69,001 $ 1,278 251,977 — 253,255 (1) Our credit facility debt obligations at December 29, 2019, totaled $75.0 million. Total interest payments on the obligations of $8.9 million for all years presented are included at a weighted average interest rate of 4.04%. Total credit facility fees of $0.9 million for all years presented are included based on December 29, 2019, rates and balances. Actual interest and fee payments will vary based on our outstanding credit facility balances and the rates in effect during those years. Refer to Note 8 of the consolidated financial statements included in this Annual Report on Form 10-K for details of our debt. Includes total interest of $1.4 million for all years presented. (2) (3) Represents the aggregate minimum lease payments under operating leases. Many of our leases also require contingent rent based on a percentage of sales in addition to the minimum base rent and require expenses incidental to the use of the property, all of which have been excluded from this table. (4) Represents contractual obligations under various agreements to purchase goods or services that are enforceable and legally binding and include $7.2 million related to the master subscription agreement for a new ERP system through April 27, 2024. We have not included in the contractual obligations table payments we may make for workers’ compensation, general liability and employee health care claims for which we pay all claims, subject to some annual stop-loss limitations both for individual claims and claims in the aggregate. The majority of our recorded liabilities related to employee health and insurance plans represent estimated reserves for incurred claims that have yet to be filed or settled. We are also party to various service and supply contracts that generally extend approximately twelve months. These arrangements are primarily individual contracts for routine goods and services that are part of our normal operations and are reflected in historical operating cash flow trends. These contract obligations are generally short-term in nature and can be canceled within a reasonable time period, at our option. We do not believe such arrangements will adversely affect our liquidity position. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Prior to the adoption of ASC 842, off-balance sheet arrangements consisted of our operating leases, which are primarily for our restaurant properties and are now included in other current liabilities and operating lease liabilities on the consolidated balance sheet as of December 29, 2019. Inflation The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses and energy costs. Labor costs in our restaurants are impacted by changes in the federal and state hourly minimum wage rates as well as changes in payroll related taxes, including federal and state unemployment taxes. We typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to fully offset such inflationary cost increases in the future. 46 Application of Critical Accounting Policies Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in the “Basis of Presentation” footnote in the Notes to our Consolidated Financial Statements. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Sales recognition at our restaurants is straightforward as customers pay for products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 30 days. The earnings reporting process is covered by our system of internal controls and generally does not require significant management estimates and judgments. However, critical accounting estimates and judgments, as noted below, are inherent in the assessment and recording of insurance liabilities, the valuation of goodwill for impairment, assessing impairment of long-lived assets, lease accounting matters and the valuation of deferred income tax assets. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. Insurance liabilities. We are insured for workers’ compensation, general liability and medical insurance claims under policies where we pay all claims, subject to annual stop-loss limitations both for individual claims and for general liability, medical insurance and certain workers’ compensation claims in the aggregate. At December 29, 2019, we had $11.7 million accrued for these insurance claims. We record insurance liabilities based on historical and industry trends, which are continually monitored, with the assistance of actuaries, and adjust accruals as warranted by changing circumstances. Since there are estimates and assumptions inherent in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on historical trends or the severity of the claims, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities. Evaluation of Goodwill. We must evaluate our recorded goodwill for impairment annually or more frequently when events and circumstances indicate that the carrying amount may be impaired. We have elected to conduct our annual impairment review of goodwill assets as of the last day of our fiscal year. We may first qualitatively assess goodwill impairment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This qualitative analysis is performed by examining key events and circumstances affecting fair value. If it is determined it is more likely than not that the reporting unit’s fair value is not greater than its carrying amount, we perform a quantitative assessment. As discussed in Note 1 to our audited consolidated financial statements, we adopted ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in the second quarter of 2019, which eliminates the requirement to calculate the implied fair value of goodwill if the fair value of a reporting unit is less than the carrying amount of the reporting unit. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. As of June 30, 2019, we determined that a triggering event had occurred due to a sustained decrease in the market price of our common stock and performed an interim quantitative impairment test. In addition, in response to a further decrease in the market price of our common stock and lower than expected profitability in the third quarter of 2019, we performed an interim quantitative impairment test as of September 29, 2019. We performed our interim impairment tests at June 30, 2019, and September 29, 2019, which indicated there was impairment as of those dates, in accordance with ASU 2017-04. In performing the quantitative assessment for impairment, we compare the net book values of our reporting units to their estimated fair values. In determining the estimated fair values of the reporting units, we employ a combination of a discounted cash flow analysis based on management’s best estimates of future cash flows and one or two market-based approaches. The results of these analyses are corroborated with other value indicators where available, such as comparable company earnings multiples. This evaluation of goodwill requires us to make estimates and assumptions to determine the fair value of our reporting units including projections regarding future operating results, anticipated growth rates, the weighted average cost of capital used to discount projected cash flows, and market multiples. For our Pollo Tropical reporting unit, the fair value exceeded the carrying value of the reporting 47 unit by a substantial amount. For our Taco Cabana reporting unit, a lower profitability and growth outlook reduced the income-based and market-based approach fair value. As a result, the carrying value exceeded the fair value of the reporting unit, and we recognized impairment charges to write down the carrying value of our Taco Cabana reporting unit goodwill of $46.5 million in the second quarter of 2019 and $21.4 million in the third quarter of 2019, resulting in a full impairment of the Taco Cabana reporting unit. We performed a qualitative assessment, which included examining key events and circumstances affecting fair value, for our annual impairment review as of December 29, 2019, and determined it was more likely than not that the Pollo Tropical reporting unit’s fair value was greater than its carrying amount. As of December 29, 2019, our Taco Cabana reporting unit goodwill has no remaining carrying value and our Pollo Tropical reporting unit has a carrying value of $56.3 million. See Note 4 to our audited consolidated financial statements. The estimates and assumptions used to determine fair value may differ from actual future events and if these estimates or related projections change significantly in the future, we may be required to record material impairment charges for goodwill assets. However, we estimate the fair value of the Pollo Tropical reporting unit significantly exceeds its carrying value as of December 29, 2019. Impairment of Long-lived Assets. We assess the potential impairment of long-lived assets, principally property and equipment and operating lease right-of-use assets, whenever events or changes in circumstances indicate that the carrying value of the restaurant asset group may not be recoverable. In addition to considering management’s plans, known regulatory/governmental actions and damage due to acts of God (hurricanes, tornadoes, etc.), we consider an event indicating that the carrying value may not be recoverable to have occurred related to a specific restaurant if the restaurant’s cash flows for the last twelve months are less than a minimum threshold or if consistent levels of cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values. We have elected to exclude operating lease payments and liabilities from future cash flows and carrying values, respectively, in the comparison. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions and, for right-of-use lease assets, current market lease rent and discount rates, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material. For one Pollo Tropical restaurant and four Taco Cabana restaurants with combined carrying values (excluding right-of-use lease assets) of $2.2 million and $0.9 million, respectively, projected cash flows are not substantially in excess of their carrying values. In addition, two Pollo Tropical restaurants one Taco Cabana restaurant with combined carrying values (excluding right-of-use lease assets) of $3.4 million and $1.0 million, respectively, have initial sales volumes lower than expected, but do not have significant operating history to form a good basis for future projections. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material. Lease Accounting. As discussed in Note 7 to our audited consolidated financial statements, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (ASC 842), the new lease accounting standard, as of as of December 31, 2018, using the modified retrospective method, with certain optional practical expedients including the transition practical expedient package, which among other things does not require reassessment of lease classification. Judgments made by management for our lease obligations include the determination of our incremental borrowing rate, the determination of standalone selling prices used to allocate the consideration in the contract, and the length of the lease term, which includes the determination of renewal options that are reasonably assured. The lease term can affect the classification of a lease as finance or operating for accounting purposes, the amount of the lease liability and corresponding right-of-use lease asset recognized, the term over which related leasehold improvements for each restaurant are amortized and any rent holidays and/or changes in rental amounts for recognizing rent expense over the term of the lease. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used. 48 We use our estimated incremental borrowing rate in determining the present value of lease payments for purposes of determining lease classification and recording lease liabilities and lease assets on our consolidated balance sheet. Our incremental borrowing rate is determined based on a synthetic credit rating, determined using a valuation model, adjusted to reflect a secured credit rating and a developed spread curve applied to a risk-free rate yield curve. Changes in the determination of our incremental borrowing rate could also have an impact on the depreciation and interest expense recognized for finance leases. Valuation of Deferred Income Tax Assets. Deferred tax assets and liabilities, which represent temporary differences between the financial statement and tax basis of assets and liabilities, are measured using enacted tax rates expected to apply to the years in which those differences are expected to be recovered or settled. Deferred tax assets are recognized to the extent we believe these assets will more likely than not be realized. A valuation allowance is established to reduce the carrying amount of deferred tax assets if we believe it is more likely than not that a portion or all of the tax benefit from these deferred tax assets will not be realized. The realization of a deferred tax asset is dependent on the generation of sufficient taxable income in future periods, and the reversal of existing taxable temporary differences in the applicable periods. In evaluating the realizability of our net deferred tax assets, we perform an assessment of positive and negative evidence. The weight given to negative and positive evidence is commensurate only to the extent that such evidence can be objectively verified. Objective historical evidence is given greater weight than subjective evidence such as forecasts of future taxable income. We considered three years of cumulative operating income (loss) in evaluating the objective evidence that historical results provide. We considered the nature of the events that led to the charges that resulted in the loss before income taxes for the twelve months ended December 31, 2017, our earnings history exclusive of the charges that resulted from exiting new markets and our historical cash flows from operations. We also considered the negative evidence from the net loss for the twelve months ended December 29, 2019, which resulted from the material goodwill impairment charges recorded in the second and third quarters of 2019, the long-lived asset impairment charges recorded in the fourth quarter of 2019 primarily related to the 19 Taco Cabana locations that were subsequently closed in January 2020 and the decline in profitability in 2019, particularly in the fourth quarter. This objective negative evidence limits our ability to consider other subjective evidence, such as our future earnings projections. Based on our evaluation of all available positive and negative evidence, and placing greater weight on the objective evidence, we determined that it is more likely than not that our deferred tax assets will not be fully realized in future periods. We recorded a $13.5 million valuation allowance to reduce our deferred tax assets in the fourth quarter of 2019, which increased our tax expense. If we generate sufficient taxable income in the future to fully utilize the tax benefits of the deferred tax assets on which a valuation allowance was recorded, a portion or all of the valuation allowance could be reversed, which would decrease our tax expense in the period or periods in which the valuation allowance is reversed. We will continue to monitor and evaluate the positive and negative evidence considered in arriving at the above conclusion in order to assess whether such conclusion remains appropriate in future periods. New Accounting Pronouncements In February 2016, and in subsequent updates, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), which requires lessee recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The Company adopted this new accounting standard and all the related amendments as of December 31, 2018 using the modified retrospective method, with certain optional practical expedients including the transition practical expedient package, which among other things does not require reassessment of lease classification. The Company elected the transition method that allows it to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The comparative period information has not been restated and continues to be reported under the accounting standard in effect for that period. The Company has recognized lease liabilities and corresponding right-of-use (“ROU”) lease assets for substantially all of the leases it previously accounted for as operating leases, including leases related to closed restaurant properties. The initial ROU assets were calculated as the present value of the remaining operating lease payments using the Company’s incremental borrowing rate as of December 31, 2018, reduced by accrued occupancy costs such as certain closed-restaurant lease reserves, accrued rent (including accruals to expense operating lease payments on a straight-line basis), unamortized lease incentives and any unamortized sale-leaseback gains that resulted from off-market terms and increased by unamortized lease acquisition costs. Upon the adoption of ASC 842, the Company no longer records closed restaurant lease reserves, and ROU lease assets are reviewed for impairment with the Company’s long-lived assets. 