DEL TACO RESTAURANTS

TACO
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DEL TACO RESTAURANTS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/18/2021 | 06:08am


The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's audited consolidated
financial statements for the fiscal year ended December 29, 2020, and related
notes thereto, along with the related Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on
March 11, 2021.
In addition to historical information, this discussion and analysis contains
forward-looking statements that involve risks and uncertainties such as the
number of restaurants we intend to open and estimates of our effective tax
rates. We use words such as "estimates," "projected," "expects," "anticipates,"
"forecasts," "plans," "intends," "believes," "seeks," "may," "will," "should,"
"future," "propose," "preliminary," "guidance" and variations of these words or
similar expressions (or the negative versions of such words or expressions) to
identify forward-looking statements. These statements are based on assumptions
and information available to us as of the date any such statements are made and
are subject to risks and uncertainties. These risks and uncertainties include,
without limitation, the impact of the COVID-19 pandemic, consumer demand, our
inability to successfully open company-operated or franchise-operated
restaurants or establish new markets, competition in our markets, our inability
to grow and manage growth profitably, adverse changes in food and supply costs,
our inability to access additional capital, changes in applicable laws or
regulations, food safety and foodborne illness concerns, our inability to manage
existing and to obtain additional franchisees, our inability to attract and
retain qualified personnel, our inability to profitably expand into new markets,
changes in, or the discontinuation of the Company's repurchase program, and the
possibility that we may be adversely affected by other economic, business,
and/or competitive factors. Our actual results may differ materially from those
anticipated in these forward-looking statements due to these risks and
uncertainties, as well as others, including, without limitation, those discussed
in Part I. Item 1A. Risk Factors in our Annual Report on Form 10-K for our
fiscal year ended December 29, 2020. We assume no obligation to update or revise
these forward-looking statements as a result of new information, future events
or any other reason.
Fiscal Year
We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to
December 31 for financial reporting purposes. Fiscal year 2021 is the 52-week
period ended December 28, 2021 ("Fiscal 2021"). Fiscal year 2020 is the 52-week
period ended December 29, 2020 ("Fiscal 2020").
Overview
We are a nationwide operator and franchisor of restaurants featuring fresh and
fast cuisine, including both Mexican inspired and American classic dishes. As of
September 7, 2021, we have 603 Del Taco restaurants, a majority of these in the
Pacific Southwest. In each of our restaurants, our food is made to order in
working kitchens. We serve our customers fresh and high-quality food typical of
fast casual restaurants but with the speed, convenience and value associated
with traditional quick service restaurants ("QSRs"). With attributes of both a
fast casual restaurant and a QSR - a combination we call QSR+ - we occupy a
place in the restaurant market distinct from our competitors. With a menu
designed to appeal to a wide variety of budgets and tastes and recently updated
interior and exterior designs across most of our entire system, we believe that
we are poised for growth, operating within the fastest growing segment of the
restaurant industry, the limited service restaurant ("LSR") segment. With high
quality food and attractive price points, we believe we offer a compelling value
proposition relative to both QSR and fast casual peers.

Highlights and Trends
Third Quarter 2021 Revenue Highlights
Our third quarter 2021 results and highlights include the following:
•Total revenues increased 2.9% for the twelve weeks ended September 7, 2021 to
$124.3 million compared to $120.8 million for the twelve weeks ended
September 8, 2020. Total revenues increased 8.8% for the thirty-six weeks ended
September 7, 2021 to $364.8 million compared to $335.2 million for the
thirty-six weeks ended September 8, 2020. The increase in both the twelve and
thirty-six weeks ended September 7, 2021 is primarily due to an increase in
company-operated and franchise-operated same store sales as well as additional
system-wide restaurants open during 2021 compared to 2020.
•For the twelve weeks ended September 7, 2021, system-wide same store sales
increased 1.8%, company-operated same store sales increased 1.6% and
franchise-operated same store sales increased 2.0%. For the thirty-six weeks
ended September 7, 2021, system-wide same store sales increased 9.2%,
company-operated same store sales increased 7.9% and franchise-operated same
store sales increased 10.6%.
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•During the twelve weeks ended September 7, 2021, we opened one new
company-operated restaurant, opened three new franchise-operated restaurants,
closed one company-operated restaurant, and closed one franchise-operated
restaurant. During the twelve weeks ended September 8, 2020, we opened one new
company-operated restaurant, opened four new franchise-operated restaurants, and
closed two franchise-operated restaurants.
•During the thirty-six weeks ended September 7, 2021, we opened three new
company-operated restaurants, opened eight new franchise-operated restaurants,
closed one company-operated restaurant, and closed three franchise-operated
restaurants. During the thirty-six weeks ended September 8, 2020, we opened
three new company-operated restaurants, opened five new franchise-operated
restaurants, sold six company-operated restaurants to franchisees, closed two
company-operated restaurants and closed six franchise-operated restaurants.
Same Store Sales
Same store sales growth reflects the change in year-over-year sales for the same
store base. We include a restaurant in the same store base in the accounting
period following its 18th full month of operations and exclude restaurant
closures. The following table shows the same store sales growth for the twelve
and thirty-six weeks ended September 7, 2021 and September 8, 2020:
12 Weeks Ended 36 Weeks Ended
September 7, 2021


September 8, 2020 September 7, 2021 September 8, 2020
Company-operated same store sales


1.6 % 2.0 % 7.9 % (4.4) %
Franchise-operated same store sales 2.0 % 6.5 % 10.6 % (1.4) %
System-wide same store sales 1.8 % 4.1 % 9.2 % (3.0) %


Food and Paper Costs
As a result of the COVID-19 pandemic, starting in the fiscal third quarter of
2021, we have and expect to continue to incur incremental food and paper costs,
including incremental costs from the expanded use of alternate sources of
supply. In addition, some of our food and paper suppliers have experienced
shortages in labor and transportation resources, which in some cases, has
resulted in increased costs of our food and paper. Despite these market
conditions, we have worked closely with our suppliers to ensure availability of
products as well as cost savings initiatives. To date, there has been minimal
disruption to the availability of our products, though it is possible that more
significant disruptions could occur if the COVID-19 pandemic and labor
availability challenges continue. We are working closely with our distributor
and suppliers to monitor the situation and to determine the appropriate actions
to minimize any supply chain interruptions.
Labor Costs
During the third quarter of 2021, we experienced labor availability challenges
in certain restaurants that has added to the continued wage inflation within our
restaurants due to minimum wage increases. We are managing the labor
availability impact on these restaurants by selectively raising wages and
limiting our hours of operation or closing dining rooms, when necessary. In
addition, we are executing our holistic staffing strategy focused on retention
and recruitment, including new digital recruiting strategies to simplify the
application process and reduce friction for applicants.
Restaurant Development
Del Taco restaurant counts at the end of the twelve and thirty-six weeks ended
September 7, 2021 and September 8, 2020 were as follows:
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12 Weeks Ended 36 Weeks Ended
September 8,
September 7, 2021 2020 September 7, 2021 September 8, 2020
Company-operated restaurant activity:
Beginning of period 297 294 295 300
Openings 1 1 3 3
Closures (1) - (1) (2)

Sold to franchisees - - - (6)
Restaurants at end of period 297 295 297


295



Franchise-operated restaurant activity:
Beginning of period 304 299 301 296
Openings 3 4 8 5
Closures (1) (2) (3) (6)
Purchased from Company - - - 6

Restaurants at end of period 306 301 306 301
Total restaurant activity:
Beginning of period 601 593 596 596
Openings 4 5 11 8
Closures (2) (2) (4) (8)
Restaurants at end of period 603 596 603 596




The closures presented in the table above represent permanent closures of
restaurants. Temporary closures, which can occur for a variety of reasons, are
not reflected as a reduction in this table. Our franchisees are independent
businesses and decisions to close restaurants can be impacted by numerous
factors that are outside of our control, including but not limited to,
franchisees' agreements with their landlords and lenders.




