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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
__________________________________________________________
FORM 10-Q
__________________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2017
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
90-0712224
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
14800 Landmark Boulevard, Suite 500
Dallas, Texas
75254
(Address of principal executive office)
(Zip Code)
Registrant’s telephone number, including area code: (972) 702-9300
__________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on their Corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting 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
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if smaller reporting company) 
 
 
 
 
 
 
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. ¨


Table of Contents

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of August 2, 2017, Fiesta Restaurant Group, Inc. had 27,089,625 shares of its common stock, $.01 par value, outstanding.


Table of Contents

FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JULY 2, 2017
 
 
 
Page
PART I   FINANCIAL INFORMATION
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
 
 
 
Item 1
 
 
 
Item 1A
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
Item 5
 
 
 
Item 6

3

Table of Contents

PART I—FINANCIAL INFORMATION
ITEM 1—INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share and per share amounts)
(Unaudited)
 
July 2, 2017
 
January 1, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
4,426

 
$
4,196

Trade receivables
9,075

 
8,771

Inventories
2,367

 
2,865

Prepaid rent
3,345

 
3,575

Income tax receivable
584

 
3,304

Prepaid expenses and other current assets
9,443

 
4,231

Total current assets
29,240

 
26,942

Property and equipment, net
239,414

 
270,920

Goodwill
123,484

 
123,484

Deferred income taxes
29,023

 
14,377

Other assets
5,082

 
5,842

Total assets
$
426,243

 
$
441,565

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
94

 
$
89

Accounts payable
18,135

 
16,165

Accrued payroll, related taxes and benefits
11,786

 
12,275

Accrued real estate taxes
5,164

 
6,924

Other liabilities
20,779

 
11,316

Total current liabilities
55,958

 
46,769

Long-term debt, net of current portion
62,375

 
71,423

Lease financing obligations
1,664

 
1,664

Deferred income—sale-leaseback of real estate
25,362

 
27,165

Other liabilities
32,082

 
30,369

Total liabilities
177,441

 
177,390

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Common stock, par value $.01; authorized 100,000,000 shares, issued 27,089,482 and 26,884,992 shares, respectively, and outstanding 26,835,137 and 26,755,640 shares, respectively.
268

 
267

Additional paid-in capital
165,097

 
163,204

Retained earnings
83,437

 
100,704

Total stockholders' equity
248,802

 
264,175

Total liabilities and stockholders' equity
$
426,243

 
$
441,565



The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4

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FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JULY 2, 2017 AND JULY 3, 2016
(In thousands of dollars, except share and per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
Revenues:
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Restaurant sales
$
172,005

 
$
180,835

 
$
346,982

 
$
356,774

Franchise royalty revenues and fees
619

 
697

 
1,249

 
1,435

Total revenues
172,624

 
181,532

 
348,231

 
358,209

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
50,728

 
54,607

 
101,676

 
108,657

Restaurant wages and related expenses (including stock-based compensation expense of ($74), $40, $35 and $76, respectively)
46,269

 
46,981

 
94,401

 
92,033

Restaurant rent expense
8,915

 
9,113

 
18,777

 
18,034

Other restaurant operating expenses
24,636

 
24,263

 
48,704

 
46,651

Advertising expense
4,292

 
7,006

 
11,831

 
14,001

General and administrative (including stock-based compensation expense of $1,248, $1,218, $1,785 and $2,193, respectively)
19,140

 
14,253

 
35,148

 
28,101

Depreciation and amortization
8,596

 
8,625

 
17,782

 
16,961

Pre-opening costs
910

 
2,016

 
1,334

 
3,198

Impairment and other lease charges
10,762

 
82

 
43,176

 
94

Other expense (income), net
654

 
10

 
798

 
(238
)
Total operating expenses
174,902

 
166,956

 
373,627

 
327,492

Income (loss) from operations
(2,278
)
 
14,576

 
(25,396
)
 
30,717

Interest expense
654

 
535

 
1,238

 
1,093

Income (loss) before income taxes
(2,932
)
 
14,041

 
(26,634
)
 
29,624

Provision for (benefit from) income taxes
(772
)
 
5,125

 
(9,414
)
 
10,813

Net income (loss)
$
(2,160
)
 
$
8,916

 
$
(17,220
)
 
$
18,811

Basic net income (loss) per share
$
(0.08
)
 
$
0.33

 
$
(0.64
)
 
$
0.70

Diluted net income (loss) per share
$
(0.08
)
 
