FIESTA RESTAURANT GROUP, INC., 10-Q filed on 11/6/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Oct. 1, 2017
Nov. 1, 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
Oct. 01, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
27,087,094 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Oct. 1, 2017
Jan. 1, 2017
Current assets:
 
 
Cash
$ 4,244 
$ 4,196 
Trade receivables
8,864 
8,771 
Inventories
2,552 
2,865 
Prepaid rent
3,335 
3,575 
Income tax receivable
3,689 
3,304 
Prepaid expenses and other current assets
8,534 
4,231 
Total current assets
31,218 
26,942 
Property and equipment, net
227,686 
270,920 
Goodwill
123,484 
123,484 
Deferred income taxes
31,263 
14,377 
Other assets
4,146 
5,842 
Total assets
417,797 
441,565 
Current liabilities:
 
 
Current portion of long-term debt
96 
89 
Accounts payable
19,126 
16,165 
Accrued payroll, related taxes and benefits
11,535 
12,275 
Accrued real estate taxes
6,881 
6,924 
Other liabilities
21,116 
11,316 
Total current liabilities
58,754 
46,769 
Long-term debt, net of current portion
62,350 
71,423 
Lease financing obligations
1,664 
Deferred income—sale-leaseback of real estate
24,365 
27,165 
Other liabilities
30,836 
30,369 
Total liabilities
176,305 
177,390 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Common stock, par value $.01; authorized 100,000,000 shares, issued 27,087,447 and 26,884,992 shares, respectively, and outstanding 26,846,809 and 26,755,640 shares, respectively.
268 
267 
Additional paid-in capital
166,044 
163,204 
Retained earnings
75,180 
100,704 
Total stockholders' equity
241,492 
264,175 
Total liabilities and stockholders' equity
$ 417,797 
$ 441,565 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Oct. 1, 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
27,087,447 
26,884,992 
Common stock, shares outstanding
26,846,809 
26,755,640 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Oct. 1, 2017
Oct. 2, 2016
Oct. 1, 2017
Oct. 2, 2016
Revenues:
 
 
 
 
Restaurant sales
$ 158,100 
$ 181,592 
$ 505,082 
$ 538,366 
Franchise royalty revenues and fees
591 
664 
1,840 
2,099 
Total revenues
158,691 
182,256 
506,922 
540,465 
Costs and expenses:
 
 
 
 
Cost of sales
49,151 
54,726 
150,827 
163,383 
Restaurant wages and related expenses (including stock-based compensation expense of $9, $35, $44 and $111, respectively)
44,649 
47,503 
139,050 
139,536 
Restaurant rent expense
9,104 
9,488 
27,881 
27,522 
Other restaurant operating expenses
24,856 
25,715 
73,560 
72,366 
Advertising expense
5,885 
7,506 
17,716 
21,507 
General and administrative (including stock-based compensation expense of $938, $330, $2,723 and $2,523, respectively)
12,065 
14,520 
47,213 
42,621 
Depreciation and amortization
8,483 
9,513 
26,265 
26,474 
Pre-opening costs
544 
1,509 
1,878 
4,707 
Impairment and other lease charges
15,905 
18,513 
59,081 
18,607 
Other expense (income), net
461 
1,259 
(238)
Total operating expenses
171,103 
188,993 
544,730 
516,485 
Income (loss) from operations
(12,412)
(6,737)
(37,808)
23,980 
Interest expense
672 
542 
1,910 
1,635 
Income (loss) before income taxes
(13,084)
(7,279)
(39,718)
22,345 
Provision for (benefit from) income taxes
(4,827)
(2,748)
(14,241)
8,065 
Net income (loss)
$ (8,257)
$ (4,531)
$ (25,477)
$ 14,280 
Basic net income (loss) per share (usd per share)
$ (0.31)
$ (0.17)
$ (0.95)
$ 0.53 
Diluted net income (loss) per share (usd per share)
$ (0.31)
$ (0.17)
$ (0.95)
$ 0.53 
Basic weighted average common shares outstanding
26,845,568 
26,716,219 
26,811,610 
26,658,739 
Diluted weighted average common shares outstanding
26,845,568 
26,716,219 
26,811,610 
26,665,091 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Oct. 1, 2017
Oct. 2, 2016
Oct. 1, 2017
Oct. 2, 2016
Stock-based compensation
$ 900 
$ 400 
$ 2,800 
$ 2,600 
Restaurant Wages And Related Expenses
 