Since 2012, we have focused on repositioning our brand, increasing brand
awareness, strengthening operational capabilities and refinancing indebtedness
to build a foundation for future organic and new unit growth. New restaurant
development is expected to contribute to our growth strategy. While the COVID-19
pandemic impacted our restaurant development plans for Fiscal 2020 due to the
significant uncertainties that resulted from the impact of dine-in operating
restrictions, various social distancing measures and stay-at-home orders on
customer re-engagement with our brand and the short- and long-term impact on
consumer discretionary spending, we and our franchisees plan to continue
restaurant development during 2021, including the recent launch of our new
"Fresh Flex" prototype restaurant design. We plan to open 13 system-wide
restaurants in Fiscal 2021. From time to time, we and our franchisees may close
restaurants.
Key Performance Indicators

In assessing the performance of our business, management utilizes a variety of
financial and performance measures.
These key measures include company restaurant sales, same store sales,
company-operated average unit volumes, restaurant contribution and restaurant
contribution margin, number of new restaurant openings, EBITDA and Adjusted
EBITDA.
Company Restaurant Sales
Company restaurant sales consists of sales of food and beverages in
company-operated restaurants net of promotional allowances, employee meals and
other discounts. Company restaurant sales in any period are directly influenced
by the number of operating weeks in such period, the number of open restaurants,
same store sales and per restaurant sales.
Seasonal factors and the timing of holidays cause revenue to fluctuate from
quarter to quarter. Revenue per restaurant is typically lower in the first
quarter due to reduced January traffic. As a result of seasonality, quarterly
and annual results of operations and key performance indicators, such as company
restaurant sales and same store sales, may fluctuate.
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Same Store Sales
We regularly monitor company, franchise and total system same store sales. Same
store sales growth reflects the change in year-over-year sales for the
comparable company, franchise and total system restaurant base. We include a
restaurant in the same store base in the accounting period following its 18th
full month of operations and exclude restaurant closures. As of September 7,
2021
and September 8, 2020, there were 293 and 283 restaurants, respectively, in
the comparable company-operated restaurant base. As of September 7, 2021 and
September 8, 2020, there were 293 and 285 restaurants, respectively, in the
comparable franchise-operated restaurant base. This measure highlights the
performance of existing restaurants as the impact of new restaurant openings is
excluded. Same store sales growth can be generated by an increase in the number
of transactions and/or by increases in the average check resulting from a shift
in menu mix and/or higher prices resulting from new products, promotions or
price increases.
Company-Operated Average Unit Volumes
We measure company-operated average unit volumes ("AUVs") on both a weekly and
an annual basis. Weekly AUVs are calculated by dividing the sales from
comparable company-operated restaurants over a seven day period from Wednesday
to Tuesday by the number of comparable restaurants. Annual AUVs are calculated
by dividing sales for the trailing 52-week period for all company-operated
restaurants that are in the comparable base by the total number of restaurants
in the comparable base for such period. This measurement allows management to
assess changes in consumer traffic and spending patterns at our company-operated
restaurants and the overall performance of the restaurant base.
Restaurant Contribution and Restaurant Contribution Margin
Restaurant
contribution and restaurant contribution margin are neither required
by, nor presented in accordance with United States generally accepted accounting
principles ("U.S. GAAP"). Restaurant contribution is defined as company
restaurant sales less restaurant operating expenses, which are food and paper
costs, labor and related expenses and occupancy and other operating expenses.
Restaurant contribution margin is defined as restaurant contribution as a
percentage of company restaurant sales. Restaurant contribution and restaurant
contribution margin are supplemental measures of operating performance of
restaurants and the calculations thereof may not be comparable to those reported
by other companies. Restaurant contribution and restaurant contribution margin
have limitations as analytical tools and should not be considered in isolation
or as substitutes for analysis of results as reported under U.S. GAAP.
Management believes that restaurant contribution and restaurant contribution
margin are important tools for investors because they are widely-used metrics
within the restaurant industry to evaluate restaurant-level productivity,
efficiency and performance. Management uses restaurant contribution and
restaurant contribution margin as key performance indicators to evaluate the
profitability of incremental sales at Del Taco restaurants, to evaluate
restaurant performance across periods and to evaluate restaurant financial
performance compared with competitors. See the heading entitled "Management's
Use of Non-GAAP Financial Measures" for the reconciliation of restaurant
contribution to the most directly comparable GAAP financial measure.
Number of New Restaurant Openings
The number of restaurant openings reflects the number of new restaurants opened
by us and our franchisees during a particular reporting period. Before a new
restaurant opens, we and our franchisees incur pre-opening costs, as described
below. Some new restaurants open with an initial start-up period of higher than
normal sales volumes, which subsequently decrease to stabilized levels.
Typically, new restaurants experience normal inefficiencies in the form of
higher food and paper, labor and other direct operating expenses and, as a
result, restaurant contribution margins are generally lower during the start-up
period of operation. Typically, the average start-up period after which new
company restaurant sales and restaurant operating expenses normalize is
approximately 26 to 52 weeks. In new markets, the length of time before average
company restaurant sales and restaurant operating expenses for new restaurants
stabilize is less predictable and can be longer as a result of limited knowledge
of these markets and consumers' limited awareness of our brand. When we enter
new markets, we may be exposed to start-up times that are longer and restaurant
contribution margins that are lower than typical historical experience, and
these new restaurants may not be profitable and their sales performance may not
follow historical patterns.
EBITDA and Adjusted EBITDA
EBITDA represents net income (loss) before interest expense, provision (benefit)
for income taxes, depreciation and amortization. Adjusted EBITDA represents net
income (loss) before interest expense, provision (benefit) for income taxes,
depreciation, amortization and items that we do not consider representative of
ongoing operating performance, as identified in the reconciliation table under
the heading entitled "Management's Use of Non-GAAP Financial Measures."
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EBITDA and Adjusted EBITDA as presented in this quarterly report are
supplemental measures of performance that are neither required by, nor presented
in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA are not measurements of
financial performance under U.S. GAAP and should not be considered as
alternatives to net income (loss), income (loss) from operations or any other
performance measures derived in accordance with U.S. GAAP or as alternatives to
cash flow from operating activities as a measure of liquidity. In addition, in
evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we
may incur expenses or charges such as those added back to calculate EBITDA and
Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be
construed as an inference that future results will be unaffected by unusual or
nonrecurring items.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should
not consider them in isolation, or as substitutes for analysis of results as
reported under U.S. GAAP. Some of these limitations include but are not limited
to:

(i)they do not reflect cash expenditures, or future requirements for capital
expenditures or contractual commitments;
(ii)they do not reflect changes in, or cash requirements for, working capital
needs;
(iii)they do not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on debt;
(iv)although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the future,
and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such
replacements;
(v)they do not adjust for all non-cash income or expense items that are
reflected in the statements of cash flows;
(vi)they do not reflect the impact of earnings or charges resulting from matters
we consider not to be indicative of ongoing operations; and
(vii)other companies in the industry may calculate these measures differently
than we do, limiting their usefulness as comparative measures.
We compensate for these limitations by providing specific information regarding
the U.S. GAAP amounts excluded from such non-GAAP financial measures. We further
compensate for the limitations in the use of non-GAAP financial measures by
presenting comparable U.S. GAAP measures more prominently.
We believe EBITDA and Adjusted EBITDA facilitate operating performance
comparisons from period to period by isolating the effects of some items that
vary from period to period without any correlation to core operating performance
or that vary widely among similar companies. These potential differences may be
caused by variations in capital structures (affecting interest expense), tax
positions (such as the impact on periods or changes in effective tax rates or
net operating losses) and the age and book depreciation of facilities and
equipment (affecting relative depreciation expense). We also present EBITDA and
Adjusted EBITDA because (i) we believe these measures are frequently used by
securities analysts, investors and other interested parties to evaluate
companies in their industry, (ii) we believe investors will find these measures
useful in assessing our ability to service or incur indebtedness, and (iii) we
use EBITDA and Adjusted EBITDA internally as benchmarks to compare performance
to that of competitors. See the heading entitled "Management's Use of Non-GAAP
Financial Measures" for the reconciliation of EBITDA and Adjusted EBITDA to net
income (loss).
Key Financial Definitions
Company Restaurant Sales
Company restaurant sales represents sale of food and beverages in
company-operated restaurants, net of promotional allowances, employee meals and
other discounts. Company restaurant sales in any period is directly influenced
by the number of operating weeks in such period, the number of open restaurants,
same store sales performance and per-restaurant sales.
Franchise Revenue
Franchise revenue consists of franchise royalty income from franchisees and, to
a lesser extent, franchise renewal fees and franchise fees from franchise owners
for new franchise restaurant openings. Franchise fees are collected upon signing
a franchise agreement and deferred and recognized as revenue over the term of
the franchise agreement and franchise renewal fees are deferred and recognized
over the term of the franchise renewal agreement. To a lesser extent, franchise
revenue also includes pass-through fees for services, such as software
maintenance and technology subscriptions, since we are considered the principal
related to the purchase and sale of the services to the franchisee and have no
remaining performance obligations. The related expenses are recognized in
occupancy and other - franchise subleases and other.
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Franchise Advertising Contributions
Franchise advertising contributions consist of a percentage of a franchise
restaurant's net sales, typically 4%, paid to the Company for advertising and
promotional services that the Company provides. The offset is recorded to
franchise advertising expenses.
Franchise Sublease and Other Income
Franchise sublease and other income primarily consists of rental income received
from franchisees related to properties where we have subleased a leasehold
interest to the franchisee but remain primarily liable to the landlord. The
related expenses are recognized in occupancy and other - franchise subleases and
other. Franchise sublease and other income also includes rental income for
closed restaurant properties where we have subleased to a third party but remain
primarily liable to the landlord. The related expenses are recognized in
restaurant closure charges, net. Franchise sublease and other income also
includes information technology hardware such as point of sale equipment,
tablets, kitchen display systems, servers, scanners and printers that we
occasionally purchase from third party vendors and then sell to franchisees.
Since we are considered the principal related to the purchase and sale of the
hardware to the franchisee and have no remaining performance obligations, the
franchisee reimbursement is recognized as franchise sublease and other income
upon transfer of the hardware. The related expenses are recognized in occupancy
and other - franchise subleases and other.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and
packaging of menu items. The components of food and paper costs are variable in
nature, change with sales volume and are impacted by menu mix and are subject to
increases or decreases based on fluctuations in commodity, distribution and
transportation costs. Other important factors causing fluctuations in food and
paper costs include seasonality, promotional activity and restaurant level
management of food and paper waste. Food and paper are a significant expense and
can be expected to grow proportionally as company restaurant sales grows.
Labor and Related Expenses
Labor and related expenses include all restaurant-level management and hourly
labor costs, including wages, benefits, bonuses, workers' compensation expense,
group health insurance, paid leave and payroll taxes. Like other expense items,
we expect labor and related expenses to grow proportionately as company
restaurant sales grows. Factors that influence fluctuations in labor and related
expenses include minimum wage, paid sick leave and payroll tax legislation,
health care and workers compensation costs and the performance of Del Taco
restaurants
.
Occupancy and Other Operating Expenses
Occupancy and other operating expenses include all other restaurant-level
operating expenses, such as rent, utilities, restaurant supplies, repairs and
maintenance, credit and debit card processing fees, advertising, insurance,
common area maintenance, real estate taxes, third party delivery fees and other
restaurant operating costs, including net expenses incurred for employees who
are not providing services due to COVID-19.
General and Administrative Expenses
General and administrative expenses are comprised of expenses associated with
corporate and regional supervision functions that support the operations of
existing restaurants and development of new restaurants, including compensation
and benefits, travel expenses, stock-based compensation expenses, legal and
professional fees, information systems, corporate office occupancy costs and
other related corporate costs. Also included are expenses above the restaurant
level, including salaries for field management, such as area and regional
managers, and franchise operational support. General and administrative expenses
also include legal, accounting, insurance, investor relations and other expenses
that are incurred as a public company.
Franchise Advertising Expenses
Franchise advertising expenses consist of the franchise portion of advertising
expense.
Depreciation and Amortization
Depreciation and amortization expenses are periodic non-cash charges that
consist of depreciation of fixed assets, including leasehold improvements and
restaurant and other equipment, and amortization of various intangible assets
primarily including franchise rights and capitalized software.
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Occupancy and Other - Franchise Subleases and Other
Occupancy and other - franchise subleases includes rent, property taxes and
common area maintenance paid on properties subleased to franchisees where we
remain primarily liable to the landlord, as well as other franchise expenses
related to information technology hardware that we occasionally purchase from
third party vendors and then sell to franchisees and recognize in franchise
sublease and other income.
Pre-opening Costs
Pre-opening costs are incurred in connection with opening of new restaurants and
incurred prior to opening, including restaurant labor related to the hiring and
training of restaurant employees, as well as supplies, occupancy costs including
cash and non-cash rent expense and other operating expenses directly associated
with the opening of new restaurants. Pre-opening costs are expensed as incurred.
Impairment of Goodwill
Goodwill arises from the excess purchase price over acquired net assets,
including identifiable intangible assets, in business combinations. Goodwill is
not amortized, and is instead reviewed for impairment annually in the fourth
quarter of each fiscal year or more frequently if events and circumstances
indicate that it might be impaired. The amount by which the carrying amount of
the Company exceeds its fair value is recorded as impairment of goodwill.
Impairment of Trademarks
The Company's trademarks are not amortized, but instead are tested for
impairment annually in the fourth quarter of each fiscal year or more frequently
if events and circumstances indicate that the assets might be impaired. When
events or circumstances indicate the carrying value of the Company's trademarks
may not be recoverable, an appropriate impairment charge is recorded.
Impairments could increase if performance of the Company is not sufficient to
recover the carrying amount of its trademarks.
Impairment of Long-Lived Assets
We review long-lived assets such as leasehold improvements, restaurant and other
equipment and operating lease right-of-use assets on a unit-by-unit basis for
impairment. When events or circumstances indicate the carrying value of the
assets may not be recoverable, an appropriate impairment charge is recorded.
Impairments could increase if performance of company-operated restaurants is not
sufficient to recover the carrying amount of the related long-lived assets.
Restaurant Closure Charges, Net
Restaurant closure charges, net, consist primarily of (1) rent expense related
to previously closed restaurants; (2) non-lease executory costs for closed
restaurants, including any positive or negative adjustments to these amounts as
more information becomes available; and (3) direct costs related to restaurant
closures.
Loss on Disposal of Assets and Adjustments to Assets Held For Sale, Net
Loss on disposal of assets and adjustments to assets held for sale, net includes
the loss on disposal of assets related to sales, retirements and replacement or
write-off of leasehold improvements, furniture, fixtures or equipment in the
ordinary course of business, impairment losses to reduce the carrying amount for
assets held for sale to estimated fair value less costs to sell, remeasurement
losses for assets held for sale reclassified back to held for use, gains or
losses associated with sale-leaseback transactions, gains or losses associated
with the sale of company-operated restaurants to franchisees and gains or losses
from the write-off of right-of-use assets and operating lease liabilities
related to the termination of leases.
Interest Expense
Interest expense consists primarily of interest expense on outstanding debt
including finance lease obligations and other debt. Deferred financing costs and
debt discount are amortized at cost over the life of the related debt.
Other Income
Other income consists of proceeds received on a legal settlement related to
construction defects at a company-operated restaurant.
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Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes consists of federal and state current and
deferred income tax expense.
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Results of Operations
Comparison of Results of Operations for the Twelve Weeks Ended September 7, 2021
and Twelve Weeks Ended September 8, 2020
The following table presents operating results for the twelve weeks ended
September 7, 2021 and twelve weeks ended September 8, 2020, in absolute terms
and expressed as a percentage of total revenue (or company restaurant sales), as
compared below:

12 Weeks Ended
September 7, 2021 September 8, 2020 Increase /


(Decrease)



(Dollar amounts in thousands) ($) (%) ($) (%) ($)


(%)



Statement of Operations Data:
Revenue:
Company restaurant sales $ 111,981 90.1 % $ 109,522 90.7 % $ 2,459 2.2 %
Franchise revenue 5,586 4.5 5,169 4.3 417 8.1
Franchise advertising contributions 4,170 3.4 4,001 3.3 169


4.2



Franchise sublease and other income 2,534 2.0 2,090 1.7 444 21.2
Total revenue 124,271 100.0 120,782 100.0 3,489 2.9
Operating expenses
Restaurant operating expenses:
Food and paper costs 29,315 26.2 (1) 29,051 26.5 (1) 264 0.9
Labor and related expenses 37,210 33.2 (1) 35,450 32.4 (1) 1,760 5.0
Occupancy and other operating expenses 26,989 24.1 (1) 25,302 23.1 (1) 1,687


6.7



Total restaurant operating expenses 93,514 83.5 (1) 89,803 82.0 (1) 3,711 4.1
General and administrative 11,218 9.0 10,841 9.0 377 3.5
Franchise advertising expenses 4,170 3.4 4,001 3.3 169


4.2



Depreciation and amortization 6,021 4.8 6,055 5.0 (34)


(0.6)



Occupancy and other-franchise subleases
and other 2,354 1.9 1,766 1.5 588 33.3
Pre-opening costs 152 0.1 63 0.1 89 141.3

Restaurant closure charges, net 690 0.6 413 0.3 277


67.1



Loss on disposal of assets and
adjustments to assets held for sale, net 37 - 140 0.1 (103) (73.6)
Total operating expenses 118,156 95.1 113,082 93.6 5,074 4.5
Income from operations 6,115 4.9 7,700 6.4 (1,585) (20.6)
Other expense, net
Interest expense 660 0.5 941 0.8 (281) (29.9)

Total other expense, net 660 0.5 941 0.8 (281) (29.9)
Income from operations before provision
for income taxes 5,455 4.4 6,759 5.6 (1,304) (19.3)
Provision for income taxes 1,617 1.3 962 0.8 655 68.1
Net income $ 3,838 3.1 % $ 5,797 4.8 % $ (1,959) (33.8) %



(1)As a percentage of company restaurant sales.
*Immaterial/not meaningful
Company Restaurant Sales
Company restaurant sales increased $2.5 million, or 2.2%, for the twelve weeks
ended September 7, 2021, primarily due to an increase in company-operated same
store sales of 1.6%.
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Franchise Revenue
Franchise revenue increased $0.4 million, or 8.1%, for the twelve weeks ended
September 7, 2021, primarily due to an increase in franchise-operated same store
sales of 2.0% as well as additional franchise-operated restaurants open during
2021 compared to 2020.
Franchise Advertising Contributions
Franchise advertising contributions increased $0.2 million, or 4.2%, for the
twelve weeks ended September 7, 2021 and is directly related to franchise
revenue.
Franchise Sublease and Other Income
Franchise sublease and other income increased $0.4 million, or 21.2%, for the
twelve weeks ended September 7, 2021, primarily due to an increase in other
income related to a rollout of kitchen equipment that we purchased from third
party vendors and then sold to franchisees.
Food and Paper Costs
Food and paper costs increased $0.3 million, or 0.9%, for the twelve weeks ended
September 7, 2021 primarily due to commodity inflation. As a percentage of
company restaurant sales, food and paper costs were 26.2% for the twelve weeks
ended September 7, 2021 compared to 26.5% for the twelve weeks ended
September 8, 2020. This percentage decrease was primarily the result of menu
price increases, partially offset by commodity inflation.
Labor and Related Expenses
Labor and related expenses increased $1.8 million, or 5.0%, for the twelve weeks
ended September 7, 2021, primarily due to a California minimum wage increase on
January 1, 2021 and Nevada minimum wage increase on July 1, 2021 as well as wage
rate pressure from restaurants with labor availability challenges where we
selectively increase wages, partially offset by a reduction in workers
compensation expense based on underlying claims activity. As a percentage of
company restaurant sales, labor and related expenses were 33.2% for the twelve
weeks ended September 7, 2021 compared to 32.4% for the twelve weeks ended
September 8, 2020. This percentage increase resulted primarily from the impact
of the increased California minimum wage and Nevada minimum wage increase on
July 1, 2021 as well as wage rate pressure from restaurants with labor
availability challenges where we selectively increase wages, partially offset by
the impact of the positive same store sales increase including menu price
increases, effective management of variable labor and the reduction in workers
compensation expense.
Occupancy and Other Operating Expenses
Occupancy and other operating expenses increased $1.7 million, or 6.7%, for the
twelve weeks ended September 7, 2021, primarily due to increased advertising,
utilities, repairs and maintenance, rent expense and third party delivery fees,
partially offset by lower net expenses related to COVID-19. As a percentage of
company restaurant sales, occupancy and other operating expenses were 24.1% for
the twelve weeks ended September 7, 2021 compared to 23.1% for the twelve weeks
ended September 8, 2020. This percentage increase was primarily related to
increased advertising, utilities and repairs and maintenance expense, partially
offset by the impact of the same store sales increase including menu price
increases and lower net expenses related to COVID-19.

