FIESTA RESTAURANT GROUP, INC., 10-Q filed on 8/7/2017
Quarterly Report
Document and Entity Information
6 Months Ended
Jul. 2, 2017
Aug. 2, 2017
Document And Entity Information [Abstract]
 
 
Entity Registrant Name
FIESTA RESTAURANT GROUP, INC. 
 
Entity Central Index Key
0001534992 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Jul. 02, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q2 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
27,089,625 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Jul. 2, 2017
Jan. 1, 2017
Current assets:
 
 
Cash
$ 4,426 
$ 4,196 
Trade receivables
9,075 
8,771 
Inventories
2,367 
2,865 
Prepaid rent
3,345 
3,575 
Income tax receivable
584 
3,304 
Prepaid expenses and other current assets
9,443 
4,231 
Total current assets
29,240 
26,942 
Property and equipment, net
239,414 
270,920 
Goodwill
123,484 
123,484 
Deferred income taxes
29,023 
14,377 
Other assets
5,082 
5,842 
Total assets
426,243 
441,565 
Current liabilities:
 
 
Current portion of long-term debt
94 
89 
Accounts payable
18,135 
16,165 
Accrued payroll, related taxes and benefits
11,786 
12,275 
Accrued real estate taxes
5,164 
6,924 
Other liabilities
20,779 
11,316 
Total current liabilities
55,958 
46,769 
Long-term debt, net of current portion
62,375 
71,423 
Lease financing obligations
1,664 
1,664 
Deferred income—sale-leaseback of real estate
25,362 
27,165 
Other liabilities
32,082 
30,369 
Total liabilities
177,441 
177,390 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Common stock, par value $.01; authorized 100,000,000 shares, issued 27,089,482 and 26,884,992 shares, respectively, and outstanding 26,835,137 and 26,755,640 shares, respectively.
268 
267 
Additional paid-in capital
165,097 
163,204 
Retained earnings
83,437 
100,704 
Total stockholders' equity
248,802 
264,175 
Total liabilities and stockholders' equity
$ 426,243 
$ 441,565 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Jul. 2, 2017
Jan. 1, 2017
Statement of Financial Position [Abstract]
 
 
Common stock, par value (usd per share)
$ 0.01 
$ 0.01 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
27,089,482 
26,884,992 
Common stock, shares outstanding
26,835,137 
26,755,640 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jul. 2, 2017
Jul. 3, 2016
Jul. 2, 2017
Jul. 3, 2016
Revenues:
 
 
 
 
Restaurant sales
$ 172,005 
$ 180,835 
$ 346,982 
$ 356,774 
Franchise royalty revenues and fees
619 
697 
1,249 
1,435 
Total revenues
172,624 
181,532 
348,231 
358,209 
Costs and expenses:
 
 
 
 
Cost of sales
50,728 
54,607 
101,676 
108,657 
Restaurant wages and related expenses (including stock-based compensation expense of ($74), $40, $35 and $76, respectively)
46,269 
46,981 
94,401 
92,033 
Restaurant rent expense
8,915 
9,113 
18,777 
18,034 
Other restaurant operating expenses
24,636 
24,263 
48,704 
46,651 
Advertising expense
4,292 
7,006 
11,831 
14,001 
General and administrative (including stock-based compensation expense of $1,248, $1,218, $1,785 and $2,193, respectively)
19,140 
14,253 
35,148 
28,101 
Depreciation and amortization
8,596 
8,625 
17,782 
16,961 
Pre-opening costs
910 
2,016 
1,334 
3,198 
Impairment and other lease charges
10,762 
82 
43,176 
94 
Other expense (income), net
654 
10 
798 
(238)
Total operating expenses
174,902 
166,956 
373,627 
327,492 
Income (loss) from operations
(2,278)
14,576 
(25,396)
30,717 
Interest expense
654 
535 
1,238 
1,093 
Income (loss) before income taxes
(2,932)
14,041 
(26,634)
29,624 
Provision for (benefit from) income taxes
(772)
5,125 
(9,414)
10,813 
Net income (loss)
$ (2,160)
$ 8,916 
$ (17,220)
$ 18,811 
Basic net income (loss) per share (usd per share)
$ (0.08)
$ 0.33 
$ (0.64)
$ 0.70 
Diluted net income (loss) per share (usd per share)
$ (0.08)
$ 0.33 
$ (0.64)
$ 0.70 
Basic weighted average common shares outstanding
26,815,015 
26,654,280 
26,794,560 
26,629,999 
Diluted weighted average common shares outstanding
26,815,015 
26,660,269 
26,794,560 
26,636,145 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jul. 2, 2017
Jul. 3, 2016
Jul. 2, 2017
Jul. 3, 2016
Stock-based compensation
$ 1,200 
$ 1,300 
$ 1,800 
$ 2,300 
Restaurant Wages And Related Expenses
 
 
 
 
Stock-based compensation
(74)
40 
35 
76 
General and Administrative Expense
 
 
 
 
Stock-based compensation
$ 1,248 
$ 1,218 
$ 1,785 
$ 2,193 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock
Additional Paid-In Capital
Retained Earnings
Beginning balance at Jan. 03, 2016
$ 243,982 
$ 266 
$ 159,724 
$ 83,992 
Beginning shares at Jan. 03, 2016
26,571,602 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
Stock-based compensation
2,269 
 
2,269 
 
Vesting of restricted shares (in shares)
115,566 
 
 
 
Vesting of restricted shares
(1)
 
Tax deficiency from stock-based compensation
(81)
 
(81)
 
Net income (loss)
18,811 
 
 
18,811 
Ending balance at Jul. 03, 2016
264,981 
267 
161,911 
102,803 
Ending shares at Jul. 03, 2016
26,687,168 
 
 
 
Beginning balance at Jan. 01, 2017
264,175 
267 
163,204 
100,704 
Beginning shares at Jan. 01, 2017
26,755,640 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
Stock-based compensation
1,820 
 
1,820 
 
Vesting of restricted shares (in shares)
79,497 
 
 
 
Vesting of restricted shares
   
 
Cumulative effect of adopting a new accounting standard (Note 1)
26 
 
73 
(47)
Net income (loss)
(17,220)
 