49 The Company elected the practical expedient to combine lease and non-lease components of real estate contracts, which resulted in classification of certain occupancy related expenses that are included in other restaurant operating expenses for periods prior to the adoption of ASC 842 as restaurant rent expenses in the consolidated statement of operations for periods subsequent to the adoption of ASC 842. The Company separately presents rent expense related to its closed restaurant locations and any sublease income related to these closed restaurant locations within closed restaurant rent expense, net of sublease income in the consolidated statement of operations for periods subsequent to the adoption of ASC 842. The Company recorded an initial adjustment to the opening balance of retained earnings of $14.0 million associated with previously deferred gains on sale-leaseback transactions and impairment of operating lease right-of-use assets as of the date of adoption. This adjustment consisted of $18.6 million in deferred gains on sale-leaseback transactions, net of a related deferred tax asset of $4.3 million and $0.2 million in impairment charges, net of tax. For any future sale-leaseback transactions, the gain (adjusted for any off-market terms) will be recognized immediately. In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the requirement to calculate the implied fair value of goodwill if the fair value of a reporting unit is less than the carrying amount of the reporting unit. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. In 2019, the Company early adopted this new accounting standard and performed its interim impairment tests in accordance with ASU 2017-04. In the second quarter of 2019, the Company recognized a $46.5 million impairment of its Taco Cabana reporting unit goodwill, which represents the excess of the reporting unit’s carrying value over its fair value at June 30, 2019. In the third quarter of 2019, the Company recognized a $21.4 million impairment of its Taco Cabana reporting unit goodwill. In the third quarter of 2019, the excess of the Taco Cabana reporting unit’s carrying value over its fair value was greater than the balance of the reporting unit’s goodwill, resulting in a full impairment of the Taco Cabana reporting unit’s goodwill. See Note 4 to our audited consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance will be effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted and may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company does not expect the standard to have a material effect on its financial statements. Management’s Use of Non-GAAP Financial Measures Consolidated Adjusted EBITDA is a non-GAAP financial measure. We use Consolidated Adjusted EBITDA in addition to net income and income from operations to assess our performance, and we believe it is important for investors to be able to evaluate us using the same measures used by management. We believe this measure is an important indicator of our operational strength and the performance of our business. Consolidated Adjusted EBITDA as calculated by us is not necessarily comparable to similarly titled measures reported by other companies, and should not be considered as an alternative to net income, earnings per share, cash flows from operating activities or other financial information determined under GAAP. Prior to the second quarter of 2017, Adjusted EBITDA and Consolidated Adjusted EBITDA were defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other expense (income), net. In 2017, our board of directors appointed a new Chief Executive Officer who initiated the Plan and uses an Adjusted EBITDA measure for the purpose of assessing performance and allocating resources to our segments. The Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants. Beginning in the second quarter of 2017, the primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is now defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense 50 (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants as set forth in the reconciliation table below. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, construction and other administrative functions. See Note 11 to our audited consolidated financial statements. We also use Restaurant-level Adjusted EBITDA as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Adjusted EBITDA for the applicable segment excluding franchise royalty revenues and fees, pre-opening costs, and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-level Adjusted EBITDA is also a non-GAAP financial measure. Management believes that Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and Restaurant-level Adjusted EBITDA (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies. All such financial measures have important limitations as analytical tools. These limitations include the following: • • • • such financial information does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment; such financial information does not reflect interest expense or the cash requirements necessary to service payments on our debt; although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and such financial information does not reflect the cash required to fund such replacements; and such financial information does not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges and gains (such as impairment and other lease charges, closed restaurant rent expense, net of sublease income, other income and expense, and stock-based compensation expense) have recurred and may recur. 51 A reconciliation from consolidated net income (loss) to Consolidated Adjusted EBITDA follows (in thousands): Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . Income (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: Year Ended December 30, 2018 December 29, 2019 (84,386) $ 9,369 (75,017) December 31, 2017 (36,232) (7,755) (43,987) 7,787 $ (2,772) 5,015 Non-general and administrative expense adjustments: Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment and other lease charges. . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Closed restaurant rent expense, net of sublease income(2) . . . . . . Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation expense in restaurant wages . . . . . . . Unused pre-production costs in advertising expense(3) . . . . . . . . Total non-general and administrative expense adjustments. . . General and administrative expense adjustments: Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . Terminated capital project(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board and shareholder matter costs(5) . . . . . . . . . . . . . . . . . . . . . Restructuring costs and retention bonuses(6) . . . . . . . . . . . . . . . . Office restructuring and relocation costs(7) . . . . . . . . . . . . . . . . . Legal settlements and related costs(8) . . . . . . . . . . . . . . . . . . . . . . Digital and brand repositioning costs(9) . . . . . . . . . . . . . . . . . . . . Total general and administrative expense adjustments . . . . . . Consolidated Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,195 13,101 67,909 3,872 4,163 1,041 195 — 129,476 37,604 21,144 — 3,966 — (3,007) 90 — 59,797 2,649 — — 964 — — 377 3,990 58,449 $ 3,379 — (597) 545 — (177) — 3,150 67,962 $ 34,957 61,760 — 2,877 — 2,190 52 410 102,246 3,493 849 3,049 2,420 (152) (473) — 9,186 67,445 (1) Goodwill impairment for the twelve months ended December 29, 2019, consists of a non-cash impairment charge to write down the value of goodwill for the Taco Cabana reporting unit. The related benefit from income taxes is the benefit attributable to the portion of the goodwill that was tax deductible. (2) Closed restaurant rent, net of sublease income for the twelve months ended December 29, 2019, primarily consists of closed restaurant lease costs of $8.2 million, partially offset by sublease income of $(4.0) million. As a result of adopting ASC 842, lease costs related to closed restaurants are recorded as closed restaurant rent. These costs were previously recorded as lease charges within impairment and other lease charges when a restaurant closed. (3) Unused pre-production costs for the twelve months ended December 31, 2017, include costs for advertising pre-production that will not be used. (4) Terminated capital project costs for the twelve months ended December 31, 2017, include costs related to the write-off of a capital project that was terminated in the first quarter of 2017. (5) Board and shareholder matter costs for the twelve months ended December 30, 2018, include fee reductions and final insurance recoveries related to 2017 shareholder activism costs. Board and shareholder matter costs for the twelve months ended December 31, 2017, include fees related to shareholder activism and CEO and board member searches. (6) Restructuring costs and retention bonuses for the twelve months ended December 29, 2019, include severance related to eliminated positions. Restructuring costs and retention bonuses for the twelve months ended December 30, 2018, and December 31, 2017, include severance related to the Strategic Renewal Plan and reduction in force and bonuses paid to certain employees for retention purposes. (7) Office restructuring and relocation costs for the twelve months ended December 31, 2017, include severance and relocation (8) adjustments. Legal settlements and related costs for the twelve months ended December 30, 2018, include reductions to final settlement amounts and benefits related to litigation matters. Legal settlements and related costs for the twelve months ended December 31, 2017, include benefits and costs related to litigation matters. (9) Digital and brand repositioning costs for the twelve months ended December 29, 2019 include consulting costs related to repositioning the digital experience for our customers. 52 A reconciliation from Adjusted EBITDA to Restaurant-level Adjusted EBITDA follows (in thousands): Twelve Months Ended December 29, 2019: Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Restaurant-level adjustments: Pollo Tropical Taco Cabana 50,560 $ 7,889 Add: Pre-opening costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: Other general and administrative expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Franchise royalty revenue and fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant-level Adjusted EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 380 28,400 1,780 77,560 $ 592 23,805 900 31,386 December 30, 2018: Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Restaurant-level adjustments: 54,903 $ 13,059 Add: Pre-opening costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: Other general and administrative expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Franchise royalty revenue and fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant-level Adjusted EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 933 28,045 1,815 82,066 $ 783 23,330 857 36,315 December 31, 2017: Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Restaurant-level adjustments: 50,937 $ 16,508 Add: Pre-opening costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: Other general and administrative expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Franchise royalty revenue and fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant-level Adjusted EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,167 28,054 1,787 78,371 $ 951 22,393 761 39,091 (1) Excludes general and administrative adjustments included in Adjusted EBITDA. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk We are exposed to market risk associated with fluctuations in interest rates, primarily limited to our senior credit facility, under which we had outstanding borrowings of $75.0 million as of December 29, 2019. Borrowings under the senior credit facility bear interest at a per annum rate, at our option, of either (all terms as defined in the senior credit facility): 1) 2) the Alternate Base Rate plus the applicable margin of 0.75% to 1.50% based on our Adjusted Leverage Ratio (with a margin of 1.25% as of December 29, 2019), or the LIBOR Rate plus the applicable margin of 1.75% to 2.50% based on our Adjusted Leverage Ratio (with a margin of 2.25% at December 29, 2019). For variable rate debt instruments, market risk is defined as the potential change in earnings resulting from a hypothetical adverse change in interest rates. As of December 29, 2019, we had primarily elected to be charged interest on borrowings under our senior credit facility at the LIBOR Rate plus the applicable margin. We elected a one-month LIBOR Rate for $75.0 million of borrowings under the senior credit facility as of December 29, 2019. The weighted average interest rate applicable to these borrowings as of December 29, 2019 was 4.04%, which would result in interest expense in 2020 of $3.1 million assuming that outstanding borrowings and interest rates remain unchanged during the year. A hypothetical increase of 100 basis points in the variable interest rate would increase interest expense in 2020 by $0.8 million. 53 Commodity Price Risk We purchase certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements have been negotiated in advance to minimize price volatility. Where possible, we use these types of purchasing techniques to control costs as an alternative to using financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases that are significant and appear to be long-term in nature by adjusting our menu pricing. However, long-term increases in commodity prices may result in lower restaurant-level operating margins. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data of Fiesta Restaurant Group, Inc. required by this Item are described in Item 15 of this Annual Report on Form 10-K and are presented beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Evaluation of Disclosure Controls and Procedures. We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 29, 2019. Changes in Internal Control over Financial Reporting. We completed the implementation of a new Enterprise Resource Planning (“ERP”) system during the fourth quarter of 2019. As a result, we modified and removed certain existing controls as well as implemented new controls and procedures impacted by the implementation of the new ERP system. With the exception of those controls modified, removed, or implemented as a result of the new ERP system, no other changes occurred in our internal control over financial reporting during the fourth quarter of 2019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting Our senior management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 54 Management has evaluated the effectiveness of its internal control over financial reporting as of December 29, 2019 based on the criteria set forth in a report entitled Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we have concluded that, as of December 29, 2019, our internal control over financial reporting was effective based on those criteria. Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on the effectiveness of our internal control over financial reporting and their report is included herein. 55 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Fiesta Restaurant Group, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Fiesta Restaurant Group, Inc. and subsidiaries (the “Company”) as of December 29, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 29, 2019, of the Company and our report dated February 26, 2020, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of a new accounting standard. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on internal control over Financial Reporting under Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Dallas, Texas February 26, 2020 56 ITEM 9B. OTHER INFORMATION None. 57 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2020 Annual Meeting of Stockholders. We have adopted a written code of ethics applicable to our directors, officers and employees in accordance with the rules of The NASDAQ Stock Market and the SEC. We make our code of ethics available free of charge through our internet website, www.frgi.com. We will disclose on our website amendments to or waivers from our code of ethics in accordance with all applicable laws and regulations. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2020 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2020 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2020 Annual Meeting of Stockholders. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Incorporated by reference from our Definitive Proxy Statement to be filed in connection with the 2020 Annual Meeting of Stockholders. 58 PART IV ITEM 15. EXHIBITS AND FINANCIAL ST ATEMENT SCHEDULES (a) (1) Financial Statements - Fiesta Restaurant Group, Inc. and Subsidiaries FIESTA RESTAURANT GROUP, INC. AND SUBSIDIARIES Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements: Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Changes in Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a) (2) Financial Statement Schedules Schedule Description Page F-1 F-2 F-3 F-4 F-5 F-6 Page II Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-30 Schedules other than those listed are omitted for the reason that they are not required, not applicable, or the required information is shown in the financial statements or notes thereto. (a) (3) Exhibits Exhibit No. 3.1 Description Amended and Restated Certificate of Incorporation of Fiesta Restaurant Group, Inc. (“Fiesta”) (incorporated by reference to Exhibit 3.1 to Amendment No. 3 to Fiesta’s Form 10, File No. 001-35373, filed on April 5, 2012) 3.2 3.3 3.4 3.5 3.6 4.1 4.2 10.1 10.2 Certificate of Amendment to Restated Certificate of Incorporation of Fiesta (incorporated by reference to Exhibit 3.1 of Fiesta’s Quarterly Report on Form 10-Q for the period ended July 2, 2017) Certificate of Amendment to Restated Certificate of Incorporation of Fiesta (incorporated by reference to Exhibit 3.1 of Fiesta’s Quarterly Report on Form 10-Q for the period ended April 1, 2018) Amended and Restated Bylaws of Fiesta (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to Fiesta’s Form 10, File No. 001-35373, filed on January 26, 2012) Amendment to Amended and Restated Bylaws of Fiesta (incorporated by reference to Exhibit 3.2 of Fiesta’s Quarterly Report on Form 10-Q for the period ended July 2, 2017) Amendment to Amended and Restated ByLaws of Fiesta (incorporated by reference to Exhibit 3.2 of Fiesta’s Quarterly Report on Form 10-Q for the period ended April 1, 2018) Form of Stock Certificate for Common Stock (incorporated by reference to Exhibit 4.4 to Amendment No.2 to Fiesta’s Form 10, File No. 001-35373, filed on March 14, 2012) Description of Common Stock# Form of Separation and Distribution Agreement among Fiesta, Carrols Restaurant Group, Inc. (“Carrols Restaurant Group”) and Carrols Corporation (“Carrols”) (incorporated by reference to Exhibit 10.1 to Amendment No. 3 to Fiesta’s Form 10, File No. 001-35373, filed on April 5, 2012) Form of Tax Matters Agreement between Fiesta, Carrols and Carrols Restaurant Group (incorporated by reference to Exhibit 10.2 to Amendment No. 3 to Fiesta’s Form 10, File No. 001-35373, filed on April 5, 2012) 59 Exhibit No. 10.3 Description Form of Employee Matters Agreement between Fiesta, Carrols and Carrols Restaurant Group (incorporated by reference to Exhibit 10.3 to Amendment No. 3 to Fiesta’s Form 10, File No. 001-35373, filed on April 5, 2012) 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 Form of Transition Services Agreement among Fiesta, Carrols Restaurant Group and Carrols (incorporated by reference to Exhibit 10.4 to Amendment No. 3 to Fiesta’s Form 10, File No. 001-35373, filed on April 5, 2012) Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Fiesta’s Current Report on Form 8-K filed on May 8, 2012)+ Agreement dated as of November 4, 2016 between Fiesta and Danny K. Meisenheimer (incorporated by reference to Exhibit 10.1 of Fiesta’s Quarterly Report on Form 10-Q for the period ended October 2, 2016)+ Agreement dated as of November 4, 2016 between Fiesta and Lynn Schweinfurth (incorporated by reference to Exhibit 10.2 of Fiesta’s Quarterly Report on Form 10-Q for the period ended October 2, 2016)+ Executive Employment Agreement, dated as of February 24, 2017, between Fiesta and Richard Stockinger (incorporated by reference to Exhibit 10.1 of Fiesta’s Current Report on Form 8-K filed on February 27, 2017)+ Offer letter dated September 24, 2017 between Fiesta and Charles Locke (incorporated by reference to Exhibit 10.11 of Fiesta’s Annual Report on Form 10-K for the year ended December 31, 2017)+ Agreement dated as of October 12, 2017 between Charles Locke and Fiesta (incorporated by reference to Exhibit 10.1 of Fiesta’s Quarterly Report on Form 10-Q for the period ended October 1, 2017)+ Offer letter dated September 23, 2017 between Fiesta and Anthony Dinkins (incorporated by reference to Exhibit 10.16 of Fiesta’s Annual Report on Form 10-K for the year ended December 31, 2017)+ Agreement dated as of February 27, 2018 between Fiesta and Danny K. Meisenheimer (incorporated by reference to Exhibit 10.1 of Fiesta’s Current Report on Form 8-K filed on March 5, 2018)+ Amendment to Agreement dated as of August 3, 2018 by and between Fiesta and Charles Locke (incorporated by reference to Exhibit 10.3 of Fiesta’s Quarterly Report on Form 10-Q for the period ended July 1, 2018)+ Fiesta Restaurant Group, Inc. and Subsidiaries Deferred Compensation Plan (incorporated by reference to Exhibit 10.10 of Fiesta’s Amendment No. 1 to Registration Statement on Form 10 filed on January 26, 2012)+ Offer letter between Fiesta and Lynn S. Schweinfurth (incorporated by reference to Exhibit 10.1 of Fiesta’s Quarterly Report on Form 10-Q for the period ended July 1, 2012)+ Offer letter dated November 2, 2018 between Fiesta and Louis DiPietro+# Offer letter dated as of September 9, 2019 between Fiesta and Dirk Montgomery (incorporated by reference to Exhibit 10.1 of Fiesta’s Quarterly Report on Form 10-Q for the period ended September 29, 2019)+ Form of Agreement+# Credit Agreement, dated as of November 30, 2017, among Fiesta, the guarantors named therein, the lenders named therein and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 of Fiesta’s Current Report on Form 8-K filed on December 4, 2017) Pledge and Security Agreement, dated as of November 30, 2017, among Fiesta, the guarantors named therein and JP Morgan Chase Bank, N,A., as administrative agent (incorporated by reference to Exhibit 10.2 of Fiesta’s Current Report on Form 8-K filed on December 4, 2017) 60 Exhibit No. 10.21 Description Amendment to Credit Agreement, dated as of March 9, 2018. among Fiesta, the guarantors named therein, the lenders named therein and JPMorgan Chase Bank, N.A., individually as a lender and as administrative agent (incorporated by reference to Exhibit 10.1 of Fiesta’s Current Report on Form 8-K filed on March 12, 2018) 10.22 10.23 21.1 23.1 31.1 31.2 32.1 32.2 Amendment to Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of Fiesta’s Annual Report on Form 10-K filed on February 19, 2015)+ Cooperation Agreement, dated February 5, 2020, by and among Fiesta, AREX Capital Management, LP, AREX Capital Master Fund, LP, AREX Capital GP, LLC, AREX Capital Management GP, LLC and Andrew Rechtschaffen (incorporated by reference to Exhibit 10.1 of Fiesta’s Current Report on Form 8-K filed on February 7, 2020) Subsidiaries of Fiesta# Consent of Deloitte & Touche LLP# Chief Executive Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.# Chief Financial Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.# Chief Executive Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.# Chief Financial Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.# 101.INS Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document # + Filed herewith. Compensatory plan or arrangement. ITEM 16. FORM 10-K SUMMARY None. 61 [THIS PAGE INTENTIONALLY LEFT BLANK.] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Fiesta Restaurant Group, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Fiesta Restaurant Group, Inc. and subsidiaries (the “Company”) as of December 29, 2019 and December 30, 2018, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 29, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 29, 2019 and December 30, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2019, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 29, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases effective December 31, 2018 due to adoption of FASB ASC 842, Leases, using the modified retrospective method. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte & Touche LLP Dallas, Texas February 26, 2020 We have served as the Company’s auditor since 2011. F-1 FIESTA RESTAURANT GROUP, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 29, 2019 December 30, 2018 Current assets: ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued payroll, related taxes and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued real estate taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income – sale-leaseback of real estate . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Stockholders’ equity: 13,413 $ 7,933 3,394 117 3,821 10,605 39,283 211,944 251,272 56,307 — 9,835 568,641 $ 212 $ 14,776 9,866 6,497 32,269 63,620 76,823 — 256,798 4,759 8,405 410,405 5,258 8,505 2,842 3,375 17,857 6,562 44,399 231,328 — 123,484 10,383 9,065 418,659 108 16,410 10,086 5,871 14,086 46,561 79,636 19,899 — — 32,504 178,600 Preferred stock, $0.01 par value; 20,000,000 shares authorized, no shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock, $0.01 par value; 100,000,000 shares authorized, 27,461,697 and 27,259,212 shares issued, respectively, and 25,612,597 and 26,858,988 shares outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock, at cost; 1,493,495 and 112,358 shares, respectively . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — — 271 173,132 1,884 (17,051) 158,236 568,641 $ 270 170,290 72,268 (2,769) 240,059 418,659 The accompanying notes are an integral part of these consolidated financial statements. F-2 FIESTA RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) December 29, 2019 Year Ended December 30, 2018 December 31, 2017 Revenues: Restaurant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Franchise royalty revenues and fees . . . . . . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 658,263 $ 2,680 660,943 685,925 $ 2,672 688,597 666,584 2,548 669,132 Costs and expenses: Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant wages and related expenses (including stock-based compensation expense of $195, $90, and $52, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other restaurant operating expenses . . . . . . . . . . . . . . . . . . . Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative (including stock-based compensation expense of $2,649, $3,379, and $3,493, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . Pre-opening costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment and other lease charges . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Closed restaurant rent expense, net of sublease income . . . . Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Earnings (loss) per common share: 207,453 218,946 202,888 179,178 47,805 91,897 23,179 188,131 36,034 100,828 23,695 56,195 39,195 972 13,101 67,909 4,163 1,041 732,088 (71,145) 3,872 (75,017) 9,369 (84,386) $ 54,525 37,604 1,716 21,144 — — (3,007) 679,616 8,981 3,966 5,015 (2,772) 7,787 $ 184,742 36,936 98,927 26,091 59,633 34,957 2,118 61,760 — — 2,190 710,242 (41,110) 2,877 (43,987) (7,755) (36,232) Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.18) $ (3.18) 0.29 $ 0.29 (1.35) (1.35) Weighted average common shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,500,356 26,500,356 26,890,577 26,894,083 26,821,471 26,821,471 The accompanying notes are an integral part of these consolidated financial statements. F-3 FIESTA RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (In thousands, except share data) Common Stock Shares Amount Additional Paid-In Capital Retained Earnings Treasury Stock Total Stockholders’ Equity Balance at January 1, 2017 . . . . . 26,755,640 $ 267 $ 163,204 $ 100,704 $ Stock-based compensation. . . . Vesting of restricted shares . . . Cumulative effect of adopting — 91,818 a new accounting standard . . Net loss. . . . . . . . . . . . . . . . . . . — — Balance at December 31, 2017 . . 26,847,458 — 123,888 Stock-based compensation. . . . Vesting of restricted shares . . . Cumulative effect of adopting a new accounting standard . . Purchase of treasury stock . . . . Net income . . . . . . . . . . . . . . . . — (112,358) — Balance at December 30, 2018 . . 26,858,988 — 134,746 Stock-based compensation. . . . Vesting of restricted shares . . . Cumulative effect of adopting a new accounting standard (Note 1) . . . . . . . . . . . . . . . . Purchase of treasury stock . . . . Net loss. . . . . . . . . . . . . . . . . . . — (1,381,137) — Balance at December 29, 2019 . . 25,612,597 $ — 1 — — 268 — 2 — — — 270 — 1 3,545 — — — (47) 74 — (36,232) 64,425 — — 166,823 3,469 (2) — — — 170,290 2,844 (2) 56 — 7,787 72,268 — — — $ — — 264,175 3,545 1 — — — — — — (2,769) — (2,769) — — — (14,282) — 27 (36,232) 231,516 3,469 — 56 (2,769) 7,787 240,059 2,844 (1) 14,002 (14,282) (84,386) 158,236 — — — 271 $ 173,132 $ 14,002 — — — — (84,386) 1,884 $ (17,051) $ The accompanying notes are an integral part of these consolidated financial statements. F-4 FIESTA RESTAURANT GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Operating activities: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Adjustments to reconcile net income (loss) to net cash provided by (84,386) $ 7,787 $ (36,232) December 29, 2019 Year Ended December 30, 2018 December 31, 2017 operating activities: Loss (gain) on disposals of property and equipment . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment and other lease charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred gains from sale-leaseback transactions. . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in other operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued payroll, related taxes and benefits . . . . . . . . . . . . . . . . . . . . . . . . Accrued real estate taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax receivable/payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . Investing activities: Capital expenditures: New restaurant development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant remodeling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other restaurant capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and restaurant information systems . . . . . . . . . . . . . . . . . . . . . Total capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from disposals of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from insurance recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities: Borrowings on revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments on revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal payments on finance/capital leases . . . . . . . . . . . . . . . . . . . . . . . . . Financing costs associated with issuance of debt . . . . . . . . . . . . . . . . . . . . . . Payments to purchase treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . Net change in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Supplemental disclosures: Interest paid on long-term debt (including capitalized interest of $247, $377 and $256, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Interest paid on lease financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . Accruals for capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payments (refunds), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finance/capital lease obligations incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash reduction of lease financing obligations . . . . . . . . . . . . . . . . . . . . Non-cash reduction of assets under lease financing obligations . . . . . . . . . . (6) 2,844 13,101 67,909 39,195 270 — 10,888 640 364 23,780 (1,360) 504 (220) 626 (2,618) (19,765) (162) 14,036 (608) 65,032 (11,390) (2,573) (19,335) (7,949) (41,247) 1,774 42 (39,431) 32,000 (35,000) (164) — (14,282) (17,446) 8,155 5,258 13,413 4,395 — 4,097 (15,557) 495 — — $ $ (757) 3,469 21,144 — 37,604 270 (3,564) 6,830 805 894 — (1,491) (1,797) (1,690) 11 (10,583) — 1,358 (6,523) 36 53,803 (21,445) (582) (27,464) (8,359) (57,850) 4,743 983 (52,124) 26,000 (23,000) (101) (150) (2,769) (20) 1,659 3,599 5,258 3,508 — 6,191 (3,081) 322 — — $ $ 815 3,545 61,760 — 34,957 352 (3,602) (2,828) (1,171) (2,015) — (552) 1,046 (499) (311) (590) — 3,887 (8,030) 288 50,820 (26,727) (3,020) (17,410) (8,709) (55,866) 374 — (55,492) 91,000 (85,900) (88) (937) — 4,075 (597) 4,196 3,599 2,363 83 8,409 3,103 — 1,664 1,193 The accompanying notes are an integral part of these consolidated financial statements. F-5 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 1. Basis of Presentation Business Description. Fiesta Restaurant Group, Inc. (“Fiesta Restaurant Group” or “Fiesta”) owns, operates and franchises two fast-casual restaurant brands through its wholly-owned subsidiaries Pollo Operations, Inc., and its subsidiaries, and Pollo Franchise, Inc., (collectively “Pollo Tropical”) and Taco Cabana, Inc. and its subsidiaries (collectively “Taco Cabana”). Unless the context otherwise requires, Fiesta and its subsidiaries, Pollo Tropical and Taco Cabana, are collectively referred to as the “Company.” At December 29, 2019, the Company owned and operated 142 Pollo Tropical® restaurants and 164 Taco Cabana® restaurants. All of the Company-owned Pollo Tropical restaurants are located in Florida, and all of the Company-owned Taco Cabana restaurants are located in Texas. At December 29, 2019, Fiesta franchised a total of 32 Pollo Tropical restaurants and eight Taco Cabana restaurants. The franchised Pollo Tropical restaurants include 17 in Puerto Rico, four in Panama, two in Guyana, one in Ecuador, one in the Bahamas, and six on college campuses and one at a hospital in Florida. The franchised Taco Cabana restaurants include six in New Mexico and two on college campuses in Texas. Basis of Consolidation. The consolidated financial statements presented herein reflect the consolidated financial position, results of operations and cash flows of Fiesta and its wholly-owned subsidiaries. 