General and Administrative Expenses
General and administrative expenses increased $0.4 million, or 3.5%, for the
twelve weeks ended September 7, 2021, primarily due to increased stock-based
compensation expense, travel expense and general inflationary trends, partially
offset by lower management incentive compensation. As a percentage of total
revenue, general and administrative expense was 9.0% for both the twelve weeks
ended September 7, 2021 and the twelve weeks ended September 8, 2020.
Franchise Advertising Expenses
Franchise advertising expenses increased $0.2 million, or 4.2%, for the twelve
weeks ended September 7, 2021 and are directly related to franchise advertising
expenses. These amounts offset against franchise advertising contributions
included in revenue.
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Depreciation and Amortization
Depreciation and amortization expenses were $6.0 million and $6.1 million for
the twelve weeks ended September 7, 2021 and September 8, 2020, respectively.
The decrease primarily reflects lower amortization and depreciation expense
related to fully depreciated assets. As a percentage of total revenue,
depreciation and amortization expenses were 4.8% for the twelve weeks ended
September 7, 2021 compared to 5.0% for the twelve weeks ended September 8, 2020.
The decrease as a percent of total revenue was primarily due to lower
amortization and depreciation expense discussed above, as well as the impact of
higher revenue.
Occupancy and Other - Franchise Sublease and Other
Occupancy and other - franchise sublease and other was $2.4 million and $1.8
million
for the twelve weeks ended September 7, 2021 and September 8, 2020,
respectively. The increase is primarily due to an increase in other expenses
related to franchise information technology service contracts and a rollout of
kitchen equipment that we purchased from third party vendors and then sold to
franchisees.
Pre-opening Costs
Pre-opening costs were $0.2 million and $0.1 million for the twelve weeks ended
September 7, 2021 and September 8, 2020, respectively, due to increased
pre-opening activity compared to the prior year.
Restaurant Closure Charges, Net
Restaurant closure charges, net, were $0.7 million and $0.4 million for the
twelve weeks ended September 7, 2021 and September 8, 2020, respectively. The
increase was due to higher rent and property tax expense related to previously
closed restaurants.
Loss on Disposal of Assets and Adjustments to Assets Held for Sale, Net
Loss on disposal of assets and adjustments to assets held for sale, net was
$0.04 million and $0.1 million for the twelve weeks ended September 7, 2021 and
September 8, 2020, respectively. Current year net loss on disposal of assets and
adjustments to assets held for sale primarily related to losses on the closure
of one company-operated restaurant and fixed asset write-offs. Prior year net
loss on disposal of assets and adjustments to assets held for sale primarily
related to the write-off of certain restaurant equipment.
Interest Expense
Interest expense was $0.7 million and $0.9 million for the twelve weeks ended
September 7, 2021 and September 8, 2020, respectively. The decrease is primarily
due to lower average outstanding balances and lower weighted average interest
rates during the twelve weeks ended September 7, 2021 compared to the prior
year.
Provision for Income Taxes
The effective income tax rates were 29.6% for the twelve weeks ended
September 7, 2021 and 14.2% for the twelve weeks ended September 8, 2020. The
provision for income taxes was $1.6 million for the twelve weeks ended
September 7, 2021 and $1.0 million for the twelve weeks ended September 8, 2020.
The income tax expense for the twelve weeks ended September 7, 2021 is driven by
our estimated annual effective income tax rate which primarily consists of
statutory federal and state tax rates based on apportioned income, the impact of
non-tax deductible compensation to executives and the impact of lower stock
compensation expense deductible for tax related to the June 30, 2021 vesting of
certain restricted stock awards as compared to the cumulative amount recorded as
stock-based compensation expense, partially offset by federal targeted job
credits. The income tax expense for the twelve weeks ended September 8, 2020 is
driven by our estimated effective income tax rate which primarily consists of
statutory federal and state tax rates based on estimated apportioned income for
fiscal year 2020, the impact of non-tax deductible compensation to executives
and the impact of lower stock compensation expense deductible for tax related to
the June 30, 2020 vesting of certain restricted stock awards as compared to the
cumulative amount recorded as stock-based compensation expense, partially offset
by federal targeted job credits.

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Results of Operations
Comparison of Results of Operations for the Thirty-Six Weeks Ended September 7,
2021
and Thirty-Six Weeks Ended September 8, 2020
The following table presents operating results for the thirty-six weeks ended
September 7, 2021 and thirty-six weeks ended September 8, 2020, in absolute
terms and expressed as a percentage of total revenue (or company restaurant
sales), as compared below:

36 Weeks Ended
September 7, 2021 September 8, 2020 Increase / (Decrease)
(Dollar amounts in thousands) ($) (%) ($) (%) ($)


(%)



Statement of Operations Data:
Revenue:
Company restaurant sales $ 328,563 90.1 % $ 305,116 91.0 % $ 23,447 7.7 %
Franchise revenue 16,395 4.5 14,080 4.2 2,315 16.4
Franchise advertising contributions 12,184 3.3 9,995 3.0 2,189


21.9



Franchise sublease and other income 7,631 2.1 5,971 1.8 1,660 27.8
Total revenue 364,773 100.0 335,162 100.0 29,611 8.8
Operating expenses
Restaurant operating expenses:
Food and paper costs 84,764 25.8 (1) 82,988 27.2 (1) 1,776 2.1
Labor and related expenses 109,932 33.5 (1) 101,995 33.4 (1) 7,937 7.8
Occupancy and other operating expenses 77,436 23.6 (1) 72,099 23.6 (1) 5,337


7.4



Total restaurant operating expenses 272,132 82.8 (1) 257,082 84.3 (1) 15,050 5.9
General and administrative 33,861 9.3 30,139 9.0 3,722 12.3
Franchise advertising expenses 12,184 3.3 9,995 3.0 2,189


21.9



Depreciation and amortization 17,952 4.9 18,477 5.5 (525)


(2.8)



Occupancy and other-franchise subleases
and other 7,324 2.0 5,088 1.5 2,236 43.9
Pre-opening costs 407 0.1 359 0.1 48 13.4
Impairment of goodwill - - 87,277 26.0 (87,277) (100.0)
Impairment of trademarks - - 11,900 3.6 (11,900) (100.0)
Impairment of long-lived assets - - 8,287 2.5 (8,287)


(100.0)



Restaurant closure charges, net 1,488 0.4 1,406 0.4 82


5.8



Loss on disposal of assets and
adjustments to assets held for sale, net 91 - 697 0.2 (606) (86.9)
Total operating expenses 345,439 94.7 430,707 128.5 (85,268) (19.8)
Income (loss) from operations 19,334 5.3 (95,545) (28.5) 114,879 (120.2)
Other expense, net
Interest expense 2,082 0.6 3,730 1.1 (1,648) (44.2)
Other income (373) (0.1) - - (373) *
Total other expense, net 1,709 0.5 3,730 1.1 (2,021) (54.2)
Income (loss) from operations before
provision (benefit) for income taxes 17,625 4.8 (99,275) (29.6) 116,900


(117.8)



Provision (benefit) for income taxes 5,154 1.4 (2,028) (0.6) 7,182 (354.1)
Net income (loss) $ 12,471 3.4 % $ (97,247) (29.0) % $ 109,718 (112.8) %



