CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
(Unaudited)
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Accumulated
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Additional
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Other
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Total
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Common Stock
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Preferred Stock
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Paid-In
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Retained
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Comprehensive
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Treasury
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Stockholders'
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Shares
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Amount
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Shares
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Amount
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Capital
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Earnings
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Loss
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Stock
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Equity
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Balance, December 31, 2018
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35,742,427
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$
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357
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|
100
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$
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—
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$
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150,459
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$
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35,511
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$
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(646
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)
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$
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(141
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)
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$
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185,540
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Stock-based compensation
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—
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—
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—
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—
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1,526
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—
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—
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—
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1,526
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Vesting of non-vested shares
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371,824
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4
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—
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—
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(4
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)
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—
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—
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—
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—
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Net loss
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—
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—
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—
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—
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—
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(11,469
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)
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—
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—
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(11,469
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)
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Adoption of ASC 842, net of taxes (Note 6)
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—
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—
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—
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—
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—
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7,504
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—
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—
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7,504
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Balance, March 31, 2019
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36,114,251
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$
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361
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100
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$
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—
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$
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151,981
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$
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31,546
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$
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(646
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)
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$
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(141
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)
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$
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183,101
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Stock-based compensation
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—
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—
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—
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—
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1,282
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—
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—
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—
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1,282
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Vesting of non-vested shares
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2,478
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—
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—
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—
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—
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—
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—
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—
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—
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Issuance of common and preferred stock
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7,364,413
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74
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10,000
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—
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145,259
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—
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—
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—
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145,333
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Retirement of treasury stock
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—
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—
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—
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—
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(141
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)
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—
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—
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141
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—
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Net loss
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—
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—
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—
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—
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—
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(3,732
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)
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—
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—
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(3,732
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)
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Balance, June 30, 2019
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43,481,142
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$
|
435
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10,100
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$
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—
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$
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298,381
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$
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27,814
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$
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(646
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)
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$
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—
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$
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325,984
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Balance, December 31, 2017
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35,436,252
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$
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354
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100
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$
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—
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$
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144,650
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$
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25,407
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$
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(1,210
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)
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$
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(141
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)
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$
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169,060
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Stock-based compensation
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—
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—
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—
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—
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1,585
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—
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—
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—
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1,585
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Vesting of non-vested shares
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283,248
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3
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—
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—
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(3
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)
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—
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—
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—
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—
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Net loss
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—
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—
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—
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—
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—
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(3,102
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)
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—
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—
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(3,102
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)
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Balance, April 1, 2018
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35,719,500
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$
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357
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100
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$
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—
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$
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146,232
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$
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22,305
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$
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(1,210
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)
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$
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(141
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)
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$
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167,543
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Stock-based compensation
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—
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—
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—
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—
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1,385
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—
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—
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—
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1,385
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Vesting of non-vested shares
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3,338
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|
1
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—
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—
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(1
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)
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—
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—
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—
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—
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Net income
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—
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—
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—
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—
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—
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7,788
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—
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—
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7,788
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Balance, July 1, 2018
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35,722,838
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$
|
358
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|
100
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|
|
$
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—
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$
|
147,616
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$
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30,093
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$
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(1,210
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)
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|
$
|
(141
|
)
|
|
$
|
176,716
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|
|
|
|
|
|
|
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|
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See accompanying notes to unaudited condensed consolidated financial statements.
5
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except share and per share amounts)
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
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Six Months Ended
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June 30, 2019
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|
July 1, 2018
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Cash flows provided by operating activities:
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Net income (loss)
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$
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(15,201
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)
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$
|
4,686
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Adjustments to reconcile net income (loss) to net cash provided by operating activities:
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Loss on disposals of property and equipment
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508
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209
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Stock-based compensation
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2,808
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2,970
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Gain on bargain purchase (Note 2)
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—
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(230
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)
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Gain on settlement agreement (Note 14)
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(1,913
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)
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—
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Impairment and other lease charges
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1,277
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|
|
3,190
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Depreciation and amortization
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32,413
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|
28,871
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Amortization of deferred financing costs
|
719
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|
|
601
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Amortization of bond premium and discount on debt
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(264
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)
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(449
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)
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Amortization of deferred gains from sale-leaseback transactions
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—
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|
|
(790
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)
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Deferred income taxes
|
(8,219
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)
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|
38
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|
Change in refundable income taxes
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(41
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)
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|
—
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Loss on extinguishment of debt - non-cash
|
129
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|
|
—
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Changes in other operating assets and liabilities
|
(1,384
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)
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|
(269
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)
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Net cash provided by operating activities
|
10,832
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|
|
38,827
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Cash flows used for investing activities:
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Capital expenditures:
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|
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New restaurant development
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(19,120
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)
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(12,157
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)
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Restaurant remodeling
|
(12,990
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)
|
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(10,995
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)
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Other restaurant capital expenditures
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(8,784
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)
|
|
(7,973
|
)
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Corporate and restaurant information systems
|
(2,198
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)
|
|
(1,338
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)
|
Total capital expenditures
|
(43,092
|
)
|
|
(32,463
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)
|
Acquisition of restaurants, net of cash acquired (Note 2)
|
(127,980
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)
|
|
—
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|
Properties purchased for sale-leaseback
|
—
|
|
|
(2,123
|
)
|
Proceeds from sale-leaseback transactions
|
4,637
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|
|
2,862
|
|
Proceeds from insurance recoveries
|
123
|
|
|
—
|
|
Net cash used for investing activities
|
(166,312
|
)
|
|
(31,724
|
)
|
Cash flows provided by financing activities:
|
|
|
|
Proceeds from issuance of Term Loan B Facility
|
422,875
|
|
|
—
|
|
Retirement of 8% Senior Secured Second Lien Notes, premium and fees
|
(280,500
|
)
|
|
—
|
|
Borrowings under prior revolving credit facility
|
—
|
|
|
4,500
|
|
Repayments under prior revolving credit facility
|
—
|
|
|
(4,500
|
)
|
Borrowings under new revolving credit facility
|
175,750
|
|
|
—
|
|
Repayments under new revolving credit facility
|
(150,750
|
)
|
|
—
|
|
Proceeds from lease financing obligations
|
—
|
|
|
2,692
|
|
Payments on finance lease liabilities
|
(981
|
)
|
|
(888
|
)
|
Costs associated with financing long-term debt
|
(11,516
|
)
|
|
(154
|
)
|
Net cash provided by financing activities
|
154,878
|
|
|
1,650
|
|
Net increase (decrease) in cash and cash equivalents
|
(602
|
)
|
|
8,753
|
|
Cash and cash equivalents, beginning of period
|
4,014
|
|
|
29,412
|
|
Cash and cash equivalents, end of period
|
$
|
3,412
|
|
|
$
|
38,165
|
|
CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(In thousands)
(Unaudited)
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Six Months Ended
|
|
June 30, 2019
|
|
July 1, 2018
|
Supplemental disclosures:
|
|
|
|
Interest paid on long-term debt
|
$
|
15,988
|
|
|
$
|
11,639
|
|
Interest paid on lease financing obligations
|
$
|
52
|
|
|
$
|
52
|
|
Accruals for capital expenditures
|
$
|
4,882
|
|
|
$
|
3,230
|
|
Common and preferred stock issued for consideration in acquisition
|
$
|
145,333
|
|
|
$
|
—
|
|
Income taxes paid
|
$
|
138
|
|
|
$
|
133
|
|
Lease assets obtained in exchange for new operating lease liabilities
|
$
|
36,124
|
|
|
$
|
—
|
|
Lease assets and liabilities resulting from lease modifications
|
$
|
10,255
|
|
|
$
|
—
|
|
Finance lease obligations acquired or incurred
|
$
|
518
|
|
|
$
|
—
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
6
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except share and per share amounts)
1. Basis of Presentation
Business Description.