$
0.33

 
$
(0.64
)
 
$
0.70

Basic weighted average common shares outstanding
26,815,015

 
26,654,280

 
26,794,560

 
26,629,999

Diluted weighted average common shares outstanding
26,815,015

 
26,660,269

 
26,794,560

 
26,636,145



The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
5

Table of Contents

FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JULY 2, 2017 AND JULY 3, 2016
(In thousands of dollars, except share amounts) 
(Unaudited)

 
Number of
Common
Stock Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at January 3, 2016
26,571,602

 
$
266

 
$
159,724

 
$
83,992

 
$
243,982

Stock-based compensation

 

 
2,269

 

 
2,269

Vesting of restricted shares
115,566

 
1

 
(1
)
 

 

Tax deficiency from stock-based compensation
 
 
 
 
(81
)
 
 
 
(81
)
Net income

 

 

 
18,811

 
18,811

Balance at July 3, 2016
26,687,168

 
$
267

 
$
161,911

 
$
102,803

 
$
264,981

 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
26,755,640

 
$
267

 
$
163,204

 
$
100,704

 
$
264,175

Stock-based compensation

 

 
1,820

 

 
1,820

Vesting of restricted shares
79,497

 
1

 

 

 
1

Cumulative effect of adopting a new accounting standard (Note 1)
 
 
 
 
73

 
(47
)
 
26

Net loss

 

 

 
(17,220
)
 
(17,220
)
Balance at July 2, 2017
26,835,137

 
$
268

 
$
165,097

 
$
83,437

 
$
248,802



The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6

Table of Contents

FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JULY 2, 2017 AND JULY 3, 2016
(In thousands of dollars)
(Unaudited)
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(17,220
)
 
$
18,811

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Loss on disposals of property and equipment
931

 
25

Stock-based compensation
1,820

 
2,269

Impairment and other lease charges
43,176

 
94

Depreciation and amortization
17,782

 
16,961

Amortization of deferred financing costs
154

 
154

Amortization of deferred gains from sale-leaseback transactions
(1,803
)
 
(1,791
)
Deferred income taxes
(14,646
)
 

Changes in other operating assets and liabilities
5,232

 
7,046

Net cash provided from operating activities
35,426

 
43,569

Cash flows from investing activities:
 
 
 
Capital expenditures:
 
 
 
New restaurant development
(18,796
)
 
(35,760
)
Restaurant remodeling
(961
)
 
(486
)
Other restaurant capital expenditures
(3,587
)
 
(1,995
)
Corporate and restaurant information systems
(2,809
)
 
(3,997
)
Total capital expenditures
(26,153
)
 
(42,238
)
Properties purchased for sale-leaseback

 
(2,663
)
Proceeds from disposals of other properties

 
226

Proceeds from sale-leaseback transactions

 
3,642

Net cash used in investing activities
(26,153
)
 
(41,033
)
Cash flows from financing activities:
 
 
 
Excess tax benefit from vesting of restricted shares

 
120

Borrowings on revolving credit facility
5,000

 
9,400

Repayments on revolving credit facility
(14,000
)
 
(12,500
)
Principal payments on capital leases
(43
)
 
(28
)
Net cash used in financing activities
(9,043
)
 
(3,008
)
Net increase (decrease) in cash
230

 
(472
)
Cash, beginning of period
4,196

 
5,281

Cash, end of period
$
4,426

 
$
4,809

Supplemental disclosures:
 
 
 
Interest paid on long-term debt
$
1,149

 
$
921

Interest paid on lease financing obligations
$
71

 
$
71

Accruals for capital expenditures
$
5,872

 
$
6,093

Income tax payments, net
$
2,486

 
$
5,275


The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
7

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except share and per share amounts)



