NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries ("Red Robin," "we," "us," "our", or the "Company"), primarily operates, franchises, and develops casual dining restaurants in North America. As of December 27, 2020, the Company owned and operated 443 restaurants located in 38 states. The Company also had 103 casual dining restaurants operated by franchisees in 16 states and one Canadian province. The Company operates its business as one operating and one reportable segment.
Basis of Presentation and Principles of Consolidation - The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Red Robin and its wholly owned subsidiaries after elimination of all intercompany accounts and transactions. The Company's fiscal year is 52 or 53 weeks ending the last Sunday of the calendar year. Year-end dates and the number of weeks in each fiscal year are shown in the table below for periods presented in this Form 10-K and for the upcoming fiscal year.
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Fiscal Year
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Year End Date
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Number of Weeks in Fiscal Year
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Current and Prior Fiscal Years:
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2020
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December 27, 2020
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52
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2019
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December 29, 2019
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52
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2018
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December 30, 2018
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52
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Upcoming Fiscal Year
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2021
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December 26, 2021
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52
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Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The areas that require management's most significant estimates are impairment of long-lived assets, lease accounting, estimating fair value, and unearned revenue. Actual results could differ from those estimates.
Reclassifications - Certain amounts presented in prior periods have been reclassified to conform with the current period presentation. As of December 29, 2019, the Company reclassified $5.3 million from Prepaid expenses and other current assets to Income tax receivable on the consolidated balance sheets. For the year ended December 29, 2019, the Company reclassified the following within net cash provided by operating activities on the consolidated statements of cash flows: $15.1 million from Non-cash other charges to Goodwill and restaurant asset impairment, $5.2 million from Prepaid expenses and other current assets to Income tax receivable, $0.7 million from Other operating assets and liabilities, net to Lease assets, net of liabilities, and $0.2 million from Prepaid expenses and other current assets to Inventories. For the year ended December 30, 2018, the Company reclassified the following within net cash provided by operating activities on the consolidated statements of cash flows: $28.1 million from Non-cash other charges to Goodwill and restaurant asset impairment, $1.4 million from Prepaid expenses and other current assets to Income tax receivable, $0.8 million from Prepaid expenses and other current assets to Inventories, and $0.6 million from Other operating assets and liabilities, net to Lease assets, net of liabilities.
Revenue Recognition - Revenues consist of sales from restaurant operations, franchise revenue, and other revenue including gift card breakage and miscellaneous revenue. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a restaurant Guest, franchisee, or other customer.
The Company recognizes revenues from restaurant sales when payment is tendered at the point of sale, as the Company's performance obligation to provide food and beverage to the customer has been satisfied.
The Company sells gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card balances. We recognize revenue from gift cards as either: (i) Restaurant revenue, when the Company's performance obligation to provide food and beverage to the customer is satisfied upon redemption of the gift card, or (ii) gift card breakage, as discussed below.
Red Robin Royalty™ deferred revenue primarily relates to a program in which registered members earn an award for a free entrée for every nine entrées purchased. We recognize the current sale of an entrée and defer a portion of the revenue to reflect partial pre-payment for the future entrée the member is entitled to receive. We estimate the future value of the award based on the historical average value of redemptions. We also estimate what portion of registered members are not likely to reach the ninth purchase based on historical activity and recognize the deferred revenue related to those purchases. We recognize the deferred revenue in restaurant revenue on earned rewards when the Company satisfies its performance obligation at redemption, or upon expiration. We compare the estimate of the value of future awards to historical redemptions to evaluate the reasonableness of the deferred amount.
Revenues we receive from our franchise arrangements include sales-based royalties, advertising fund contributions, area development fees, and franchise fees. Red Robin franchisees are required to remit 4.0% to 5.0% of their revenues as royalties to the Company and contribute up to 3.0% of revenues to two national advertising funds. The Company recognizes these sales-based royalties and advertising fund contributions as the underlying franchisee sales occur.
The Company also provides its franchisees with management expertise, training, pre-opening assistance, and restaurant operating assistance in exchange for area development fees and franchise fees. The Company capitalizes these fees upon collection from the franchisee, which then amortize over the contracted franchise term as the services comprising the performance obligation are satisfied. The Company typically grants franchise rights to franchisees for a term of 20 years, with the right to extend the term for an additional ten years if various conditions are satisfied by the franchisee.
Gift card breakage is recognized when the likelihood of a gift card being redeemed by the customer is remote and the Company determines there is not a legal obligation to remit the unredeemed gift card balance to the relevant jurisdiction. The determination of the gift card breakage rate is based upon the Company's specific historical redemption patterns. The Company recognizes gift card breakage by applying its estimate of the rate of gift card breakage on a pro rata basis over the period of estimated redemption.
Other revenue consists of miscellaneous revenues considered insignificant to the Company's business.
Cash Equivalents - The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Amounts receivable from credit card issuers are typically converted to cash within two days to four days of the original sales transaction and are considered to be cash equivalents.
Cash and cash equivalents are maintained with multiple financial institutions. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company holds cash and cash equivalents at financial institutions in excess of amounts covered by the Federal Depository Insurance Corporation (the "FDIC") and sometimes invests excess cash in money market funds not insured by the FDIC.
Accounts Receivable - Accounts receivable consists primarily of third party gift card receivables, third party delivery partner receivables, trade receivables due from franchisees for royalties, and tenant improvement allowances. At the end of 2020, there was approximately $7.6 million of gift cards in transit in accounts receivable related to gift cards that were sold by third party retailers compared to $13.3 million at the end of 2019. At the end of 2020, there was also approximately $4 million related to third party delivery partners in accounts receivable compared to $1.2 million at the end of 2019.
Inventories - Inventories consist of food, beverages, and supplies valued at the lower of cost (first-in, first-out method) or net realizable value. At the end of 2020 and 2019, food and beverage inventories were $6.8 million and $8.1 million, and supplies inventories were $17.0 million and $18.3 million.
Property and Equipment - Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are expensed as incurred. Depreciation is computed on the straight-line method based on the shorter of the estimated useful lives or the terms of the underlying leases of the related assets. Interest incurred on funds used to construct Company-owned restaurants is capitalized and amortized over the estimated useful life of the related assets.
The estimated useful lives for property and equipment are:
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Buildings
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5 years to 20 years
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Leasehold improvements
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Shorter of lease term or estimated useful life, not to exceed 20 years
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Furniture, fixtures and equipment
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5 years to 20 years
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Computer equipment
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2 years to 5 years
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The Company capitalizes certain overhead related to the development and construction of its new restaurants as well as certain information technology infrastructure upgrades. Costs incurred for the potential development of restaurants that are subsequently terminated are expensed.
Leases - The Company leases land, buildings, and equipment used in its operations under operating and finance leases. Our leases generally have remaining terms of 1-15 years, most of which include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the non-cancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years.
We determine if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. We estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.
Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.
Some of our leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant's sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.
We elected the practical expedient that does not require us to separate lease and non-lease components for our population of real estate assets.
Goodwill and Intangible Assets, net - Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired. Intangible assets comprise primarily leasehold interests, acquired franchise rights, and the costs of purchased liquor licenses. Leasehold interests primarily represent the fair values of acquired lease contracts having contractual rents lower than fair market rents and are amortized on a straight-line basis over the remaining initial lease term. Acquired franchise rights, which represent the acquired value of franchise contracts, are amortized over the term of the franchise agreements. The costs of obtaining non-transferable liquor licenses from local government agencies are capitalized and generally amortized over a period of up to 20 years. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets.
Goodwill, which is not subject to amortization, is evaluated for impairment annually as of the end of the Company's third fiscal quarter, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant number of restaurant closures, that would indicate an impairment may exist. Goodwill is evaluated at the level of the Company's single operating segment, which also represents the Company's only reporting unit.
When evaluating goodwill for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we perform a quantitative assessment and calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. Our decision to perform a qualitative impairment assessment in a given year is influenced by a number of factors, including the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, and the price of our common stock.
The Company determined the sustained decrease in our stock price coupled with the closure of dining rooms and significant decline to the equity value of our peers and overall U.S. stock market represented a goodwill impairment triggering event due to the COVID-19 pandemic. We performed 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 resulted in full impairment of our goodwill balance totaling $95.4 million included in Other charges on the consolidated statements of operations and comprehensive loss. The goodwill impairment was measured as the amount by which the carrying value of the reporting unit, including goodwill, exceeded its fair value.
The Company performed a qualitative assessment for the 2019 annual impairment evaluation at the end of the third fiscal quarter and determined goodwill was not impaired. No indicators of impairment were identified from the date of our impairment test through the end of 2019. By review of macroeconomic conditions, industry and market conditions, cost factors, overall financial performance compared with prior projections and prior actual financial results, other relevant entity-specific events, and changes in share price, we determined it was not more likely than not that the fair value of the reporting unit was less than its carrying amount.
Liquor licenses with indefinite lives are reviewed for impairment annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. We determine fair value based on prices in the open market for license in same or similar jurisdictions. No impairment charges were recorded in 2020, 2019, or 2018.
