Item 8.01 Other
Events
Filing Relief - First Quarter 2020 Quarterly Report on
Form 10-Q
The Company will be relying on the Securities
and Exchange Commission’s order (Release No. 34-88318) under Section 36 of the Exchange Act granting exemptions from specified
provisions of the Exchange Act and certain rules thereunder, as superseded by a subsequent order (Release No. 34-88465) issued
on March 25, 2020 (collectively, the “Order”) to delay filing its Quarterly Report on Form 10-Q for the quarterly period
ended April 19, 2020 (the “Quarterly Report”) that is due May 29, 2020, due to circumstances related to the novel coronavirus
(COVID-19).
We have experienced significant disruptions
to our business due to the COVID-19 pandemic and related mandated social distancing and shelter-in-place orders, resulting in previously
disclosed temporary closures of 35 Company-owned restaurants across our portfolio and remaining locations shifted to an off-premise
only operating model.
The considerable effect of the
COVID-19 pandemic has triggered the need to perform additional impairment assessments of our property and equipment,
goodwill, and other intangible assets. Due to the effect of the COVID-19 pandemic, we are currently anticipating recognizing
a material goodwill impairment up to the full carrying amount totaling approximately $95 million, and long lived asset
impairment losses of approximately $10 million to $20 million in our Quarterly Report. Further, the March 19, 2020 passage of
the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) created an opportunity for the Company to
carry back net operating losses, which in turn require us to analyze our realization of deferred tax assets related to our
job tax credits. We anticipate recognizing a material valuation allowance on our deferred tax assets related to our job
tax credits; however, we anticipate recognizing the full carryforward balance for cash tax purposes. These items represent a
substantial undertaking due to the need to develop and analyze several best estimates and assumptions, compounded by the
additional difficulty in forecasting operations during the COVID-19 pandemic, including future guest traffic, sales and
operating results, discount and royalty rates, and volatility factors.
Due to the reporting impacts and disruption
to our business of COVID-19, the Company will be unable to complete the analyses described above in time to file its Quarterly
Report by the original filing deadline. Accordingly, we are relying on the Order to postpone the filing of our Quarterly Report
to provide us with additional time to finalize these assessments and related disclosure. The Company expects to file its Quarterly
Report no later than 45 days after the original deadline of May 29, 2020.
Financial Update
The Company expects to recognize or has
recognized the following material changes to the consolidated financial statements during its first fiscal quarter of 2020. There
have been no changes to the related accounting policies as disclosed in Part II, Item 8, Financial Statements and Supplementary
Data, of our Annual Report on Form 10-K filed with the SEC on February 25, 2020.
Goodwill
The Company determined the sustained decrease
in our stock price coupled with the closure of our dining rooms and significant decline to the equity value of our peers and overall
U.S. stock market represented a goodwill impairment triggering event. We are finalizing a quantitative analysis as of our first
quarter ended April 19, 2020 to determine if impairment to our goodwill existed for our one reporting unit. We used a blended approach
in calculating fair value of our one reporting unit including the income approach, market approach, and market capitalization approach.
This analysis could lead to a material impairment up to the full carrying amount of goodwill totaling approximately $95 million.
The goodwill impairment will be measured as the amount by which the carrying amount of a reporting unit, including goodwill, exceeds
its fair value.
Restaurant Assets
The Company determined the triggering
event described above also represented a long-lived asset impairment triggering event. The Company is anticipating
recognizing between $10 million and $20 million of impairment related to restaurant assets during the sixteen weeks ended
April 19, 2020 resulting from the continuing and projected future results of Company-owned restaurants. Recoverability of
restaurant assets, including restaurant sites, leasehold improvements, information technology systems, right-of-use assets,
amortizable intangible assets, and other fixed assets, to be held and used is measured by a comparison of the carrying amount
of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are
measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and
liabilities, generally at the restaurant level. Each restaurant’s past and present operating performance is being
reviewed in combination with projected future results through projected undiscounted cash flows that includes
management’s expectation of future financial impacts from COVID-19. If the assets are determined to be impaired through
comparison of the assets carrying value to its undiscounted cash flows, the Company will compare the carrying amount of each
restaurant’s assets to its fair value as estimated by management to calculate the impairment amount. The fair value of
restaurant assets is generally determined using a discounted cash flow projection model, which is based on significant inputs
not observed in the market and represents a level 3 fair value measurement. In certain cases, management will use other
market information, when available, to estimate the fair value of a restaurant’s assets. The restaurant asset
impairment charges will represent the excess of the carrying amount over the estimated fair value of the restaurant assets
calculated using a discounted cash flow projection model. Additional restaurant asset impairment may be required to be
recognized in future periods if the COVID-19 pandemic continues to negatively impact our business.
Rent
In response to the impact of COVID-19 on
our operations, beginning April 1, 2020 the Company has not made full lease payments under its existing lease agreements for our
restaurants and restaurant support center. During the suspension of payments, the Company continued to recognize expenses and liabilities
for lease obligations and corresponding right-of-use assets on the balance sheet in accordance with ASC Topic 842.