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, 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 July 2, 2017, the Company owned and operated 153 Pollo Tropical® restaurants and 169 Taco Cabana® restaurants. The Pollo Tropical restaurants included 134 located in Florida, six located in Texas and 13 located in Georgia. The Taco Cabana restaurants included 168 located in Texas and one located in Oklahoma. At July 2, 2017, the Company franchised a total of 32 Pollo Tropical restaurants and seven Taco Cabana restaurants. The franchised Pollo Tropical restaurants included 17 in Puerto Rico, one in the Bahamas, two in Guyana, one in Venezuela, four in Panama, one in Honduras, and six on college campuses and at a hospital in Florida. The franchised Taco Cabana restaurants included five in New Mexico and two on college campuses in Texas.
Basis of Consolidation. The unaudited condensed 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 year ended January 1, 2017 contained 52 weeks. The three and six months ended July 2, 2017 and July 3, 2016 each contained thirteen and twenty six weeks, respectively. The fiscal year ending December 31, 2017 will contain 52 weeks.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements for the three and six months ended July 2, 2017 and July 3, 2016 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and six months ended July 2, 2017 and July 3, 2016 are not necessarily indicative of the results to be expected for the full year.
These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended January 1, 2017 included in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2017. The January 1, 2017 balance sheet data is derived from those audited financial statements.
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 at 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 our 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 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 and carrying value of the Company's senior credit facility were approximately $60.9 million at July 2, 2017 and $69.9 million at January 1, 2017.
Long-Lived Assets. The Company assesses the recoverability of property and equipment and definite-lived intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. Impairment is reviewed when events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. See Note 3.
Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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: accrued occupancy costs, insurance liabilities, evaluation for impairment of goodwill and long-lived assets and lease accounting matters. Actual results could differ from those estimates.

8

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


Guidance Adopted in 2017. In March 2016, the Financial Accounting Standards Board issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), to simplify various aspects of the accounting and presentation of share-based payments, including the income tax effects of awards and forfeiture assumptions. In the first quarter of 2017, the Company prospectively adopted the amendments in this guidance that relate to the classification of excess tax benefits or tax benefit deficiencies from share-based payment arrangements in the statement of cash flows and income statement. Excess tax benefits from share-based payment arrangements result from share-based compensation windfall deductions in excess of compensation costs for financial reporting purposes and tax benefit deficiencies result from share-based compensation deduction shortfalls. During the six months ended July 2, 2017, the Company recognized $0.2 million of tax benefit deficiencies, which pursuant to the adopted guidance increased income tax expense and decreased net income by $0.2 million. Effective January 2, 2017, the Company elected to change its accounting policy to recognize forfeitures as they occur. The new forfeiture policy election was adopted using a modified retrospective approach with a $0.1 million cumulative-effect adjustment to beginning retained earnings in the first quarter of 2017 as a result of adopting the standard.

2. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets, consist of the following:
 
July 2, 2017
 
January 1, 2017
Prepaid contract expenses
$
2,984

 
$
2,089

Assets held for sale(1)
2,705

 

Other
3,754

 
2,142

 
$
9,443

 
$
4,231


(1) See Note 3.
3. Impairment of Long-Lived Assets and Other Lease Charges
The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. 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 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 over the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. 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. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries. There is uncertainty in the estimates of future lease costs and sublease recoveries. Actual costs and sublease recoveries could vary significantly from the estimated amounts and result in additional lease charges or recoveries, and such amounts could be material.
A summary of impairment on long-lived assets and other lease charges recorded by segment is as follows:
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Pollo Tropical
$
10,536

 
$

 
$
42,607

 
$

Taco Cabana
226

 
82

 
569

 
94

 
$
10,762

 
$
82

 
$
43,176

 
$
94


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 Company-owned Pollo Tropical restaurants outside its core Florida markets. The Company closed all Pollo Tropical locations in Dallas-Fort Worth and Austin, Texas, and Nashville, Tennessee during the second quarter of

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


2017. The Company continues to own and operate 19 Pollo Tropical restaurants located outside of Florida, including 13 in Atlanta and six in south Texas. Up to two Pollo Tropical restaurants that closed in April 2017 in Texas may be rebranded as Taco Cabana restaurants.
In the first quarter of 2017, the Company recognized impairment charges of $32.0 million with respect to the 30 closed restaurants, seven of which were impaired in 2016, as well as an additional impairment charge related to previously closed restaurants primarily as a result of the decision not to convert a location to a Taco Cabana restaurant. In the first quarter of 2017, the Company also recognized impairment charges of $0.3 million with respect to three Taco Cabana restaurants that it continues to operate.
In the second quarter of 2017, the Company recognized other lease charges, net of recoveries, of $6.7 million, primarily related to Pollo Tropical restaurants that were closed during the quarter. In addition, the Company recognized impairment charges of $3.8 million related to three closed Pollo Tropical restaurants as a result of the decision not to convert the locations to Taco Cabana restaurants and $0.2 million with respect to four Taco Cabana restaurants that it subsequently closed in the third quarter of 2017.
Impairment and other lease charges for the three and six months ended July 2, 2017 for Pollo Tropical consist of impairment charges of $3.8 million and $35.7 million, respectively, and other lease charges, net of recoveries, of $6.7 million and $6.9 million, respectively. Impairment and other lease charges for the three and six months ended July 2, 2017 for Taco Cabana consist of impairment charges of $0.2 million and $0.6 million, respectively.
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. 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 six months ended July 2, 2017 totaled $9.5 million, which primarily consist of leasehold improvements related to Pollo Tropical restaurants that may be rebranded as Taco Cabana restaurants and the estimated fair value of owned properties.
The Company owns two of the Pollo Tropical restaurants that were closed in the second quarter of 2017. The carrying value of these restaurants, which are classified as held for sale, totaled $2.7 million at July 2, 2017.  The Company is actively marketing these properties for sale.