Impairment of Long-Lived Assets - The Company reviews its long-lived assets, including restaurant sites, leasehold improvements, information technology systems, and other fixed assets, and amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of 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. If the assets are determined to be impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined using forecasted cash flows discounted using an estimated weighted average cost of capital. Management may also utilize other market information to determine fair value when relevant information is available. Restaurant sites and other assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. Information technology systems, such as internal-use computer software, are reviewed and tested for recoverability if the internal-use computer software is not expected to provide substantive service potential, a significant change occurs in the extent or manner in which the software is used or is expected to be used, a significant change is made or will be made to the software program, or costs of developing or modifying internal-use software significantly exceed the amount originally expected to develop or modify the software.
Other Assets, net - Other assets, net consist primarily of assets related to various deposits, the employee deferred compensation plan, and unamortized debt issuance costs on the credit facility. Debt issuance costs are capitalized and amortized to interest expense on a straight-line basis which approximates the effective interest rate method over the term of the Company's long-term debt.
Advertising - Under the Company's franchise agreements, both the Company and the franchisees must contribute up to 3.0% of revenues to two national media advertising funds (the "Advertising Funds"). These Advertising Funds are used to build the Company's brand equity and awareness primarily through a national marketing strategy, including national television advertising, digital media, social media programs, email, loyalty, and public relations initiatives. Contributions to these Advertising Funds from franchisees are recorded as revenue under Franchise revenue in the consolidated statements of operations and comprehensive loss in accordance with ASC Topic 606, Revenue from Contracts with Customers.
Total advertising costs were $24.9 million, $44.3 million, and $44.3 million in 2020, 2019, and 2018 and were included in Selling, general, and administrative expenses.
Advertising production costs are expensed in the period when the advertising first takes place. Other advertising costs are expensed as incurred.
Self-Insurance Programs - The Company utilizes a self-insurance plan for health, general liability, and workers' compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit the Company's per occurrence cash outlay. Accrued liabilities and other current liabilities and accrued payroll and payroll-related liabilities include the estimated cost to settle reported claims and incurred but unreported claims.
Legal Contingencies - In the normal course of business, we are subject to various legal proceedings and claims, the outcomes of which are uncertain. We record an accrual for legal contingencies when we determine it is probable that we have incurred a liability and we can reasonably estimate the amount of the loss. In making such determinations we evaluate, among other things, the probability of an unfavorable outcome, and when we believe it probable that a liability has been incurred, our ability to make a reasonable estimate of the loss.
Pre-opening Costs - Pre-opening costs are expensed as incurred. Pre-opening costs include rental expenses through the date of opening for each restaurant, travel expenses, wages, and benefits for the training and opening teams, as well as food, beverage, and other restaurant opening costs incurred prior to a restaurant opening for business. Costs related to preparing restaurants to introduce Donatos® will be expensed as incurred and included in pre-opening costs.
Income Taxes - Deferred tax liabilities are recognized for the estimated effects of all taxable temporary differences, and deferred tax assets are recognized for the estimated effects of all deductible temporary differences, net operating losses, and tax credit carryforwards. Realization of net deferred tax assets is dependent upon profitable operations and future reversals of existing taxable temporary differences. However, the amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the carry forward period are increased or reduced or if there are differences in the timing or amount of future reversals of existing taxable temporary differences.
Pursuant to the guidance for uncertain tax positions, a taxpayer must be able to more likely than not sustain a position to recognize a tax benefit, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. The Company has analyzed filing positions in all of the federal, state, and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company's federal and state returns are the 2015 through 2019 tax years.
The Company records interest and penalties associated with audits as a component of income before taxes. Penalties are recorded in Selling, general, and administrative expenses, interest received is recorded in Interest income and other, net, and interest paid is recorded in Interest expense on the consolidated statements of operations and comprehensive loss. The Company recorded immaterial interest expense on the identified tax liabilities in 2020, 2019, and 2018. Approximately $1.1 million of interest income was recorded related to the $49.4 million federal cash tax refund received during the fourth quarter of 2020.
Loss Per Share - Basic loss per share amounts are calculated by dividing net loss by the weighted average number of common shares outstanding during the year. Diluted loss per share amounts are calculated based upon the weighted average number of common and potentially dilutive common shares outstanding during the year. Potentially dilutive shares are excluded from the computation in periods in which they have an anti-dilutive effect. Diluted loss per share reflect the potential dilution that could occur if holders of options and awards exercised their holdings into common stock.
The Company uses the treasury stock method to calculate the impact of outstanding stock options and awards. Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding for the fiscal years ended December 27, 2020, December 29, 2019, and December 30, 2018 as follows (in thousands):
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2020
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2019
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2018
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Basic weighted average shares outstanding
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14,314
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|
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12,959
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|
|
12,976
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Dilutive effect of stock options and awards
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—
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—
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—
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Diluted weighted average shares outstanding
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14,314
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|
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12,959
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|
|
12,976
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Awards excluded due to anti-dilutive effect on diluted earnings per share
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489
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378
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|
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427
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Comprehensive Loss - Total comprehensive loss consists of the net loss and other gains and losses affecting stockholders' equity that, under U.S. GAAP, are excluded from net income. Other comprehensive (loss) income as presented in the consolidated statements of operations and comprehensive loss for 2020, 2019, and 2018 consisted of the foreign currency translation adjustment resulting from the Company's Canadian restaurant operations.
Stock-Based Compensation - The Company maintains several equity incentive plans under which it may grant stock options, stock appreciation rights, restricted stock, stock variable compensation, or other forms of awards granted or denominated in the Company's common stock or units of the Company's common stock, as well as cash variable compensation awards to employees, non-employees, directors, and consultants. The Company also maintains an employee stock purchase plan. The Company issues shares relating to stock-based compensation plans and the employee stock purchase plan from treasury shares.
Deferred Compensation (Income) Expense - The Company has assets and liabilities related to a deferred compensation plan. The assets of the deferred compensation plan are held in a rabbi trust, where they are invested in certain mutual funds that cover an investment spectrum range from equities to money market instruments. Increases in the market value of the investments held in the trust result in the recognition of deferred compensation expense reported in Selling, general, and administrative expenses and recognition of investment gain reported in Interest income and other, net, in the consolidated statements of operations and comprehensive loss. Decreases in the market value of the investments held in the trust result in the recognition of a reduction to deferred compensation expense and recognition of investment loss reported in Interest income and other, net, in the consolidated statements of operations and comprehensive loss.
Foreign Currency Translation - The Canadian Dollar is the functional currency for our Canadian restaurant operations. Assets and liabilities denominated in Canadian Dollars are translated into U.S. Dollars at exchange rates in effect as of the balance sheet date. Income and expense accounts are translated using the average exchange rates prevailing throughout the period. The resulting translation adjustment is recorded as a separate component of Other comprehensive (loss) income. Gain or loss from foreign currency transactions is recognized in our consolidated statements of operations and comprehensive loss. During the fourth quarter of 2020, the Company substantially completed the exit of Company-owned restaurants in Canada resulting in the removal of the accumulated currency translation adjustment as a component of stockholders' equity and the recognition in Other charges on the consolidated statements of operations and comprehensive loss totaling a loss of $5.5 million.
2. COVID-19 Pandemic
Overview
Due to the COVID-19 pandemic, we continue to navigate unprecedented times for our business and industry. The COVID-19 pandemic has had a material adverse effect on our business, and we expect the impact from COVID-19 will continue to negatively affect our business.
Franchise Revenue
In response to COVID-19's effect on our franchisee's operations throughout 2020, we temporarily abated franchise royalty payments and advertising contributions at various times during the year. During periods of abated payments, franchise revenue was not recognized or collected from our franchisees. Abated royalty payments and advertising contributions will not be collected by the Company. Franchised restaurants operate under contractual arrangements with the Company, and the payments specified in the franchise contracts are accounted for under ASC Topic 606, Revenue from Contracts with Customers.
Rent and Leases
In response to the impact of COVID-19 on our operations, beginning April 1, 2020, the Company stopped making full lease payments under its existing lease agreements. 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 are engaging in ongoing constructive discussions with landlords regarding the potential restructuring of lease payments and rent concessions. The Company has concluded negotiations with many of its landlords representing more than 75% of its leases as of December 27, 2020. Rent concessions agreed upon include early termination, early renewal, rent deferral, and rent abatement.
For contractual rent concessions that do not substantially change the total cash flows of the lease, the Company has elected to account for these concessions assuming the existing lease agreements provide enforceable rights and obligations 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 ("FASB Relief"). For leases where the rent concession did not substantially change the total cash flows, the concession was accounted for as a remeasurement to the lease liability based on the original discount rate with a corresponding adjustment to the right-of-use asset. Additionally, the classification of the leases was not reassessed. The Company recorded a $8.6 million remeasurement to increase the lease liability and right-of-use asset resulting from contractual rent concessions under the FASB relief during 2020 and recorded an additional $1.1 million of broker's fees to the right-of-use asset.
For contractual rent concessions that substantially changed the total cash flows of the lease and did not qualify for the FASB relief, we applied the modification framework in accordance with ASC Topic 842, Leases. The Company reassessed lease classification for rent concessions that did not qualify for the FASB relief. During 2020, one lease changed classification from operating to finance, and one lease changed classification from finance to operating. Based on updated discount rates, a $49.0 million remeasurement was recorded to increase the lease liability and a $49.2 million adjustment, inclusive of broker's fees, was recorded to increase the right-of-use asset during 2020. Contractual rent concessions granted to the Company during 2020 did not grant the right to use additional assets not included in the original lease contracts, so no separate contracts were accounted for as part of the rent concession modifications.