At
June 30, 2019
Carrols Restaurant Group, Inc. ("Carrols Restaurant Group") operated, as franchisee,
1,023
Burger King
®
restaurants in
23
Northeastern, Midwestern and Southeastern states. At
June 30, 2019
, the Company also operated
58
Popeyes
®
in
7
Southeastern states.
Basis of Consolidation.
Carrols Restaurant Group, Inc. is a holding company and conducts all of its operations through its wholly-owned subsidiaries Carrols Corporation (“Carrols”) and Carrols' wholly-owned subsidiary, Carrols LLC, a Delaware limited liability company, and Carrols LLC's wholly-owned subsidiary Republic Foods, Inc., a Maryland corporation ("Republic Foods"), and effective on April 30, 2019, New CFH, LLC and it's wholly-owned subsidiaries. New CFH's direct wholly-owned subsidiaries include Alabama Quality, LLC, Carolina Quality, LLC, Cambridge Quality Chicken, LLC, Frayser Holdings, LLC, Louisiana Quality, LLC, Cambridge Franchise Real Estate, LLC, Cambridge Real Estate Development, LLC, Carolina Quality Properties, LLC, CFH Real Estate, LLC, and Tennessee Quality, LLC. Unless the context otherwise requires, Carrols Restaurant Group and its wholly-owned subsidiaries are collectively referred to as the “Company.” All intercompany transactions have been eliminated in consolidation.
Fiscal Year.
The Company uses a
52
-
53
week fiscal year ending on the Sunday closest to December 31. The three and
six months ended
June 30, 2019
and
July 1, 2018
each contained
thirteen
and twenty-six weeks, respectively. The
2019
fiscal year will end
December 29, 2019
and will contain
52
weeks.
Basis of Presentation.
The accompanying unaudited condensed consolidated financial statements as of and for the three and
six months ended
June 30, 2019
and
July 1, 2018
have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such unaudited condensed consolidated financial statements have been included. The results of operations for the three and
six months ended
June 30, 2019
and
July 1, 2018
are not necessarily indicative of the results to be expected for the full year.
These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended
December 30, 2018
. The
December 30, 2018
consolidated balance sheet data is derived from those audited consolidated financial statements.
Use of Estimates.
The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, evaluation for impairment of long-lived assets and franchise rights, lease accounting matters, the valuation of acquired assets and liabilities and the valuation of deferred income tax assets. Actual results could differ from those estimates.
Segment Information.
Operating segments are components of an entity for which separate financial information is available and is regularly reviewed by the chief operating decision maker in order to allocate resources and assess performance. The Company's chief operating decision maker currently evaluates the Company's operations from a number of different operational perspectives; however resource allocation decisions are determined based on the chief operating decision maker's evaluation of the total Company operations. The Company derives all significant revenues from a single operating segment. Accordingly, the Company views the operating results of its restaurants as one reportable segment.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
Business Combinations.
In accordance with ASC 805, the Company allocates the purchase price of an acquired business to its net identifiable assets and liabilities based on the estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. The excess value of the net identifiable assets and liabilities acquired over the purchase price, if any, is recorded as a bargain purchase gain. The Company uses all available information to estimate fair values of identifiable intangible assets and property acquired. In making these determinations, the Company sometimes engages an independent third party valuation specialist to assist with the valuation of certain leasehold improvements, franchise rights and favorable and unfavorable leases.
The Company estimates that the seller's carrying value of acquired restaurant equipment, subject to certain adjustments, is equivalent to fair value of this equipment at the date of the acquisition. The fair values of assumed franchise agreements are valued as if the remaining term of the agreement is at the market rate. The fair values of acquired land, buildings, certain leasehold improvements and restaurant equipment subject to finance leases are determined using both the cost approach and market approach. The fair value of the favorable and unfavorable leases acquired, right-of-use assets, right-of-use liabilities, as well as the fair value of land, buildings, leasehold improvements and restaurant equipment subject to finance leases acquired is measured using significant inputs observable in the open market. The Company categorizes all such inputs as Level 2 inputs under ASC 820. The fair value of acquired franchise rights is primarily determined using the income approach, and unobservable inputs classified as Level 3 under ASC 820.
Cash and Cash Equivalents.
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. At
June 30, 2019
, the Company did not have any cash invested in money market funds. At
December 30, 2018
, the Company had
$2.3 million
, invested in money market funds, which are classified as cash equivalents on the condensed consolidated balance sheet.
Fair Value of Financial Instruments.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect the Company's own assumptions. Financial instruments include cash and cash equivalents, trade and other receivables, accounts payable and long-term debt. The carrying amounts of cash and cash equivalents, trade and other receivables and accounts payable approximate fair value because of the short-term nature of these financial instruments. The carrying amount of the Term Loan B Credit Facility at
June 30, 2019
approximate fair value because of its variable rate. The Carrols Restaurant Group
8.0%
Senior Secured Second Lien Notes due 2022 were redeemed in full as of
June 30, 2019
. At
December 30, 2018
, the fair value of the of the
8.0%
Senior Secured Second Lien Notes was based on a recent trading value, which is considered Level 2, and was approximately
$277.1 million
.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analysis of long-lived assets, goodwill and intangible assets. Long-lived assets and definite-lived intangible assets are measured at fair value on a nonrecurring basis using Level 3 inputs. As described in Note 4, the Company recorded long-lived asset impairment charges of
$0.3 million
and
$1.1 million
during the three and six months ended
June 30, 2019
, respectively, and
$2.3 million
and
$2.4 million
during the three and
six months ended
July 1, 2018
.
Recently Issued Accounting Pronouncements Adopted.
The Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) on December 31, 2018, the first day of fiscal 2019. The new standard requires a lessee to recognize a liability for lease obligations, representing the discounted obligation to make minimum lease payments, and a corresponding right-of-use asset on the balance sheet for all leases with a term longer than 12 months.
The Company elected the optional transition method to initially apply the new lease standard at the adoption date and accordingly, financial information for periods prior to the date of initial application have not been adjusted. The Company has elected the package of practical expedients, which permits the Company to not reassess its prior conclusions regarding lease identification, lease classification and initial direct costs. The Company did not elect to
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
use the allowed expedient that permitted the use of hindsight or the expedient in determining lease term or impairment of right-of-use assets. In addition, the Company elected a short-term lease exemption policy that permits the Company to not apply the recognition requirements of the new lease standard to leases with a term of 12 months or less. The Company also elected an accounting policy to not separate lease and non-lease components for certain classes of leases.