 
(17,220)
Ending balance at Jul. 02, 2017
$ 248,802 
$ 268 
$ 165,097 
$ 83,437 
Ending shares at Jul. 02, 2017
26,835,137 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jul. 2, 2017
Jul. 3, 2016
Cash flows from operating activities:
 
 
Net income (loss)
$ (17,220)
$ 18,811 
Adjustments to reconcile net income to net cash provided from operating activities:
 
 
Loss on disposals of property and equipment
931 
25 
Stock-based compensation
1,820 
2,269 
Impairment and other lease charges
43,176 
94 
Depreciation and amortization
17,782 
16,961 
Amortization of deferred financing costs
154 
154 
Amortization of deferred gains from sale-leaseback transactions
(1,803)
(1,791)
Deferred income taxes
(14,646)
Changes in other operating assets and liabilities
5,232 
7,046 
Net cash provided from operating activities
35,426 
43,569 
Capital expenditures:
 
 
New restaurant development
(18,796)
(35,760)
Restaurant remodeling
(961)
(486)
Other restaurant capital expenditures
(3,587)
(1,995)
Corporate and restaurant information systems
(2,809)
(3,997)
Total capital expenditures
(26,153)
(42,238)
Properties purchased for sale-leaseback
(2,663)
Proceeds from disposals of other properties
226 
Proceeds from sale-leaseback transactions
3,642 
Net cash used in investing activities
(26,153)
(41,033)
Cash flows from financing activities:
 
 
Excess tax benefit from vesting of restricted shares
120 
Borrowings on revolving credit facility
5,000 
9,400 
Repayments on revolving credit facility
(14,000)
(12,500)
Principal payments on capital leases
(43)
(28)
Net cash used in financing activities
(9,043)
(3,008)
Net increase (decrease) in cash
230 
(472)
Cash, beginning of period
4,196 
5,281 
Cash, end of period
4,426 
4,809 
Supplemental disclosures:
 
 
Interest paid on long-term debt
1,149 
921 
Interest paid on lease financing obligations
71 
71 
Accruals for capital expenditures
5,872 
6,093 
Income tax payments, net
$ 2,486 
$ 5,275 
Basis of Presentation
Basis of Presentation
Basis of Presentation
Business Description. Fiesta Restaurant Group, Inc. ("Fiesta Restaurant Group" or "Fiesta") owns, operates and franchises two fast-casual restaurant brands through its wholly-owned subsidiaries Pollo Operations, Inc. and its subsidiaries, Pollo Franchise, Inc. (collectively “Pollo Tropical”) and Taco Cabana, Inc. and its subsidiaries (collectively “Taco Cabana”). Unless the context otherwise requires, Fiesta and its subsidiaries, Pollo Tropical and Taco Cabana, are collectively referred to as the “Company”. At July 2, 2017, the Company owned and operated 153 Pollo Tropical® restaurants and 169 Taco Cabana® restaurants. The Pollo Tropical restaurants included 134 located in Florida, six located in Texas and 13 located in Georgia. The Taco Cabana restaurants included 168 located in Texas and one located in Oklahoma. At July 2, 2017, the Company franchised a total of 32 Pollo Tropical restaurants and seven Taco Cabana restaurants. The franchised Pollo Tropical restaurants included 17 in Puerto Rico, one in the Bahamas, two in Guyana, one in Venezuela, four in Panama, one in Honduras, and six on college campuses and at a hospital in Florida. The franchised Taco Cabana restaurants included five in New Mexico and two on college campuses in Texas.
Basis of Consolidation. The unaudited condensed consolidated financial statements presented herein reflect the consolidated financial position, results of operations and cash flows of Fiesta and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended January 1, 2017 contained 52 weeks. The three and six months ended July 2, 2017 and July 3, 2016 each contained thirteen and twenty six weeks, respectively. The fiscal year ending December 31, 2017 will contain 52 weeks.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements for the three and six months ended July 2, 2017 and July 3, 2016 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and six months ended July 2, 2017 and July 3, 2016 are not necessarily indicative of the results to be expected for the full year.
These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended January 1, 2017 included in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2017. The January 1, 2017 balance sheet data is derived from those audited financial statements.
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect our own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:
Current Assets and Liabilities. The carrying values reported on the balance sheet of cash, accounts receivable and accounts payable approximate fair value because of the short maturity of those financial instruments.
Revolving Credit Borrowings. The fair value of outstanding revolving credit borrowings under the Company's senior credit facility, which is considered Level 2, is based on current LIBOR rates. The fair value and carrying value of the Company's senior credit facility were approximately $60.9 million at July 2, 2017 and $69.9 million at January 1, 2017.
Long-Lived Assets. The Company assesses the recoverability of property and equipment and definite-lived intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. Impairment is reviewed when events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. See Note 3.
Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements. Estimates also affect the reported amounts of expenses during the reporting periods. Significant items subject to such estimates and assumptions include: accrued occupancy costs, insurance liabilities, evaluation for impairment of goodwill and long-lived assets and lease accounting matters. Actual results could differ from those estimates.
Guidance Adopted in 2017. In March 2016, the Financial Accounting Standards Board issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), to simplify various aspects of the accounting and presentation of share-based payments, including the income tax effects of awards and forfeiture assumptions. In the first quarter of 2017, the Company prospectively adopted the amendments in this guidance that relate to the classification of excess tax benefits or tax benefit deficiencies from share-based payment arrangements in the statement of cash flows and income statement. Excess tax benefits from share-based payment arrangements result from share-based compensation windfall deductions in excess of compensation costs for financial reporting purposes and tax benefit deficiencies result from share-based compensation deduction shortfalls. During the six months ended July 2, 2017, the Company recognized $0.2 million of tax benefit deficiencies, which pursuant to the adopted guidance increased income tax expense and decreased net income by $0.2 million. Effective January 2, 2017, the Company elected to change its accounting policy to recognize forfeitures as they occur. The new forfeiture policy election was adopted using a modified retrospective approach with a $0.1 million cumulative-effect adjustment to beginning retained earnings in the first quarter of 2017 as a result of adopting the standard.
Prepaid Expenses and Other Current Assets
Prepaid Expenses and Other Current Assets
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets, consist of the following:
 
July 2, 2017
 
January 1, 2017
Prepaid contract expenses
$
2,984

 
$
2,089

Assets held for sale(1)
2,705

 