Goodwill
As discussed in Note 1, Description of Business and Summary of Significant Accounting Policies, the Company recognized full goodwill impairment during the first quarter of 2020 totaling $95.4 million resulting from the negative effects of COVID-19 on our business.
Restaurant Assets
During 2020, the Company recognized $21.7 million of impairment related to restaurant assets included in Other charges on the consolidated statements of operations and comprehensive loss resulting from the continuing and projected future results of 40 Company-owned restaurants. Restaurant asset impairment of $5.7 million was related to six permanently closed Company-owned restaurants and included in Restaurant closure and refranchising costs in Note 5, Other Charges. Additional restaurant asset impairment was recognized during the fourth quarter of 2020 due to planned permanent closures of certain temporarily closed restaurants. Although current fiscal year to date results continue to align with management's forecast, the increase in reported COVID-19 cases during the fourth quarter of 2020 across the United States and factors associated with the pandemic have changed management's expectation on the timing of the Company's recovery and projected results in future fiscal periods at certain restaurants. Our restaurant asset impairment assessment is based on inputs subject to various risks and uncertainties caused by the COVID-19 pandemic, including forecasted revenues, expenses, and cash flows, current discount rates, growth rates, observable market data, and changes to the regulatory environment. If reported COVID-19 cases increase or other factors associated with the pandemic develop, management's forecast could change in future periods requiring additional restaurant asset impairment.
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 was reviewed in combination with projected future results primarily through projected undiscounted cash flows that included management's current expectation of future financial impacts from COVID-19. If the restaurant assets were determined to be impaired through comparison of the assets carrying value to its undiscounted cash flows, the Company compared 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 uses other market information, when available, to estimate the fair value of a restaurant's assets. The restaurant asset impairment charges represent the excess of the carrying amount over the estimated fair value of the restaurant assets calculated using a discounted cash flow projection model.
Payroll Tax
Under provisions of the CARES Act, we are deferring approximately $18 million in payroll taxes to be paid in fiscal years 2022 and 2023.
Borrowings
On February 25, 2021, the Company entered into the Second Amendment to our credit facility. The Second Amendment further amends the credit facility to, among other things:
•suspend the application of (a) the lease adjusted leverage ratio financial covenant (the "LALR ratio") and (b) the fixed charge coverage ratio (the "FCC ratio") for the first and second fiscal quarters of 2021;
•increase the maximum leverage permitted for purposes of the LALR ratio for the fourth fiscal quarter of 2021 and the first and second fiscal quarters of 2022;
•for the third and fourth fiscal quarters of 2021 and the first fiscal quarter of 2022, provide that (a) the LALR ratio will be calculated using a seasonally adjusted annualized consolidated EBITDA for the applicable period since the beginning of the third fiscal quarter and (b) the FCC ratio will be calculated only for the applicable periods since the beginning of the third fiscal quarter of 2021;
•revise the FCC ratio to account for cash tax refunds received in fiscal year 2021;
•amend the minimum liquidity covenant such that is it measured as of the last day of each applicable fiscal quarter and (a) for the first and second quarters of 2021, requires minimum liquidity of $55 million and (b) for the third and fourth fiscal quarters of 2021, requires minimum liquidity of $42 million;
•remove provisions requiring mandatory prepayments from net cash proceeds of certain equity issuances and convertible debt issuances;
•shorten the maturity date applicable to the revolver and term loan to January 10, 2023;
•reduce the aggregate revolving commitment to $130 million on the Second Amendment effective date and to $100 million at the end of the third fiscal quarter of 2021;
•increase the pricing under the credit facility for (a) the period from the Second Amendment effective date through the first interest determination date occurring after the fourth fiscal quarter of 2021 to LIBOR (subject to a 1% floor) plus 4.50% and (b) periods thereafter to LIBOR (subject to a 1% floor) plus 4%;
•require the payment of a utilization fee (paid on the revolver maturity date) equal to 0.75% per annum of the daily outstanding principal balance of term loans, revolving loans, swingline loans, and letter of credit obligations from the Second Amendment effective date to the first interest determination date occurring after the fourth fiscal quarter of 2021;
•subject to limited exceptions and other limitations, prohibit certain capital expenditures, restricted payments, acquisitions, and other investments until the Company delivers a compliance certificate for a fiscal quarter (beginning with third fiscal quarter of 2021 and the fourth fiscal quarter of 2021 specifically for restricted payments) demonstrating a LALR ratio less than or equal to 5.00:1.00; and
•amend the maximum allowable cash on hand provision to require revolver payments (but with no associated permanent reduction in the revolving commitment) to the extent that the Company's consolidated cash on hand exceeds $35 million at any time.
In conjunction with the Second Amendment, the Company paid certain customary amendment fees to the lenders under the credit facility totaling approximately $0.6 million which will be capitalized as deferred loan fees and amortized over the remaining term of the credit facility.
3. Revenue
Disaggregation of Revenue
In the following table, revenue is disaggregated by type of good or service (in thousands):
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Year Ended
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December 27, 2020
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December 29, 2019
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December 30, 2018
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Restaurant revenue
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$
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854,136
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$
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1,289,521
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$
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1,316,209
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Franchise revenue(1)
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8,853
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17,497
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17,409
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Gift card breakage
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4,516
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6,776
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3,898
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Other revenue
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1,210
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|
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1,220
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|
|
1,047
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Total revenues
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$
|
868,715
|
|
|
$
|
1,315,014
|
|
|
$
|
1,338,563
|
|
———————————————————
(1) The decrease in Franchise revenue during 2020 was driven by the temporary abatement and non-collection of franchise payments. See Note 2, COVID-19 Pandemic, for further discussion.
Contract Liabilities
Components of Unearned revenue in the consolidated balance sheets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2020
|
|
December 29, 2019
|
Unearned gift card revenue
|
|
$
|
38,309
|
|
|
$
|
43,544
|
|
Deferred loyalty revenue
|
|
$
|
11,829
|
|
|
$
|
10,679
|
|
Revenue recognized in the consolidated statements of operations and comprehensive loss for the redemption of gift cards that were included in the liability balance at the beginning of the fiscal year was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 27, 2020
|
|
December 29, 2019
|
|
December 30, 2018
|
Gift card revenue
|
|
$
|
16,385
|
|
|
$
|
19,941
|
|
|
$
|
17,487
|
|
4. Recent Accounting Pronouncements
Income Taxes
In December 2019, the Financial Accounting Standards Board ("FASB") issued Update 2019-12, Income Taxes ("Topic 740") as part of its Simplification Initiative. This guidance provides amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for annual and interim reporting periods beginning after December 15, 2020, and early adoption is permitted. We plan to adopt during the first quarter of 2021, and we expect an immaterial impact to the consolidated financial statements.
Reference Rate Reform
In March 2020, FASB issued Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides temporary optional expedients to applying the reference rate reform guidance to contracts that reference LIBOR or another reference rate expected to be discontinued. Under this update, contract modifications resulting in a new reference rate may be accounted for as a continuation of the existing contract. This guidance is effective upon issuance of the update and applies to contract modifications made through December 31, 2022. We are currently evaluating the full impact this guidance will have on our consolidated financial statements.
We reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a significant impact on the Company's consolidated financial statements.
5. Other Charges
Other charges consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 27, 2020
|
|
December 29, 2019
|
|
December 30, 2018
|
Goodwill impairment
|
|
$
|
95,414
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Asset impairment
|
|
26,940
|
|
|
15,094
|
|
|
28,127
|
|
Restaurant closure and refranchising costs (gains)
|
|
19,846
|
|
|
(1,187)
|
|
|
—
|
|
Litigation contingencies
|
|
6,440
|
|
|
—
|
|
|
4,795
|
|
Board and stockholder matters costs
|
|
2,504
|
|
|
3,261
|
|
|
—
|
|
COVID-19 related costs
|
|
1,858
|
|
|
—
|
|
|
—
|
|
Severance and executive transition
|
|
881
|
|
|
3,450
|
|
|
—
|
|
Executive retention
|
|
—
|
|
|
980
|
|
|
—
|
|
Reorganization costs
|
|
—
|
|
|
—
|
|
|
3,273
|
|
Smallwares disposal
|
|
—
|
|
|
—
|
|
|
2,936
|
|
Other charges
|
|
$
|
153,883
|
|
|
$
|
21,598
|
|
|
$
|
39,131
|
|
Goodwill Impairment
The Company recognized full goodwill impairment during the first quarter of 2020 totaling $95.4 million resulting from the negative effects of COVID-19 on our business. See Note 1, Description of Business and Summary of Significant Accounting Policies, for further discussion.
Asset Impairment
During 2020, the Company determined long-lived assets at 40 Company-owned restaurants were impaired and recognized non-cash impairment charges of $21.7 million. See Note 2, COVID-19 Pandemic, for further discussion. Additionally, the Company impaired information technology assets totaling $5.2 million due to the COVID-19 pandemic redirecting our implementation of certain digital platforms in order to accelerate our speed to market.