Upon adoption of this ASU, the Company recognized lease liabilities of approximately
$542.9 million
, based on the present value of remaining minimum rental payments discounted at the Company's incremental borrowing rate and right-of-use assets of approximately
$517.6 million
. The difference between the right-of-use assets and operating lease liabilities is related to prepaid and deferred non-level rents, unamortized lease acquisition costs and unamortized favorable and unfavorable lease balances. The Company has recognized an adjustment to retained earnings upon adoption of
$7.5 million
, net of the deferred tax impact, to eliminate the historical deferred gains on qualified sale-leaseback transactions. Adoption of this ASU did not materially impact the condensed consolidated statements of cash flows or any covenant related to the Company's long-term debt.
Recently Issued Accounting Standards Not Yet Adopted.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill by eliminating step 2 from the goodwill impairment test. Under the new ASU, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized for the amount by which the carrying amount exceeds its fair value. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company believes that this pronouncement will have no impact on its consolidated financial statements and related disclosures.
Subsequent events.
The Company reviewed and evaluated subsequent events through the issuance date of the Company’s unaudited condensed consolidated financial statements.
2. Acquisitions
In 2012, as part of an acquisition of restaurants from Burger King Corporation ("BKC"), the Company was assigned BKC's right of first refusal on the sale of franchisee-operated restaurants in
20
states (the "ROFR"). Since the beginning of 2018, the Company has acquired an aggregate of
222
Burger King restaurants and
55
Popeyes restaurants from other franchisees in the following transactions, some of which were acquired pursuant to the exercise of the ROFR (in thousands, except number of restaurants):
|
|
|
|
|
|
|
|
|
|
|
Closing Date
|
|
Number of Restaurants
|
|
Purchase Price
|
|
Market Location
|
2018 Acquisitions:
|
|
|
|
|
|
|
February 13, 2018
|
(1)
|
1
|
|
|
$
|
—
|
|
|
New York
|
August 21, 2018
|
(2)
|
2
|
|
|
1,666
|
|
|
Detroit, Michigan
|
September 5, 2018
|
(2)
|
31
|
|
|
25,930
|
|
|
Western Virginia
|
October 2, 2018
|
|
10
|
|
|
10,506
|
|
|
South Carolina and Georgia
|
|
|
44
|
|
|
38,102
|
|
|
|
2019 Acquisitions:
|
|
|
|
|
|
|
April 30, 2019
|
(3)
|
220
|
|
|
257,525
|
|
|
Southeastern states
|
June 11, 2019
|
|
13
|
|
|
15,788
|
|
|
Baltimore, Maryland
|
Total 2018 and 2019 Acquisitions
|
|
277
|
|
|
$
|
311,415
|
|
|
|
|
|
(1)
|
The Company recorded a bargain purchase gain because the fair value of assets acquired, largely representing a franchise right asset of
$0.3 million
, exceeded the total fair value of consideration paid by
$0.2 million
.
|
|
|
(2)
|
Acquisitions resulting from the exercise of the ROFR with Burger King.
|
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
|
|
(3)
|
During the second quarter of 2019, the Company completed the merger with New CFH, LLC (“Cambridge”) and acquired
165
Burger King restaurants and
55
Popeyes restaurants. See further discussion below.
|
2019 Acquisitions
On April 30, 2019 the Company completed a merger with Cambridge ("the Cambridge Merger") for a purchase price of
$257.5 million
through the issuance of shares of stock which consisted of (i) approximately
7.4 million
shares of common stock, (ii)
10,000
shares of the Company's newly designated Series C Convertible Preferred Stock, convertible into approximately
7.5 million
shares of common stock, and (iii) the retirement of approximately
$112.2 million
of the outstanding indebtedness of Cambridge. The conversion of the Series C Preferred Stock will be subject to a vote of the Company's stockholders at the Company’s 2019 Annual Meeting of Stockholders to be held on August 29, 2019 (and to the extent not approved, at any stockholder meeting thereafter), and will automatically convert into the Company's common stock upon stockholder approval of such conversion. All shares issued are subject to a
two
year restriction on sale or transfer subject to certain limited exceptions. As part of the transaction, Cambridge has the right to designate up to
two
director nominees and
two
Cambridge Holdings executives joined the Company's Board of Directors on April 30, 2019.
Under the purchase method of accounting, the aggregate purchase price is allocated to the net tangible and intangible assets based on their estimated fair values on the acquisition date. For purposes of estimating the total purchase price in connection with the Cambridge merger, we have assumed the issuance of
14.9 million
shares of common stock which includes the conversion of the Company's Series C Preferred Stock into common stock as the Company believes this is the most likely scenario. If the conversion does not occur at the 2019 Annual Meeting of Stockholders on
August 29, 2019
, the fair value of the Series C Preferred Stock could be adjusted; which would impact the allocation of the purchase price for the Cambridge Merger. The value for the common stock of
$145.3 million
was based on the
$9.81
closing price of the Company's stock on the date of acquisition. See Note 12—Preferred Stock for further information.
The Company has engaged a third party valuation specialist to assist with the valuation of assets acquired. As the values of certain assets and liabilities are preliminary in nature, the fair values for the equity consideration, property and equipment, favorable and unfavorable leases which are an adjustment to the right-of-use assets under ASC 842, restaurant equipment, franchise rights and goodwill are subject to adjustment as additional information is obtained. The preliminary fair value of property and equipment, franchise agreements, and favorable and unfavorable lease value of the right-of-use assets was based on the assets carrying value due to recent valuations completed by Cambridge on the acquisition of
132
restaurants and construction of
33
new restaurants in the last three years. When the independent valuation is finalized, changes to the preliminary valuation of assets acquired or liabilities assumed may result in material adjustments to the estimated fair value of identifiable assets acquired, including franchise rights, goodwill, and the related deferred taxes.
Goodwill recorded in connection with the Cambridge Merger represents a preliminary assessment of costs in excess of fair values assigned to the underlying net assets of acquired restaurants. Goodwill is not expected to be deductible for income tax purposes for the Cambridge Merger.