We have engaged
in ongoing constructive discussions with landlords regarding the potential restructuring of lease payments and rent concessions.
To the extent we qualify, we will elect to recognize any contractual rent concessions reached in the future as a variable credit
to rent expense as opposed to a lease modification consistent with the relief issued by the Financial Accounting Standards Board
titled ASC Topic 842 and ASC Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic. Contractual
rent concessions expected to be agreed to cannot be reasonably determined at this time based
on the status of discussions with our landlords.
Legal Proceedings
On July 14, 2017, a current hourly employee
filed a class action lawsuit alleging that the Company failed to provide required meal breaks and rest periods and failed to reimburse
business expenses, among other claims. The case is styled Manuel Vigueras v. Red Robin International, Inc. and is currently pending
before the United States District Court in Santa Ana, California. In a related action, on September 21, 2017, a companion case,
styled Genny Vasquez v. Red Robin International, Inc. was filed and is currently pending in California Superior Court in Santa
Ana, California and involves claims under the California Private Attorneys’ General Act (“PAGA”) that partially
overlap in the claims made in the Vigueras matter. In the first quarter of 2020, the Company reached a tentative settlement agreement
resolving all claims and the cost of class administration in both cases for an aggregate $8.5 million. The Company is in the process
of finalizing the settlement agreement, which will then be submitted to the court for approval. Court approval is required before
any settlement agreement between the parties becomes final. An additional $4.5 million was accrued to reach the $8.5 million settlement
amount during its first fiscal quarter of 2020.
Valuation Allowance on Deferred Tax Assets
In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the future reversals of existing deferred
tax liabilities and projected future taxable income, including whether future originating deductible temporary differences are
likely to be realized.
The March 19, 2020 passage of the
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) created an opportunity for the Company to carry
back 2019 and 2020 projected net operating losses (“NOL’s”). As a result of these projected NOL carrybacks,
$30 million to $40 million of previously utilized FICA tip tax credits could be reinstated. Given the reinstatement of the
FICA tip tax credits, in combination with our existing FICA credit deferred tax asset, we are currently evaluating whether we
would be required to recognize a valuation allowance against these FICA tip tax credits which could result in the recognition
of a material valuation allowance up to our full carryforward.
Financial Condition Update and Going
Concern
Under ASC 205-40, Presentation of Financial
Statements – Going Concern, the Company is required to assess whether substantial doubt is raised in that conditions or events
indicate that it is probable the Company will be unable to meet its obligations when they come due within one year from the financial
statement issuance date. The assessment also includes the Company’s consideration of any management plans to alleviate such
substantial doubt. The conditions related to the COVID-19 pandemic have had a material adverse impact on the Company’s revenues,
profitability, and cash flows.
Pursuant to the terms of the Amendment to
the Company’s Credit Facility described above, the lenders thereto agreed, among other things, to waive the existing events
of default under the Credit Facility related to the Borrower’s failure to comply with the financial covenants as of the end
of the fiscal quarter ended on or about April 19, 2020. In addition, the lenders agreed to (a) suspend the application of
the Leverage Ratio Covenant and the FCCR Covenant, in each case, for the fiscal quarters ending on or about October 4, 2020 and
December 27, 2020 and (b) increase the maximum leverage permitted for purposes of the Leverage Ratio Covenant for each of the fiscal
quarters ending in 2021; provided that the Company issues new equity generating net cash proceeds of at least $25,000,000.
The Company is actively evaluating options
for raising equity capital in order to satisfy the requirements of the Amendment. If the Company is unable to raise sufficient
equity capital within the timeframe prescribed by the Amendment, and is unable to obtain a further waiver or amendment to the Credit
Facility, then the Company could experience an event of default under the Credit Facility, which could have a material adverse
effect on the Company’s liquidity, financial condition, and results of operations. We cannot make any assurances regarding
the likelihood, certainty, or exact timing of the Company’s ability to raise capital or execute further amendments to the
Credit Facility. As a result, under applicable accounting standards, the Company concluded, because the equity raise is outside
of management’s control, substantial doubt exists surrounding the Company’s ability to meet its obligations within
one year from the financial statement issuance date and to continue as a going concern.
Risk Factor Update
The Company is also filing this Current
Report on Form 8-K for the purpose of supplementing the Risk Factors disclosed in Item 1A of its Annual Report on Form 10-K for
the fiscal year ended December 29, 2019. Accordingly, the Company’s Risk Factor disclosure is hereby updated to add the following:
The
novel coronavirus (COVID-19) pandemic has disrupted and may further disrupt our business, which has and could further materially
affect our operations and business and financial results. In addition, any other epidemic, disease outbreak, or public health
emergency may result in similar adverse effects.