4. Other Liabilities
Other liabilities, current, consist of the following:
 
July 2, 2017
 
January 1, 2017
Accrued workers' compensation and general liability claims
$
6,539

 
$
4,838

Sales and property taxes
2,062

 
1,844

Accrued occupancy costs
6,891

 
2,161

Other
5,287

 
2,473

 
$
20,779

 
$
11,316


Other liabilities, long-term, consist of the following:
 
July 2, 2017
 
January 1, 2017
Accrued occupancy costs
$
22,676

 
$
20,172

Deferred compensation
1,121

 
2,027

Accrued workers’ compensation and general liability claims
4,029

 
4,030

Other
4,256

 
4,140

 
$
32,082

 
$
30,369


Accrued occupancy costs include obligations pertaining to closed restaurant locations and accruals to expense operating lease rental payments on a straight-line basis over the lease term.

10

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


The following table presents the activity in the closed-store reserve, of which $7.3 million and $3.1 million are included in long-term accrued occupancy costs at July 2, 2017 and January 1, 2017, respectively, with the remainder in other current liabilities.
 
Six Months Ended July 2, 2017
 
Year Ended January 1, 2017
Balance, beginning of period
$
4,912

 
$
1,832

Provisions for restaurant closures
7,423

 
3,093

Additional lease charges, net of (recoveries)
(698
)
 
(237
)
Payments, net
(1,928
)
 
(806
)
Other adjustments
4,371

 
1,030

Balance, end of period
$
14,080

 
$
4,912



5. Stock-Based Compensation
During the six months ended July 2, 2017 and July 3, 2016, the Company granted certain employees 182,522 and 50,087 non-vested restricted shares, respectively, under the Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan (the "Fiesta Plan"). These shares generally vest and become non-forfeitable over a four year vesting period. The weighted average fair value at grant date for these non-vested shares issued during the six months ended July 2, 2017 and July 3, 2016 was $20.75 and $35.25, respectively.
During the six months ended July 2, 2017, the Company granted new non-employee directors 8,927 non-vested restricted shares, under the Fiesta Plan. These shares vest and become non-forfeitable over a five year vesting period. The weighted average fair value at grant date for these non-vested shares was $22.41.
During the three and six months ended July 2, 2017 and July 3, 2016, the Company granted non-employee directors 29,669 and 14,081 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 three and six months ended July 2, 2017 and July 3, 2016 was $20.90 and $33.39. These shares vest and become non-forfeitable over a one year vesting period.
During the six months ended July 2, 2017 and July 3, 2016, the Company granted certain employees 11,745 and 5,762 restricted stock units, respectively, under the Fiesta Plan. The restricted stock units granted during the six months ended July 2, 2017 and July 3, 2016 vest and become non-forfeitable at the end of a four year vesting period. The weighted average fair value at grant date for these restricted stock units issued to employees during the six months ended July 2, 2017 and July 3, 2016 was $20.75 and $35.25, respectively.
Also during the three and six months ended July 2, 2017, the Company granted 92,171 restricted stock units under the Fiesta Plan to certain employees subject to continued service requirements and market performance conditions:
The Company granted its Chief Executive Officer 72,290 restricted stock units, which vest and become non-forfeitable 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 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.
The Company granted certain executives 19,881 restricted stock units, which vest and become non-forfeitable in March 2020 subject to market performance conditions. The weighted average fair value at grant date for these restricted stock units was $6.20.
During the six months ended July 3, 2016, the Company granted 33,691 non-vested restricted shares and 33,691 restricted stock units, respectively, under the Fiesta Plan to certain employees subject to performance conditions. The non-vested restricted shares vest and become non-forfeitable over a four year vesting period subject to the attainment of financial performance conditions. The restricted stock units vest and become non-forfeitable at the end of a three year vesting period. The number of shares into