(1)As a percentage of company restaurant sales.
*Immaterial/not meaningful
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Company Restaurant Sales
Company restaurant sales increased $23.4 million, or 7.7%, for the thirty-six
weeks ended September 7, 2021, primarily due to an increase in company-operated
same store sales of 7.9% due in part to the negative impact of COVID-19 on prior
year sales.
Franchise Revenue
Franchise revenue increased $2.3 million, or 16.4%, for the thirty-six ended
September 7, 2021, primarily due to an increase in franchise-operated same store
sales of 10.6% as well as additional franchise-operated restaurants open during
2021 compared to 2020.
Franchise Advertising Contributions
Franchise advertising contributions increased $2.2 million, or 21.9%, for the
thirty-six weeks ended September 7, 2021 and is directly related to franchise
revenue. In addition, starting the last fiscal week of the first quarter of
2020, as a result of the COVID-19 pandemic, the Company reduced franchise
advertising contributions from 4.0% to 2.5% of franchise restaurant net sales
for eight weeks.
Franchise Sublease and Other Income
Franchise sublease and other income increased $1.7 million, or 27.8%, for the
thirty-six weeks ended September 7, 2021, primarily due to sublease income
related to the sale of six company-operated restaurants to franchisees during
2020, in which we retained the leasehold interest to the real estate, as well as
an increase in other income related to information technology hardware and
kitchen equipment that we purchase from third party vendors and then sell to
franchisees.
Food and Paper Costs
Food and paper costs increased $1.8 million, or 2.1%, for the thirty-six weeks
ended September 7, 2021 due to the increase in company restaurant sales and
commodity inflation. As a percentage of company restaurant sales, food and paper
costs were 25.8% for the thirty-six weeks ended September 7, 2021 compared to
27.2% for the thirty-six weeks ended September 8, 2020. This percentage decrease
was the result of menu price increases, partially offset by commodity inflation.
Labor and Related Expenses
Labor and related expenses increased $7.9 million, or 7.8%, for the thirty-six
weeks ended September 7, 2021, primarily due to an increase in company
restaurant sales and a California minimum wage increase on January 1, 2021 and
Nevada minimum wage increase on July 1, 2021 as well as wage rate pressure from
restaurants with labor availability challenges where we selectively increase
wages. As a percentage of company restaurant sales, labor and related expenses
were 33.5% for the thirty-six weeks ended September 7, 2021 compared to 33.4%
for the thirty-six weeks ended September 8, 2020. This percentage increase
resulted primarily from the impact of the increased California minimum wage and
Nevada minimum wage increase on July 1, 2021 as well as wage rate pressure from
restaurants with labor availability challenges where we selectively increase
wages, partially offset by the impact of the positive same store sales increase
including menu price increases and effective management of variable labor.
Occupancy and Other Operating Expenses
Occupancy and other operating expenses increased $5.3 million, or 7.4%, for the
thirty-six weeks ended September 7, 2021, primarily due to increased
advertising, third party delivery fees, utilities, rent expense and credit card
fees. As a percentage of company restaurant sales, occupancy and other operating
expenses were 23.6% for both the thirty-six weeks ended September 7, 2021 and
the thirty-six weeks ended September 8, 2020 due to higher advertising expense
and utilities as a percent of sales, offset by the impact of the same store
sales including menu price increases and lower rent expense as a percent of
sales.

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General and Administrative Expenses
General and administrative expenses increased $3.7 million, or 12.3%, for the
thirty-six weeks ended September 7, 2021, primarily due to higher management
incentive compensation, general inflationary trends, legal expenses and
stock-based compensation expense. As a percentage of total revenue, general and
administrative expense was 9.3% for the thirty-six weeks ended September 7, 2021
compared to 9.0% for the thirty-six weeks ended September 8, 2020. The increase
as a percent of total revenue was primarily due to higher management incentive
compensation, general inflationary trends, legal expenses and stock-based
compensation, partially offset by the impact of higher revenue.
Franchise Advertising Expenses
Franchise advertising expenses increased $2.2 million, or 21.9%, for the
thirty-six weeks ended September 7, 2021 and are directly related to franchise
advertising expenses. These amounts offset against franchise advertising
contributions included in revenue. In addition, starting the last fiscal week of
the first quarter of 2020, as a result of the COVID-19 pandemic, the Company
reduced franchise advertising contributions from 4.0% to 2.5% of franchise
restaurant net sales for eight weeks.
Depreciation and Amortization
Depreciation and amortization expenses were $18.0 million and $18.5 million for
the thirty-six weeks ended September 7, 2021 and September 8, 2020,
respectively. The decrease primarily reflects lower amortization and
depreciation expense related to fully depreciated assets. As a percentage of
total revenue, depreciation and amortization expenses were 4.9% for the
thirty-six weeks ended September 7, 2021 compared to 5.5% for the thirty-six
weeks ended September 8, 2020. The decrease as a percent of total revenue was
primarily due to lower amortization and depreciation expense discussed above, as
well as the impact of higher revenue.
Occupancy and Other - Franchise Sublease and Other
Occupancy and other - franchise sublease and other was $7.3 million and $5.1
million
for the thirty-six weeks ended September 7, 2021 and September 8, 2020,
respectively. The increase is primarily due to sublease expense related to the
sale of six company-operated restaurants to franchisees during 2020, in which we
retained the leasehold interest to the real estate, as well as an increase in
other expenses related to franchise information technology service contracts and
information technology hardware and kitchen equipment that we purchase from
third party vendors and then sell to franchisees.
Pre-opening Costs
Pre-opening costs were $0.4 million for both the thirty-six weeks ended
September 7, 2021 and September 8, 2020 due to a similar level of pre-opening
activity compared to the prior year.
Impairment of Goodwill
No impairment charges were recorded during the thirty-six weeks ended
September 7, 2021. The Company recorded a non-cash impairment charge of $87.3
million
during the thirty-six weeks ended September 8, 2020 related to an
interim goodwill impairment assessment performed during the first quarter of
2020 in response to changes in business, market and economic conditions
resulting from the COVID-19 pandemic coupled with a sustained decline in the
Company's stock price, which were indicators of potential goodwill impairment.
Impairment of Trademarks
No impairment charges were recorded during the thirty-six weeks ended
September 7, 2021. The Company recorded a non-cash impairment charge of $11.9
million
during the thirty-six weeks ended September 8, 2020 related to an
interim trademark impairment assessment performed during the first quarter of
2020 in response to changes in business, market and economic conditions
resulting from the COVID-19 pandemic coupled with a sustained decline in the
Company's stock price, which were indicators of potential impairment.
Impairment of Long-Lived Assets
No impairment charges were recorded during the thirty-six weeks ended
September 7, 2021. The Company recorded a non-cash impairment charge of $8.3
million
during the thirty-six weeks ended September 8, 2020 related to the
evaluation of long-lived assets underlying eight restaurants in California,
Nevada and Georgia which had indicators of impairment.
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Restaurant Closure Charges, Net
Restaurant closure charges, net, were $1.5 million and $1.4 million for the
thirty-six weeks ended September 7, 2021 and September 8, 2020, respectively.
The increase was due to higher rent and property tax expense related to
previously closed restaurants.
Loss on Disposal of Assets and Adjustments to Assets Held for Sale, Net
Loss on disposal of assets and adjustments to assets held for sale, net was $0.1
million
and $0.7 million for the thirty-six weeks ended September 7, 2021 and
September 8, 2020, respectively. Current year net loss on disposal of assets and
adjustments to assets held for sale primarily related to losses on the closure
of one company-operated restaurant, an adjustment to estimated net realizable
value for assets classified as held for sale and fixed asset write-offs. Prior
year net loss on disposal of assets and adjustments to assets held for sale
primarily related to an adjustment resulting from the reclassification of 14
company-operated restaurants from held for sale to held for use, losses on the
closure of one company-operated restaurant, an adjustment to estimated net
realizable value for assets classified as held for sale, the write-off of
certain restaurant equipment and losses on the sale of six company-operated
restaurants, partially offset by a gain from one sale-leaseback transaction.
Interest Expense
Interest expense was $2.1 million and $3.7 million for the thirty-six weeks
ended September 7, 2021 and September 8, 2020, respectively. The decrease is
primarily due to lower average outstanding balances and lower weighted average
interest rates during the thirty-six weeks ended September 7, 2021 compared to
the prior year.
Other Income
Other income was $0.4 million for the thirty-six weeks ended September 7, 2021
and consisted of proceeds from a legal settlement related to construction defect
issues at a company-operated restaurant. There was no other income for the
thirty-six weeks ended September 8, 2020.
Provision (Benefit) for Income Taxes
The effective income tax rates were 29.2% for the thirty-six weeks ended
September 7, 2021 and 2.0% for the thirty-six weeks ended September 8, 2020. The
provision (benefit) for income taxes consisted of income tax expense of $5.2
million
for the thirty-six weeks ended September 7, 2021 and income tax benefit
of $2.0 million for the thirty-six weeks ended September 8, 2020. The income tax
expense for the thirty-six weeks ended September 7, 2021 is driven by our
estimated annual effective income tax rate which primarily consists of statutory
federal and state tax rates based on apportioned income, the impact of non-tax
deductible compensation to executives and the impact of lower stock compensation
expense deductible for tax related to the June 30, 2021 vesting of certain
restricted stock awards as compared to the cumulative amount recorded as
stock-based compensation expense, partially offset by federal targeted job
credits. The income tax benefit for the thirty-six weeks ended September 8, 2020
is primarily impacted by impairment of non-tax deductible goodwill of $87.3
million
and reclassification of $3.5 million of goodwill from held for sale, as
well as statutory federal and state tax rates based on estimated apportioned
income for fiscal year 2020, the impact of non-tax deductible compensation to
executives and the impact of lower stock compensation expense deductible for tax
related to the June 30, 2020 vesting of certain restricted stock awards as
compared to the cumulative amount recorded as stock-based compensation expense,
partially offset by federal targeted job credits.
Liquidity and Capital Resources
Potential Impacts of Market Conditions on Capital Resources
We believe that cash from operations, together with our cash balance of $3.4
million
and available borrowing capacity of $130.6 million at September 7, 2021,
will be sufficient to meet ongoing debt service requirements, operating lease
obligations, capital expenditures, working capital requirements and other needs
for at least the next 12 months. In addition, share repurchases and our
quarterly cash dividend may impact our available capital resources. Should our
business take longer to recover from the COVID-19 pandemic than we currently
anticipate, there are actions we can take to conserve liquidity.
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Summary of Cash Flows
Our primary sources of liquidity and capital resources have been cash provided
from operations, cash and cash equivalents, and our senior secured credit
facilities. Our primary requirements for liquidity and capital are new
restaurants, existing restaurant capital investments (primarily maintenance),
investments in infrastructure and information technology, interest payments on
debt, lease obligations, income tax payments, purchases under our share
repurchase program, dividend payments, working capital and general corporate
needs. The working capital requirements are not significant since customers pay
for their purchases in cash or by payment card (credit or debit) at the time of
sale. Thus, we are able to sell many inventory items before we have to pay
suppliers for such items since we typically have payment terms for our food and
paper suppliers. Our company-operated restaurants do not require significant
inventories.
The following table presents summary cash flow information for the periods
indicated (in thousands).