The novel coronavirus (COVID-19)
pandemic has had an adverse effect that is material on our business. The COVID-19 pandemic has
impacted and may continue to impact sales and traffic at our restaurants, may make it more difficult to staff restaurants,
cause an inability to obtain supplies, increase commodity costs, continue to cause partial or total closures of impacted
restaurants, and could damage our reputation. The extent to which the COVID-19 pandemic and other epidemics, disease
outbreaks, or public health emergencies will impact our business, liquidity, financial condition, and results of operations,
depends on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and
scope of the pandemic, epidemic, disease outbreak, or public health emergency; the negative impact on the economy; the short
and longer-term impacts on the demand for restaurant services and levels of consumer confidence; our ability to successfully
navigate the impacts; government action, including restrictions on restaurant operations; and increased unemployment and
reductions in consumer discretionary spending. Even if a virus or other disease does not spread significantly, the perceived
risk of infection or health risk may damage our reputation and adversely affect our business, liquidity, financial condition,
and results of operations.
We have
been and could continue to be adversely affected by government restrictions on public gatherings, shelter-in-place orders,
and limitations on operations of restaurants, including dine-in restrictions, and mandatory or
voluntary closures or restrictions on hours of operations. Restaurants in the U.S. are currently under government mandates or
guidelines to temporarily suspend operation or limit restaurant dine-in business in light of COVID-19. We are unable to
predict when these measures may be further reduced, how quickly or if our operations will return to previous levels after the
measures are scaled back, or if there will be additional future suspensions of operation for potential future waves of
COVID-19 or another epidemic or public health emergency. While a limited number of our restaurants have recently been able to
re-open, most of our restaurants have shifted to a take-out, catering, and delivery-only operating model, suspending most
sit-down dining. We have also implemented temporary restaurant closures, modified hours, reduced staff, and furloughed
employees. These changes and any additional changes may materially adversely affect our business, liquidity, financial
condition, and results of operations, particularly if these changes are in place for a prolonged amount of time. The COVID-19
pandemic as well as other epidemics, disease outbreaks, or public health emergencies may also materially adversely affect our
ability to implement our strategic growth plans, including delays in the rollout of Donatos® pizza
to additional restaurant locations, the implementation of technology platforms and technology solutions, restaurant remodels,
and development of new restaurants in future years.
In an effort to preserve
liquidity, we have and may continue to take certain actions with respect to some or all of our leases, including negotiating with
landlords to obtain rent abatement or deferrals and discontinuing payment. We can provide no assurances that forbearance of any
lease obligations will be provided to us, or that, following the COVID-19 pandemic, we will be able to continue restaurant operations
on the current terms of our existing leases, any of which could have an adverse effect on our business and results.
As we previously
announced, we drew the full amount available under our revolving credit facility. The increase in our level of debt may adversely
affect our financial and operating activities or ability to incur additional debt. Further, if we are unable to raise sufficient
equity capital within the timeframe prescribed by the Amendment, and are unable to obtain a further waiver or amendment to the
Credit Facility, then the Company could experience an event of default under the Credit Facility and be unable to make additional
borrowings on any undrawn amounts and be required to repay its then outstanding borrowings which could have a material adverse
effect on the Company’s liquidity, financial condition, results of operations and ability to continue as a going concern.
Forward-Looking Statements
Certain
information and statements contained in this report are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include, without limitation, statements regarding the impact of COVID-19 on
the Company’s business, the ability of the Company’s restaurants to re-open and operate on and grow a
substantially all off-premise model, goodwill impairment, impairment losses, valuation
allowance on our deferred tax assets related to our job tax credits, the timing of the
Company’s delayed 10-Q filing, future capital raise, and ability to continue as a going concern.
These statements are based on assumptions believed by the Company to be reasonable and speak only as of the date on which
such statements are made. Except as required by law, the Company undertakes no obligation to update such statements to
reflect events or circumstances arising after such date, and cautions investors not to place undue reliance on any such
forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to
differ materially from those described in the statements based on a number of factors, including but not limited to the
following: the rapidly evolving nature of the COVID-19 pandemic and related containment measures, including the potential for
a complete shutdown of Company restaurants; economic, public health, and political conditions that impact consumer confidence
and spending, including the impact of COVID-19 and other health epidemics or pandemics on the global economy; changes in
unemployment rates; changes in laws impacting the Company’s business, including increases in minimum wages and benefit
costs; the ability to achieve significant cost savings; the Company’s ability to defer lease or contract
payments or otherwise obtain concessions from landlords, vendors, and other parties in light of the impact of the COVID-19
pandemic; the economic health of the Company’s landlords and other tenants in retail
centers in which its restaurants are located; the economic health of suppliers, licensees, vendors, and other third parties
providing goods or services to the Company; the Company’s ability to continue to increase sales; the effectiveness of
the Company’s marketing strategies and promotions and menu changes; the cost and availability of key food products,
distribution, labor, and energy; the effectiveness of the Company’s long term strategic initiatives; the cost and
availability of capital or credit facility borrowings; the ability to obtain equity financing; the adequacy of cash flows or
available debt resources to fund operations; the impact of federal, state, and local regulation of the Company’s
business; and other risk factors described from time to time in the Company’s Form 10-K, Form 10-Q, and Form 8-K
reports (including all amendments to those reports) filed with the U.S. Securities and Exchange Commission.