Other
3,754

 
2,142

 
$
9,443

 
$
4,231


(1) See Note 3.
Impairment of Long-Lived Assets and Other Lease Charges
Impairment of Long-Lived Assets and Other Lease Charges
Impairment of Long-Lived Assets and Other Lease Charges
The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. In addition to considering management’s plans, known regulatory or governmental actions and damage due to acts of God (hurricanes, tornadoes, etc.), the Company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s cash flows for the last twelve months are less than a minimum threshold or if consistent levels of cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. If an indicator of impairment exists for any of its assets, an estimate of undiscounted future cash flows over the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. There is uncertainty in the projected undiscounted future cash flows used in the Company's impairment review analysis. If actual performance does not achieve the projections, the Company may recognize impairment charges in future periods, and such charges could be material. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries. There is uncertainty in the estimates of future lease costs and sublease recoveries. Actual costs and sublease recoveries could vary significantly from the estimated amounts and result in additional lease charges or recoveries, and such amounts could be material.
A summary of impairment on long-lived assets and other lease charges recorded by segment is as follows:
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Pollo Tropical
$
10,536

 
$

 
$
42,607

 
$

Taco Cabana
226

 
82

 
569

 
94

 
$
10,762

 
$
82

 
$
43,176

 
$
94


On April 24, 2017, the Company announced a Strategic Renewal Plan (the "Plan") to drive long-term shareholder value creation that included the closure of 30 Company-owned Pollo Tropical restaurants outside its core Florida markets. The Company closed all Pollo Tropical locations in Dallas-Fort Worth and Austin, Texas, and Nashville, Tennessee during the second quarter of
2017. The Company continues to own and operate 19 Pollo Tropical restaurants located outside of Florida, including 13 in Atlanta and six in south Texas. Up to two Pollo Tropical restaurants that closed in April 2017 in Texas may be rebranded as Taco Cabana restaurants.
In the first quarter of 2017, the Company recognized impairment charges of $32.0 million with respect to the 30 closed restaurants, seven of which were impaired in 2016, as well as an additional impairment charge related to previously closed restaurants primarily as a result of the decision not to convert a location to a Taco Cabana restaurant. In the first quarter of 2017, the Company also recognized impairment charges of $0.3 million with respect to three Taco Cabana restaurants that it continues to operate.
In the second quarter of 2017, the Company recognized other lease charges, net of recoveries, of $6.7 million, primarily related to Pollo Tropical restaurants that were closed during the quarter. In addition, the Company recognized impairment charges of $3.8 million related to three closed Pollo Tropical restaurants as a result of the decision not to convert the locations to Taco Cabana restaurants and $0.2 million with respect to four Taco Cabana restaurants that it subsequently closed in the third quarter of 2017.
Impairment and other lease charges for the three and six months ended July 2, 2017 for Pollo Tropical consist of impairment charges of $3.8 million and $35.7 million, respectively, and other lease charges, net of recoveries, of $6.7 million and $6.9 million, respectively. Impairment and other lease charges for the three and six months ended July 2, 2017 for Taco Cabana consist of impairment charges of $0.2 million and $0.6 million, respectively.
The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions, the Company’s history of using these assets in the operation of its business and the Company's expectation of how a market participant would value the assets. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The Level 3 assets measured at fair value associated with impairment charges recorded during the six months ended July 2, 2017 totaled $9.5 million, which primarily consist of leasehold improvements related to Pollo Tropical restaurants that may be rebranded as Taco Cabana restaurants and the estimated fair value of owned properties.
The Company owns two of the Pollo Tropical restaurants that were closed in the second quarter of 2017. The carrying value of these restaurants, which are classified as held for sale, totaled $2.7 million at July 2, 2017.  The Company is actively marketing these properties for sale.
Other Liabilities
Other Liabilities
Other Liabilities
Other liabilities, current, consist of the following:
 
July 2, 2017
 
January 1, 2017
Accrued workers' compensation and general liability claims
$
6,539

 
$
4,838

Sales and property taxes
2,062

 
1,844

Accrued occupancy costs
6,891

 
2,161

Other
5,287

 
2,473

 
$
20,779

 
$
11,316


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

 
$
20,172

Deferred compensation
1,121

 
2,027

Accrued workers’ compensation and general liability claims
4,029

 
4,030

Other
4,256

 
4,140

 
$
32,082

 
$
30,369


Accrued occupancy costs include obligations pertaining to closed restaurant locations and accruals to expense operating lease rental payments on a straight-line basis over the lease term.
The following table presents the activity in the closed-store reserve, of which $7.3 million and $3.1 million are included in long-term accrued occupancy costs at July 2, 2017 and January 1, 2017, respectively, with the remainder in other current liabilities.
 