36 Weeks Ended
September 7, 2021 September 8,


2020



Net cash provided by (used in)
Operating activities $ 35,537 $ 39,523
Investing activities (17,157) (13,431)
Financing activities (22,908) (22,154)
Net (decrease) increase in cash $ (4,528) $


3,938





Cash Flows Provided by Operating Activities
During the thirty-six weeks ended September 7, 2021, cash flows provided by
operating activities were $35.5 million. The cash flows provided by operating
activities resulted from net income of $12.5 million, non-cash adjustments for
asset depreciation and amortization of $18.1 million, amortization of operating
lease assets of $15.9 million, stock-based compensation of $4.3 million,
deferred income taxes of $2.1 million, restaurant closure charges of $0.2
million
and a loss on disposal of assets and adjustments to assets held for sale
of $0.1 million, partially offset by net working capital requirements of $17.3
million
and other income of $0.4 million.
During the thirty-six weeks ended September 8, 2020, cash flows provided by
operating activities were $39.5 million. The cash flows provided by operating
activities resulted from a net loss of $97.2 million, non-cash adjustments for
goodwill impairment of $87.3 million, trademark impairment of $11.9 million,
long-lived asset impairment of $8.3 million, asset depreciation and amortization
of $18.7 million, amortization of operating lease assets of $15.2 million,
stock-based compensation of $3.9 million, a loss on disposal of assets and
adjustments to assets held for sale of $0.7 million, restaurant closure charges
of $0.1 million, partially offset by deferred income taxes of $8.1 million and
net working capital requirements of $1.3 million.
Cash Flows Used in Investing Activities
During the thirty-six weeks ended September 7, 2021, cash flows used in
investing activities were $17.2 million, which was the result of purchase of
property and equipment and other assets of $17.2 million. For the thirty-six
weeks ended September 7, 2021, purchase of property and equipment was $15.7
million
, including approximately $12.4 million to maintain or enhance our
existing restaurants and information systems and for discretionary investment in
equipment, technology and remodeled restaurants, as well as approximately $3.3
million
for new restaurant construction. This was partially offset by proceeds
received on a legal settlement related to construction defects at a
company-operated restaurant of $0.4 million. Additionally, accrued capital
expenditures increased $0.5 million, resulting in net cash paid of $14.8 million
related to the purchase of property and equipment during the thirty-six weeks
ended September 7, 2021.
During the thirty-six weeks ended September 8, 2020, cash flows used in
investing activities were $13.4 million, which were primarily the result of
purchase of property and equipment and other assets of $17.4 million, partially
offset by proceeds from the sale of six company-operated restaurants of $2.6
million
and proceeds from the disposal of property and equipment of $1.4
million
.
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Cash Flows Used in Financing Activities
During the thirty-six weeks ended September 7, 2021, cash flows used in
financing activities were $22.9 million. The cash flows used in financing
activities were primarily the result of the repurchase of 765,774 shares of our
common stock for an aggregate purchase price of $7.5 million, dividend payments
of $4.4 million, payments of tax withholding of $1.9 million related to
restricted stock vesting and payments on finance leases and other debt totaling
$0.1 million. In addition, during the thirty-six weeks ended September 7, 2021,
the Company borrowed $24.0 million on its revolving credit facility and made
payments of $33.0 million on its revolving credit facility.
During the thirty-six weeks ended September 8, 2020, cash flows used in
financing activities were $22.2 million. The cash flows used in financing
activities were primarily the result of payments of tax withholding of $1.0
million
related to restricted stock vesting and payments on finance leases
totaling $0.2 million. In addition, during the thirty-six weeks ended
September 8, 2020, the Company borrowed $65.0 million on the revolving credit
facility and made payments of $86.0 million on its revolving credit facility.
Senior Credit Facility
During the fourth quarter of 2019, the Company refinanced the Senior Credit
Facility, which provides for a $250 million five-year senior secured revolving
facility. The Senior Credit Facility, as amended, includes a sub limit of
$35 million for letters of credit. The Senior Credit Facility, as amended, will
mature on September 19, 2024.
The Senior Credit Facility, as amended, contains certain financial covenants,
including the maintenance of a consolidated total lease adjusted leverage ratio
and a consolidated fixed charge coverage ratio. The Company was in compliance
with the financial covenants as of September 7, 2021.
As of September 7, 2021, the weighted-average interest rate on the outstanding
balance of the Senior Credit Facility was 1.61%. As of September 7, 2021, there
were $106.0 million of borrowings under the Senior Credit Facility and letters
of credit outstanding of $13.4 million. Unused borrowing capacity at
September 7, 2021 was $130.6 million.
Stock Repurchase Program
In February 2016, the Board of Directors authorized a share repurchase program
under which we may purchase up to $25.0 million in the aggregate of our common
stock and warrants, which expires upon completion of the repurchase program,
unless terminated earlier by the Board of Directors. On August 23, 2016, we
announced that the Board of Directors increased the repurchase program by $25.0
million
to $50.0 million. The Board of Directors authorized an additional
increase for the repurchase program effective July 23, 2018 of another $25.0
million
to a total of $75.0 million. Purchases under the program may be made in
open market or privately negotiated transactions. During the twelve weeks ended
September 7, 2021, the Company repurchased 449,324 shares of common stock for an
average price per share of $9.87 for an aggregate cost of approximately $4.4
million
, including incremental direct costs to acquire the shares. During the
thirty-six weeks ended September 7, 2021, the Company repurchased 765,774 shares
of common stock for an average price per share of $9.79 for an aggregate cost of
approximately $7.5 million, including incremental direct costs to acquire the
shares. As of September 7, 2021, there was approximately $10.6 million remaining
under the share repurchase program. All of the Company's outstanding warrants
expired on June 30, 2020. We have no obligations to repurchase shares under the
share repurchase program, and the timing and value of shares purchased, if any,
will depend on our stock price, market conditions and other factors.
Construction Defect Issues
During the second quarter of 2020, we identified various construction defects
related to three closed restaurants in Texas. During the fourth quarter of 2020,
we identified a fourth closed restaurant with construction defects. We believe
the issues are attributable to defective construction performed by the same
general contractor for all four restaurants. We plan to undertake voluntary
rehabilitation of the four properties, and while the full extent of voluntary
rehabilitation costs are not yet known, we are pursuing legal remedies against
the general contractor to recover future incurred costs. Subsequent to
September 7, 2021, we reached a settlement with the general contractor regarding
three of the restaurants for $1.5 million, of which $0.4 million is payable to
our attorney as a contingency fee.