During 2019 and 2018, the Company impaired long-lived assets of 29 and 41 Company-owned restaurants and recognized non-cash impairment charges of $15.1 million and $28.1 million.
Restaurant Closure and Refranchising Costs
During 2020, the Company temporarily closed 35 restaurants due to COVID-19. Of the temporarily closed restaurants, we permanently closed six restaurants and reopened 17 restaurants as of the end of 2020. During periods of temporary closure, restaurant operating and occupancy costs were included in Restaurant closures and refranchising costs. In total, the Company permanently closed 11 restaurants, of which six were initially temporarily closed due to COVID-19. Due to permanent closure of certain restaurants during 2020, we impaired long-lived assets at six of the 11 permanently closed restaurants totaling $5.7 million.
Additionally, during 2020, the Company substantially completed the exit of Company-owned restaurants in Canada and accordingly recognized the accumulated currency translation adjustment as a loss in Other charges on the consolidated statements of operations and comprehensive loss totaling $5.5 million.
During 2019, the Company closed 18 restaurants resulting in a gain of $1.2 million. The gain is driven by early lease terminations on previously closed restaurants.
During 2018, the Company closed four restaurants resulting in immaterial restaurant closure costs.
Litigation Contingencies
In 2020, the Company recorded $6.4 million of legal settlement costs primarily related to class action employment cases. See Note 13, Commitments and Contingencies, for further discussion.
In 2018, the Company recorded $4.8 million of litigation contingencies for class action employment cases that were settled in January 2021.
Board and Stockholder Matters Costs
During 2020, the Company recorded $2.5 million of board and stockholder matters costs primarily related to the shareholder rights plan and the recruitment and appointment of a new board member in the first quarter of 2020.
During 2019, the Company recorded $3.3 million of board and stockholder matters costs primarily related to the recruitment and appointment of the three new board members and the adoption of a shareholder rights plan.
COVID-19 Related Costs
In 2020, the Company recorded $1.9 million of costs related to purchasing personal protective equipment for restaurant Team Members and Guests and providing emergency sick pay to restaurant Team Members during the pandemic.
Severance and Executive Transition
During 2020, the Company recorded $0.9 million of severance and executive transition costs primarily related to severance costs associated with the reduction in force of restaurant support center Team Members in the first quarter of 2020.
During 2019, the Company recorded $3.5 million of severance and executive transition costs primarily related to the transition and realignment of our executive team, including the appointment of a new CEO in the third quarter of 2019.
Executive Retention
During 2019, the Company recorded $1.0 million of executive retention costs related to payments made to retain executive leadership believed to be critical to the ongoing operation of the Company during the uncertainty created following the retirement of our CEO in early April 2019 and throughout the subsequent transition period.
Reorganization Costs
During 2018, the Company recorded $3.3 million of severance costs related to the reorganization in first quarter 2018.
Smallwares Disposal
During 2018, the Company recorded $2.9 million of costs related to the disposal of smallwares.
6. Property and Equipment
Property and equipment consist of the following at December 27, 2020 and December 29, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2020
|
|
December 29, 2019
|
Land
|
$
|
41,850
|
|
|
$
|
41,850
|
|
Buildings
|
97,550
|
|
|
96,944
|
|
Leasehold improvements
|
682,449
|
|
|
708,954
|
|
Furniture, fixtures, and equipment
|
403,051
|
|
|
411,874
|
|
Construction in progress
|
5,086
|
|
|
13,697
|
|
Property and equipment, gross
|
$
|
1,229,986
|
|
|
$
|
1,273,319
|
|
Accumulated depreciation and amortization
|
(802,953)
|
|
|
(755,306)
|
|
Property and equipment, net
|
$
|
427,033
|
|
|
$
|
518,013
|
|
Depreciation and amortization expense on property and equipment was $83.2 million in 2020, $87.4 million in 2019, and $91.0 million in 2018.
7. Goodwill and Intangible Assets
The following table presents goodwill as of December 27, 2020 and December 29, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Balance, beginning
|
|
$
|
96,397
|
|
|
$
|
95,838
|
|
Foreign currency translation adjustment
|
|
(983)
|
|
|
559
|
|
Goodwill impairment(1)
|
|
(95,414)
|
|
|
—
|
|
Balance, end
|
|
$
|
—
|
|
|
$
|
96,397
|
|
———————————————————
(1) See Note 2, COVID-19 Pandemic, for further discussion of goodwill impairment recognized during 2020.
The following table presents intangible assets as of December 27, 2020 and December 29, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2020
|
|
December 29, 2019
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise rights
|
|
$
|
49,972
|
|
|
$
|
(36,815)
|
|
|
$
|
13,157
|
|
|
$
|
53,336
|
|
|
$
|
(35,896)
|
|
|
$
|
17,440
|
|
Leasehold interests
|
|
13,001
|
|
|
(9,254)
|
|
|
3,747
|
|
|
13,001
|
|
|
(8,794)
|
|
|
4,207
|
|
Liquor licenses and other
|
|
9,714
|
|
|
(9,364)
|
|
|
350
|
|
|
10,737
|
|
|
(9,869)
|
|
|
868
|
|
|
|
$
|
72,687
|
|
|
$
|
(55,433)
|
|
|
$
|
17,254
|
|
|
$
|
77,074
|
|
|
$
|
(54,559)
|
|
|
$
|
22,515
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquor licenses and other
|
|
$
|
7,460
|
|
|
$
|
—
|
|
|
$
|
7,460
|
|
|
$
|
7,460
|
|
|
$
|
—
|
|
|
$
|
7,460
|
|
Intangible assets, net
|
|
$
|
80,147
|
|
|
$
|
(55,433)
|
|
|
$
|
24,714
|
|
|
$
|
84,534
|
|
|
$
|
(54,559)
|
|
|
$
|
29,975
|
|
Immaterial impairment charges were recorded related to finite-lived intangibles resulting from the continuing and projected future results at Company-owned restaurants in 2020, 2019, and 2018, and no impairment charges were recorded related to indefinite-lived intangibles in 2020, 2019, and 2018.
The aggregate amortization expense related to intangible assets subject to amortization for 2020, 2019, and 2018 was $4.4 million, $4.4 million, and $4.3 million.
The estimated aggregate future amortization expense as of December 27, 2020 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
2,903
|
|
2022
|
|
2,490
|
|
2023
|
|
2,349
|
|
2024
|
|
2,098
|
|
2025
|
|
1,758
|
|
Thereafter
|
|
5,656
|
|
|
|
$
|
17,254
|
|
8. Accrued Payroll and Payroll-Related Liabilities, and Accrued Liabilities and Other Current Liabilities
Accrued payroll and payroll-related liabilities consist of the following at December 27, 2020 and December 29, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2020
|
|
December 29, 2019
|
Payroll and payroll-related taxes
|
$
|
11,327
|
|
|
$
|
16,736
|
|
Workers compensation insurance
|
4,943
|
|
|
5,720
|
|
Corporate and restaurant incentive compensation
|
4,776
|
|
|
5,397
|
|
Accrued vacation
|
4,283
|
|
|
5,451
|
|
Other
|
2,324
|
|
|
1,917
|
|
Accrued payroll and payroll-related liabilities
|
$
|
27,653
|
|
|
$
|
35,221
|
|
Accrued liabilities and other current liabilities consist of the following at December 27, 2020 and December 29, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2020
|
|
December 29, 2019
|
Legal
|
$
|
10,480
|
|
|
$
|
4,290
|
|
Real estate, personal property, state income, and other taxes payable
|
6,501
|
|
|
1,135
|
|
General liability insurance
|
6,370
|
|
|
6,622
|
|
State and city sales tax payable
|
3,487
|
|
|
6,776
|
|
Utilities
|
2,747
|
|
|
2,791
|
|
Other
|
10,032
|
|
|
7,789
|
|
Accrued liabilities and other current liabilities
|
$
|
39,617
|
|
|
$
|
29,403
|
|
9. Borrowings
Borrowings as of December 27, 2020 and December 29, 2019 are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2020
|
|
December 29, 2019
|
|
Borrowings
|
|
Weighted
Average
Interest Rate
|
|
Borrowings
|
|
Weighted
Average
Interest Rate
|
Revolving credit facility, term loan, and other long-term debt
|
$
|
170,644
|
|
|
4.50
|
%
|
|
$
|
206,875
|
|
|
5.10
|
%
|
Total debt
|
170,644
|
|
|
|
|
206,875
|
|
|
|
Current portion
|
9,692
|
|
|
|
|
—
|
|
|
|
Long-term debt
|
$
|
160,952
|
|
|
|
|
$
|
206,875
|
|
|
|
Maturities of long-term debt as of December 27, 2020 are as follows (in thousands):
|
|
|
|
|
|
2021
|
$
|
9,692
|
|
2022
|
9,692
|
|
2023
|
9,692
|
|
2024
|
9,692
|
|
2025
|
131,001
|
|
Thereafter
|
875
|
|
|
$
|
170,644
|
|
Credit Facility
On January 10, 2020, the Company replaced its prior credit facility with a new Amended and Restated Credit Agreement (the "credit facility") which provides for a $161.5 million revolving line of credit and a $138.5 million term loan for a total borrowing capacity of $300 million. In addition, the credit facility allows for the issuance of $25 million in letters of credit, swingline loans up to $15 million, and the option to increase the borrowing capacity by up to an additional $100 million subject to lenders' participation. The credit facility also provides for a Canadian Dollar borrowing sub-limit equivalent to $20 million and limits sale leasebacks transactions to $50 million.