 
 
 
Stock-based compensation
35 
44 
111 
General and Administrative Expense
 
 
 
 
Stock-based compensation
$ 938 
$ 330 
$ 2,723 
$ 2,523 
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
2,634 
 
2,634 
 
Vesting of restricted shares (in shares)
174,410 
 
 
 
Vesting of restricted shares
(1)
 
Tax deficiency from stock-based compensation
(9)
 
(9)
 
Net income (loss)
14,280 
 
 
14,280 
Ending balance at Oct. 02, 2016
260,887 
267 
162,348 
98,272 
Ending shares at Oct. 02, 2016
26,746,012 
 
 
 
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
2,767 
 
2,767 
 
Vesting of restricted shares (in shares)
91,169 
 
 
 
Vesting of restricted shares
   
 
Cumulative effect of adopting a new accounting standard (Note 1)
26 
 
73 
(47)
Net income (loss)
(25,477)
 
 
(25,477)
Ending balance at Oct. 01, 2017
$ 241,492 
$ 268 
$ 166,044 
$ 75,180 
Ending shares at Oct. 01, 2017
26,846,809 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Oct. 1, 2017
Oct. 2, 2016
Cash flows from operating activities:
 
 
Net income (loss)
$ (25,477)
$ 14,280 
Adjustments to reconcile net income to net cash provided from operating activities:
 
 
Loss on disposals of property and equipment
1,020 
178 
Stock-based compensation
2,767 
2,634 
Impairment and other lease charges
59,081 
18,607 
Depreciation and amortization
26,265 
26,474 
Amortization of deferred financing costs
231 
232 
Amortization of deferred gains from sale-leaseback transactions
(2,703)
(2,687)
Deferred income taxes
(16,886)
(6,761)
Changes in other operating assets and liabilities
3,355 
13,400 
Net cash provided from operating activities
47,653 
66,357 
Capital expenditures:
 
 
New restaurant development
(23,994)
(52,828)
Restaurant remodeling
(2,280)
(956)
Other restaurant capital expenditures
(7,650)
(4,625)
Corporate and restaurant information systems
(4,615)
(4,634)
Total capital expenditures
(38,539)
(63,043)
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
(38,539)
(61,838)
Cash flows from financing activities:
 
 
Excess tax benefit from vesting of restricted shares
211 
Borrowings on revolving credit facility
7,000 
14,400 
Repayments on revolving credit facility
(16,000)
(19,500)
Principal payments on capital leases
(66)
(49)
Net cash used in financing activities
(9,066)
(4,938)
Net increase (decrease) in cash
48 
(419)
Cash, beginning of period
4,196 
5,281 
Cash, end of period
4,244 
4,862 
Supplemental disclosures:
 
 
Interest paid on long-term debt
1,756 
1,393 
Interest paid on lease financing obligations
83 
106 
Accruals for capital expenditures
7,950 
9,591 
Income tax payments, net
3,003 
9,540 
Non-cash reduction of lease financing obligations
1,664 
Non-cash reduction of assets under lease financing obligations
$ 1,193 
$ 0 
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 October 1, 2017, the Company owned and operated 149 Pollo Tropical® restaurants and 168 Taco Cabana® restaurants. The Pollo Tropical restaurants included 136 located in Florida and 13 located in Georgia. The Taco Cabana restaurants included 167 located in Texas and one located in Oklahoma. At October 1, 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 nine months ended October 1, 2017 and October 2, 2016 each contained thirteen and thirty-nine 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 nine months ended October 1, 2017 and October 2, 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 nine months ended October 1, 2017 and October 2, 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 October 1, 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 nine months ended October 1, 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:
 
October 1, 2017
 
January 1, 2017
Prepaid contract expenses
$
3,455

 
$
2,089

Assets held for sale(1)
2,705

 