The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the Cambridge Merger at their estimated fair values. The following table summarizes the preliminary allocation of the aggregate purchase price for the Cambridge Merger reflected in the condensed consolidated balance sheets as of
June 30, 2019
.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
|
|
|
|
|
Inventory
|
$
|
2,865
|
|
Prepaid expenses
|
3,074
|
|
Other assets
|
2,230
|
|
Land and buildings
|
19,746
|
|
Restaurant equipment
|
26,729
|
|
Right-of-use assets
|
250,544
|
|
Leasehold improvements
|
3,941
|
|
Franchise fees
|
7,308
|
|
Franchise rights
|
144,499
|
|
Goodwill
|
67,639
|
|
Operating lease liabilities
|
(255,015
|
)
|
Accounts payable
|
(5,229
|
)
|
Accrued payroll, related taxes and benefits
|
(2,990
|
)
|
Other liabilities
|
(7,816
|
)
|
Net assets acquired
|
$
|
257,525
|
|
The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the 2019 acquisitions (other than the Cambridge Merger) at their estimated fair values. The following table summarizes the preliminary allocation of the aggregate purchase price for the 2019 acquisitions reflected in the condensed consolidated balance sheets as of
June 30, 2019
.
|
|
|
|
|
Inventory
|
$
|
147
|
|
Restaurant equipment
|
706
|
|
Restaurant equipment - subject to finance leases
|
150
|
|
Right-of-use assets
|
9,515
|
|
Leasehold improvements
|
6,205
|
|
Franchise fees
|
358
|
|
Franchise rights
|
8,849
|
|
Goodwill
|
55
|
|
Operating lease liabilities
|
(9,968
|
)
|
Finance lease liabilities for restaurant equipment
|
(185
|
)
|
Accounts payable
|
(44
|
)
|
Net assets acquired
|
$
|
15,788
|
|
Goodwill recorded in connection with the 2019 acquisitions represents costs in excess of fair values assigned to the underlying net assets of acquired restaurants. The Company is evaluating if goodwill will be deductible for income tax purposes for the 2019 acquisitions. Deferred income tax assets and liabilities are due primarily to the book and tax bases difference of franchise rights, property and equipment, net favorable and unfavorable leases.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
2018 Acquisitions
The Company allocated the aggregate purchase price to the net tangible and intangible assets acquired in the acquisitions at their estimated fair values. The following table summarizes the final allocation of the aggregate purchase price for the 2018 acquisitions reflected in the condensed consolidated balance sheets as of
December 30, 2018
.
|
|
|
|
|
Inventory
|
$
|
401
|
|
Restaurant equipment
|
2,092
|
|
Restaurant equipment - subject to finance leases
|
43
|
|
Leasehold improvements
|
1,329
|
|
Franchise fees
|
1,264
|
|
Franchise rights
|
31,275
|
|
Favorable leases
|
587
|
|
Deferred income taxes
|
346
|
|
Goodwill
|
1,677
|
|
Finance lease liabilities for restaurant equipment
|
(49
|
)
|
Unfavorable leases
|
(624
|
)
|
Accounts payable
|
(9
|
)
|
Net assets acquired
|
$
|
38,332
|
|
The results of operations for the restaurants acquired are included from the closing date of the respective acquisition. The 2018 and 2019 acquired restaurants contributed restaurant sales of
$65.7 million
and
$78.6 million
in the three and
six months ended
June 30, 2019
, respectively, and contributed restaurant sales of
$0.3 million
and
$0.4 million
in the three and
six months ended
July 1, 2018
, respectively. It is impracticable to disclose net earnings for the post-acquisition period for the acquired restaurants as net earnings of these restaurants were not tracked on a collective basis due to the integration of administrative functions, including field supervision.
The unaudited pro forma impact on the results of operations for the restaurants acquired in 2019 for the three and
six months ended
June 30, 2019
and
July 1, 2018
is included below. The unaudited pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. The following table summarizes the Company's unaudited pro forma operating results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2019
|
|
July 1, 2018
|
|
June 30, 2019
|
|
July 1, 2018
|
Restaurant sales
|
$
|
397,213
|
|
|
$
|
394,283
|
|
|
$
|
764,014
|
|
|
$
|
750,412
|
|
Net income (loss)
|
$
|
(926
|
)
|
|
$
|
13,535
|
|
|
$
|
(8,440
|
)
|
|
$
|
14,655
|
|
Basic and diluted net income (loss) per share
|
$
|
(0.02
|
)
|
|
$
|
0.30
|
|
|
$
|
(0.22
|
)
|
|
$
|
0.32
|
|
This unaudited pro forma financial information does not give effect to any anticipated synergies, operating efficiencies, cost savings or any integration costs related to the acquired restaurants.
The unaudited pro forma financial results exclude transaction costs recorded as general and administrative expenses of
$1.4 million
and
$4.0 million
during the three and
six months ended
June 30, 2019
and
$0.1 million
and
$0.2 million
during the three and
six months ended
July 1, 2018
.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
3. Intangible Assets
Goodwill.
The Company is required to review goodwill for impairment annually, or more frequently when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment as of the last day of its fiscal year and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess the value of its goodwill. There have been
no
recorded goodwill impairment losses during the
six months ended
June 30, 2019
or
July 1, 2018
. The change in goodwill for the
six months ended
June 30, 2019
is summarized below.
|
|
|
|
|
Balance at December 30, 2018
|
$
|
38,469
|
|
Acquisitions of restaurants (Note 2)
|
67,694
|
|
Balance at June 30, 2019
|
$
|
106,163
|
|
Franchise Rights.
Amounts allocated to franchise rights for each acquisition of Burger King
®
and Popeyes
®
restaurants are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one
twenty
-year renewal period.
The Company assesses the potential impairment of franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value.
No
impairment charges were recorded related to the Company’s franchise rights for the three or
six months ended
June 30, 2019
and
July 1, 2018
. The change in franchise rights for the
six months ended
June 30, 2019
is summarized below:
|
|
|
|
|
Balance at December 30, 2018
|
$
|
175,897
|
|
Acquisitions of restaurants (Note 2)
|
153,348
|
|
Amortization expense
|
(4,072
|
)
|
Balance at June 30, 2019
|
$
|
325,173
|
|
Amortization expense related to franchise rights was
$2.0 million
and
$1.8 million
for the three months ended
June 30, 2019
and
July 1, 2018
, respectively and
$4.1 million
and
$3.6 million
for the
six months ended
June 30, 2019
and
July 1, 2018
, respectively. The Company expects annual amortization expense to be
$8.3 million
in
2019
and
$8.4 million
in each of the following five years.
4. Impairment of Long-Lived Assets and Other Lease Charges
The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. If an indicator of impairment exists for any of its assets, an estimate of the undiscounted future cash flows over the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries.
The Company determines the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions and the Company’s history of transferring these assets in the operation of its business. The Company determines the fair value of right-of-use lease assets based on an assessment of market rents and a discounted future cash flow model. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
During the three months ended
June 30, 2019
, the Company recorded impairment and other lease charges of
$0.4 million
consisting of
$0.2 million
related to initial impairment charges for
one
underperforming restaurant, capital expenditures of
$0.1 million
at previously impaired restaurants, and
$0.1 million
associated with the closure of one underperforming restaurant. During the six months ended
June 30, 2019
, the Company also recorded impairment and other lease charges of
$1.3 million
consisting of
$0.9 million
related to initial impairment charges for
three
underperforming restaurants, capital expenditures of
$0.2 million
at underperforming restaurants and
$0.2 million
of other lease charges primarily due to the de-imaging of
six
restaurants closed during the first quarter.
During the three months ended
July 1, 2018
, the Company recorded impairment and other lease charges of
$2.9 million
which included
$1.9 million
related to the write-off of defective product holding unit kitchen equipment that was replaced, a loss of
$0.6 million
associated with a sale-leaseback of a restaurant property and
$0.4 million
of capital expenditures at underperforming restaurants. During the six months ended
July 1, 2018
, the company also recorded impairment and other lease charges of
$0.1 million
associated with the closure of
two
underperforming restaurants.