Six Months Ended July 2, 2017
 
Year Ended January 1, 2017
Balance, beginning of period
$
4,912

 
$
1,832

Provisions for restaurant closures
7,423

 
3,093

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

 
1,030

Balance, end of period
$
14,080

 
$
4,912

Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation
During the six months ended July 2, 2017 and July 3, 2016, the Company granted certain employees 182,522 and 50,087 non-vested restricted shares, respectively, under the Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan (the "Fiesta Plan"). These shares generally vest and become non-forfeitable over a four year vesting period. The weighted average fair value at grant date for these non-vested shares issued during the six months ended July 2, 2017 and July 3, 2016 was $20.75 and $35.25, respectively.
During the six months ended July 2, 2017, the Company granted new non-employee directors 8,927 non-vested restricted shares, under the Fiesta Plan. These shares vest and become non-forfeitable over a five year vesting period. The weighted average fair value at grant date for these non-vested shares was $22.41.
During the three and six months ended July 2, 2017 and July 3, 2016, the Company granted non-employee directors 29,669 and 14,081 non-vested restricted shares, respectively, under the Fiesta Plan. The weighted average fair value at the grant date for restricted non-vested shares issued to directors during the three and six months ended July 2, 2017 and July 3, 2016 was $20.90 and $33.39. These shares vest and become non-forfeitable over a one year vesting period.
During the six months ended July 2, 2017 and July 3, 2016, the Company granted certain employees 11,745 and 5,762 restricted stock units, respectively, under the Fiesta Plan. The restricted stock units granted during the six months ended July 2, 2017 and July 3, 2016 vest and become non-forfeitable at the end of a four year vesting period. The weighted average fair value at grant date for these restricted stock units issued to employees during the six months ended July 2, 2017 and July 3, 2016 was $20.75 and $35.25, respectively.
Also during the three and six months ended July 2, 2017, the Company granted 92,171 restricted stock units under the Fiesta Plan to certain employees subject to continued service requirements and market performance conditions:
The Company granted its Chief Executive Officer 72,290 restricted stock units, which vest and become non-forfeitable in four tranches over a four year vesting period subject to continued service and attainment of specified share prices of the Company's Common Stock during 20 consecutive trading days at any point during each year. Each tranche vests by the end of a one year period if the specified target stock price condition for that year is met. If the specified target stock price condition for any tranche is not met for the year, the cumulative unearned units will be rolled over to subsequent tranches on a pro rata basis. The number of shares into which these restricted stock units convert ranges from no shares, if the service and market performance conditions are not met, to 72,290 shares, if the service and market performance conditions are met in the fourth year. The weighted average fair value at grant date for these restricted stock units was $12.90.
The Company granted certain executives 19,881 restricted stock units, which vest and become non-forfeitable in March 2020 subject to market performance conditions. The weighted average fair value at grant date for these restricted stock units was $6.20.
During the six months ended July 3, 2016, the Company granted 33,691 non-vested restricted shares and 33,691 restricted stock units, respectively, under the Fiesta Plan to certain employees subject to performance conditions. The non-vested restricted shares vest and become non-forfeitable over a four year vesting period subject to the attainment of financial performance conditions. The restricted stock units vest and become non-forfeitable at the end of a three year vesting period. The number of shares into
which the restricted stock units convert is based on the attainment of certain financial performance conditions and for the restricted stock units granted during the six months ended July 3, 2016, ranges from no shares, if the minimum financial performance condition is not met, to 67,382 shares, if the maximum performance condition is met. The weighted average fair value at grant date for both restricted non-vested shares and restricted stock units subject to financial performance conditions granted during the six months ended July 3, 2016 was $35.25.
Stock-based compensation expense for the three and six months ended July 2, 2017 was $1.2 million and $1.8 million, respectively, and for the three and six months ended July 3, 2016 was $1.3 million and $2.3 million, respectively. At July 2, 2017, the total unrecognized stock-based compensation expense related to non-vested restricted shares and restricted stock units was approximately $7.0 million. At July 2, 2017, the remaining weighted average vesting period for non-vested restricted shares was 3.0 years and restricted stock units was 2.1 years.
A summary of all non-vested restricted shares and restricted stock units activity for the six months ended July 2, 2017 is as follows:
 
Non-Vested Shares
 
Restricted Stock Units
 
Shares
 
Weighted
Average
Grant Date
Price
 
Units
 
Weighted
Average
Grant Date
Price
Outstanding at January 1, 2017
129,352

 
$
37.94

 
51,445

 
$
46.59

Granted
221,118

 
20.84

 
103,916

 
12.51

Vested/Released
(78,325
)
 
30.54

 
(1,172
)
 
51.54

Forfeited
(17,800
)
 
32.85

 
(5,556
)
 
37.43

Outstanding at July 2, 2017
254,345

 
$
25.71

 
148,633

 
$
23.06


The fair value of the restricted stock units subject to market performance conditions was estimated using the Monte Carlo simulation method. The fair value of the non-vested restricted shares and all other restricted stock units is based on the closing price on the date of grant.
Business Segment Information
Business Segment Information
Business Segment Information
The Company is engaged in the fast-casual restaurant industry, with two restaurant concepts (each of which is an operating segment): Pollo Tropical and Taco Cabana. Pollo Tropical restaurants offer a wide variety of freshly prepared tropical inspired food while our Taco Cabana restaurants offer a broad selection of freshly prepared Mexican inspired food.
Each segment's accounting policies are the same as those described in the summary of significant accounting policies in Note 1 to the Company's audited financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2017. Prior to the second quarter of 2017, the primary measures of segment profit or loss used to assess performance and allocate resources were income (loss) before taxes and an Adjusted EBITDA measure, which was defined as earnings attributable to the applicable operating segment before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other income and expense.
In 2017, the Company’s Board of Directors appointed a new Chief Executive Officer who initiated the Plan and uses an Adjusted EBITDA measure for the purpose of assessing performance and allocating resources to segments. The new Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company’s restaurants. Beginning in the second quarter of 2017, the primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is now defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, stock-compensation expense, other expense (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company's restaurants as set forth in the reconciliation table below. The Company has included the presentation of Adjusted EBITDA for all periods presented.
The “Other” column includes corporate-related items not allocated to reportable segments and consists primarily of corporate-owned property and equipment, miscellaneous prepaid costs, capitalized costs associated with the issuance of indebtedness, corporate cash accounts, a current income tax receivable, and advisory fees related to a previously proposed and terminated separation transaction.
Three Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
July 2, 2017:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
94,374

 
$
77,631

 
$

 
$
172,005

Franchise revenue
 
427

 
192

 

 
619

Cost of sales
 
28,956

 
21,772

 

 
50,728

Restaurant wages and related expenses
 
21,691

 
24,578

 

 
46,269

Restaurant rent expense
 
4,472

 
4,443

 

 
8,915

Other restaurant operating expenses
 
12,930

 
11,706

 

 
24,636

Advertising expense
 
2,011

 
2,281

 

 
4,292

General and administrative expense
 
10,782

 
8,358

 

 
19,140

Adjusted EBITDA
 
17,139

 
6,982

 

 
24,121

Depreciation and amortization
 
5,435

 
3,161

 

 
8,596

Capital expenditures
 
8,243

 
5,320

 
916

 
14,479

July 3, 2016:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
101,879

 
$
78,956

 
$

 
$
180,835

Franchise revenue
 
508

 
189

 

 
697

Cost of sales
 
32,266

 
22,341

 

 
54,607

Restaurant wages and related expenses
 
23,980

 
23,001

 

 
46,981

Restaurant rent expense
 
4,825

 
4,288

 

 
9,113

Other restaurant operating expenses
 
13,701

 
10,562

 

 
24,263

Advertising expense
 
3,685

 
3,321

 

 
7,006

General and administrative expense
 
8,843

 
5,363

 
47

 
14,253

Adjusted EBITDA
 
14,588

 
10,528

 