Other
2,374

 
2,142

 
$
8,534

 
$
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
 
Nine Months Ended
 
October 1, 2017
 
October 2, 2016
 
October 1, 2017
 
October 2, 2016
Pollo Tropical
$
13,729

 
$
18,390

 
$
56,336

 
$
18,390

Taco Cabana
2,176

 
123

 
2,745

 
217

 
$
15,905

 
$
18,513

 
$
59,081

 
$
18,607


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. In September 2017, due to the ongoing uncertainty created in south Texas by Hurricane Harvey, limited awareness of the Pollo Tropical brand and overhead costs needed to operate the small remaining Pollo Tropical restaurant base in Texas, the Company closed the six remaining Company-owned Pollo Tropical restaurants in south Texas. These restaurants included two restaurants in Houston, Texas that were not re-opened after Hurricane Harvey and four restaurants in San Antonio, Texas. The Company continues to own and operate 13 Pollo Tropical restaurants located in Atlanta, Georgia. Up to three Pollo Tropical restaurants that closed in April 2017 and one Pollo Tropical restaurant that closed in September 2017 may be rebranded as Taco Cabana restaurants. In July 2017, the Company closed four Company-owned Taco Cabana restaurants in Texas.
In the first quarter of 2017, the Company recognized impairment charges of $32.0 million with respect to the 30 closed Pollo Tropical restaurants, seven of which were impaired in 2016, as well as an additional impairment charge related to previously closed Pollo Tropical 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 Company-owned 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 were closed in July 2017.
In the third quarter of 2017, the Company recognized impairment charges of $15.6 million with respect to the six Company-owned Pollo Tropical restaurants that closed in September 2017 and six additional Company-owned Pollo Tropical restaurants that it continues to operate, including five in Georgia and one in Florida. In addition, the Company recognized a net reduction to other lease charges, net of recoveries, of $1.9 million related to previously closed Company-owned Pollo Tropical restaurants as a result of lease terminations, assignments and other adjustments to estimates of future lease costs, partially offset by lease charges related to Company-owned Pollo Tropical restaurants closed in September 2017. In the third quarter of 2017, the Company also recognized impairment charges of $0.9 million primarily related to two Company-owned Taco Cabana restaurants that it continues to operate, and $1.3 million in other lease charges related to the closure of four Company-owned Taco Cabana restaurants in July 2017.
Impairment and other lease charges for the nine months ended October 1, 2017 for Pollo Tropical consist of impairment charges of $51.3 million and other lease charges, net of recoveries, of $5.0 million. Impairment and other lease charges for the nine months ended October 1, 2017 for Taco Cabana consist of impairment charges of $1.4 million and other lease charges, net of recoveries, of $1.3 million.
Impairment and other lease charges for the three and nine months ended October 2, 2016 consist of impairment charges of $18.5 million related to sixteen Company-owned Pollo Tropical restaurants that were subsequently closed in the fourth quarter of 2016 and second quarter of 2017 and one Company-owned Taco Cabana restaurant that was subsequently closed in the third quarter of 2017. Impairment and other lease charges for the nine months ended October 2, 2016 also included other lease charges of $0.1 million related to previously closed Company-owned Taco Cabana restaurants.
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. In addition, for those restaurants reviewed for impairment where the company owns the land and building, the Company utilized third-party information such as a broker quoted value to determine the fair value of the property. The Company also utilized discounted future cash flows to determine the fair value of assets for certain leased restaurants with positive discounted projected future cash flows. 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 nine months ended October 1, 2017 and October 2, 2016 totaled $13.5 million and $8.6 million, respectively, 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 four of the Pollo Tropical restaurants that were closed in the second and third quarters of 2017. Three of these properties are available for sale and the Company intends to lease the other property. Two of these restaurants with a total carrying value of $2.7 million at October 1, 2017 are classified as held for sale.
Other Liabilities
Other Liabilities
Other Liabilities
Other liabilities, current, consist of the following:
 
October 1, 2017
 
January 1, 2017
Accrued workers' compensation and general liability claims
$
6,796