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Management's Use of Non-GAAP Financial Measures
A reconciliation of company restaurant sales to restaurant contribution is
provided below (in thousands):

12 Weeks Ended 36 Weeks Ended
September 7, September 8, September 7,
2021 2020 2021 September 8, 2020
Company restaurant sales $ 111,981 $


109,522 $ 328,563 $ 305,116
Restaurant operating expenses


93,514 89,803 272,132 257,082
Restaurant contribution $ 18,467 $


19,719 $ 56,431 $ 48,034
Restaurant contribution margin


16.5 % 18.0 % 17.2 % 15.7 %




A reconciliation of income (loss) from operations to restaurant contribution is
provided below (in thousands):



12 Weeks Ended 36 Weeks Ended
September 7, September 8, September 7,
2021 2020 2021 September 8, 2020
Income (loss) from operations $ 6,115 $


7,700 $ 19,334 $ (95,545)
Less:
Franchise revenue


(5,586) (5,169) (16,395) (14,080)
Franchise advertising contributions (4,170) (4,001) (12,184) (9,995)
Franchise sublease income and other (2,534) (2,090) (7,631) (5,971)


Plus:



General and administrative 11,218 10,841 33,861 30,139
Franchise advertising expenses 4,170 4,001 12,184 9,995
Depreciation and amortization 6,021 6,055 17,952 18,477
Occupancy and other - franchise subleases
and other 2,354 1,766 7,324 5,088
Pre-opening costs 152 63 407 359
Impairment of goodwill - - - 87,277
Impairment of trademarks - - - 11,900
Impairment of long-lived assets - - - 8,287
Restaurant closure charges, net 690 413 1,488 1,406
Loss on disposal of assets and
adjustments to assets held for sale, net 37 140 91 697
Restaurant contribution $ 18,467 $ 19,719 $ 56,431 $ 48,034
Company restaurant sales $ 111,981 $



109,522 $ 328,563 $ 305,116
Restaurant contribution margin


16.5 % 18.0 % 17.2 % 15.7 %



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The following table sets forth reconciliations of net income (loss) to EBITDA
and Adjusted EBITDA (in thousands):
12 Weeks Ended 36 Weeks Ended
September 7, September 8, September 7, September 8,
2021 2020 2021 2020
Net income (loss) $ 3,838 $


5,797 $ 12,471 $ (97,247)
Non-GAAP adjustments:
Provision (benefit) for income taxes


1,617 962 5,154 (2,028)
Interest expense 660 941 2,082 3,730
Depreciation and amortization 6,021 6,055 17,952 18,477
EBITDA 12,136 13,755 37,659 (77,068)
Stock-based compensation expense (a) 1,427 1,267 4,346 3,905
Loss on disposal of assets and adjustments
to assets held for sale, net (b) 37 140 91 697
Impairment of goodwill (c) - - - 87,277
Impairment of trademarks (d) - - - 11,900
Impairment of long-lived assets (e) - - - 8,287
Restaurant closure charges, net (f) 690 413 1,488 1,406
Amortization of favorable and unfavorable
lease assets and liabilities, net (g) (72) (70) (243) (185)
Pre-opening costs (h) 152 63 407 359
Sublease income for closed restaurants (i) (282) (247) (807) (745)
Executive transition costs (j) - - - 287
Other income (k) - - (373) -
Adjusted EBITDA $ 14,088 $ 15,321 $ 42,568 $ 36,120




(a)Includes non-cash, stock-based compensation.
(b)Loss on disposal of assets and adjustments to assets held for sale, net
includes adjustments to reduce the carrying amount for assets held for sale to
estimated fair value less cost to sell, remeasurement losses for assets held for
sale reclassified back to held for use, loss or gain on disposal of assets
related to sales, retirements and replacement or write-off of leasehold
improvements or equipment in the ordinary course of business, net gains or
losses recorded associated with the sale of company-operated restaurants to
franchisees, gains from the write-off of right-of-use assets and operating lease
liabilities related to the termination of leases and net gains or losses
recorded associated with sale-leaseback transactions.
(c)Includes non-cash charges related to impairment of goodwill.
(d)Includes non-cash charges related to impairment of trademarks.
(e)Includes non-cash charges related to impairment of long-lived assets.
(f)Restaurant closure costs include rent expense, non-lease executory costs,
other direct costs associated with previously closed restaurants and future
obligations associated with the closure of a restaurant.
(g)Includes amortization of favorable lease assets and unfavorable lease
liabilities.
(h)Pre-opening costs consist of costs directly associated with the opening of
new restaurants and incurred prior to opening, including restaurant labor,
supplies, cash and non-cash rent expense and other related pre-opening costs.
These are generally incurred over the three to five months prior to opening.
(i)Includes other sublease income related to closed restaurants that have been
subleased to third parties.
(j)Includes costs associated with the transition of former Company executives,
such as severance expense.
(k)During 2021, other income consists of a legal settlement related to
construction defects at a company-operated restaurant.
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