 
25,116

Depreciation and amortization
 
5,428

 
3,197

 

 
8,625

Capital expenditures
 
20,468

 
3,633

 
1,346

 
25,447


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

 
$
153,298

 
$

 
$
346,982

Franchise revenue
 
876

 
373

 

 
1,249

Cost of sales
 
58,903

 
42,773

 

 
101,676

Restaurant wages and related expenses
 
45,737

 
48,664

 

 
94,401

Restaurant rent expense
 
9,847

 
8,930

 

 
18,777

Other restaurant operating expenses
 
26,319

 
22,385

 

 
48,704

Advertising expense
 
6,336

 
5,495

 

 
11,831

General and administrative expense
 
19,676

 
15,472

 

 
35,148

Adjusted EBITDA
 
31,861

 
13,476

 

 
45,337

Depreciation and amortization
 
11,518

 
6,264

 

 
17,782

Capital expenditures
 
16,906

 
8,016

 
1,231

 
26,153

July 3, 2016:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
200,785

 
$
155,989

 
$

 
$
356,774

Franchise revenue
 
1,085

 
350

 

 
1,435

Cost of sales
 
63,870

 
44,787

 

 
108,657

Restaurant wages and related expenses
 
46,876

 
45,157

 

 
92,033

Restaurant rent expense
 
9,469

 
8,565

 

 
18,034

Other restaurant operating expenses
 
26,293

 
20,358

 

 
46,651

Advertising expense
 
7,447

 
6,554

 

 
14,001

General and administrative expense
 
16,528

 
10,825

 
748

 
28,101

Adjusted EBITDA
 
30,050

 
20,768

 

 
50,818

Depreciation and amortization
 
10,706

 
6,255

 

 
16,961

Capital expenditures
 
34,567

 
5,267

 
2,404

 
42,238

Identifiable Assets:
 
 
 
 
 
 
 
 
July 2, 2017
 
$
247,312

 
$
164,384

 
$
14,547

 
$
426,243

January 1, 2017
 
263,868

 
165,195

 
12,502

 
441,565


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

 
$

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

 
3,161

 

 
8,596

          Impairment and other lease charges
 
10,536

 
226

 

 
10,762

          Interest expense
 
295

 
359

 

 
654

          Other expense (income), net
 
744

 
(90
)
 

 
654

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

 
(74
)
          Unused pre-production costs in advertising expense
 

 
88

 

 
88

                Total Non-general and administrative expense adjustments
 
16,965

 
3,715

 

 
20,680

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

 
608

 

 
1,248

          Terminated capital project
 
7

 
6

 

 
13

          Board and shareholder matter costs
 
1,767

 
1,332

 

 
3,099

          Write-off of site development costs
 
109

 
35

 

 
144

          Plan restructuring costs and retention bonuses
 
1,153

 
716

 

 
1,869

               Total General and administrative expense adjustments
 
3,676

 
2,697

 

 
6,373

Adjusted EBITDA:
 
$
17,139

 
$
6,982

 
$

 
$
24,121

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

Provision for (benefit from) income taxes
 
 
 
 
 
 
 
5,125

Income (loss) before taxes
 
$
7,636

 
$
6,452

 
$
(47
)
 
$
14,041

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

 
3,197

 

 
8,625

          Impairment and other lease charges
 

 
82

 

 
82

          Interest expense
 
228

 
307

 

 
535

          Other expense (income), net
 

 
10

 

 
10

          Stock-based compensation expense in restaurant wages
 
21

 
19

 

 
40

                Total Non-general and administrative expense adjustments
 
5,677

 
3,615

 

 
9,292

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

 
538

 

 
1,218

          Board and shareholder matter costs
 

 

 
47

 
47

          Write-off of site development costs
 
190

 
14

 

 
204

          Office restructuring and relocation costs
 
346

 

 

 
346

          Legal settlements and related costs
 
59

 
(91
)
 

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

 
461

 
47

 
1,783

Adjusted EBITDA:
 
$
14,588

 
$
10,528

 
$

 
$
25,116

 
 
 
 
 
 
 
 
 

Six Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
July 2, 2017:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
(17,220
)
Provision for (benefit from) income taxes
 
 
 
 
 
 
 
(9,414
)
Income (loss) before taxes
 
$
(28,598
)
 
$
1,964

 
$

 
$
(26,634
)
Add:
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Depreciation and amortization
 
11,518

 
6,264

 

 
17,782

          Impairment and other lease charges
 
42,607

 
569

 

 
43,176

          Interest expense
 
544

 
694

 

 
1,238

          Other expense (income), net
 
888

 
(90
)
 

 
798

          Stock-based compensation expense in restaurant wages
 

 
35

 

 
35

          Unused pre-production costs in advertising expense
 
322

 
88

 

 
410

                Total Non-general and administrative expense adjustments
 
55,879

 
7,560

 

 
63,439

     General and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Stock-based compensation expense
 
955

 
830

 

 
1,785

          Terminated capital project
 
484

 
365

 

 
849

          Board and shareholder matter costs
 
2,225

 
1,678

 

 
3,903

          Write-off of site development costs
 
162

 
292

 

 
454

          Plan restructuring costs and retention bonuses
 
1,227

 
787

 

 
2,014

          Legal settlements and related costs
 
(473
)
 

 

 
(473
)
               Total General and administrative expense adjustments
 
4,580

 
3,952

 

 
8,532

Adjusted EBITDA:
 
$
31,861

 
$
13,476

 
$

 
$
45,337

 
 
 
 
 
 
 
 
 
July 3, 2016:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
18,811

Provision for (benefit from) income taxes
 
 
 
 
 
 
 
10,813

Income (loss) before taxes
 
$
17,305

 
$
13,067

 
$
(748
)
 
$
29,624

Add:
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Depreciation and amortization
 
10,706

 
6,255

 

 
16,961

          Impairment and other lease charges
 

 
94

 

 
94

          Interest expense
 
479

 
614

 

 
1,093

          Other expense (income), net
 
(12
)
 
(226
)
 

 
(238
)
          Stock-based compensation expense in restaurant wages
 
38

 
38

 

 
76

                Total Non-general and administrative expense adjustments
 
11,211

 
6,775

 

 
17,986

     General and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Stock-based compensation expense
 
1,225

 
968

 

 
2,193

          Board and shareholder matter costs
 

 