The following table presents the activity in the accrual for closed restaurant locations:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Year Ended
|
|
June 30, 2019
|
|
December 30, 2018
|
Balance, beginning of period
|
$
|
1,352
|
|
|
$
|
2,028
|
|
Provisions for closures
|
42
|
|
|
249
|
|
Changes in estimates of accrued costs
|
82
|
|
|
(147
|
)
|
Payments, net
|
(260
|
)
|
|
(889
|
)
|
Other adjustments, including the effect of discounting future obligations
|
575
|
|
|
111
|
|
Balance, end of period
|
$
|
1,791
|
|
|
$
|
1,352
|
|
Changes in estimates of accrued costs primarily relate to revisions or terminations of certain closed restaurant leases, changes in assumptions for sublease income and other costs. Other adjustments include the assumption of a
$0.5 million
liability for a closed restaurant acquired in the Cambridge merger.
5. Other Liabilities, Long-Term
Other liabilities, long-term, at
June 30, 2019
and
December 30, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 30, 2018
|
Deferred rent
|
$
|
—
|
|
|
$
|
16,610
|
|
Unfavorable leases, net
|
—
|
|
|
12,348
|
|
Accrual for closed restaurants, long-term
|
828
|
|
|
3,074
|
|
Accrued workers’ compensation and general liability claims
|
4,676
|
|
|
4,398
|
|
Deferred compensation
|
3,799
|
|
|
3,610
|
|
Other
|
592
|
|
|
120
|
|
|
$
|
9,895
|
|
|
$
|
40,160
|
|
In accordance with the adoption of ASC 842, as of December 31, 2018, the first day of fiscal 2019, unamortized unfavorable leases of
$12.3 million
, deferred rent balances of
$16.6 million
and unamortized lease incentives of
$2.6 million
were reclassified to adjust the beginning balance of operating right-of-use assets.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
6. Leases
The Company utilizes land and buildings in its operations under various lease agreements. The Company does not consider any one of these individual leases material to the Company's operations. Initial lease terms are generally for
twenty
years and, in many cases, provide for renewal options and in most cases rent escalations. The exercise of such renewal options are generally at the Company’s sole discretion. The Company evaluates renewal options at lease commencement to determine if such options are reasonably certain to be exercised based on economic factors. Certain leases also require contingent rent, determined as a percentage of sales as defined by the terms of the applicable lease agreement. For most locations, the Company is obligated for occupancy related costs including payment of property taxes, insurance and utilities.
The right-of-use (“ROU”) lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments in exchange for that right of use. As the rate implicit within our leases is not readily determinable, the Company uses its incremental borrowing rate which considers the Company's debt issuances and lease term in determining the present value of future payments. The ROU asset is also reduced by lease incentives, initial direct costs and adjusted by favorable lease assets and unfavorable lease liabilities. Variable lease components represent amounts that are fixed in nature and are recognized in expense as incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term. The Company does not account for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the non-lease components.
As of
June 30, 2019
, the Company had additional leases that have not yet commenced of
$9.7 million
. These leases will commence during the remainder of fiscal
2019
or in
2020
with lease terms of
5
years to
20
years.
In addition, the Company utilizes certain restaurant equipment under various finance lease agreements with initial terms of generally eight years. The Company does not consider any one of these individual leases material to the Company's operations.
For certain leases where rent escalates based upon a change in a financial index, such as the Consumer Price Index, the difference between the rate at lease inception and the subsequent fluctuations in that rate are included in variable lease costs. Additionally, because the Company has elected to not separate lease and non-lease components, in limited instances, variable costs also include payments to the landlord for common area maintenance, real estate taxes, insurance and other operating expenses. Lease expense is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred.
Lease Cost
The components and classification of lease expense for the three and six months ended
June 30, 2019
are as follows:
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Lease cost
|
|
Classification
|
|
June 30, 2019
|
|
June 30, 2019
|
Operating lease cost (1)
|
|
Restaurant rent expense
|
|
$
|
22,543
|
|
|
$
|
40,837
|
|
Operating lease cost
|
|
General and administrative
|
|
148
|
|
|
222
|
|
Variable lease cost
|
|
Restaurant rent expense
|
|
4,290
|
|
|
8,090
|
|
Sublease income
|
|
Restaurant rent expense
|
|
(143
|
)
|
|
(321
|
)
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
Depreciation and amortization
|
|
523
|
|
|
999
|
|
Interest on lease liabilities
|
|
Interest expense
|
|
64
|
|
|
135
|
|
Total lease cost
|
|
|
|
$
|
27,425
|
|
|
$
|
49,962
|
|
|
|
(1)
|
Includes short-term leases which are not material.
|
Lease Position
Supplemental balance sheet information related to leases was as follows as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
Leases
|
|
Classification
|
|
June 30, 2019
|
Assets
|
|
|
|
|
Operating leases
|
|
Operating right-of-use assets, net
|
|
$
|
785,000
|
|
Finance leases
|
|
Property and equipment, net
|
|
2,904
|
|
Total leased assets
|
|
|
|
$
|
787,904
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating leases
|
|
Current portion of operating lease liabilities
|
|
$
|
39,715
|
|
Finance leases
|
|
Current portion of long-term debt and finance lease liabilities
|
|
2,261
|
|
Long-term
|
|
|
|
|
Operating leases
|
|
Operating lease liabilities
|
|
777,054
|
|
Finance leases
|
|
Long-term debt and finance lease liabilities, net
|
|
1,393
|
|
Total lease liabilities
|
|
|
|
$
|
820,423
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
Operating leases
|
|
|
|
14.5 years
|
|
Finance leases
|
|
|
|
1.9 years
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
|
|
|
7.0
|
%
|
Finance leases
|
|
|
|
8.0
|
%
|
Other Information
Supplemental cash flow information related to leases for the six months ended
June 30, 2019
are as follows:
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30, 2019
|
Gain on sale-leaseback transactions
|
|
$
|
105
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
36,006
|
|
Operating cash flows from finance leases
|
|
$
|
135
|
|
Financing cash flows from finance leases
|
|
$
|
981
|
|
Future minimum lease payments under noncancelable lease at June 30, 2019 are as follows:
|
|
|
|
|
|
|
|
|
Fiscal year ending:
|
Operating Leases
|
|
Finance Leases
|
December 29, 2019
|
$
|
47,846
|
|
|
$
|
1,244
|
|
January 3, 2021
|
93,769
|
|
|
1,755
|
|
January 2, 2022
|
92,202
|
|
|
583
|
|
January 1, 2023
|
91,415
|
|
|
240
|
|
December 31, 2023
|
90,493
|
|
|
68
|
|
Thereafter
|
907,550
|
|
|
129
|
|
Total minimum lease payments
|
1,323,275