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 fiscal years ended December 29, 2019; December 30, 2018; and December 31, 2017, each contained 52 weeks. Use of Estimates. The preparation of the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) 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 financial statements. Estimates also affect the reported amounts of expenses during the reporting periods. Significant items subject to such estimates and assumptions include: insurance liabilities, evaluation for impairment of goodwill and long-lived assets, lease accounting matters, and deferred income tax assets. Actual results could differ from those estimates. Concentrations of Risk. Food and supplies are ordered from approved suppliers and are shipped to the restaurants via distributors. Performance Food Group, Inc. is the primary distributor of food and beverage products and supplies for both Pollo Tropical and Taco Cabana. In the twelve months ended December 29, 2019, and December 30, 2018, Performance Food Group, Inc. accounted for approximately 85% and 74%, respectively, of the food and supplies delivered to restaurants. The Company’s limited distributor relationships could have an adverse effect on the Company’s operations. 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. Inventories. Inventories, primarily consisting of food and paper, are stated at the lower of cost (first-in, first-out) or market. Property and Equipment. The Company capitalizes all direct costs incurred to construct and substantially improve its restaurants. These costs are depreciated and charged to expense based upon their property classification when placed in service. Property and equipment is recorded at cost. Application development stage costs for significant internally developed software projects are capitalized and amortized. Repairs and maintenance activities are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the following estimated useful lives: Buildings and improvements Equipment Computer hardware and software Assets subject to finance lease 5 to 30 years 3 to 7 years 3 to 7 years Shorter of useful life or lease term F-6 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 1. Basis of Presentation (cont.) Leasehold improvements, including new buildings constructed on leased land, are depreciated over the shorter of their estimated useful lives or the underlying lease term. In circumstances where an economic penalty would be presumed by the non-exercise of one or more renewal options under the lease, the Company includes those renewal option periods when determining the lease term for depreciation purposes. For significant leasehold improvements made during the latter part of the lease term, the Company amortizes those improvements over the shorter of their useful life or an extended lease term. The extended lease term would consider the exercise of renewal options if the value of the improvements would imply that an economic penalty would be incurred without the renewal of the option. For significant leasehold improvements made during the latter part of the lease term prior to the adoption of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”), this extended term may differ from the lease term used to determine lease assets and liabilities. Building costs incurred for new restaurants on leased land are depreciated over the lease term, which is generally a 20-year period. Cloud-Based Computing Arrangements. The Company defers and amortizes application development stage costs for cloud-based computing arrangements over the life of the related service (subscription) agreement. Goodwill. Goodwill represents the excess purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets acquired by Carrols Restaurant Group, Inc. (“Carrols”), Fiesta’s former parent company, from the acquisition of Pollo Tropical in 1998 and Taco Cabana in 2000. Goodwill is not amortized but is assessed for impairment at least annually as of the last day of the fiscal year or more frequently if impairment indicators exist. Long-Lived Assets. The Company assesses the recoverability of property and equipment and definite-lived intangible assets, including right-of-use (“ROU”) lease assets, by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. Impairment is reviewed whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. See Note 5 — Impairment of Long-Lived Assets. Deferred Financing Costs. Financing costs incurred in obtaining revolving credit facilities are capitalized and amortized over the life of the related obligation as interest expense on a straight-line basis. Leases. The Company assesses whether an agreement contains a lease at inception. Subsequent to the adoption of ASC 842, all leases are reviewed for finance or operating classification once control is obtained. The majority of the Company’s leases are operating leases. Operating leases are included within operating lease right-of-use assets, other current liabilities, and operating lease liabilities in the consolidated balance sheets. Finance leases are included within property and equipment, net, current portion of long-term debt, and long-term debt, net of current portion in the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any lease payments made in advance and is reduced by lease incentives received. As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate at commencement date in determining the present value of lease payments. Lease terms include options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company assumes options are reasonably certain to be exercised when such options are required to achieve a minimum 20-year lease term for new restaurant properties, and subsequent to the adoption of ASC 842, when it incurs significant leasehold improvement costs near the end of a lease term. The Company uses judgment and available data to allocate consideration in a contract when it leases land and a building. The Company also uses judgment in determining its incremental borrowing rate, which includes selecting a yield curve based on a synthetic credit rating determined using a valuation model. Lease expense for lease payments is recognized on a straight-line basis over the lease term unless the related ROU asset has been adjusted for an impairment charge. The Company has real estate lease agreements with lease and non-lease components, which are accounted for as a single lease component. See Note 7 — Leases. F-7 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 1. Basis of Presentation (cont.) Income Taxes. Deferred income tax assets and liabilities are based on the difference between the financial statement and tax bases of assets and liabilities as measured by the tax rates that are anticipated to be in effect when those differences reverse. The deferred tax provision generally represents the net change in deferred tax assets and liabilities during the period. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts for which realization is more likely than not. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Advertising Costs. All advertising costs are expensed as incurred. Cost of Sales. The Company includes the cost of food, beverage and paper, net of any discounts, in cost of sales. Cost of sales excludes depreciation and amortization expense, which are presented separately on the consolidated statement of operations. Pre-opening Costs. The Company’s pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening and generally include restaurant employee wages and related expenses, travel expenditures, recruiting, training, promotional costs associated with the restaurant opening and rent, including any non-cash rent expense recognized during the construction period. Insurance. The Company is insured for workers’ compensation, general liability and medical insurance claims under policies where it pays all claims, subject to stop-loss limitations both for individual claims and for general liability, medical insurance and certain workers’ compensation claims in the aggregate. Losses are accrued based upon estimates of the aggregate liability for claims based on the Company’s experience and certain actuarial methods used to measure such estimates. The Company does not discount any of its self-insurance obligations. 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 under current market conditions. 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 management’s own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value: • • Current Assets and Liabilities. The carrying values reported on the consolidated balance sheet of cash, accounts receivable and accounts payable approximate fair value because of the short maturity of those financial instruments. Revolving Credit Borrowings. The fair value of outstanding revolving credit borrowings under the Company’s senior credit facility, which is considered Level 2, is based on current LIBOR rates. The fair value of the Company’s senior credit facility was approximately $75.0 million at December 29, 2019 and $78.0 million at December 30, 2018. The carrying value of the Company’s senior credit facility was $75.0 million at December 29, 2019 and $78.0 million at December 30, 2018 See Note 5 for discussion of the fair value measurement of non-financial assets. Revenue Recognition. Revenue is recognized upon transfer of promised products or services to customers in an amount that reflects the consideration the Company received in exchange for those products or services. Revenues from the Company’s owned and operated restaurants are recognized when payment is tendered at the time of sale. Franchise royalty revenues are based on a percent of gross sales and are recorded as income when earned. Initial franchise fees and area development fees associated with new franchise agreements are not distinct from the continuing rights and services offered by the Company during the term of the related franchise agreements and are recognized as income over F-8 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 1. Basis of Presentation (cont.) the term of the related franchise agreements. A portion of the initial franchise fee is allocated to training services and is recognized as revenue when the Company completes the training services. Prior to adopting Accounting Standards Codification Topic 606 (“Topic 606”), the Company recognized initial franchise fees as revenue in the period that a franchised location opened for business. See Note 11 — Business Segment Information. Gift cards. The Company sells gift cards to its customers in its restaurants and through select third parties. The Company recognizes revenue from gift cards upon redemption by the customer. For unredeemed gift cards that the Company expects to be entitled to breakage, the Company recognizes expected breakage as revenue in proportion to the pattern of redemption by the customers. The gift cards have no stated expiration dates. Revenues from unredeemed gift cards and gift card liabilities, which are recorded in other current liabilities, are not material to the Company’s financial statements. Prior to adopting Topic 606, the Company did not recognize breakage on its gift cards. Guidance Adopted in 2019. In February 2016, and in subsequent updates, the Financial Accounting Standards Board (“FASB”) issued ASC 842, which requires lessee recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The Company adopted this new accounting standard and all the related amendments as of December 31, 2018 using the modified retrospective method, with certain optional practical expedients including the transition practical expedient package, which among other things does not require reassessment of lease classification. The Company elected the transition method that allows it to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The comparative period information has not been restated and continues to be reported under the accounting standard in effect for that period. The Company has recognized lease liabilities and corresponding right-of-use (“ROU”) lease assets for substantially all of the leases it previously accounted for as operating leases, including leases related to closed restaurant properties. The initial ROU assets were calculated as the present value of the remaining operating lease payments using the Company’s incremental borrowing rate as of December 31, 2018, reduced by accrued occupancy costs such as certain closed-restaurant lease reserves, accrued rent (including accruals to expense operating lease payments on a straight-line basis), unamortized lease incentives and any unamortized sale-leaseback gains that resulted from off-market terms and increased by unamortized lease acquisition costs. Upon the adoption of ASC 842, the Company no longer records closed restaurant lease reserves, and ROU lease assets are reviewed for impairment with the Company’s long-lived assets. The Company elected the practical expedient to combine lease and non-lease components of real estate contracts, which resulted in classification of certain occupancy related expenses that are included in other restaurant operating expenses for periods prior to the adoption of ASC 842 as restaurant rent expenses in the consolidated statement of operations for periods subsequent to the adoption of ASC 842. The Company separately presents rent expense related to its closed restaurant locations and any sublease income related to these closed restaurant locations within closed restaurant rent expense, net of sublease income in the consolidated statement of operations for periods subsequent to the adoption of ASC 842. The Company recorded an initial adjustment to the opening balance of retained earnings of $14.0 million associated with previously deferred gains on sale-leaseback transactions and impairment of operating lease right-of-use assets as of the date of adoption. This adjustment consisted of $18.6 million in deferred gains on sale-leaseback transactions, net of a related deferred tax asset of $4.3 million and $0.2 million in impairment charges, net of tax. For any future sale-leaseback transactions, the gain (adjusted for any off-market terms) will be recognized immediately. In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the requirement to calculate the implied fair value of goodwill if the fair value of a reporting unit is less than the carrying amount of the reporting unit. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. In 2019, the Company early adopted this new accounting standard and performed its interim impairment tests in accordance with ASU 2017-04. In the second quarter of 2019, the Company recognized a $46.5 million impairment of its Taco Cabana reporting unit goodwill, which represents the excess of the reporting unit’s F-9 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 1. Basis of Presentation (cont.) carrying value over its fair value at June 30, 2019. In the third quarter of 2019, the Company recognized a $21.4 million impairment of its Taco Cabana reporting unit goodwill. In the third quarter of 2019, the excess of the Taco Cabana reporting unit’s carrying value over its fair value was greater than the balance of the reporting unit’s goodwill, resulting in a full impairment of the Taco Cabana reporting unit’s goodwill. See Note 4 — Goodwill. Recent Accounting Pronouncements. In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance will be effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted and may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company does not expect the standard to have a material effect on its financial statements. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), which is a part of the Simplification Initiative being undertaken by the FASB to reduce complexity of accounting standards. The amendments in this update simplify the accounting for income taxes by removing certain exceptions, the most notable for the Company being the exception to the general methodology for calculating income taxes in an interim period when the year-to-date loss exceeds the anticipated loss for the full year. The guidance will be effective for interim and annual periods beginning after December 15, 2020. Early adoption is permitted and any adjustments should be reflected as of the beginning of the annual period of adoption. Amendments relevant to the Company should be applied on a prospective basis. The Company is still evaluating the impact the standard will have on its financial statements. 2. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets, consist of the following: Prepaid contract expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Assets held for sale(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,410 $ 4,110 2,085 10,605 $ 4,232 — 2,330 6,562 (1) One closed Pollo Tropical restaurant and two closed Taco Cabana restaurant properties owned by the Company were classified December 29, 2019 December 30, 2018 as held for sale as of December 29, 2019. 3. Property and Equipment Property and equipment consisted of the following: December 29, 2019 December 30, 2018 Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Owned buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets subject to capital/finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . $ (1) Leasehold improvements include the cost of new buildings constructed on leased land. 21,051 $ 13,978 212,413 219,610 2,713 469,765 (257,821) 211,944 $ 20,428 15,205 207,206 214,674 1,905 459,418 (228,090) 231,328 F-10 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 3. Property and Equipment (cont.) Assets subject to capital/finance leases primarily pertain to buildings leased for certain restaurant locations and fleet vehicles, and had accumulated amortization at December 29, 2019, and December 30, 2018, of $1.3 million and $1.1 million, respectively. Depreciation and amortization expense for all property and equipment for the years ended December 29, 2019; December 30, 2018; and December 31, 2017, was $39.2 million, $37.6 million, and $35.0 million, respectively. 4. 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 the fiscal year and has determined its reporting units to be its operating segments, Pollo Tropical and Taco Cabana. There were no changes in goodwill or goodwill impairment losses recorded during the years ended December 30, 2018, and December 31, 2017. In performing its goodwill impairment test as of December 30, 2018, the Company compared the net book values of its reporting units to their estimated fair values, the latter determined by employing an income-based discounted cash flow analysis approach and a market-based approach, which was corroborated with other value indicators where available, such as comparable company earnings multiples. As of June 30, 2019, the Company determined that a triggering event had occurred due to a sustained decrease in the market price of the Company’s common stock. In response to the triggering event, the Company performed a quantitative impairment test for both the Pollo Tropical and Taco Cabana reporting units. Fair value for each reporting unit was determined using a combination of the income-based approach and two market-based approaches. Based on the impairment test analysis, the fair value of the Pollo Tropical reporting unit substantially exceeded its carrying amount, while the carrying amount for the Taco Cabana reporting unit exceeded its estimated fair value, which indicated an impairment of the Taco Cabana reporting unit. Lower than expected profitability and a lower profitability and growth outlook for the Taco Cabana reporting unit reduced its income-based and market-based approach fair value. The Company early adopted ASU 2017-04, which eliminates Step 2 from the goodwill impairment test, and requires recognition of an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the carrying value of the reporting unit’s goodwill. In the second quarter of 2019, the Company recorded an impairment charge on the goodwill of its Taco Cabana reporting unit of $46.5 million, which represented the excess of the reporting unit’s carrying value over its fair value at June 30, 2019, and which was not deductible for tax purposes. In addition, in response to a further decrease in the market price of the Company’s common stock and lower than expected profitability in the third quarter of 2019, the Company performed a quantitative impairment test for both the Pollo Tropical and Taco Cabana reporting units as of September 29, 2019. Based on the impairment test analysis, which utilized the same approach used in the second quarter of 2019, the fair value of the Pollo Tropical reporting unit continued to substantially exceed its carrying amount, while the carrying amount for the Taco Cabana reporting unit exceeded its estimated fair value. In the third quarter of 2019, the Company recorded an impairment charge on the goodwill of its Taco Cabana reporting unit of $21.4 million, of which $9.1 million was deductible for tax purposes and resulted in an income tax benefit of $2.1 million. The excess of the Taco Cabana reporting unit’s carrying value over its fair value was greater than the balance of the reporting unit’s goodwill, resulting in a full impairment of the Taco Cabana reporting unit’s goodwill. The Company’s annual goodwill impairment assessment as of December 29, 2019, was performed using a qualitative assessment, which included examining key events and circumstances affecting fair value and indicated that it is more likely than not that the Pollo Tropical reporting unit’s fair value is greater than its carrying value. There were no changes in goodwill or goodwill impairment losses for the Pollo Tropical reporting unit recorded during the year ended December 29, 2019. F-11 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 4. Goodwill (cont.) A summary of changes in goodwill during the twelve months ended December 29, 2019, is as follows: Balance, December 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . $ Impairment charges(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 29, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,307 $ — 56,307 $ 67,177 $ (67,177) — $ Pollo Tropical Taco Cabana Total 123,484 (67,177) 56,307 (1) Accumulated impairment losses at December 29, 2019, were $67.2 million. There were no accumulated impairment losses (2) at December 30, 2018. Impairment charges during the twelve months ended December 29, 2019, include $0.7 million previously classified as an intangible asset and included in other assets. 5. Impairment of Long-Lived Assets and Other Lease Charges The Company reviews its long-lived assets, principally property and equipment and lease ROU assets, for impairment at the restaurant level. The Company has elected to exclude operating lease payments and liabilities from future cash flows and carrying values, respectively, in its impairment review. In addition to considering management’s plans, known regulatory or governmental actions and damage due to acts of God (hurricanes, tornadoes, etc.), the Company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s cash flows, exclusive of operating lease payments, for the last twelve months are less than a minimum threshold or if consistent levels of cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. If an indicator of impairment exists for any of its assets, an estimate of undiscounted future cash flows, exclusive of operating lease payments, over the life of the primary asset for each restaurant is compared to that long-lived asset group’s carrying value, excluding operating lease liabilities. 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. There is uncertainty in the projected undiscounted future cash flows used in the Company’s impairment review analysis. If actual performance does not achieve the projections, the Company may recognize impairment charges in future periods, and such charges could be material. Prior to the adoption of ASC 842 on December 31, 2018, for closed restaurant locations, the Company reviewed 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 recorded a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries. A summary of impairment on long-lived assets and other lease charges recorded by segment is as follows: December 29, 2019 Year Ended December 30, 2018 December 31, 2017 Pollo Tropical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Taco Cabana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15 $ 13,086 13,101 $ 13,587 $ 7,557 21,144 $ 57,947 3,813 61,760 On April 24, 2017, the Company announced a Strategic Renewal Plan (the “Plan”) to drive long-term shareholder value creation that included the closure of 30 Pollo Tropical restaurants outside its core Florida markets. In September 2017, the Company also closed the six remaining Pollo Tropical restaurants in south Texas. In December 2017, the Company closed four additional underperforming Pollo Tropical restaurants in Atlanta, Georgia. Six Pollo Tropical restaurants that were closed in 2016 and 2017 in Texas were rebranded as Taco Cabana restaurants in 2017 and 2018 and one Pollo Tropical restaurant was rebranded as a Taco Cabana location in 2019. In December 2018, based on a restaurant portfolio examination, the Company closed 14 Pollo Tropical restaurants including all the remaining restaurants in Atlanta, Georgia, and nine Taco Cabana restaurants. The Company also closed six Taco Cabana restaurants in 2017 in conjunction with the Plan, two Taco Cabana restaurants in the second quarter of 2018 as a result F-12 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 5. Impairment of Long-Lived Assets and Other Lease Charges (cont.) of the sale of a property and a lease termination, one Taco Cabana restaurant in the fourth quarter of 2019 as a result of a lease termination, and 19 Taco Cabana restaurants in January 2020 as a result of a restaurant portfolio review. Impairment and other lease charges for the twelve months ended December 29, 2019, consisted of impairment charges for Pollo Tropical and Taco Cabana restaurants of $0.8 million and $13.2 million, respectively, and net lease charge recoveries for Pollo Tropical and Taco Cabana restaurants of $(0.8) million and $(0.1) million, respectively. Impairment charges in 2019, which also included right-of-use asset impairment, were related primarily to 19 Taco Cabana restaurants that were subsequently closed in 2020, five of which were initially impaired in prior years, as well as previously closed Pollo Tropical restaurants and other underperforming Taco Cabana restaurants that the Company continues to operate. Net lease charge recoveries in 2019 were related primarily to lease terminations for previously closed restaurants. Impairment and other lease charges for the twelve months ended December 30, 2018, consisted of impairment charges for Pollo Tropical and Taco Cabana restaurants of $13.1 million and $6.0 million, respectively, and lease and other charges for Pollo Tropical and Taco Cabana restaurants (as well as a Taco Cabana office location) of $0.5 million and $1.6 million, respectively, net of recoveries. Impairment charges in 2018 were related primarily to 14 Pollo Tropical restaurants that were closed in 2018, two of which were initially impaired in 2017, nine Taco Cabana restaurants that were closed in 2018, one of which was initially impaired in 2017, and one Pollo Topical restaurant and six Taco Cabana restaurants the Company continued to operate. Other lease charges, net of recoveries, in 2018 were related primarily to restaurants and an office location that were closed in 2018 as well as previously closed restaurants. Impairment and other lease charges for the twelve months ended December 31, 2017, consisted of impairment charges for Pollo Tropical and Taco Cabana restaurants and an office location of $52.1 million, $1.9 million, and $0.2 million, respectively, and lease and other charges for Pollo Tropical and Taco Cabana restaurants and an office location of $5.4 million, $1.6 million, and $0.5 million, respectively, net of recoveries. Impairment charges in 2017 were related primarily to 40 Pollo Tropical restaurants that were closed in 2017, seven of which were initially impaired in 2016, six Taco Cabana restaurants that were closed in 2017, four of which were initially impaired in 2016, and two Pollo Topical restaurants and five Taco Cabana restaurants the Company continued to operate. Impairment charges in 2017 also included charges with respect to an office location that was closed in December 2017. Other lease charges, net of recoveries, in 2017 were related primarily to restaurants and an office location that were closed in 2017 as well as previously closed restaurants. The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions, the Company’s history of using these assets in the operation of its business and the Company’s expectation of how a market participant would value the assets. In addition, for those restaurants reviewed for impairment where the Company owns the land and building, the Company utilized third-party information such as a broker quoted value to determine the fair value of the property. The Company also utilized discounted future cash flows to determine the fair value of assets for certain leased restaurants with positive discounted projected future cash flows. The Company utilized current market lease rent and discount rates to determine the fair value of right-of-use lease assets. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The Level 3 assets measured at fair value associated with impairment charges recorded during the twelve months ended December 29, 2019, and December 30, 2018, totaled $5.8 million and $8.0 million, respectively. F-13 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 6. Other Liabilities Other current liabilities consist of the following: December 29, 2019 December 30, 2018 Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Accrued workers’ compensation and general liability claims. . . . . . . . . . . . . . . . Sales and property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued occupancy costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,338 $ 4,354 1,889 891 2,797 32,269 $ — 4,886 1,958 4,554 2,688 14,086 Other non-current liabilities consist of the following: December 29, 2019 December 30, 2018 Accrued occupancy costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Accrued workers’ compensation and general liability claims. . . . . . . . . . . . . . . . Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78 $ 7,348 424 555 8,405 $ 21,534 6,808 867 3,295 32,504 At December 30, 2018 accrued occupancy costs included obligations pertaining to closed restaurant locations and accruals to expense operating lease rental payments on a straight-line basis over the lease term. As a result of adopting ASC 842 on December 31, 2018, at December 29, 2019, accrued occupancy costs primarily consisted of obligations pertaining to closed restaurant locations. The following table presents the activity in the closed restaurant reserve, of which $0.1 million and $4.4 million are included in non-current liabilities at December 29, 2019 and December 30, 2018, respectively, with the remainder in other current liabilities. Year Ended December 29, 2019 December 30, 2018 Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Provisions for restaurant closures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional lease charges (recoveries), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other adjustments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,819 $ — — (1,405) (6,662) 752 $ 12,994 2,228 (152) (6,778) 527 8,819 (1) As a result of adopting ASC 842 on December 31, 2018, the portion of the closed restaurant reserve related to operating lease rental payments totaling $6.0 million was reclassified and included as a component of the related ROU assets during the twelve months ended December 29, 2019. The portion of the closed restaurant reserve related to variable ancillary lease costs was not reclassified and was not included as a reduction to ROU assets. 