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


which the restricted stock units convert is based on the attainment of certain financial performance conditions and for the restricted stock units granted during the six months ended July 3, 2016, ranges from no shares, if the minimum financial performance condition is not met, to 67,382 shares, if the maximum performance condition is met. The weighted average fair value at grant date for both restricted non-vested shares and restricted stock units subject to financial performance conditions granted during the six months ended July 3, 2016 was $35.25.
Stock-based compensation expense for the three and six months ended July 2, 2017 was $1.2 million and $1.8 million, respectively, and for the three and six months ended July 3, 2016 was $1.3 million and $2.3 million, respectively. At July 2, 2017, the total unrecognized stock-based compensation expense related to non-vested restricted shares and restricted stock units was approximately $7.0 million. At July 2, 2017, the remaining weighted average vesting period for non-vested restricted shares was 3.0 years and restricted stock units was 2.1 years.
A summary of all non-vested restricted shares and restricted stock units activity for the six months ended July 2, 2017 is as follows:
 
Non-Vested Shares
 
Restricted Stock Units
 
Shares
 
Weighted
Average
Grant Date
Price
 
Units
 
Weighted
Average
Grant Date
Price
Outstanding at January 1, 2017
129,352

 
$
37.94

 
51,445

 
$
46.59

Granted
221,118

 
20.84

 
103,916

 
12.51

Vested/Released
(78,325
)
 
30.54

 
(1,172
)
 
51.54

Forfeited
(17,800
)
 
32.85

 
(5,556
)
 
37.43

Outstanding at July 2, 2017
254,345

 
$
25.71

 
148,633

 
$
23.06


The fair value of the restricted stock units subject to market performance conditions was estimated using the Monte Carlo simulation method. 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.

6. Business Segment Information
The Company is engaged in the fast-casual restaurant industry, with two restaurant concepts (each of which is an operating segment): Pollo Tropical and Taco Cabana. Pollo Tropical restaurants offer a wide variety of freshly prepared tropical inspired food while our Taco Cabana restaurants offer a broad selection of freshly prepared Mexican inspired food.
Each segment's accounting policies are the same as those described in the summary of significant accounting policies in Note 1 to the Company's audited financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2017. 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, stock-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.

12

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


The “Other” column includes corporate-related items not allocated to reportable segments and consists primarily of corporate-owned property and equipment, miscellaneous prepaid costs, capitalized costs associated with the issuance of indebtedness, corporate cash accounts, a current income tax receivable, and advisory fees related to a previously proposed and terminated separation transaction.
Three Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
July 2, 2017:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
94,374

 
$
77,631

 
$

 
$
172,005

Franchise revenue
 
427

 
192

 

 
619

Cost of sales
 
28,956

 
21,772

 

 
50,728

Restaurant wages and related expenses
 
21,691

 
24,578

 

 
46,269

Restaurant rent expense
 
4,472

 
4,443

 

 
8,915

Other restaurant operating expenses
 
12,930

 
11,706

 

 
24,636

Advertising expense
 
2,011

 
2,281

 

 
4,292

General and administrative expense
 
10,782

 
8,358

 

 
19,140

Adjusted EBITDA
 
17,139

 
6,982

 

 
24,121

Depreciation and amortization
 
5,435

 
3,161

 

 
8,596

Capital expenditures
 
8,243

 
5,320

 
916

 
14,479

July 3, 2016:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
101,879

 
$
78,956

 
$

 
$
180,835

Franchise revenue
 
508

 
189

 

 
697

Cost of sales
 
32,266

 
22,341

 

 
54,607

Restaurant wages and related expenses
 
23,980

 
23,001

 

 
46,981

Restaurant rent expense
 
4,825

 
4,288

 

 
9,113

Other restaurant operating expenses
 
13,701

 
10,562

 

 
24,263

Advertising expense
 
3,685

 
3,321

 

 
7,006

General and administrative expense
 
8,843

 
5,363

 
47

 
14,253

Adjusted EBITDA
 
14,588

 
10,528

 

 
25,116

Depreciation and amortization
 
5,428

 
3,197

 

 
8,625

Capital expenditures
 
20,468

 
3,633

 
1,346

 
25,447


 

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


Six Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
July 2, 2017:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
193,684

 
$
153,298

 
$

 
$
346,982

Franchise revenue
 
876

 
373

 

 
1,249

Cost of sales
 
58,903

 
42,773

 

 
101,676

Restaurant wages and related expenses
 
45,737

 
48,664

 