|
|
|
4,019
|
|
Less: imputed interest
|
(506,506
|
)
|
|
(365
|
)
|
Present value of lease liabilities
|
816,769
|
|
|
3,654
|
|
Less: current portion
|
(39,715
|
)
|
|
(2,261
|
)
|
Total long-term lease liabilities
|
$
|
777,054
|
|
|
$
|
1,393
|
|
Disclosures Related to Periods Prior to Adoption of the New Lease Standard
As previously disclosed in the Company's 2018 Annual Report on Form 10-K and under the previous lease accounting standard, the maturities of lease liabilities at December 30, 2018 were as follows:
|
|
|
|
|
|
|
|
|
Fiscal year ending:
|
Operating Leases
|
|
Capital Leases
|
December 29, 2019
|
$
|
73,304
|
|
|
$
|
2,180
|
|
January 3, 2021
|
71,764
|
|
|
1,454
|
|
January 2, 2022
|
70,607
|
|
|
345
|
|
January 1, 2023
|
70,160
|
|
|
190
|
|
December 31, 2023
|
69,221
|
|
|
68
|
|
Thereafter
|
640,793
|
|
|
129
|
|
Total minimum lease payments
|
$
|
995,849
|
|
|
4,366
|
|
Less amount representing interest
|
|
|
(425
|
)
|
Total obligations under capital leases
|
|
|
3,941
|
|
Less current portion
|
|
|
(1,948
|
)
|
Long-term obligations under capital leases
|
|
|
$
|
1,993
|
|
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
7. Long-Term Debt
Long-term debt at
June 30, 2019
and
December 30, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 30, 2018
|
Collateralized:
|
|
|
|
Term Loan B Facility
|
$
|
425,000
|
|
|
$
|
—
|
|
Senior Credit Facility - Revolving credit borrowings
|
25,000
|
|
|
—
|
|
Carrols Restaurant Group 8% Senior Secured Second Lien Notes
|
—
|
|
|
275,000
|
|
Finance lease liabilities
|
3,654
|
|
|
3,941
|
|
|
453,654
|
|
|
278,941
|
|
Less: current portion of long-term debt and finance lease liabilities
|
(6,512
|
)
|
|
(1,948
|
)
|
Less: unamortized debt issuance costs
|
(8,519
|
)
|
|
(3,673
|
)
|
Less: unamortized original issue discount
|
(2,082
|
)
|
|
—
|
|
Add: bond premium
|
—
|
|
|
3,503
|
|
Total Long-term debt
|
$
|
436,541
|
|
|
$
|
276,823
|
|
On April 30, 2019, the Company entered into a new senior secured credit facility in an aggregate principal amount of
$550.0 million
, consisting of (i) a Term Loan B Facility in an aggregate principal amount of
$425.0 million
(the “Term Loan B Facility”) maturing on April 30, 2026 and (ii) a new revolving credit facility (including a sub-facility for standby letters of credit) in an aggregate principal amount of
$125.0 million
maturing on April 30, 2024 (the “New Revolving Credit Facility” and, together with the Term Loan B Facility, the “New Senior Credit Facilities”).
The net proceeds of the Term Loan B Facility were
$422.9 million
after original issue discount and were used to (i) refinance the indebtedness of Carrols, including redemption of
$275.0 million
of
8.0%
Senior Secured Second Lien Notes due 2022 and accrued interest thereon at a redemption price of
102%
, and (ii) retirement of the indebtedness of Cambridge and (iii) the payment of fees and expenses in connection with the Cambridge Merger and New Senior Credit Facilities. The proceeds of the Revolving Credit Facility will finance ongoing working capital and other general corporate purposes, including permitted acquisitions and required expenditures under development agreements. In connection with these transactions, the Company recognized a loss of
$7.4 million
on the extinguishment of the 8% Senior Secured Second Lien Notes.
Borrowings under the New Senior Credit Facilities bear interest, at a rate per annum equal to (i) the Alternate Base Rate (as defined in the New Senior Credit Facilities) plus
2.25%
or (b) LIBOR Rate (as defined in the New Senior Credit Facilities) plus
3.25%
. At
June 30, 2019
the Company's LIBOR Rate margin was
3.25%
and the Alternate Base Rate margin was
2.25%
.
The Term Loan B borrowings shall be due and payable in quarterly installments, beginning on September 30, 2019 as follows:
(i)
twenty-seven
quarterly installments of
$1.1 million
;
(ii) one final payment of
$396.3 million
on April 30, 2026.
As of
June 30, 2019
, there were
$25.0 million
of revolving credit borrowings outstanding and
$11.7 million
of letters of credit issued under the new revolving credit facility. After reserving for issued letters of credit and outstanding revolving credit borrowings,
$88.3 million
was available for revolving credit borrowings under the New Senior Credit Facilities at
June 30, 2019
.
The Company was in compliance with the financial covenants under its New Senior Credit Facilities at
June 30, 2019
.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
8% Senior Secured Second Lien Notes due 2022.
On April 29, 2015, the Company issued
$200.0 million
principal amount of
8.0%
Senior Secured Second Lien Notes due 2022 and on June 23, 2017, the Company issued an additional
$75.0 million
principal amount of
8.0%
Senior Secured Second Lien Notes due 2022 (the "8% Notes"). The 8% Notes mature and were payable on May 1, 2022. Interest was payable semi-annually on May 1 and November 1. The 8% Notes were guaranteed by the Company's subsidiaries and were secured by second-priority liens on substantially all of the Company's and its subsidiaries' assets (including a pledge of all of the capital stock and equity interests of its subsidiaries).
Prior Senior Credit Facility.
The Company's prior senior credit facility provided for maximum revolving credit borrowings of up to
$73.0 million
(including
$20.0 million
available for letters of credit). Borrowings under the prior senior credit facility bore interest at a rate per annum, at the Company’s option, of:
(i) the Alternate Base Rate plus the applicable margin of
1.75%
to
2.75%
based on the Company’s Adjusted Leverage Ratio, or
(ii) the LIBOR Rate plus the applicable margin of
2.75%
to
3.75%
based on the Company’s Adjusted Leverage Ratio (all terms as defined under the prior senior credit facility).
The Company’s obligations under the prior senior credit facility were jointly and severally guaranteed by its subsidiaries and were secured by first priority liens on substantially all of the assets of the Company and its subsidiaries, including a pledge of all of the capital stock and equity interests of its subsidiaries.
Under the prior senior credit facility, the Company was required to make mandatory prepayments of borrowings in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions).
The prior senior credit facility contained certain covenants, including without limitation, those limiting the Company’s and its subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in all material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. In addition, the prior senior credit facility required the Company to meet certain financial ratios, including a Fixed Charge Coverage Ratio, Adjusted Leverage Ratio and First Lien Leverage Ratio (all as defined under the prior senior credit facility).
The prior senior credit facility contained customary default provisions, including that the lenders could terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which included, without limitation, payment default, covenant defaults, bankruptcy type defaults, cross-defaults on other indebtedness, judgments or upon the occurrence of a change of control.