 
$
4,838

Sales and property taxes
2,134

 
1,844

Accrued occupancy costs
7,296

 
2,161

Other
4,890

 
2,473

 
$
21,116

 
$
11,316


Other liabilities, long-term, consist of the following:
 
October 1, 2017
 
January 1, 2017
Accrued occupancy costs
$
21,551

 
$
20,172

Deferred compensation
992

 
2,027

Accrued workers’ compensation and general liability claims
4,028

 
4,030

Other
4,265

 
4,140

 
$
30,836

 
$
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-restaurant reserve, of which $6.0 million and $3.1 million are included in long-term accrued occupancy costs at October 1, 2017 and January 1, 2017, respectively, with the remainder in current accrued occupancy costs.
 
Nine Months Ended October 1, 2017
 
Year Ended January 1, 2017
Balance, beginning of period
$
4,912

 
$
1,832

Provisions for restaurant closures
7,857

 
3,093

Additional lease charges, net of (recoveries)
(1,616
)
 
(237
)
Payments, net
(3,526
)
 
(806
)
Other adjustments(1)
5,507

 
1,030

Balance, end of period
$
13,134

 
$
4,912


(1) Includes the transfer of accruals to expense operating lease payments on a straight-line basis.
Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation
During the nine months ended October 1, 2017 and October 2, 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 nine months ended October 1, 2017 and October 2, 2016 was $20.75 and $35.25, respectively.
During the nine months ended October 1, 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 nine months ended October 1, 2017 and October 2, 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 nine months ended October 1, 2017 and October 2, 2016 was $20.90 and $33.39, respectively. These shares vest and become non-forfeitable over a one year vesting period.
During the nine months ended October 1, 2017 and October 2, 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 nine months ended October 1, 2017 and October 2, 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 nine months ended October 1, 2017 and October 2, 2016 was $20.75 and $35.25, respectively.
Also during the nine months ended October 1, 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 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 in three tranches over a three year vesting period subject to continued service and attainment of specified share price of the Company's Common Stock. 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 19,881 shares, if the service and market performance conditions are met in the third year.
During the nine months ended October 2, 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 nine months ended October 2, 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 nine months ended October 2, 2016 was $35.25.
Stock-based compensation expense for the three and nine months ended October 1, 2017 was $0.9 million and $2.8 million, respectively, and for the three and nine months ended October 2, 2016 was $0.4 million and $2.6 million, respectively. At October 1, 2017, the total unrecognized stock-based compensation expense related to non-vested restricted shares and restricted stock units was approximately $5.8 million. At October 1, 2017, the remaining weighted average vesting period for non-vested restricted shares was 2.8 years and restricted stock units was 1.7 years.
A summary of all non-vested restricted shares and restricted stock units activity for the nine months ended October 1, 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

 
13.10

Vested/Released
(89,739
)
 
29.99

 
(1,430
)
 
51.51

Forfeited
(20,093
)
 
32.16

 
(8,647
)
 
35.43

Outstanding at October 1, 2017
240,638

 
$
24.82

 
145,284

 
$
23.25


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
October 1, 2017:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
87,888

 
$
70,212

 
$

 
$
158,100

Franchise revenue
 
396

 
195

 

 
591

Cost of sales
 
28,527

 
20,624

 

 
49,151

Restaurant wages and related expenses
 
21,208

 
23,441

 

 
44,649

Restaurant rent expense
 
4,655

 
4,449

 

 
9,104

Other restaurant operating expenses
 
13,034

 
11,822

 

 
24,856

Advertising expense
 
4,980

 
905

 

 
5,885

General and administrative expense
 
6,655

 
5,410

 

 
12,065

Adjusted EBITDA
 
9,396

 
3,776

 

 
13,172

Depreciation and amortization
 
5,187

 
3,296

 

 
8,483

Capital expenditures
 
6,302

 
5,471

 
613

 
12,386

October 2, 2016:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
103,353

 
$
78,239

 
$

 
$
181,592

Franchise revenue
 
474

 
190

 

 
664

Cost of sales
 
32,565

 
22,161

 

 
54,726

Restaurant wages and related expenses
 
24,383

 
23,120

 