 
748

 
748

          Write-off of site development costs
 
247

 
49

 

 
296

          Office restructuring and relocation costs
 
346

 

 

 
346

          Legal settlements and related costs
 
(284
)
 
(91
)
 

 
(375
)
               Total General and administrative expense adjustments
 
1,534

 
926

 
748

 
3,208

Adjusted EBITDA:
 
$
30,050

 
$
20,768

 
$

 
$
50,818

Net Income (Loss) per Share
Net Income (Loss) per Share
Net Income (Loss) per Share
The Company computes basic net income (loss) per share by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during each period. Our non-vested restricted shares contain a non-forfeitable right to receive dividends on a one-to-one per share ratio to common shares and are thus considered participating securities. The impact of the participating securities is included in the computation of basic net income per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings attributable to common shares and participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Net income per common share is computed by dividing undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and non-vested restricted shares based on the weighted average shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that could occur if our restricted stock units were to be converted into common shares. Restricted stock units with performance conditions are only included in the diluted earnings per share calculation to the extent that performance conditions have been met at the measurement date. We compute diluted earnings per share by adjusting the basic weighted average number of common shares by the dilutive effect of the restricted stock units, determined using the treasury stock method.
For the three and six months ended July 2, 2017, all restricted stock units outstanding were excluded from the computation of diluted earnings per share because to do so would have been antidilutive as a result of the net loss in the three and six months ended July 2, 2017. Weighted average outstanding restricted stock units totaling 13,990 and 10,698 shares for the three and six months ended July 3, 2016, respectively, were not included in the computation of diluted earnings per share because to do so would have been antidilutive.
The computation of basic and diluted net income (loss) per share is as follows:
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Basic and diluted net income (loss) per share:
 
 
 
 
 
 
 
Net income (loss)
$
(2,160
)
 
$
8,916

 
$
(17,220
)
 
$
18,811

Less: income allocated to participating securities

 
(89
)
 

 
(183
)
Net income (loss) available to common shareholders
$
(2,160
)
 
$
8,827

 
$
(17,220
)
 
$
18,628

Weighted average common shares, basic
26,815,015

 
26,654,280

 
26,794,560

 
26,629,999

Restricted stock units

 
5,989

 

 
6,146

Weighted average common shares, diluted
26,815,015

 
26,660,269

 
26,794,560

 
26,636,145

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

 
$
(0.64
)
 
$
0.70

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

 
$
(0.64
)
 
$
0.70

Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Lease Assignments. Taco Cabana has assigned three leases to various parties on properties where it no longer operates restaurants with lease terms expiring on various dates through 2029. The assignees are responsible for making the payments required by the leases. The Company is a guarantor under one of the leases, and it remains secondarily liable as a surety with respect to two of the leases. The maximum potential liability for future rental payments that the Company could be required to make under these leases at July 2, 2017 was $1.5 million. The Company could also be obligated to pay property taxes and other lease related costs. The obligations under these leases will generally continue to decrease over time as the operating leases expire. The Company does not believe it is probable that it will be ultimately responsible for the obligations under these leases.
Legal Matters. The Company is a party to legal proceedings incidental to the conduct of business, including the matter described below. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters
that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.
On November 24, 2015, Pollo Tropical received a legal demand letter alleging that assistant managers were misclassified as exempt from overtime wages under the Fair Labor Standards Act. On September 30, 2016, prior to any suit being filed, Pollo Tropical reached a settlement with seven named individuals and a proposed collective action class that will allow current and former assistant managers to receive notice and opt-in to the settlement. Pollo Tropical denies any liability or unlawful conduct. The Company has recorded a charge of $0.8 million to cover the estimated costs related to the settlement, including estimated payments to individuals that opt-in to the settlement, premium payments to named individuals, attorneys’ fees for the individuals' counsel, and related settlement administration costs. The charge does not include legal fees incurred by Pollo Tropical in defending the action. The settlement, which is subject to approval by an arbitrator and a judicial body, will result in dismissal with prejudice for the named individuals and all individuals that opt-in to the settlement.
The Company is also a party to various other litigation matters incidental to the conduct of business. The Company does not believe that the outcome of any of these matters will have a material effect on its consolidated financial statements.
Recent Accounting Pronouncements
Recent Accounting Pronouncements
Recent Accounting Pronouncements
In May 2014, and in subsequent updates, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the guidance in former Topic 605, Revenue Recognition, and provides for either a full retrospective adoption in which the standard is applied to all of the periods presented or a modified retrospective adoption in which the cumulative effect of initially applying the standard is recognized at the date of initial application. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope of other US GAAP requirements. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as property and equipment, including real estate. The Company is currently evaluating the impact of the provisions of Topic 606; however, the Company does not believe the standard will impact its recognition of revenue from company-owned restaurants or its recognition of franchise royalty revenues, which are based on a percent of gross sales. The Company expects the provisions to primarily impact franchise and development fees as well as gift card programs and does not expect the standard to have a material effect on its financial statements. The Company does not plan to early adopt the standard and plans to use the modified retrospective approach to adopt the standard. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2017.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessee recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required with an option to use certain practical expedients. The new guidance is required to be applied at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact on its financial statements. Although the impact is not currently estimable, the Company expects to recognize lease assets and lease liabilities for most of the leases it currently accounts for as operating leases. In addition, for the Company's leases that are classified as sale-leaseback transactions, the Company will be required to record an initial adjustment to retained earnings associated with the previously deferred gains, and for any future transactions, the gain, adjusted for any off-market terms, will be recorded immediately. Currently the Company amortizes sale-leaseback gains over the lease term. The Company is continuing its assessment, which may identify other impacts.
In March 2016, the FASB issued ASU No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products (Topic 405-20), which creates an exception under Topic 405-20 to derecognize financial liabilities related to certain prepaid stored-value products using a breakage model consistent with the revenue breakage model in Topic 606. The new guidance will be effective concurrent with Topic 606, which is effective for the Company for interim and annual periods beginning after December 15, 2017. The Company does not expect this standard to have a material effect on its financial statements.
Basis of Presentation (Policies)
6 Months Ended
Jul. 2, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]
 