In connection with the termination of the credit facility and new borrowings under the credit facility, the Company repaid all outstanding borrowings, accrued interest, and fees under the previous credit facility. Borrowings refinanced under the credit facility totaled $186.6 million, net of loan origination fees.
The credit facility will mature on January 10, 2023. The term loan requires quarterly principal payments at a rate of 7.0% per annum of the original principal balance. Borrowings under the revolving line of credit and term loans denominated in U.S. Dollars, are subject to rates based on the London Interbank Offered Rate ("LIBOR") plus a spread based on leverage or a base rate plus a spread based on leverage (base rate is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.5%, and (c) LIBOR for an Interest Period of one month plus 1%). Additional pricing on the credit facility is effective per the Second Amendment.
The publication of LIBOR is expected to discontinue in December 2021; however, we anticipate an amended credit agreement will be executed at the new applicable reference rate.
On May 29, 2020, the Company entered into the First Amendment to the Credit Agreement and Waiver (the "First Amendment") which set forth the following: increased pricing under the credit facility, waiver of the lease adjusted leverage covenant ratio ("LALR ratio") and fixed charge coverage covenant ratio ("FCC ratio") for the remainder of fiscal year 2020, adjustments allowable during the first three fiscal quarters of 2021 to the LALR ratio, including increasing the maximum LALR ratio permitted and allowing the use of a seasonally adjusted annualized consolidated EBITDA in the LALR ratio calculation, and to the FCC ratio, including only being calculated for applicable periods since the beginning of 2021, and added various other additional covenant requirements. The covenant relief in the First Amendment was contingent on the Company raising capital of at least $25 million. As a result of the First Amendment, the Company repaid $59 million on the revolving line of credit such that the amount of the Company's consolidated cash on hand did not exceed $30 million as of the First Amendment effective date; paid certain customary amendment fees to lenders and advisors totaling approximately $1.9 million, which were capitalized as deferred loan fees and will be amortized over the remaining term of the credit facility; and issued 2.6 million shares of common stock raising proceeds of $28.7 million, net of stock issuance costs, which were used to pay down the revolving line of credit as required by the First Amendment.
Borrowings under the credit facility are secured by substantially all of the assets of the Company and are available to: (i) refinance certain existing indebtedness of the Company and its subsidiaries, (ii) finance restaurant construction costs, (iii) pay costs, fees, and expenses in connection with such new restaurant construction, (iv) pay any fees and expenses in connection with the credit facility, and (v) provide for the working capital and general corporate requirements of the Company, including permitted acquisitions and the redemption of capital stock. Restrictions on how borrowings are used by the Company are in place per requirements set forth by our lenders.
The Company will continue to be subject to a number of customary covenants under the credit facility, including limitations on additional borrowings, acquisitions, capital expenditures, share repurchases, lease commitments, dividend payments, and requirements to maintain certain financial ratios including the lease adjusted leverage ratio and fixed charge coverage ratio. However, the First Amendment provides certain covenant relief to the Company through the end of the third quarter of 2021. The Company was in compliance with such covenants as of December 27, 2020. Our debt covenant assessment is based on inputs subject to various risks and uncertainties caused by the COVID-19 pandemic, including forecasted revenues, expenses, and cash flows, current discount rates, growth rates, observable market data, and changes to the regulatory environment.
As of December 27, 2020, the Company had outstanding borrowings under the credit facility of $169.8 million, in addition to amounts issued under letters of credit of $8.7 million. As of December 29, 2019, the Company had outstanding borrowings under the prior credit facility of $206.0 million, in addition to amounts issued under letters of credit of $7.5 million. The amounts issued under letters of credit reduce the amount available under the credit facility but are not recorded as debt. As of December 27, 2020, the current portion of long-term borrowings under the credit facility totaled $9.7 million; no outstanding borrowings under the prior credit facility were considered current as of December 29, 2019.
On February 25, 2021, the Company entered into the Second Amendment to the credit facility, which is discussed further in Note 2, COVID-19 Pandemic. Covenant relief and other provisions of the First Amendment discussed above were changed upon execution of the Second Amendment.
Loan origination costs associated with the credit facility are included as deferred costs in Other assets, net in the accompanying consolidated balance sheets, except for the current portion of these costs which is included in Prepaid expenses and other current assets. Unamortized debt issuance costs were $3.3 million and $1.0 million as of December 27, 2020 and December 29, 2019.
10. Fair Value Measurements
Fair value measurements are made under a three-tier fair value hierarchy, which prioritizes the inputs used in the measuring of fair value:
Level 1: Observable inputs that reflect unadjusted quote prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying amounts of the Company's cash and cash equivalents, accounts receivable, accounts payable, and current accrued expenses and other liabilities approximate fair value due to the short-term nature or maturity of the instruments.
The Company maintains a rabbi trust to fund obligations under a deferred compensation plan. See Note 16, Employee Benefit Programs. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities and carried at fair value and are included in Other assets, net in the accompanying consolidated balance sheets. Fair market value of mutual funds is measured using level 1 inputs (quoted prices for identical assets in active markets). The value of the deferred compensation plan liability is dependent upon the fair value of the assets held in the rabbi trust and therefore is not measured at fair value.
The following tables present the Company's assets measured at fair value on a recurring basis as of December 27, 2020 and December 29, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Investments in rabbi trust
|
|
$
|
6,740
|
|
|
$
|
6,740
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets measured at fair value
|
|
$
|
6,740
|
|
|
$
|
6,740
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Investments in rabbi trust
|
|
$
|
7,337
|
|
|
$
|
7,337
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets measured at fair value
|
|
$
|
7,337
|
|
|
$
|
7,337
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property, plant and equipment, right of use assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.
During 2020 and 2019, the Company measured non-financial assets for impairment using continuing and projected future cash flows, as discussed in Note 5, Other Charges, which were based on significant inputs not observable in the market and thus represented a level 3 fair value measurement.
Based on our 2020 and 2019 impairment analyses, we impaired long-lived assets at 40 and 29 Company-owned restaurants with carrying values of $67.3 million and $17.3 million. We determined the fair value of these long-lived assets in 2020 and 2019 to be $34.7 million and $2.2 million based on level 3 fair value measurements.
See Note 1, Description of Business and Summary of Significant Accounting Policies, for discussion of the first quarter 2020 nonrecurring fair value measurement of goodwill and related impairment charges.
Disclosures of Fair Value of Other Assets and Liabilities
The Company's liability under its credit facility is carried at historical cost in the accompanying consolidated balance sheets. Due to market interest rates decreasing during 2020, the Company determined the carrying value of the liability under its credit facility did not approximate fair value. The carrying value and fair value of the credit facility as of December 27, 2020 were $169.8 million and $172.6 million. As of December 29, 2019, the carrying value of the credit facility approximated fair value as the interest rate on the instrument approximated current market rates. The interest rate on the credit facility represents a level 2 fair value input.
11. Leases
Adoption of FASB Accounting Standards Update ("ASU") 2016-02
On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) ("Topic 842") along with related clarifications and improvements using the modified retrospective approach without application to prior periods. This guidance requires the recognition of liabilities for lease obligations and corresponding right of use assets on the balance sheet and disclosure of key information about leasing arrangements. We applied the practical expedients that do not require us to reassess existing contracts for embedded leases, to separate leases and non-lease components for our population of real estate assets, or to reassess lease classification or initial direct costs.