8. Income Taxes
The provision (benefit) for income taxes for the three and
six months ended
June 30, 2019
and
July 1, 2018
was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2019
|
|
July 1, 2018
|
|
June 30, 2019
|
|
July 1, 2018
|
Current
|
$
|
53
|
|
|
$
|
57
|
|
|
$
|
65
|
|
|
$
|
160
|
|
Deferred
|
(8,561
|
)
|
|
279
|
|
|
(8,219
|
)
|
|
38
|
|
Provision (benefit) for income taxes
|
$
|
(8,508
|
)
|
|
$
|
336
|
|
|
$
|
(8,154
|
)
|
|
$
|
198
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
The benefit for income taxes for the three and
six months ended
June 30, 2019
was derived using an estimated effective annual income tax rate for all of 2019 of
35.1%
, which excludes any discrete tax adjustments. The difference compared to the statutory rate for 2019 is attributed to approximately $3.0 million of non-deductible acquisition costs incurred during the year and the benefits of federal employment credits which are not directly related to the amount of pre-tax loss recorded in a period. Accordingly, in periods where recorded pre-tax income (loss) is relatively small, the proportional effect of these items on the effective tax rate may be significant. The income tax benefit for the
six months ended
June 30, 2019
contains net discrete tax adjustments of
$0.1 million
of tax expense.
The provision for income taxes for the three and
six months ended
July 1, 2018
was derived using an estimated effective annual income tax rate for all of 2018 of
1.5%
, which excludes any discrete tax adjustments and was below the statutory rate due to the effect of fixed employment tax credits on taxable income. The income tax expense for the
six months ended
July 1, 2018
contains net discrete tax adjustments of
$0.1 million
of tax expense.
As of
June 30, 2019
, the Company had federal net operating loss carryforwards of approximately
$89.6 million
which expire beginning in
2033
. The Company's state net operating loss carryforwards expire beginning in 2019 through 2038.
The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At
June 30, 2019
and
December 30, 2018
, the Company had
no
unrecognized tax benefits and
no
accrued interest related to uncertain tax positions. The tax years 2013 - 2018 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to the uncertainties regarding the timing of examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.
9. Stock-Based Compensation
Stock-based compensation expense for the three months ended
June 30, 2019
and
July 1, 2018
was
$1.3 million
and
$1.4 million
, respectively and for the six months ended
June 30, 2019
and
July 1, 2018
was
$2.8 million
and
$3.0 million
, respectively. On January 15, 2019, the Company granted
417,500
non-vested restricted shares to certain employees and officers of the Company and
47,470
non-vested restricted shares to outside directors of the Company. These shares vest, become non-forfeitable and are being expensed over their three-year vesting period.
A summary of all non-vested shares activity for the
six months ended
June 30, 2019
was as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Price
|
Non-vested at December 30, 2018
|
796,476
|
|
|
$
|
13.12
|
|
Granted
|
468,199
|
|
|
$
|
9.48
|
|
Vested
|
(374,302
|
)
|
|
$
|
12.66
|
|
Non-vested at June 30, 2019
|
890,373
|
|
|
$
|
11.40
|
|
The fair value of non-vested shares is based on the closing price on the date of grant. As of
June 30, 2019
, the total non-vested unrecognized stock-based compensation expense was approximately
$7.6 million
and the remaining weighted average vesting period for non-vested shares was
1.9
years. The Company expects to record an additional
$2.8 million
in stock-based compensation expense related to the vesting of these awards for the remainder of
2019
.
10. Commitments and Contingencies
Lease Guarantees.
Fiesta Restaurant Group, Inc. ("Fiesta"), a former wholly-owned subsidiary of the Company, was spun-off in 2012 to the Company's stockholders. As of
June 30, 2019
, the Company is a guarantor under
27
Fiesta restaurant property leases, of which all except for
one
of those restaurants is still operating, with lease terms expiring on various dates through 2030, and is the primary lessee on
five
Fiesta restaurant property leases, which it subleases to Fiesta. The Company is fully liable for all obligations under the terms of the leases in the event that Fiesta fails to pay any sums due under the lease, subject to indemnification provisions of a Separation and Distribution Agreement entered into in connection with the spin-off of Fiesta.
The maximum potential amount of future undiscounted rental payments the Company could be required to make under these leases at
June 30, 2019
was
$13.8 million
of which $
0.4 million
is included in operating lease liabilities in accordance with ASC 842. The obligations under these leases will generally continue to decrease over time as these operating leases expire.
No
payments related to these guarantees have been made by the Company to date and
none
are expected to be required to be made in the future. The Company has not recorded a liability for $
13.4 million
of these guarantees in accordance with ASC 460 -
Guarantees
as Fiesta has indemnified the Company for all such obligations and the Company did not believe it was probable it would be required to perform under any of the guarantees or direct obligations.
Litigation.
The Company is a party to various litigation matters that arise in the ordinary course of business. The Company does not believe that the outcome of any of these other matters meet the disclosure or recognition standards, nor will they have a material adverse effect on its consolidated financial statements.
11. Transactions with Related Parties
In connection with an acquisition of restaurants from BKC in 2012, the Company issued to BKC
100
shares of Series A Convertible Preferred Stock, which was exchanged for
100
shares of newly issued Series B Convertible Preferred Stock in 2018, and as of
June 30, 2019
is convertible into approximately
15.4%
of the outstanding shares of the Company's common stock after giving effect to the conversion of the Series B and Series C Preferred Stock. Pursuant to the terms of the Series B Convertible Preferred Stock, BKC together with certain other entities that are both affiliates of BKC and either Restaurant Brands International or Restaurant Brands International Limited Partnership ("RBI") are entitled to elect
two
representatives on the Company's board of directors.
Each of the Company's restaurants operates under a separate franchise agreement with RBI. These franchise agreements generally provide for an initial term of
twenty
years and currently have an initial franchise fee of
fifty thousand
dollars. Any franchise agreement, including renewals, can be extended at the Company's discretion for an additional
20
year term, with RBI 's approval, provided that, among other things, the restaurant meets the current restaurant image standard and the Company is not in default under terms of the franchise agreement. In addition to the initial franchise fee, the Company generally pays BKC a monthly royalty at a rate of
4.5
% of sales and Popeye's a weekly royalty at a rate of
5.0%
of sales. Royalty expense was
$15.6 million
and
$13.0 million
in the three months ended
June 30, 2019
and
July 1, 2018
, respectively and was
$28.0 million
and
$24.5 million
in the
six months ended
June 30, 2019
and
July 1, 2018
, respectively.
The Company is also generally required to contribute
4
% of restaurant sales from its restaurants to an advertising fund utilized by RBI for its advertising, promotional programs and public relations activities, and additional amounts for additional local advertising in markets that approve such advertising. Advertising expense associated with these expenditures was
$14.4 million
and
$12.1 million
in the three months ended
June 30, 2019
and
July 1, 2018
, respectively and was
$25.8 million
and
$23.0 million
in the
six months ended
June 30, 2019
and
July 1, 2018
, respectively.
As of
June 30, 2019
, the Company leased
249
of its restaurant locations from BKC and
115
of these locations are subleased by BKC from various third-party lessors. Aggregate rent under these BKC leases was
$6.8 million
for each of the three months ended
June 30, 2019
and
July 1, 2018
, and was
$13.6 million
and
$13.5 million
in the
six
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
months ended
June 30, 2019
and
July 1, 2018
, respectively. The Company does not believe that such lease terms have been significantly affected by the fact that the Company and BKC are deemed to be related parties.