Basis of Consolidation
Fiscal Year
Basis of Presentation
Fair Value of Financial Instruments
Long-Lived Assets
Use of Estimates
Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements. Estimates also affect the reported amounts of expenses during the reporting periods. Significant items subject to such estimates and assumptions include: accrued occupancy costs, insurance liabilities, evaluation for impairment of goodwill and long-lived assets and lease accounting matters. Actual results could differ from those estimates. 
Recent Accounting Pronouncements
Segment Reporting
Net Income per Share
The Company computes basic net income (loss) per share by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during each period. Our non-vested restricted shares contain a non-forfeitable right to receive dividends on a one-to-one per share ratio to common shares and are thus considered participating securities. The impact of the participating securities is included in the computation of basic net income per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings attributable to common shares and participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Net income per common share is computed by dividing undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and non-vested restricted shares based on the weighted average shares outstanding during the period.Diluted earnings per share reflects the potential dilution that could occur if our restricted stock units were to be converted into common shares. Restricted stock units with performance conditions are only included in the diluted earnings per share calculation to the extent that performance conditions have been met at the measurement date. We compute diluted earnings per share by adjusting the basic weighted average number of common shares by the dilutive effect of the restricted stock units, determined using the treasury stock method. 
Basis of Consolidation. The unaudited condensed consolidated financial statements presented herein reflect the consolidated financial position, results of operations and cash flows of Fiesta and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended January 1, 2017 contained 52 weeks. The three and six months ended July 2, 2017 and July 3, 2016 each contained thirteen and twenty six weeks, respectively. The fiscal year ending December 31, 2017 will contain 52 weeks.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements for the three and six months ended July 2, 2017 and July 3, 2016 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and six months ended July 2, 2017 and July 3, 2016 are not necessarily indicative of the results to be expected for the full year.These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended January 1, 2017 included in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2017. The January 1, 2017 balance sheet data is derived from those audited financial statements.
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect our own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:
Current Assets and Liabilities. The carrying values reported on the balance sheet of cash, accounts receivable and accounts payable approximate fair value because of the short maturity of those financial instruments.
Revolving Credit Borrowings. The fair value of outstanding revolving credit borrowings under the Company's senior credit facility, which is considered Level 2, is based on current LIBOR rates.
Long-Lived Assets. The Company assesses the recoverability of property and equipment and definite-lived intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. Impairment is reviewed when events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. See Note 3.
Guidance Adopted in 2017. In March 2016, the Financial Accounting Standards Board issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), to simplify various aspects of the accounting and presentation of share-based payments, including the income tax effects of awards and forfeiture assumptions. In the first quarter of 2017, the Company prospectively adopted the amendments in this guidance that relate to the classification of excess tax benefits or tax benefit deficiencies from share-based payment arrangements in the statement of cash flows and income statement. Excess tax benefits from share-based payment arrangements result from share-based compensation windfall deductions in excess of compensation costs for financial reporting purposes and tax benefit deficiencies result from share-based compensation deduction shortfalls. During the six months ended July 2, 2017, the Company recognized $0.2 million of tax benefit deficiencies, which pursuant to the adopted guidance increased income tax expense and decreased net income by $0.2 million. Effective January 2, 2017, the Company elected to change its accounting policy to recognize forfeitures as they occur. The new forfeiture policy election was adopted using a modified retrospective approach with a $0.1 million cumulative-effect adjustment to beginning retained earnings in the first quarter of 2017 as a result of adopting the standard.Recent Accounting Pronouncements
In May 2014, and in subsequent updates, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the guidance in former Topic 605, Revenue Recognition, and provides for either a full retrospective adoption in which the standard is applied to all of the periods presented or a modified retrospective adoption in which the cumulative effect of initially applying the standard is recognized at the date of initial application. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope of other US GAAP requirements. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as property and equipment, including real estate. The Company is currently evaluating the impact of the provisions of Topic 606; however, the Company does not believe the standard will impact its recognition of revenue from company-owned restaurants or its recognition of franchise royalty revenues, which are based on a percent of gross sales. The Company expects the provisions to primarily impact franchise and development fees as well as gift card programs and does not expect the standard to have a material effect on its financial statements. The Company does not plan to early adopt the standard and plans to use the modified retrospective approach to adopt the standard. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2017.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessee recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required with an option to use certain practical expedients. The new guidance is required to be applied at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact on its financial statements. Although the impact is not currently estimable, the Company expects to recognize lease assets and lease liabilities for most of the leases it currently accounts for as operating leases. In addition, for the Company's leases that are classified as sale-leaseback transactions, the Company will be required to record an initial adjustment to retained earnings associated with the previously deferred gains, and for any future transactions, the gain, adjusted for any off-market terms, will be recorded immediately. Currently the Company amortizes sale-leaseback gains over the lease term. The Company is continuing its assessment, which may identify other impacts.
In March 2016, the FASB issued ASU No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products (Topic 405-20), which creates an exception under Topic 405-20 to derecognize financial liabilities related to certain prepaid stored-value products using a breakage model consistent with the revenue breakage model in Topic 606. The new guidance will be effective concurrent with Topic 606, which is effective for the Company for interim and annual periods beginning after December 15, 2017. The Company does not expect this standard to have a material effect on its financial statements.
Each segment's accounting policies are the same as those described in the summary of significant accounting policies in Note 1 to the Company's audited financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2017. Prior to the second quarter of 2017, the primary measures of segment profit or loss used to assess performance and allocate resources were income (loss) before taxes and an Adjusted EBITDA measure, which was defined as earnings attributable to the applicable operating segment before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other income and expense. In 2017, the Company’s Board of Directors appointed a new Chief Executive Officer who initiated the Plan and uses an Adjusted EBITDA measure for the purpose of assessing performance and allocating resources to segments. The new Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company’s restaurants. Beginning in the second quarter of 2017, the primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is now defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, stock-compensation expense, other expense (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company's restaurants as set forth in the reconciliation table below. The Company has included the presentation of Adjusted EBITDA for all periods presented.
Prepaid Expenses and Other Current Assets (Tables)
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets, consist of the following:
 
July 2, 2017
 
January 1, 2017
Prepaid contract expenses
$
2,984

 
$
2,089

Assets held for sale(1)
2,705

 

Other
3,754

 
2,142

 
$
9,443

 
$
4,231


(1) See Note 3.
Impairment of Long-Lived Assets and Other Lease Charges (Tables)
Summary of Impairment on Long-Lived Assets and Other Lease Charges by Segment
A summary of impairment on long-lived assets and other lease charges recorded by segment is as follows:
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Pollo Tropical
$
10,536