The effects of the changes made to our consolidated balance sheet as of December 30, 2018 as a result of the adoption of Topic 842 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2018
|
|
Adjustments due to Topic 842
|
|
Balance at December 30, 2018
|
Balance Sheet
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
Right of use assets, net
|
$
|
—
|
|
|
$
|
478,268
|
|
|
$
|
478,268
|
|
Prepaid expenses and other current assets
|
27,576
|
|
|
(6,592)
|
|
|
20,984
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Current portion of lease obligations
|
786
|
|
|
40,606
|
|
|
41,392
|
|
Non-current liabilities
|
|
|
|
|
|
Deferred rent
|
75,675
|
|
|
(75,675)
|
|
|
—
|
|
Long-term portion of lease obligations
|
9,414
|
|
|
506,745
|
|
|
516,159
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
Retained earnings
|
$
|
376,341
|
|
|
$
|
(15,172)
|
|
|
$
|
361,169
|
|
Leases - Topic 842
Leases are included in right of use assets, net, current portion of lease obligations, and long-term portion of lease liabilities on our consolidated balance sheet as of December 27, 2020 and December 29, 2019 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2020
|
|
Finance
|
|
Operating
|
|
Total
|
Right of use assets, net
|
|
$
|
9,644
|
|
|
$
|
415,929
|
|
|
$
|
425,573
|
|
|
|
|
|
|
|
|
Current portion of lease obligations
|
|
1,078
|
|
|
54,197
|
|
|
55,275
|
|
Long-term portion of lease obligations
|
|
10,937
|
|
|
454,296
|
|
|
465,233
|
|
Total
|
|
$
|
12,015
|
|
|
$
|
508,493
|
|
|
$
|
520,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2019
|
|
Finance
|
|
Operating
|
|
Total
|
Right of use assets, net
|
|
$
|
7,552
|
|
|
$
|
418,696
|
|
|
$
|
426,248
|
|
|
|
|
|
|
|
|
Current portion of lease obligations
|
|
725
|
|
|
41,974
|
|
|
42,699
|
|
Long-term portion of lease obligations
|
|
8,822
|
|
|
456,613
|
|
|
465,435
|
|
Total
|
|
$
|
9,547
|
|
|
$
|
498,587
|
|
|
$
|
508,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of lease expense, including variable lease costs primarily consisting of common area maintenance charges and real estate taxes, are included in Occupancy on our consolidated statements of operations and comprehensive loss as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 27, 2020
|
|
December 29, 2019
|
|
|
Operating lease cost
|
|
$
|
67,320
|
|
|
$
|
75,496
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of right of use assets
|
|
845
|
|
|
793
|
|
|
|
Interest on lease liabilities
|
|
534
|
|
|
544
|
|
|
|
Total finance lease cost
|
|
$
|
1,379
|
|
|
$
|
1,337
|
|
|
|
Variable lease cost
|
|
24,482
|
|
|
29,300
|
|
|
|
Total lease costs
|
|
$
|
93,181
|
|
|
$
|
106,133
|
|
|
|
Maturities of our lease liabilities as of December 27, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
Operating Leases
|
|
Total
|
2021
|
$
|
1,581
|
|
|
$
|
86,111
|
|
|
$
|
87,692
|
|
2022
|
1,314
|
|
|
75,885
|
|
|
77,199
|
|
2023
|
1,244
|
|
|
73,457
|
|
|
74,701
|
|
2024
|
1,264
|
|
|
71,368
|
|
|
72,632
|
|
2025
|
1,283
|
|
|
66,520
|
|
|
67,803
|
|
Thereafter
|
8,793
|
|
|
346,676
|
|
|
355,469
|
|
Total future lease liability
|
$
|
15,479
|
|
|
$
|
720,017
|
|
|
$
|
735,496
|
|
Less imputed interest
|
3,464
|
|
|
211,524
|
|
|
214,988
|
|
Present value of lease liability
|
$
|
12,015
|
|
|
$
|
508,493
|
|
|
$
|
520,508
|
|
Supplemental cash flow information in thousands (except other information) related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 27, 2020
|
|
December 29, 2019
|
Cash flows from operating activities
|
|
|
|
|
Cash paid related to lease liabilities
|
|
|
|
|
Operating leases
|
|
$
|
47,164
|
|
|
$
|
78,260
|
|
Finance leases
|
|
534
|
|
|
512
|
|
Cash flows from financing activities
|
|
|
|
|
Cash paid related to lease liabilities
|
|
|
|
|
Finance leases
|
|
270
|
|
|
817
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
47,968
|
|
|
$
|
79,589
|
|
|
|
|
|
|
Right of use assets obtained in exchange for operating lease obligations
|
|
$
|
56,014
|
|
|
$
|
12,580
|
|
Right of use assets obtained in exchange for finance lease obligations
|
|
$
|
2,918
|
|
|
$
|
1,606
|
|
|
|
|
|
|
Other information related to operating leases as follows:
|
|
|
|
|
Weighted average remaining lease term
|
|
10.24 years
|
|
10.70 years
|
Weighted average discount rate
|
|
6.90
|
%
|
|
7.38
|
%
|
|
|
|
|
|
Other information related to financing leases as follows:
|
|
|
|
|
Weighted average remaining lease term
|
|
11.76 years
|
|
12.37 years
|
Weighted average discount rate
|
|
4.56
|
%
|
|
4.90
|
%
|
12. Income Taxes
Loss before income taxes includes the following components for the fiscal years ended December 27, 2020, December 29, 2019, and December 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
U.S.
|
|
$
|
(262,728)
|
|
|
$
|
(14,549)
|
|
|
$
|
(16,045)
|
|
Foreign
|
|
(20,824)
|
|
|
(7,688)
|
|
|
(5,365)
|
|
Loss before income taxes
|
|
$
|
(283,552)
|
|
|
$
|
(22,237)
|
|
|
$
|
(21,410)
|
|
The benefit for income taxes for the fiscal years ended December 27, 2020, December 29, 2019, and December 30, 2018 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(60,340)
|
|
|
$
|
(3,054)
|
|
|
$
|
2,043
|
|
State
|
|
1,354
|
|
|
(1,687)
|
|
|
1,579
|
|
Foreign
|
|
—
|
|
|
—
|
|
|
—
|
|
Total current income tax (benefit) expense
|
|
$
|
(58,986)
|
|
|
$
|
(4,741)
|
|
|
$
|
3,622
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
$
|
44,353
|
|
|
$
|
(10,994)
|
|
|
$
|
(16,688)
|
|
State
|
|
8,086
|
|
|
1,354
|
|
|
(2,068)
|
|
Foreign
|
|
(937)
|
|
|
47
|
|
|
143
|
|
Total deferred income tax expense (benefit)
|
|
51,502
|
|
|
(9,593)
|
|
|
(18,613)
|
|
Income tax benefit
|
|
$
|
(7,484)
|
|
|
$
|
(14,334)
|
|
|
$
|
(14,991)
|
|
The reconciliation between the income tax benefit and the amount of income tax computed by applying the U.S. federal statutory rate to loss before income taxes as shown in the accompanying consolidated statements of operations and comprehensive loss for fiscal years ended December 27, 2020, December 29, 2019, and December 30, 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Tax provision at U.S. federal statutory rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State income taxes
|
|
3.9
|
|
|
2.2
|
|
|
2.9
|
|
FICA tip tax credits
|
|
—
|
|
|
46.0
|
|
|
49.9
|
|
Foreign taxes versus U.S statutory rate
|
|
0.2
|
|
|
0.8
|
|
|
0.9
|
|
Valuation allowance on deferred income tax assets
|
|
(27.9)
|
|
|
(9.1)
|
|
|
(7.5)
|
|
Impact of CARES Act and related method changes
|
|
5.5
|
|
|
—
|
|
|
—
|
|
Other tax credits
|
|
—
|
|
|
6.1
|
|
|
7.1
|
|
Meals and entertainment
|
|
—
|
|
|
(0.7)
|
|
|
(0.8)
|
|
Excess stock options
|
|
(0.1)
|
|
|
(2.9)
|
|
|
(0.6)
|
|
Employee travel
|
|
—
|
|
|
(0.1)
|
|
|
(2.1)
|
|
Other
|
|
—
|
|
|
1.2
|
|
|
(0.8)
|
|
Effective tax rate
|
|
2.6
|
%
|
|
64.5
|
%
|
|
70.0
|
%
|
The Company had a tax benefit in all three years presented above, but due to the mathematical computation of tax benefit to book loss the effective tax rate in 2020, 2019 and 2018 are represented as a positive percentage. The decreases in the Company's effective tax benefit in 2020 is primarily a result of a decrease in tax credits and an increase in the valuation allowance, partially offset by a decrease in income and the favorable rate impact of net operating loss ("NOL") carrybacks allowed as part of the CARES Act. The decrease in the 2019 effective tax benefit is primarily attributable to a decrease in credits and an increase in the valuation allowance.
The Company's federal and state deferred taxes at December 27, 2020 and December 29, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
|
Leasing transactions
|
|
$
|
134,471
|
|
|
$
|
131,679
|
|
General business and other tax credits
|
|
40,366
|
|
|
40,409
|
|
Net operating loss carryover
|
|
23,567
|
|
|
5,346
|
|
Accrued compensation and related costs
|
|
11,893
|
|
|
5,970
|
|
Goodwill
|
|
9,536
|
|
|
—
|
|
Stock-based compensation
|
|
5,561
|
|
|
4,920
|
|
Advanced payments
|
|
4,702
|
|
|
3,597
|
|
Other non-current deferred tax assets
|
|
3,073
|
|
|
2,238
|
|
Subtotal
|
|
233,169
|
|
|
194,159
|
|
Valuation allowance
|
|
(86,677)
|
|
|
(7,293)
|
|
Total
|
|
$
|
146,492
|
|
|
$
|
186,866
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Leasing transactions
|
|
$
|
(112,860)
|
|
|
$
|
(112,766)
|
|
Property and equipment
|
|
(21,549)
|
|
|
(757)
|
|
Supplies inventory
|
|
(4,267)
|
|
|
(4,611)
|
|
Prepaid expenses
|
|
(2,884)
|
|
|
(3,387)
|
|
Goodwill
|
|
—
|
|
|
(12,138)
|
|
Other non-current deferred tax liabilities
|
|
(4,932)
|
|
|
(1,680)
|
|
Total
|
|
$
|
(146,492)
|
|
|
$
|
(135,339)
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
51,527
|
|
The Company had net operating loss carryforwards for tax purposes of $23.6 million as of December 27, 2020. This is comprised of approximately $2.0 million of federal net operating loss carryovers, approximately $12.4 million of state net operating loss carryovers, and approximately $9.2 million of foreign net operating loss carryovers. The federal net operating loss has an indefinite carryforward period, the state net operating loss carryovers may expire between 2025 and 2040, and the foreign net operating loss carryovers may expire between 2035 and 2040.