 
94,401

Restaurant rent expense
 
9,847

 
8,930

 

 
18,777

Other restaurant operating expenses
 
26,319

 
22,385

 

 
48,704

Advertising expense
 
6,336

 
5,495

 

 
11,831

General and administrative expense
 
19,676

 
15,472

 

 
35,148

Adjusted EBITDA
 
31,861

 
13,476

 

 
45,337

Depreciation and amortization
 
11,518

 
6,264

 

 
17,782

Capital expenditures
 
16,906

 
8,016

 
1,231

 
26,153

July 3, 2016:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
200,785

 
$
155,989

 
$

 
$
356,774

Franchise revenue
 
1,085

 
350

 

 
1,435

Cost of sales
 
63,870

 
44,787

 

 
108,657

Restaurant wages and related expenses
 
46,876

 
45,157

 

 
92,033

Restaurant rent expense
 
9,469

 
8,565

 

 
18,034

Other restaurant operating expenses
 
26,293

 
20,358

 

 
46,651

Advertising expense
 
7,447

 
6,554

 

 
14,001

General and administrative expense
 
16,528

 
10,825

 
748

 
28,101

Adjusted EBITDA
 
30,050

 
20,768

 

 
50,818

Depreciation and amortization
 
10,706

 
6,255

 

 
16,961

Capital expenditures
 
34,567

 
5,267

 
2,404

 
42,238

Identifiable Assets:
 
 
 
 
 
 
 
 
July 2, 2017
 
$
247,312

 
$
164,384

 
$
14,547

 
$
426,243

January 1, 2017
 
263,868

 
165,195

 
12,502

 
441,565



14

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FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


A reconciliation of consolidated net income (loss) to Adjusted EBITDA follows:
Three Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
July 2, 2017:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
(2,160
)
Provision for (benefit from) income taxes
 
 
 
 
 
 
 
(772
)
Income (loss) before taxes
 
$
(3,502
)
 
$
570

 
$

 
$
(2,932
)
Add:
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Depreciation and amortization
 
5,435

 
3,161

 

 
8,596

          Impairment and other lease charges
 
10,536

 
226

 

 
10,762

          Interest expense
 
295

 
359

 

 
654

          Other expense (income), net
 
744

 
(90
)
 

 
654

          Stock-based compensation credit in restaurant wages
 
(45
)
 
(29
)
 

 
(74
)
          Unused pre-production costs in advertising expense
 

 
88

 

 
88

                Total Non-general and administrative expense adjustments
 
16,965

 
3,715

 

 
20,680

     General and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Stock-based compensation expense
 
640

 
608

 

 
1,248

          Terminated capital project
 
7

 
6

 

 
13

          Board and shareholder matter costs
 
1,767

 
1,332

 

 
3,099

          Write-off of site development costs
 
109

 
35

 

 
144

          Plan restructuring costs and retention bonuses
 
1,153

 
716

 

 
1,869

               Total General and administrative expense adjustments
 
3,676

 
2,697

 

 
6,373

Adjusted EBITDA:
 
$
17,139

 
$
6,982

 
$

 
$
24,121

 
 
 
 
 
 
 
 
 
July 3, 2016:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
8,916

Provision for (benefit from) income taxes
 
 
 
 
 
 
 
5,125

Income (loss) before taxes
 
$
7,636

 
$
6,452

 
$
(47
)
 
$
14,041

Add:
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Depreciation and amortization
 
5,428

 
3,197

 

 
8,625

          Impairment and other lease charges
 

 
82

 

 
82

          Interest expense
 
228

 
307

 

 
535

          Other expense (income), net
 

 
10

 

 
10

          Stock-based compensation expense in restaurant wages
 
21

 
19

 

 
40

                Total Non-general and administrative expense adjustments
 
5,677

 
3,615

 

 
9,292

     General and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Stock-based compensation expense
 
680

 
538

 

 
1,218

          Board and shareholder matter costs
 

 

 
47

 
47

          Write-off of site development costs
 
190

 
14

 

 
204

          Office restructuring and relocation costs
 
346

 

 

 
346

          Legal settlements and related costs
 
59

 
(91
)
 

 
(32
)
               Total General and administrative expense adjustments
 
1,275

 
461

 
47

 
1,783

Adjusted EBITDA:
 
$
14,588

 
$
10,528

 
$

 
$
25,116

 
 
 
 
 
 
 
 
 


15

Table of Contents
FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


Six Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
July 2, 2017:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
(17,220
)