The Company and BKC have entered into an Area Development and Remodeling Agreement ("Area Development Agreement") commencing on April 30, 2019 and ending on September 30, 2024, which supersedes the Operating Agreement dated as of May 30, 2012, as amended, between Carrols LLC and BKC. Pursuant to the Area Development Agreement, BKC assigned its right of first refusal under its franchise agreements with its franchisees to purchase all of the assets of a Burger King restaurant on the same terms proposed between such franchisee and a third party purchaser (the “ADA ROFR”), in
16
states and a limited number of counties in
four
additional states, and granted franchise pre-approval to acquire Burger King restaurants until the date that Carrols LLC has acquired more than an aggregate of
500
Burger King restaurants. The continued assignment of the ADA ROFR is subject to suspension or termination in the event of non-compliance by Carrols LLC with certain terms as set forth in the Area Development Agreement. Carrols LLC will pay BKC
$3.0 million
for the ADA ROFR in
four
equal installment payments over the course of one year. As of
June 30, 2019
, the Company owed BKC
$1.5 million
associated with its purchase of the ADA ROFR and
$10.1 million
related to the payment of advertising, royalties and rent, which is remitted on a monthly basis.
The Company has assumed Cambridge's development agreement for Popeyes
®,
which includes a right of first refusal for acquisitions in
two
southern states, as well as a development commitment for approximately
80
new Popeyes
®
restaurants over
six
years.
In addition, the Company received $
1.9 million
related to a settlement with BKC for their approval of new restaurant development by other franchisees which unfavorably impacted the Company's restaurants which was recorded as other income in the first quarter of 2019.
12. Preferred Stock
In connection with the Cambridge Merger, Cambridge was issued
10,000
shares of Series C Preferred Stock. The Series C Preferred Stock shall (i) accrue a dividend of
9%
per annum that is payable by increasing the Stated Value (as defined in the Carrols Restaurant Group, Inc. Certificate of Designations of Series C Convertible Preferred Stock) per share of Series C Preferred Stock every six months from the date of issuance (ii) be subject to certain issuance restrictions and (iii) be initially convertible into
7.5 million
of shares of the Company's common stock, subject to adjustment pursuant to certain anti-dilution provisions and (iv) be automatically convertible into shares of the Company's common stock upon the vote of the Company's stockholders at the Company's 2019 Annual Meeting of Stockholders to be held on August 29, 2019 (and to the extent not approved, at any stockholder meeting thereafter). Pursuant to the Merger Agreement, the Stockholder Approval will be voted upon at its next annual meeting of stockholders to be held after the closing of the Mergers. As of
June 30, 2019
the
10,000
shares of Series C Preferred Stock, along with
7.4 million
shares of common stock, constitutes approximately
24.2%
of the Company's common stock after giving effect to the conversion of the Series B and Series C Preferred Stock.
13. Net Income (Loss) per Share
The Company applies the two-class method to calculate and present net income (loss) per share. The Company's non-vested share awards, Series B Convertible Preferred Stock issued to BKC and Series C Preferred Stock contain non-forfeitable rights to dividends and are considered participating securities for purposes of computing net income (loss) per share pursuant to the two-class method. Under the two-class method, net earnings are reduced by the amount of dividends declared (whether paid or unpaid) and the remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. As the Company incurred a net loss for the three months and
six months ended
June 30, 2019
, and losses are not allocated to participating securities under the two-class method, such method is not applicable for the aforementioned interim reporting periods.
Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted net income
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
(loss) per share reflects additional shares of common stock outstanding, where applicable, calculated using the treasury stock method or the two-class method.
The following table sets forth the calculation of basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2019
|
|
July 1, 2018
|
|
June 30, 2019
|
|
July 1, 2018
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(3,732
|
)
|
|
$
|
7,788
|
|
|
$
|
(15,201
|
)
|
|
$
|
4,686
|
|
Less: Income attributable to non-vested shares
|
—
|
|
|
(139
|
)
|
|
—
|
|
|
(83
|
)
|
Less: Income attributable to preferred stock
|
—
|
|
|
(1,596
|
)
|
|
—
|
|
|
(961
|
)
|
Net income (loss) available to common stockholders
|
$
|
(3,732
|
)
|
|
$
|
6,053
|
|
|
$
|
(15,201
|
)
|
|
$
|
3,642
|
|
Weighted average common shares outstanding
|
41,051,354
|
|
|
35,720,243
|
|
|
38,548,246
|
|
|
35,693,027
|
|
Basic net income (loss) per share
|
$
|
(0.09
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.39
|
)
|
|
$
|
0.10
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(3,732
|
)
|
|
$
|
7,788
|
|
|
$
|
(15,201
|
)
|
|
$
|
4,686
|
|
Shares used in computing basic net loss per share
|
41,051,354
|
|
|
35,720,243
|
|
|
38,548,246
|
|
|
35,693,027
|
|
Dilutive effect of preferred stock and non-vested shares
|
—
|
|
|
9,481,023
|
|
|
—
|
|
|
9,541,577
|
|
Shares used in computing diluted net loss per share
|
41,051,354
|
|
|
45,201,266
|
|
|
38,548,246
|
|
|
45,234,604
|
|
Diluted net income (loss) per share
|
$
|
(0.09
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.39
|
)
|
|
$
|
0.10
|
|
Shares excluded from diluted net income (loss) per share computations (1)
|
17,755,355
|
|
|
—
|
|
|
17,755,355
|
|
|
—
|
|
(1) Shares issuable upon conversion of preferred stock and non-vested shares were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive.
14. Other Expense (Income)
In the three months ended
June 30, 2019
, the Company recorded other expense, net of
$0.4 million
consisting of a loss on the disposal of restaurant equipment of
$0.5 million
and a
$0.1 million
gain on a sale-leaseback transaction.
In the
six months ended
June 30, 2019
, the Company recorded other income of
$1.8 million
which consisted of a $
1.9 million
gain from a settlement with BKC for their approval of new restaurant development by other franchisees which unfavorably impacted the Company's restaurants, a
$0.1 million
gain on
two
sale-leaseback transactions, a
$0.1 million
gain related to an insurance recovery from a fire at
one
of its restaurants in the prior year and a loss on a disposal of restaurant equipment of
$0.5 million
.
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Tabular amounts in thousands, except share and per share amounts)
15. Subsequent Events
The Company reviewed and evaluated subsequent events through the issuance date of the Company’s unaudited condensed consolidated financial statements.
Stock Repurchase Program
On
August 2, 2019
, the Company's Board of Directors approved a stock repurchase plan ("Repurchase Program") under which the Company may repurchase up to
$25 million
of its outstanding common stock. The authorization is effective
August 2, 2019
, and will expire 24 months thereafter, unless terminated earlier by the Company's Board of Directors. Purchases under the Repurchase Program may be made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions (including, without limitation, the use of Rule 10b5-1 plans) in compliance with applicable federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The Company has no obligation to repurchase stock under the Repurchase Program, and the timing, actual number and value of shares purchased will depend on the Company's stock price, trading volume, general market and economic conditions, and other factors.