7. Leases The Company utilizes land and buildings in its operations under various operating and finance 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 20 years and, in many cases, provide for renewal options and in most cases rent escalations. As of December 29, 2019, the Company’s leases have remaining lease terms of 0.3 years to 21.8 years. Some of the Company’s leases include options to extend the lease for up to 40 years. Certain leases require contingent rent, F-14 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 7. Leases (cont.) 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. Variable lease payments included in rent expense consist of such contingent rent, certain rent payments based on changes in an index and certain occupancy related costs, such as variable common area maintenance expense and property taxes. The Company is not subject to residual value guarantees under any of the lease agreements. Many of the Company’s real estate leases contain usage restrictions, but its leases do not contain financial covenants and restrictions. Lease expense consisted of the following: Twelve Months Ended December 29, 2019 Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,414 Finance lease costs: Amortization of right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Interest on lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total finance lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Variable lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sublease income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 202 226 428 12,050 (4,037) 53,855 Supplemental balance sheet information related to leases is as follows: December 29, 2019 Operating Leases Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Finance Leases Property and equipment, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total finance lease liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Weighted Average Remaining Lease Term (in Years) Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted Average Discount Rate Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251,272 22,338 256,798 279,136 2,713 (1,323) 1,390 212 1,823 2,035 12.1 7.9 7.67% 12.67% F-15 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 7. Leases (cont.) Supplemental cash flow information related to leases is as follows: Twelve Months Ended December 29, 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Operating cash flows for finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing cash flows for finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Right-of-use assets obtained in exchange for lease liabilities: Operating lease ROU assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finance lease ROU assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Right-of-use assets and lease liabilities reduced for terminated leases: Operating lease ROU assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease right-of-use assets obtained and liabilities incurred as a result of adoption of ASC 842: Operating lease ROU assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturities of lease liabilities were as follows: 41,216 226 164 12,654 495 4,372 5,126 267,743 291,373 Operating Leases Finance Leases 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less amount representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total discounted lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term portion of lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,479 $ 40,189 38,917 35,742 32,481 251,977 441,785 (162,649) 279,136 (22,338) 256,798 $ 434 475 475 428 350 1,278 3,440 (1,405) 2,035 (212) 1,823 As of December 29, 2019, the Company had five additional operating leases for restaurant properties. These operating leases will commence in fiscal year 2020 with each lease having an initial lease term of 15 years. F-16 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 7. Leases (cont.) Minimum rent commitments due under capital and non-cancelable operating leases at December 30, 2018, were as follows: Operating Capital 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total minimum lease payments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Less amount representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total obligations under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,427 $ 44,144 41,396 40,215 36,587 264,704 471,473 $ 323 327 342 342 349 1,646 3,329 (1,585) 1,744 (108) 1,636 (1) Minimum operating lease payments include contractual rent payments for closed restaurants for which the Company is still obligated under the lease agreements and have not been reduced by minimum sublease rent of $41.4 million due in the future under non-cancelable subleases. See Note 6 — Other Liabilities. The Company subleases land and buildings related to closed restaurant locations and a closed office location under various operating sublease agreements. Initial sublease terms are generally for the period of time remaining on the head lease term and, in some cases, subleases provide for renewal options and in most cases rent escalations. As of December 29, 2019, the Company’s subleases have remaining sublease terms of 2.3 years to 19.4 years. Some of the Company’s subleases include options to extend the lease for up to 25 years. Variable lease payments included in sublease income consist of certain occupancy related costs, such as variable common area maintenance expense and property taxes where the Company makes the real estate payment and is reimbursed by the lessee. The sublease agreements do not include residual value guarantees. Consistent with the Company’s real estate leases, many of the subleases contain usage restrictions, but its subleases do not contain financial covenants and restrictions. The undiscounted cash flows to be received under operating subleases were as follows: 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Operating Leases 4,651 4,878 4,833 4,828 4,884 45,031 69,105 F-17 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 7. Leases (cont.) Total rent expense on operating leases, including contingent rentals, prior to the adoption of ASC 842 was as follows: Year Ended December 30, 2018 December 31, 2017 Minimum rent on real property, excluding rent included in pre-opening costs . . $ Additional rent based on percentage of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent included in pre-opening costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative and equipment rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,881 $ 153 36,034 861 850 37,745 $ 36,760 176 36,936 856 988 38,780 8. Long-term Debt Long term debt at December 29, 2019, and December 30, 2018, consisted of the following: December 29, 2019 December 30, 2018 Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Finance/capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,000 $ 2,035 77,035 (212) 76,823 $ 78,000 1,744 79,744 (108) 79,636 Senior Credit Facility. In November 2017, the Company entered into a senior secured revolving credit facility with a syndicate of lenders. The senior credit facility provides for aggregate revolving credit borrowings of up to $150.0 million (including up to $15.0 million available for letters of credit) and matures on November 30, 2022. The senior credit facility also provides for potential incremental increases of up to $50.0 million to the revolving credit borrowings available under the senior credit facility. On December 29, 2019, there were $75.0 million in outstanding borrowings under the senior credit facility. Borrowings under the senior credit facility bear interest at a per annum rate, at the Company’s option, equal to either (all terms as defined in the senior credit facility agreement): 1) 2) the Alternate Base Rate plus the applicable margin of 0.75% to 1.50% based on the Company’s Adjusted Leverage Ratio (with a margin of 1.25% as of December 29, 2019), or the LIBOR Rate plus the applicable margin of 1.75% to 2.50% based on the Company’s Adjusted Leverage Ratio (with a margin of 2.25% at December 29, 2019) In addition, the senior credit facility requires the Company to pay (i) a commitment fee based on the applicable Commitment Fee rate of 0.25% to 0.35%, based on the Company’s Adjusted Leverage Ratio, (with a rate of 0.30% at December 29, 2019) and the unused portion of the facility and (ii) a letter of credit participation fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit. All obligations under the Company’s senior credit facility are guaranteed by all of the Company’s material domestic subsidiaries. In general, the Company’s obligations under the senior credit facility and its subsidiaries’ obligations under the guarantees are secured by a first priority lien and security interest on substantially all of its assets and the assets of its material subsidiaries (including a pledge of all of the capital stock and equity interests of its material subsidiaries), other than certain specified assets, including real property owned by the Company or its subsidiaries. F-18 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 8. Long-term Debt (cont.) The outstanding borrowings under the Company’s senior credit facility are prepayable subject to breakage costs as defined in the senior credit facility agreement. The senior credit facility requires the Company to comply with customary affirmative, negative and financial covenants, including, without limitation, those limiting the Company’s and its subsidiaries’ ability to (i) incur indebtedness, (ii) incur liens, (iii) loan, advance, or make acquisitions and other investments or other commitments to construct, acquire or develop new restaurants (subject to certain exceptions), (iv) pay dividends, (v) redeem and repurchase equity interests (subject to certain exceptions), (vi) conduct asset and restaurant sales and other dispositions (subject to certain exceptions), (vii) conduct transactions with affiliates and (viii) change its business. In addition, the senior credit facility requires the Company to maintain certain financial ratios, including minimum Fixed Charge Coverage and maximum Adjusted Leverage Ratios (all as defined in the senior credit facility agreement). The Company’s senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of the Company’s indebtedness having an outstanding principal amount of $5 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. As of December 29, 2019, the Company was in compliance with the financial covenants under its senior credit facility. After reserving $3.7 million for letters of credit, $71.3 million was available for borrowing under the senior credit facility at December 29, 2019. At December 29, 2019, principal payments required on borrowings under the senior credit facility were $75.0 million in 2022. The weighted average interest rate on the borrowings under the senior credit facility was 4.04% and 4.59% at December 29, 2019, and December 30, 2018, respectively. Interest expense on the Company’s long-term debt, excluding lease financing obligations, was $3.7 million, $3.9 million and $2.7 million for the years ended December 29, 2019; December 30, 2018; and December 31, 2017, respectively. 9. Income Taxes The Company’s income tax provision (benefit) was comprised of the following: December 29, 2019 Year Ended December 30, 2018 December 31, 2017 Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,347) $ 336 492 (1,519) (2,132) (425) (2,557) 13,445 9,369 $ (10,378) $ 355 421 (9,602) 6,591 297 6,888 (58) (2,772) $ (5,718) 346 445 (4,927) (1,059) (1,649) (2,708) (120) (7,755) F-19 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 9. Income Taxes (cont.) Deferred income taxes reflect the effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred income tax assets and liabilities at December 29, 2019, and December 30, 2018, were as follows: December 29, 2019 December 30, 2018 Deferred income tax assets: Accrued vacation benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Incentive compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income on sale-leaseback of real estate . . . . . . . . . . . . . . . . . . . . . . Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal net operating loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax liabilities: Right-of-use operating lease assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of other intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cloud-based software deferred costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 875 $ 1,024 2,804 — 65,251 175 1,949 2,770 973 75,821 (58,524) (6,509) (34) (990) (400) (66,457) (14,123) (4,759) $ 1,017 959 2,976 4,591 — 6,038 1,534 1,040 839 18,994 — (5,438) (2,121) — (374) (7,933) (678) 10,383 The Company establishes a valuation allowance to reduce the carrying amount of deferred income tax assets when it is more likely than not that it will not realize some portion or all of the tax benefit of its deferred tax assets. The Company evaluates whether its deferred income tax assets are probable of realization on a quarterly basis. In performing this analysis, the Company considers all available positive and negative evidence including historical operating results, the estimated timing of future reversals of existing taxable temporary differences and, when appropriate, estimated future taxable income exclusive of reversing temporary differences and carryforwards. In the fourth quarter of 2019, the Company determined that it is more likely than not that its deferred tax assets will not be fully realized in future periods and established a valuation allowance of $10.3 million against federal deferred tax assets and $3.2 million against state deferred tax assets. At December 29, 2019, the Company had a valuation allowance of $14.1 million against deferred income tax assets where it was determined to be more likely than not that the deferred income tax assets will not be realized through the reversal of existing deferred tax liabilities. At December 30, 2018, the Company had a valuation allowance of $0.7 million against net deferred income tax assets due to foreign income tax credit carryforwards where it was determined to be more likely than not that the deferred income tax asset amounts would not be realized. The valuation allowance increased $13.4 million in 2019 as a result of establishing a valuation allowance in the fourth quarter of 2019, and decreased $0.1 million in 2018 primarily due to expired foreign income tax credits. The Company’s ability to utilize deferred income tax assets and estimate future taxable income for federal and state purposes can significantly change based on future events and operating results. F-20 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 9. Income Taxes (cont.) The Company’s effective tax rate was (12.5)%, (55.3)%, and 17.6% for the years ended December 29, 2019; December 30, 2018; and December 31, 2017, respectively. A reconciliation of the statutory federal income tax provision (benefit) to the effective tax provision (benefit) was as follows: December 29, 2019 Year Ended December 30, 2018 December 31, 2017 Statutory federal income tax provision (benefit) . . . . . . . . . . . $ State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . Change in federal income tax rate and tax methods . . . . . . . . . Net share-based compensation-tax benefit deficiencies . . . . . . Non-deductible goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employment tax credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign tax credits/deductions . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (15,753) $ 49 13,445 (716) 235 12,357 214 336 (381) (71) (346) 9,369 $ 1,053 $ 552 (58) (3,977) 178 — 53 355 (897) (75) 44 (2,772) $ (15,394) (734) (120) 8,952 228 — 84 346 (914) (121) (82) (7,755) Tax Law Changes. On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”), which includes a provision that reduced the federal corporate income tax rate from 35.0% to 21.0% effective January 1, 2018, was signed into law. In accordance with generally accepted accounting principles, the enactment of this new tax legislation required the Company to revalue its net deferred income tax assets at the new corporate statutory rate of 21.0% as of the enactment date, which resulted in an adjustment to its deferred income taxes of $9.0 million with a corresponding increase to the provision for income taxes as a discrete item during the fourth quarter of 2017. In 2018, in conjunction with a cost segregation study conducted prior to filing its 2017 federal income tax return, the Company changed the depreciation method for certain assets for federal income tax purposes to accelerate tax deductions. Changes in the Company’s 2017 federal income tax return from the amounts recorded as of December 31, 2017 were primarily the result of changing the depreciable lives of assets for federal income tax purposes. These changes allowed the Company to record an incremental benefit of $4.0 million during the twelve months ended December 30, 2018. The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expense. As of December 29, 2019, and December 30, 2018, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions. The Company has deferred tax benefits of $2.8 million related to federal net operating loss carryforwards which have no expiration date and $1.3 million related to employment tax credits which, if unutilized after various times beginning in 2038, will have a reduced value of $0.3 million. The Company also has a deferred tax benefit of $0.4 million (for which a valuation allowance has been established) related to a Florida net operating loss carryforward that has no expiration date. The Company is currently under examination by the Internal Revenue Service for the tax years 2015 – 2017. It is not currently under examination by any other taxing jurisdictions. The tax years 2015 – 2019 remain open to examination by the 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 uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months. F-21 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 10. Stockholders’ Equity Purchase of Treasury Stock In 2018, the Company’s board of directors approved a share repurchase program for up to 1,500,000 shares of the Company’s common stock. In 2019, the Company’s board of directors approved increases to the share repurchase program of an additional 1,500,000 shares of the Company’s common stock for an aggregate approval of 3,000,000 shares of the Company’s common stock. Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by the Company’s board of directors. The Company repurchased 1,381,137 shares and 112,358 shares of its common stock under the program in open market transactions during the twelve months ended December 29, 2019, and December 30, 2018, for $14.3 million and $2.8 million, respectively. The repurchased shares are held as treasury stock at cost. Stock-Based Compensation The Company established the Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan (the “Fiesta Plan”) in order to be able to compensate its employees and directors by issuing stock options, stock appreciation rights, or stock awards to them under this plan. The aggregate number of shares of stock authorized for distribution under the Fiesta Plan is 3,300,000. As of December 29, 2019, there were 1,467,699 shares available for future grants under the Fiesta Plan. During the years ended December 29, 2019; December 30, 2018; and December 31, 2017, the Company granted certain employees, and in 2019 and 2018 a consultant, in the aggregate 243,948; 161,791; and 182,522 non-vested restricted shares, respectively, under the Fiesta Plan. Shares granted to employees during the years ended December 29, 2019; December 30, 2018; and December 31, 2017, vest and become non-forfeitable over a four-year vesting period. The shares granted to the consultant vest over a three-year vesting period. The weighted average fair value at the grant date for restricted non-vested shares issued during the years ended December 29, 2019; December 30, 2018; and December 31, 2017, was $13.06 per share, $18.70 per share, and $20.75 per share, respectively. During the years ended December 29, 2019; December 30, 2018; and December 31, 2017, the Company granted non-employee directors 43,054; 31,146; and 38,596 non-vested restricted shares, respectively, under the Fiesta Plan. The weighted average fair value at the grant date for restricted non-vested shares issued to directors during the twelve months ended December 29, 2019; December 30, 2018; and December 31, 2017, was $12.66 per share, $20.71 per share, and $21.25 per share, respectively. These shares vest and become non-forfeitable over a one-year vesting period, or for certain grants to new directors, over a five-year vesting period. During the year ended December 31, 2017, the Company granted certain employees 11,745 restricted stock units under the Fiesta Plan. Certain of the restricted stock units vest and become non-forfeitable over a four-year vesting period and certain of the restricted stock units vest and become non-forfeitable at the end of a four-year vesting period. The weighted average fair value at grant date for the restricted stock units issued to employees during the year ended December 31, 2017, was $20.75 per share. Also during the years ended December 29, 2019; December 30, 2018; and December 31, 2017 the Company granted certain employees 15,348; 112,169; and 92,171 restricted stock units, respectively, under the Fiesta Plan subject to continued service requirements and market performance conditions. • During the year ended December 31, 2017, the Company granted its Chief Executive Officer 72,290 restricted stock units, which vest in four tranches over a four-year vesting period subject to continued service and attainment of specified share prices of the Company’s common stock during 20 consecutive trading days at any point during each year. Each tranche vests by the end of a one-year period if the specified target stock price condition for that year is met. If the specified target stock price condition F-22 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 10. Stockholders’ Equity (cont.) • • for any tranche is not met for the year, the cumulative unearned units will be rolled over to subsequent tranches on a pro rata basis. The number of shares into which these restricted stock units convert ranges from no shares, if the service and market performance conditions are not met, to 72,290 shares, if the service and market performance conditions are met in the fourth year. The weighted average fair value at grant date for these restricted stock units was $12.90 per share. During the years ended December 30, 2018, and December 31, 2017, the Company granted certain executives 112,169 and 19,881 restricted stock units, respectively, which vest in three tranches over a three-year vesting period subject to continued service and attainment of specified share price of the Company’s common stock. Each tranche vests by the end of a one-year period if the specified target stock price condition for that year is met. If the specified target stock price condition for any tranche is not met for the year, the cumulative unearned units will be rolled over to subsequent tranches on a pro rata basis. The number of shares into which these restricted stock units convert ranges from no shares, if the service and market performance conditions are not met, to 112,169 and 19,881 shares, if the service and market performance conditions are met in the third year. The weighted average fair value at grant date for the restricted stock units granted to executives in the years ended December 30, 2018, and December 31, 2017, was $6.96 per share and $9.31 per share, respectively. During the year ended December 29, 2019, the Company granted a certain executive 15,348 restricted stock units, which vest in two tranches over a two-year vesting period subject to continued service and attainment of specified share price of the Company’s common stock. Each tranche vests by the end of a one-year period if the specified target stock price condition for that year is met. If the specified target stock price condition for the first tranche is not met for the year, the cumulative unearned units will be rolled over to the subsequent tranche. The number of shares into which these restricted stock units convert ranges from no shares, if the service and market performance conditions are not met, to 15,348 shares, if the service and market performance conditions are met in the last vesting period. The weighted average fair value at grant date for the restricted stock units granted in the year ended December 29, 2019 was $1.76 per share. Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable requisite service period of the award (the vesting period) using the straight-line method, or for restricted stock units subject to market performance conditions using the accelerated method. Stock-based compensation expense for the years ended December 29, 2019; December 30, 2018; and December 31, 2017, was $2.8 million, $3.5 million, and $3.5 million, respectively. As of December 29, 2019, the total unrecognized stock-based compensation expense related to non-vested shares and restricted stock units was approximately $4.0 million. At December 29, 2019, the remaining weighted average vesting period for non-vested restricted shares was 2.4 years and restricted stock units was 0.7 years. A summary of all non-vested restricted shares and restricted stock units activity for the year ended December 29, 2019, is as follows: Outstanding at December 30, 2018 . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested/Released . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 29, 2019 . . . . . Non-Vested Shares Restricted Stock Units Weighted Average Grant Date Fair Value Units Weighted Average Grant Date Fair Value Shares 20.70 13.00 20.30 17.02 15.47 231,112 $ 15,348 (3,516) (66,582) 176,362 $ 12.44 1.76 62.05 15.34 9.42 287,866 $ 287,002 (131,185) (88,078) 355,605 $ F-23 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 10. Stockholders’ Equity (cont.) The fair value of the non-vested restricted shares and all other restricted stock units is based on the closing price on the date of grant. The fair value of the restricted stock units subject to market conditions was estimated using the Monte Carlo simulation method. The assumptions used to value grant restricted stock units subject to market conditions are detailed below: 2019 Non-CEO Grant 2018 Non-CEO Grant 2017 Non-CEO Grant CEO Grant Grant date stock price . . . . . . . . . . . . . . . . . $ Fair value at grant date . . . . . . . . . . . . . . . . $ Risk free interest rate . . . . . . . . . . . . . . . . . Expected term (in years) . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . $ $ 14.66 1.76 2.53% 2 —% 43.18% $ $ 18.70 6.96 2.40% 3 —% 41.49% $ $ 17.60 9.31 1.51% 2.5 —% 41.72% 22.55 12.90 1.52% 3.8 —% 39.06% The fair value of the shares vested and released during the years ended December 29, 2019; December 30, 2018; and December 31, 2017, was $1.8 million, $2.5 million, and $2.1 million, respectively. 11. Business Segment Information The Company owns, operates and franchises two restaurant brands, Pollo Tropical® and Taco Cabana®, each of which is an operating segment. Pollo Tropical restaurants feature fire-grilled and crispy citrus marinated chicken and other freshly prepared tropical-inspired menu items, while Taco Cabana restaurants specialize in Mexican-inspired food. Each segment’s accounting policies are the same as those described in the summary of significant accounting policies in Note 1. Prior to the second quarter of 2017, the primary measures of segment profit or loss used to assess performance and allocate resources were income (loss) before taxes and an Adjusted EBITDA measure, which was defined as earnings attributable to the applicable operating segment before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other income and expense. In 2017, the Company’s board of directors appointed a new Chief Executive Officer who initiated the Plan and uses an Adjusted EBITDA measure for the purpose of assessing performance and allocating resources to segments. The new Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company’s restaurants. Beginning in the second quarter of 2017, the primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is now defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company’s restaurants as set forth in the reconciliation table below. The Company has included the presentation of Adjusted EBITDA for all periods presented. The “Other” column includes corporate-related items not allocated to reportable segments and consists primarily of corporate-owned property and equipment, lease assets, miscellaneous prepaid costs, capitalized costs associated with the issuance of indebtedness, corporate cash accounts, and a current income tax receivable. F-24 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 11. Business Segment Information (cont.) Pollo Tropical Taco Cabana Other Consolidated Year Ended December 29, 2019: Restaurant sales . . . . . . . . . . . . . . . . . . . . . . $ Franchise revenue . . . . . . . . . . . . . . . . . . . . Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . Restaurant wages and related expenses(1) . . Restaurant rent expense . . . . . . . . . . . . . . . Other restaurant operating expenses . . . . . . Advertising expense . . . . . . . . . . . . . . . . . . General and administrative expense(2) . . . . . Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . . December 30, 2018: Restaurant sales . . . . . . . . . . . . . . . . . . . . . . $ Franchise revenue . . . . . . . . . . . . . . . . . . . . Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . Restaurant wages and related expenses(1) . . Restaurant rent expense . . . . . . . . . . . . . . . Other restaurant operating expenses . . . . . . Advertising expense . . . . . . . . . . . . . . . . . . General and administrative expense(2) . . . . . Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . . December 31, 2017: Restaurant sales . . . . . . . . . . . . . . . . . . . . . . $ Franchise revenue . . . . . . . . . . . . . . . . . . . . Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . Restaurant wages and related expenses(1) . . Restaurant rent expense . . . . . . . . . . . . . . . Other restaurant operating expenses . . . . . . Advertising expense . . . . . . . . . . . . . . . . . . General and administrative expense(2) . . . . . Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . . Identifiable Assets: December 29, 2019 . . . . . . . . . . . . . . . . . . . $ December 30, 2018 . . . . . . . . . . . . . . . . . . . December 31, 2017 . . . . . . . . . . . . . . . . . . . 361,693 $ 1,780 115,119 84,909 22,050 49,768 12,358 31,023 50,560 21,476 21,921 374,381 $ 1,815 123,042 87,025 17,457 51,757 13,068 29,621 54,903 21,372 27,667 372,328 $ 1,787 117,493 88,587 18,949 52,848 16,397 33,025 50,937 21,758 31,786 296,570 $ 900 92,334 94,269 25,755 42,129 10,821 25,172 7,889 17,719 18,023 311,544 $ 857 95,904 101,106 18,577 49,071 10,627 24,904 13,059 16,232 28,886 294,256 $ 761 85,395 96,155 17,987 46,079 9,694 26,608 16,508 13,199 20,781 — $ — — — — — — — — — 1,303 — $ — — — — — — — — — 1,297 — $ — — — — — — — — — 3,299 340,012 $ 207,435 227,194 195,883 $ 174,681 167,237 32,746 $ 36,543 28,882 658,263 2,680 207,453 179,178 47,805 91,897 23,179 56,195 58,449 39,195 41,247 685,925 2,672 218,946 188,131 36,034 100,828 23,695 54,525 67,962 37,604 57,850 666,584 2,548 202,888 184,742 36,936 98,927 26,091 59,633 67,445 34,957 55,866 568,641 418,659 423,313 (1) (2) Includes stock-based compensation expense of $195, $90 and $52 for the years ended December 29, 2019; December 30, 2018; and December 31, 2017, respectively. Includes stock-based compensation expense of $2,649, $3,379 and $3,493 for the years ended December 29, 2019; December 30, 2018; and December 31, 2017, respectively. F-25 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 11. Business Segment Information (cont.) A reconciliation of consolidated net income (loss) to Adjusted EBITDA follows: Year Ended December 29, 2019: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Add: Non-general and administrative expense adjustments: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . Impairment and other lease charges . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Closed restaurant rent expense, net of sublease income . . . . . Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation expense in restaurant wages . . . . Total non-general and administrative expense Pollo Tropical Taco Cabana Consolidated $ 20,300 $ (95,317) $ 21,476 15 — 1,953 3,260 862 70 17,719 13,086 67,909 1,919 903 179 125 (84,386) 9,369 (75,017) 39,195 13,101 67,909 3,872 4,163 1,041 195 adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,636 101,840 129,476 General and administrative expense adjustments: Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . Restructuring costs and retention bonuses . . . . . . . . . . . . . . . Digital and brand repositioning costs . . . . . . . . . . . . . . . . . . . Total general and administrative expense adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ December 30, 2018: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit from income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Add: Non-general and administrative expense adjustments: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . Impairment and other lease charges . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation expense in restaurant wages . . . . Total non-general and administrative expense 1,590 827 207 1,059 137 170 2,649 964 377 2,624 50,560 $ 1,366 7,889 $ 3,990 58,449 $ 17,639 $ (12,624) $ 21,372 13,587 1,920 (1,225) 34 16,232 7,557 2,046 (1,782) 56 7,787 (2,772) 5,015 37,604 21,144 3,966 (3,007) 90 adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,688 24,109 59,797 General and administrative expense adjustments: Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . Board and shareholder matter costs . . . . . . . . . . . . . . . . . . . . Restructuring costs and retention bonuses . . . . . . . . . . . . . . . Legal settlements and related costs . . . . . . . . . . . . . . . . . . . . . Total general and administrative expense adjustments . . . . Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,885 (328) 196 (177) 1,576 54,903 $ 1,494 (269) 349 — 1,574 13,059 $ 3,379 (597) 545 (177) 3,150 67,962 F-26 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 11. Business Segment Information (cont.) Year Ended: December 31, 2017: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit from income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Add: Non-general and administrative expense adjustments: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . Impairment and other lease charges . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation expense in restaurant wages . . . . Unused pre-production costs in advertising expense . . . . . . . Total non-general and administrative expense Pollo Tropical Taco Cabana Consolidated $ (37,831) $ (6,156) $ 21,758 57,947 1,348 2,427 (4) 322 13,199 3,813 1,529 (237) 56 88 (36,232) (7,755) (43,987) 34,957 61,760 2,877 2,190 52 410 adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,798 18,448 102,246 General and administrative expense adjustments: Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . Terminated capital project . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board and shareholder matter costs . . . . . . . . . . . . . . . . . . . . Restructuring costs and retention bonuses . . . . . . . . . . . . . . . Office restructuring and relocation costs . . . . . . . . . . . . . . . . Legal settlements and related costs . . . . . . . . . . . . . . . . . . . . . Total general and administrative expense adjustments . . . . Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,983 484 1,738 1,390 (152) (473) 4,970 50,937 $ 1,510 365 1,311 1,030 — — 4,216 16,508 $ 3,493 849 3,049 2,420 (152) (473) 9,186 67,445 12. Earnings (Loss) Per Share Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during each period. Non-vested restricted shares contain a non-forfeitable right to receive dividends on a one-to-one per share ratio to common shares and are thus considered participating securities. The impact of the participating securities is included in the computation of basic EPS pursuant to the two-class method. The two-class method of computing EPS is an earnings allocation formula that determines earnings attributable to common shares and participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. EPS is computed by dividing undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and non-vested restricted shares based on the weighted average shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the restricted stock units were to be converted into common shares. Restricted stock units with performance conditions are only included in the diluted EPS calculation to the extent that performance conditions have been met at the measurement date. Diluted EPS is computed by adjusting the basic weighted average number of common shares by the dilutive effect of the restricted stock units, determined using the treasury stock method. Weighted average outstanding restricted stock units totaling 560 shares were not included in the computation of diluted earnings per share for the twelve months ended December 30, 2018, because including these restricted stock units would have been antidilutive. For the twelve months ended December 29, 2019, and December 31, 2017, all restricted stock units outstanding were excluded from the computation of diluted earnings per share because including restricted stock units would have been antidilutive as a result of the net loss in the period. F-27 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 12. Earnings (Loss) Per Share (cont.) The computation of basic and diluted EPS is as follows: December 29, 2019 Year Ended December 30, 2018 December 31, 2017 Basic and diluted EPS: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Less: income allocated to participating securities . . . . . . . . Net income (loss) available to common stockholders . . . . . . . . $ Weighted average common shares – basic . . . . . . . . . . . . . . . . Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average common shares – diluted . . . . . . . . . . . . . . . (84,386) $ — (84,386) $ 7,787 $ 85 7,702 $ 26,500,356 — 26,500,356 26,890,577 3,506 26,894,083 (36,232) — (36,232) 26,821,471 — 26,821,471 Earnings (loss) per common share – basic . . . . . . . . . . . . . . $ Earnings (loss) per common share – diluted . . . . . . . . . . . . $ (3.18) $ (3.18) $ 0.29 $ 0.29 $ (1.35) (1.35) 13. Commitments and Contingencies Lease Assignments. Taco Cabana has assigned two leases to various parties on properties where it no longer operates restaurants with lease terms expiring on various dates through 2029. The assignees are responsible for making the payments required by the leases. The Company is a guarantor under one of the leases, and it remains secondarily liable as a surety with respect to one of the leases. Pollo Tropical assigned one lease to a third party on a property where it no longer operates with a lease term expiring in 2033. The assignee is responsible for making the payments required by the lease. The Company is a guarantor under the lease. The maximum potential liability for future rental payments that the Company could be required to make under these leases at December 29, 2019, was $3.2 million. The Company could also be obligated to pay property taxes and other lease related costs. The obligations under these leases will generally continue to decrease over time as the operating leases expire. The Company does not believe it is probable that it will be ultimately responsible for the obligations under these leases. Legal Matters. The Company is a party to various legal proceedings incidental to the conduct of business. The Company does not believe that the outcome of any of these matters will have a material effect on its consolidated financial statements. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. Contingency Related to Insurance Recoveries. During the third quarter of 2017, Texas and Florida were struck by Hurricane Harvey and Irma (the “Hurricanes”). Forty-three Taco Cabana and two Pollo Tropical restaurants in the Houston metropolitan area and all Pollo Tropical restaurants in Florida and the Atlanta metropolitan area were temporarily closed and affected by the Hurricanes to varying degrees. In 2017, the Company recorded expected insurance proceeds of $0.7 million and $0.4 million for Pollo Tropical and Taco Cabana, respectively. In the twelve months ended December 30, 2018, the Company received business interruption and property damage insurance settlement proceeds of $2.8 million and $1.7 million, respectively, and recognized other income of $2.1 million and $1.4 million for Pollo Tropical and Taco Cabana, respectively, related to the Hurricanes. The Company has received a final settlement related to the Hurricanes as of December 30, 2018. F-28 FIESTA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 14. Retirement Plans Fiesta offers the Company’s salaried employees the option to participate in the Fiesta Corporation Retirement Savings Plan (the “Retirement Plan”). The Retirement Plan includes a savings option pursuant to section 401(k) of the Internal Revenue Code in addition to a post-tax savings option. Fiesta may elect to contribute to the Retirement Plan on an annual basis. Contributions made by Fiesta to the Retirement Plan for the Company’s employees are made after the end of each plan year. For 2019, 2018 and 2017, Fiesta’s discretionary annual contribution is equal to 50% of the employee’s contribution up to the first 6% of eligible compensation for a maximum Fiesta contribution of 3% of eligible compensation per participating employee. Under the Retirement Plan, Fiesta contributions begin to vest after 1 year and fully vest after 5 years of service. A year of service is defined as a plan year during which an employee completes at least 1,000 hours of service. Participating employees may contribute up to 50% of their salary annually to either of the savings options, subject to other limitations. The employees have various investment options available under a trust established by the Retirement Plan. Retirement Plan employer matching expense for the years ended December 29, 2019; December 30, 2018; and December 31, 2017, was $0.4 million, $0.5 million and $0.4 million respectively. Fiesta also has a Deferred Compensation Plan which permits employees not eligible to participate in the Retirement Plan because they have been excluded as “highly compensated” employees (as so defined in the Retirement Plan) to voluntarily defer portions of their base salary and annual bonus. All amounts deferred by the participants earn interest at 8% per annum. There is no Company matching on any portion of the funds. At December 29, 2019, and December 30, 2018, a total of $0.4 million and $0.9 million, respectively, was deferred by the Company’s employees under the Deferred Compensation Plan, including accrued interest. 15. Selected Quarterly Financial and Earnings Data (Unaudited) Year Ended December 29, 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Income (loss) from operations(1) . . . . . . . . . . . . . . . . . . Net income (loss)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings (loss) per common share – basic . . . . . . . . . . $ Earnings (loss) per common share – diluted . . . . . . . . . 165,852 $ 4,469 2,289 0.08 $ 0.08 171,381 $ (41,850) (43,440) (1.62) $ (1.62) 164,248 $ (24,305) (22,182) (0.84) $ (0.84) 159,462 (9,459) (21,053) (0.82) (0.82) Year Ended December 30, 2018 First Quarter Second Quarter Third Quarter Fourth Quarter Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Income (loss) from operations(1) . . . . . . . . . . . . . . . . . Net income (loss)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings (loss) per common share – basic . . . . . . . . . $ Earnings (loss) per common share – diluted . . . . . . . . 169,484 $ 6,878 4,184 176,827 $ 13,500 9,493 174,648 $ (1,921) 2,047 0.15 $ 0.15 0.35 $ 0.35 0.08 $ 0.08 167,638 (9,476) (7,937) (0.30) (0.30) (1) (2) (3) The Company recognized impairment and other lease charges of $(0.3) million, $1.8 million, $3.3 million and $8.4 million in the first, second, third and fourth quarters of 2019, respectively, and $(0.7) million, $0.8 million, $6.4 million and $14.6 million in the first, second, third and fourth quarters of 2018, respectively. See Note 5 — Impairment of Long-lived Assets and Other Lease Charges. The Company recognized goodwill impairment charges of $46.5 million (which was not tax deductible) and $21.4 million (of which $9.1 million was tax deductible) in the second and third quarters of 2019, respectively. The Company recorded a valuation allowance on its deferred income tax assets, which resulted in a $13.5 million increase in income taxes in the fourth quarter of 2019. In 2018, in conjunction with a cost segregation study conducted prior to filing its 2017 federal income tax return, the Company changed the depreciation method for certain assets for federal income tax purposes to accelerate tax deductions. Changes in the Company’s 2017 federal income tax return from the amounts recorded as of December 31, 2017 were primarily the result of changing the depreciable lives of assets for federal income tax purposes. These changes allowed the Company to record an incremental benefit of $3.9 million during the third quarter of 2018. See Note 9 for further information regarding income taxes. The federal corporate income tax rate changed from 35.0% to 21.0% effective January 1, 2018. F-29 FIESTA RESTAURANT GROUP, INC. SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS (In thousands of dollars) Description Year ended December 29, 2019: Column B Balance at beginning of period Column C Charged to costs and expenses Charged to other accounts Column D Deduction Column E Balance at end of period Deferred income tax valuation allowance . . . . $ 678 $ 13,445 $ — $ — $ 14,123 Year ended December 30, 2018: Deferred income tax valuation allowance . . . . Year ended December 31, 2017: Deferred income tax valuation allowance . . . . 736 856 (58) (120) — — — — 678 736 F-30 Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 26th day of February 2020. SIGNATURES Date: February 26, 2020 FIESTA RESTAURANT GROUP, INC. /S/ RICHARD C. STOCKINGER (Signature) Richard C. Stockinger Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature /s/ STACEY RAUCH Stacey Rauch /s/ RICHARD C. STOCKINGER Richard C. Stockinger Title Date Director and Chairman of the Board of Directors February 26, 2020 Chief Executive Officer, President and Director February 26, 2020 /s/ DIRK MONTGOMERY Dirk Montgomery Senior Vice President, Chief Financial Officer, and Treasurer /s/ CHERI KINDER Cheri Kinder Vice President, Corporate Controller, and Chief Accounting Officer /s/ NICHOLAS DARAVIRAS Nicholas Daraviras /s/ STEPHEN P. ELKER Stephen P. Elker /s/ BRIAN P. FRIEDMAN Brian P. Friedman /s/ NICHOLAS P. SHEPHERD Nicholas P. Shepherd /s/ PAUL E. TWOHIG Paul E. Twohig /s/ SHERRILL KAPLAN Sherrill Kaplan Director Director Director Director Director Director /s/ ANDREW RECHTSCHAFFEN Director Andrew Rechtschaffen February 26, 2020 February 26, 2020 February 26, 2020 February 26, 2020 February 26, 2020 February 26, 2020 February 26, 2020 February 26, 2020 February 26, 2020 [THIS PAGE INTENTIONALLY LEFT BLANK.] STOCKHOLDER INFORMATION DIRECTORS Stacey Rauch, Chair Nicholas Daraviras Stephen P. Elker Brian P. Friedman Sherrill Kaplan Andrew V. Rechtschaffen Nicholas P. Shepherd Richard C. Stockinger Paul E. Twohig EXECUTIVE OFFICERS Richard C. Stockinger Chief Executive Officer and President Hope Diaz Senior Vice President and Chief Marketing Officer Anthony Dinkins Senior Vice President and Chief Human Resources Officer Louis DiPietro Senior Vice President, Chief Legal Officer, General Counsel and Secretary Cheri Kinder Vice President, Corporate Controller and Chief Accounting Officer Patricia Lopez-Calleja Senior Vice President, Guest Engagement Dirk Montgomery Senior Vice President, Chief Financial Officer and Treasurer Eladio (Willie) Romeo Senior Vice President, Operations, Pollo Tropical INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Dallas, Texas OUTSIDE GENERAL COUNSEL Akerman LLP New York, New York Fiesta Restaurant Group, Inc.’s common stock is traded on the NASDAQ Global Select Market under the symbol ‘‘FRGI’’. STOCK TRANSFER AGENT American Stock Transfer & Trust Company, LLC 6201 15th Ave Brooklyn, NY 11219 FORM 10-K REPORT The Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission is fully reproduced in this annual report. You may obtain additional copies of this report by writing to Investor Relations, Fiesta Restaurant Group, Inc., 14800 Landmark Boulevard, Suite 500, Dallas, Texas 75254. Certain statements contained in this report and in our public disclosures, whether written, oral or otherwise made, relating to future events or future performance, including any discussion, express or implied regarding our anticipated growth, plans, objectives and the impact of our investments in strategic and sales building initiatives, including those relating to advertising and marketing, operations improvements, menu development and simplification, digital ordering and online sales, catering and third-party delivery on future sales, margins and earnings, and the recent COVID-19 outbreak contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the words “may,” “might,” “believes,” “thinks,” “anticipates,” “plans,” “positioned,” “target,” “continue,” “expects,” “look to,” “intends” and other similar expressions, whether in the negative or the affirmative, that are not statements of historical fact. These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict, and you should not place undue reliance on our forward-looking statements. Our actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those discussed from time to time in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended December 29, 2019 and our quarterly reports on Form 10-Q. All forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this report are made only as of the date of this report and may change. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.