As of December 27, 2020, the Company had a deferred tax asset of $39.2 million related to federal tax credits, which expire at various dates between 2037 and 2039. The Company also had a deferred tax asset of $1.2 million related to state tax credits which expire in 2024.
In assessing the realizability of deferred income tax assets, ASC 740 requires a more likely than not standard be met. If the Company determines that it is more likely than not that deferred income tax assets will not be realized, a valuation allowance must be established. The realization of deferred tax assets depends on the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies when making this determination. Due to the COVID-19 pandemic, the Company has experienced cumulative losses in recent years which is significant negative evidence that is difficult to overcome in order to reach a determination that a valuation allowance is not required. Projected future taxable income is positive subjective evidence but is not strong enough to overcome the recent cumulative loss objective evidence. Therefore, management determined that a full valuation allowance was required as of December 27, 2020.
Based on the Company's evaluation of its deferred tax assets, a valuation allowance of approximately $86.7 million has been recorded against the deferred tax asset for federal and state tax credits, federal and state deferred tax assets, all net operating loss carry forwards and the deferred taxes of our foreign subsidiary.
The following table summarizes the Company's unrecognized tax benefits at December 27, 2020 and December 29, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Beginning of year
|
|
$
|
104
|
|
|
$
|
304
|
|
Increase due to current year tax positions
|
|
—
|
|
|
52
|
|
Due to decrease to a position taken in a prior year
|
|
(24)
|
|
|
(170)
|
|
Settlements
|
|
—
|
|
|
(16)
|
|
Reductions related to lapses
|
|
—
|
|
|
(66)
|
|
End of year
|
|
$
|
80
|
|
|
$
|
104
|
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $0.1 million. The Company does not anticipate significant changes in the aggregate amount of unrecognized tax benefits within the next 12 months, other than nominal tax settlements.
13. Commitments and Contingencies
In July 2017, an hourly Team Member filed a class actions lawsuit before the United States District Court in Santa Ana, California (Vigueras v. Red Robin International, Inc.) alleging the Company failed to provide required meal breaks and rest periods and failed to reimburse business expenses, among other claims. In the first quarter of 2020, the Company reached a tentative settlement resolving all claims for an aggregate $8.5 million. An additional $4.5 million was accrued during the Company's first fiscal quarter of 2020 to fully reserve the $8.5 million settlement amount, which was paid out in January 2021.
In the normal course of business, there are various claims in process, matters in litigation, and other contingencies. These include employment related claims and claims from Guests or Team Members alleging illness, injury, food quality, health, or operational concerns. To date, none of these claims, certain of which are covered by insurance policies, have had a material effect on the Company. While it is not possible to predict the outcome of these suits, legal proceedings, and claims with certainty, management is of the opinion that adequate provision for potential losses associated with these matters has been made in the financial statements and that the ultimate resolution of these matters will not have a material adverse effect on our financial position and results of operations. However, a significant increase in the number of these claims, or one or more successful claims resulting in greater liabilities than we currently anticipate, could materially and adversely affect our business, financial condition, results of operations, and cash flows.
Including the accrued liabilities related to the Vigueras settlement, as of December 27, 2020, we had a balance of $10.5 million for loss contingencies on our consolidated balance sheets. We ultimately may be subject to greater or less than the accrued amount.
14. Stockholders' Equity
On August 9, 2018, the Company's board of directors authorized an increase to the Company's share repurchase program of approximately $21 million to a total of $75 million of the Company's common stock. The increased share repurchase authorization became effective on August 9, 2018 and will terminate upon completing repurchases of $75 million of common stock unless otherwise terminated by the board. Purchases under the repurchase program may be made in open market or privately negotiated transactions. Purchases may be made from time to time at the Company's discretion, and the timing and amount of any share repurchases will be determined based on share price, market conditions, legal requirements, and other factors. The repurchase program does not obligate the Company to acquire any particular amount of common stock, and the Company may suspend or discontinue the repurchase program at any time. In 2020, the Company purchased 72,100 shares with an average purchase price of $22.68 per share for a total of approximately $1.6 million. From the date of the current program approval through December 27, 2020, we have repurchased a total of 226,500 shares at an average price of $29.14 per share for an aggregate amount of $6.6 million. Accordingly, as of December 27, 2020, we had $68.4 million of availability under the current share repurchase program.
Effective March 14, 2020, the Company temporarily suspended its share repurchase program to provide additional liquidity during the COVID-19 pandemic. Our ability to repurchase shares is limited to conditions set forth by our lenders in the Second Amendment prohibiting us from repurchasing additional shares until the first fiscal quarter of 2022 at the earliest and not until we deliver a covenant compliance certificate demonstrating a lease adjusted leverage ratio less than or equal to 5.00:1.00.
15. Stock Incentive Plans
In May 2017, the Company's stockholders approved the 2017 Performance Incentive Plan (the "2017 Stock Plan"). Following the date of approval, all grants are made under the 2017 Stock Plan and no new awards may be granted under the Second Amended and Restated 2007 Performance Plan (the "2007 Stock Plan"). The 2017 Stock Plan authorizes the issuance of stock options, stock appreciation rights (SARs), and other forms of awards granted or denominated in the Company common stock or unit of the Company's common stock, as well as cash performance awards pursuant to the plan. Persons eligible to receive awards under the 2017 Stock Plan include officers, employees, directors, consultants, and other service providers or any affiliate of the Company. The maximum number of shares of the Company's common stock that may be issued or transferred pursuant to awards under the 2017 Stock Plan was 630,182 shares. The 2017 stock plan was amended in May 2019, and again in May 2020 to add an additional 660,000 and 275,000 shares, respectively, bringing the total to 1,565,182 as of December 27, 2020.
Vesting of the awards under the 2017 Stock Plan is determined at the date of grant by the plan administrator. Each award granted under the 2017 Stock Plan and 2007 Stock Plan fully vests, becomes exercisable and/or payable, as applicable, upon a change in control event. However, unless the individual award agreement provides otherwise, with respect to executive and certain other high level officers, upon the occurrence of a change in control, no award will vest unless such officers' employment with the Company is terminated by the Company without cause during the two years following such change in control event. Each award expires on such date as shall be determined at the date of grant; however, the maximum term of options, SARs, and other rights to acquire common stock under the plan is ten years after the initial date of the award, subject to provisions for further deferred payment in certain circumstances. Vesting of awards under these plans were generally time based over a period of one year to four years. As of December 27, 2020, 219,874 options and awards to acquire the Company's common stock remained outstanding under the 2007 Stock Plan; all remaining options and awards are outstanding under the 2017 Stock Plan.
Stock-based compensation costs recognized in 2020, 2019, and 2018 were $4.3 million, $3.3 million, and $4.0 million with related income tax benefits of $0.3 million, $0.3 million, and $0.5 million. As of December 27, 2020, there was $8.2 million of unrecognized compensation cost, excluding estimated forfeitures. Unrecognized compensation costs are expected to be recognized over the weighted average remaining vesting period of approximately 1.19 years for stock options, 1.12 years for the restricted stock units ("RSU"), and 1.82 years for the performance stock units ("PSU").
Stock Options
The tables below summarize the status of the Company's stock option plans (in thousands, except exercise price):
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|
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|
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|
|
|
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Stock Options
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|
|
Shares
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|
Weighted Average Exercise Price
|
Outstanding, December 29, 2019
|
|
288
|
|
|
$
|
58.33
|
|
Granted
|
|
241
|
|
|
12.61
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|
Forfeited/expired
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|
(54)
|
|
|
46.89
|
|
Exercised
|
|
(5)
|
|
|
21.61
|
|
Outstanding, December 27, 2020
|
|
470
|
|
|
$
|
36.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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Shares
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|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Years of
Contractual
Life
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|
Aggregate
Intrinsic Value
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Outstanding as of December 27, 2020
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470
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|
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$
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36.64
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|
|
6.78
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$
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1,714
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Vested and expected to vest as of December 27, 2020(1)
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|
429
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|
|
38.82
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|
|
6.54
|
|
1,414
|
|
Exercisable as of December 27, 2020
|
|
223
|
|
|
$
|
59.74
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|
|
4.25
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$
|
—
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———————————————————
(1) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumption to total outstanding options. The Company applies estimated forfeiture rates that are derived from our historical forfeitures of similar awards.