 
$

 
$
42,607

 
$

Taco Cabana
226

 
82

 
569

 
94

 
$
10,762

 
$
82

 
$
43,176

 
$
94

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

 
$
4,838

Sales and property taxes
2,062

 
1,844

Accrued occupancy costs
6,891

 
2,161

Other
5,287

 
2,473

 
$
20,779

 
$
11,316

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

 
$
20,172

Deferred compensation
1,121

 
2,027

Accrued workers’ compensation and general liability claims
4,029

 
4,030

Other
4,256

 
4,140

 
$
32,082

 
$
30,369

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

 
$
1,832

Provisions for restaurant closures
7,423

 
3,093

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

 
1,030

Balance, end of period
$
14,080

 
$
4,912

Stock-Based Compensation (Tables)
A summary of all non-vested restricted shares and restricted stock units activity for the six months ended July 2, 2017 is as follows:
 
Non-Vested Shares
 
Restricted Stock Units
 
Shares
 
Weighted
Average
Grant Date
Price
 
Units
 
Weighted
Average
Grant Date
Price
Outstanding at January 1, 2017
129,352

 
$
37.94

 
51,445

 
$
46.59

Granted
221,118

 
20.84

 
103,916

 
12.51

Vested/Released
(78,325
)
 
30.54

 
(1,172
)
 
51.54

Forfeited
(17,800
)
 
32.85

 
(5,556
)
 
37.43

Outstanding at July 2, 2017
254,345

 
$
25.71

 
148,633

 
$
23.06

A summary of all non-vested restricted shares and restricted stock units activity for the six months ended July 2, 2017 is as follows:
 
Non-Vested Shares
 
Restricted Stock Units
 
Shares
 
Weighted
Average
Grant Date
Price
 
Units
 
Weighted
Average
Grant Date
Price
Outstanding at January 1, 2017
129,352

 
$
37.94

 
51,445

 
$
46.59

Granted
221,118

 
20.84

 
103,916

 
12.51

Vested/Released
(78,325
)
 
30.54

 
(1,172
)
 
51.54

Forfeited
(17,800
)
 
32.85

 
(5,556
)
 
37.43

Outstanding at July 2, 2017
254,345

 
$
25.71

 
148,633

 
$
23.06

Business Segment Information (Tables)
Three Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
July 2, 2017:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
94,374

 
$
77,631

 
$

 
$
172,005

Franchise revenue
 
427

 
192

 

 
619

Cost of sales
 
28,956

 
21,772

 

 
50,728

Restaurant wages and related expenses
 
21,691

 
24,578

 

 
46,269

Restaurant rent expense
 
4,472

 
4,443

 

 
8,915

Other restaurant operating expenses
 
12,930

 
11,706

 

 
24,636

Advertising expense
 
2,011

 
2,281

 

 
4,292

General and administrative expense
 
10,782

 
8,358

 

 
19,140

Adjusted EBITDA
 
17,139

 
6,982

 

 
24,121

Depreciation and amortization
 
5,435

 
3,161

 

 
8,596

Capital expenditures
 
8,243

 
5,320

 
916

 
14,479

July 3, 2016:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
101,879

 
$
78,956

 
$

 
$
180,835

Franchise revenue
 
508

 
189

 

 
697

Cost of sales
 
32,266

 
22,341

 

 
54,607

Restaurant wages and related expenses
 
23,980

 
23,001

 

 
46,981

Restaurant rent expense
 
4,825

 
4,288

 

 
9,113

Other restaurant operating expenses
 
13,701

 
10,562

 

 
24,263

Advertising expense
 
3,685

 
3,321

 

 
7,006

General and administrative expense
 
8,843

 
5,363

 
47

 
14,253

Adjusted EBITDA
 
14,588

 
10,528

 

 
25,116

Depreciation and amortization
 
5,428

 
3,197

 

 
8,625

Capital expenditures
 
20,468

 
3,633

 
1,346

 
25,447


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

 
$
153,298

 
$

 
$
346,982

Franchise revenue
 
876

 
373

 

 
1,249

Cost of sales
 
58,903

 
42,773

 

 
101,676

Restaurant wages and related expenses
 
45,737

 
48,664

 

 
94,401

Restaurant rent expense
 
9,847

 
8,930

 

 
18,777

Other restaurant operating expenses
 
26,319

 
22,385

 

 
48,704

Advertising expense
 
6,336

 
5,495

 

 
11,831

General and administrative expense
 
19,676

 
15,472

 

 
35,148

Adjusted EBITDA
 
31,861

 
13,476

 

 
45,337

Depreciation and amortization
 
11,518

 
6,264

 

 
17,782

Capital expenditures
 
16,906

 
8,016

 
1,231

 
26,153

July 3, 2016:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
200,785

 
$
155,989

 
$

 
$
356,774

Franchise revenue
 
1,085

 
350

 

 
1,435

Cost of sales
 
63,870

 
44,787

 

 
108,657

Restaurant wages and related expenses
 
46,876

 
45,157

 

 
92,033

Restaurant rent expense
 
9,469

 
8,565

 

 
18,034

Other restaurant operating expenses
 
26,293

 
20,358

 

 
46,651

Advertising expense
 
7,447

 
6,554

 

 
14,001

General and administrative expense
 
16,528

 
10,825

 
748

 
28,101

Adjusted EBITDA
 
30,050

 
20,768

 

 
50,818

Depreciation and amortization
 
10,706

 
6,255

 

 
16,961

Capital expenditures
 
34,567

 
5,267

 
2,404

 
42,238

Identifiable Assets:
 
 
 
 
 
 
 
 
July 2, 2017
 
$
247,312

 
$
164,384

 
$
14,547

 
$
426,243

January 1, 2017
 
263,868

 
165,195

 
12,502

 
441,565

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

 
$

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

 
3,161

 

 
8,596

          Impairment and other lease charges
 
10,536

 
226

 

 
10,762

          Interest expense
 
295

 
359

 

 
654

          Other expense (income), net
 
744

 
(90
)
 

 
654

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

 
(74
)
          Unused pre-production costs in advertising expense
 

 
88

 

 
88

                Total Non-general and administrative expense adjustments