The estimated fair value of each option granted is calculated using the Black-Scholes multiple option-pricing model, and expense is recognized straight line over the vesting period. No options were granted during 2019. The average assumptions used in the model for the fiscal years ended December 27, 2020 and December 30, 2018 were as follows:
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2020
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2019
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2018
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Risk-free interest rate
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0.5
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%
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—
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%
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|
2.5
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%
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Expected years until exercise
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4.7
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|
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0
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|
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3.2
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Expected stock volatility
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61.0
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%
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—
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%
|
|
43.4
|
|
%
|
Dividend yield
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—
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|
%
|
|
—
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|
%
|
|
—
|
|
%
|
Weighted average Black-Scholes fair value per share at date of grant
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$
|
6.28
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|
|
|
$
|
—
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|
|
|
$
|
16.56
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|
|
Total intrinsic value of options exercised (in thousands)
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$
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30
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$
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20
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$
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390
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|
|
The risk-free interest rate was based on the rate for zero coupon U.S. Government issues with a remaining term similar to the expected life. The expected life of the options represents the period of time the options are expected to be outstanding and is based on historical trends and Team Member exercise patterns. The expected stock price volatility represents an average of the Company's historical volatility measured over a period approximating the expected life. The dividend yield assumption is based on the Company's history and expectations of dividend payouts.
Time-Based RSUs
During 2020, 2019, and 2018, the Company issued time-based restricted stock units ("RSUs") to certain employees as permitted under the 2017 Stock Plan. The Company can grant RSUs to its directors, executive officers, and other key employees. The RSUs granted to employees typically vest in equal installments over three to four years. For the Company's board of directors, RSUs vest in full on the earlier of the one-year anniversary of the grant date or the next annual stockholder meeting. Upon vesting, one share of the Company's common stock is issued for each RSU. The fair value of each RSU granted is equal to the market price of the Company's stock at the date of grant, and expense is recognized straight line over the vesting period.
The table below summarizes the status of the Company's time-based RSUs under the 2017 and 2007 Stock Plans (shares in thousands):
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|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
|
Shares
|
|
Weighted Average Grant-Date Fair Value (per share)
|
Outstanding, December 29, 2019
|
|
218
|
|
|
$
|
35.62
|
|
Awarded
|
|
239
|
|
|
12.98
|
|
Forfeited
|
|
(54)
|
|
|
36.80
|
|
Vested
|
|
(56)
|
|
|
36.45
|
|
Outstanding, December 27, 2020
|
|
347
|
|
|
$
|
19.74
|
|
Performance Stock Units
During 2020, 2019, and 2018, the Company granted performance stock unit awards ("PSUs") to certain employees as permitted under the 2017 Stock Plan. Each PSU represents the right to receive one share of the Company's common stock on the payment date.
Prior to 2020, each PSU was divided into three equal tranches with applicable performance periods, typically consisting of a fiscal year, subject to the achievement of the applicable performance goals at target and applicable vesting conditions. Fair value of each PSU granted was equal to the market price of the Company's stock at the grant date, and expense is recognized variably across the total performance period based on probability of achieving applicable performance goals. PSUs remain unvested until the end of the third performance period and are forfeited in the event of termination of employment of a grantee prior to the last day of the third performance period.
Beginning in 2020, the Company began granting PSU awards based on relative total stockholder return defined as increases in the Company's stock price during a performance period of three years as compared to the total stockholder return of a group of peer companies. Fair value of each PSU granted is determined by a Monte Carlo valuation model, and expense is recognized straight line over the performance period. PSUs remain unvested until the last day of the three year performance period and are forfeited in the event of termination of employment of a grantee prior to the last day of the three year performance period.
The table below summarizes the status of the Company's performance stock units under the 2017 Stock Plan (shares in thousands:
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|
|
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|
|
|
|
|
|
Performance Stock Units
|
|
|
Shares
|
|
Weighted Average Grant-Date Fair Value (per share)
|
Outstanding, December 29, 2019
|
|
102
|
|
|
$
|
36.23
|
|
Awarded
|
|
256
|
|
|
18.09
|
|
Forfeited
|
|
(52)
|
|
|
34.78
|
|
Vested
|
|
(9)
|
|
|
49.03
|
|
Outstanding, December 27, 2020
|
|
297
|
|
|
$
|
20.52
|
|
Long-Term Cash Incentive Plan
Beginning in 2020, the long-term cash incentive plan is based on relative total stockholder return defined as increases in the Company's stock price during a performance period of three years as compared to the total stockholder return of a group of peer companies. Compensation is recognized variably over the three year performance period based on a Monte Carlo valuation model. Beginning in 2017, the long-term cash incentive plan was based on operational metrics with three one year performance periods. Prior to 2017, the long-term cash incentive plan was based on operational metrics with one performance period totaling three years. Compensation expense for awards granted before 2020 is recognized variably over the performance period based on the plan-to-date performance achievement. All long-term cash incentive awards cliff vest after three years at the end of each performance cycle. In 2020, 2019, and 2018, the Company recorded $0.2 million, $0.2 million, and $0.7 million in compensation expense related to the 2017 long-term cash incentive plan.
During 2020, the long-term cash incentive plan payout totaled $0.5 million; no long-term cash incentive plan payouts occurred during 2019. At December 27, 2020 and December 29, 2019, a $0.8 million and $1.1 million long-term cash incentive plan liability was included in Accrued payroll and payroll-related liabilities on the consolidated balance sheets.
16. Employee Benefit Programs
Employee Deferred Compensation Plan
The Company offers a deferred compensation plan that permits key employees and other members of management defined as highly compensated employees under the IRS code to defer portions of their compensation in a pre-tax savings vehicle that allows for retirement savings above 401(k) limits. Under this plan, eligible Team Members may elect to defer up to 75% of their base salary and up to 100% of variable compensation and commissions each plan year. Beginning in 2019, the Company did not make matching contributions under the deferred compensation plan because the Company amended its 401(k) plan to allow a broader group, including highly compensated employees, to participate and receive matching contributions under the 401(k) plan. Prior to 2019, the board of directors authorized matching contributions equal to 50% of the first 4% of compensation that was deferred by the participant. The Company recognized immaterial matching contribution expenses in 2018 related to the deferred compensation plan.
The assets of the deferred compensation plan are held in a rabbi trust, where they are invested in certain mutual funds that cover an investment spectrum ranging from equities to money market instruments and are available to satisfy the claims of the Company's creditors in the event of bankruptcy or insolvency. These mutual funds have published market prices and are reported at fair value. See Note 10, Fair Value Measurements. Changes in the market value of the investments held in the trust result in the recognition of a corresponding gain or loss reported in Interest income and other, net in the consolidated statements of operations and comprehensive loss. A corresponding change in the liability associated with the deferred compensation plan results in an offsetting deferred compensation expense, or reduction of expense, reported in Selling, general, and administrative expenses in the consolidated statements of operations and comprehensive loss.
The Company recognized $0.6 million of deferred compensation expense in 2020, $1.1 million in 2019, and an immaterial amount in 2018. As of December 27, 2020 and December 29, 2019, $6.7 million and $7.3 million of deferred compensation asset is included in Other assets, net and $6.7 million and $7.3 million of deferred compensation plan liability is included in Other non-current liabilities in the accompanying consolidated balance sheets.
Employee Stock Purchase Plan
In July 2017, the Company adopted the Amended and Restated Employee Stock Purchase Plan (the "New Plan"). The New Plan authorized 100,000 shares of the Company's common stock for issuance. Under the New Plan, eligible Team Members may voluntarily contribute up to 15% of their salary, subject to limitations, to purchase common stock at a price equal to 85% of the fair market value of a share of the Company's common stock on the first day of each offering period or 85% of the fair market value of a share of the Company's common stock on the last day of each offering period, whichever amount is less. In general, all of the Company's officers and Team Members who have been employed by the Company for at least one year and who are regularly scheduled to work more than 20 hours per week are eligible to participate in this plan which operates in the successive six months commencing on January 1 and July 1 of each fiscal year. During 2020, the Company issued a total of 40,462 shares under the New Plan with 161,989 shares available for future issuance. During 2019, the Company issued a total of 29,582 shares under the New Plan.
For 2020, in accordance with the guidance for accounting for stock compensation, the Company estimated the fair value of the awards granted pursuant to the stock purchase plan using the Black-Scholes multiple-option pricing model. The assumptions used in the model included 0.1% risk-free interest rate, 0.5 year expected life, expected volatility of 50.40%, and 0% dividend yield. The weighted average fair value per share at grant date was $2.16. For 2019, the assumptions used in the model included 1.51% risk-free interest rate, 0.5 year expected life, expected volatility of 41.82%, and 0% dividend yield. The weighted average fair value per share at grant date was $7.56. The Company recognized $0.1 million of compensation expense related to this plan in 2020, $0.2 million in 2019, and $0.1 million in 2018.
Employee Defined Contribution Plan
The Company maintains a 401(k) Savings Plan ("401k Plan") which covers eligible Team Members who have satisfied the service requirements and reached 21 years of age. The 401k Plan, which qualifies under Section 401(k) of the Internal Revenue Code, allows Team Members to defer specified percentages of their compensation on a pre-tax basis. The Company may make matching contributions in an amount determined by the board of directors. In addition, the Company may contribute each period, at its discretion, an additional amount from profits. In 2019, the board of directors authorized an increase to employer matching contributions equal to 100% of the first 3% of compensation and 50% on the next 2% of compensation. The Company matches contributions when the employee contribution is made, and the employer matching contributions are not subject to a vesting schedule. Prior to 2019, the Company matched employee contributions equal to 50% of the first 4% of compensation that was deferred by the participant consistent with the Company's vesting schedule. The Company recognized matching contribution expense of $2.5 million in 2020, $3.0 million in 2019, and $0.9 million in 2018.