 
47,503

Restaurant rent expense
 
5,059

 
4,429

 

 
9,488

Other restaurant operating expenses
 
14,361

 
11,354

 

 
25,715

Advertising expense
 
5,026

 
2,480

 

 
7,506

General and administrative expense
 
9,091

 
5,355

 
74

 
14,520

Adjusted EBITDA
 
13,782

 
9,762

 

 
23,544

Depreciation and amortization
 
6,337

 
3,176

 

 
9,513

Capital expenditures
 
18,146

 
2,791

 
(132
)
 
20,805


 
Nine Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
October 1, 2017:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
281,572

 
$
223,510

 
$

 
$
505,082

Franchise revenue
 
1,272

 
568

 

 
1,840

Cost of sales
 
87,430

 
63,397

 

 
150,827

Restaurant wages and related expenses
 
66,945

 
72,105

 

 
139,050

Restaurant rent expense
 
14,502

 
13,379

 

 
27,881

Other restaurant operating expenses
 
39,353

 
34,207

 

 
73,560

Advertising expense
 
11,316

 
6,400

 

 
17,716

General and administrative expense
 
26,331

 
20,882

 

 
47,213

Adjusted EBITDA
 
41,257

 
17,252

 

 
58,509

Depreciation and amortization
 
16,705

 
9,560

 

 
26,265

Capital expenditures
 
23,208

 
13,487

 
1,844

 
38,539

October 2, 2016:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
304,138

 
$
234,228

 
$

 
$
538,366

Franchise revenue
 
1,559

 
540

 

 
2,099

Cost of sales
 
96,435

 
66,948

 

 
163,383

Restaurant wages and related expenses
 
71,259

 
68,277

 

 
139,536

Restaurant rent expense
 
14,528

 
12,994

 

 
27,522

Other restaurant operating expenses
 
40,654

 
31,712

 

 
72,366

Advertising expense
 
12,473

 
9,034

 

 
21,507

General and administrative expense
 
25,619

 
16,180

 
822

 
42,621

Adjusted EBITDA
 
43,832

 
30,530

 

 
74,362

Depreciation and amortization
 
17,043

 
9,431

 

 
26,474

Capital expenditures
 
52,713

 
8,058

 
2,272

 
63,043

Identifiable Assets:
 
 
 
 
 
 
 
 
October 1, 2017
 
$
234,433

 
$
166,368

 
$
16,996

 
$
417,797

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
October 1, 2017:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
(8,257
)
Provision for (benefit from) income taxes
 
 
 
 
 
 
 
(4,827
)
Income (loss) before taxes
 
$
(10,816
)
 
$
(2,268
)
 
$

 
$
(13,084
)
Add:
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Depreciation and amortization
 
5,187

 
3,296

 

 
8,483

          Impairment and other lease charges
 
13,729

 
2,176

 

 
15,905

          Interest expense
 
329

 
343

 

 
672

          Other expense (income), net
 
566

 
(105
)
 

 
461

          Stock-based compensation expense in restaurant wages
 
(4
)
 
13

 

 
9

                Total Non-general and administrative expense adjustments
 
19,807

 
5,723

 

 
25,530

     General and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Stock-based compensation expense
 
587

 
351

 

 
938

          Board and shareholder matter costs
 
(89
)
 
(66
)
 

 
(155
)
          Write-off of site development costs
 
8

 

 

 
8

          Plan restructuring costs and retention bonuses
 
51

 
36

 

 
87

          Office restructuring and relocation costs
 
(152
)
 

 

 
(152
)
               Total General and administrative expense adjustments
 
405

 
321

 

 
726

Adjusted EBITDA:
 
$
9,396

 
$
3,776

 
$

 
$
13,172

 
 
 
 
 
 
 
 
 
October 2, 2016:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
(4,531
)
Provision for (benefit from) income taxes
 
 
 
 
 
 
 
(2,748
)
Income (loss) before taxes
 
$
(13,070
)
 
$
5,865

 
$
(74
)
 
$
(7,279
)
Add:
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Depreciation and amortization
 
6,337

 
3,176

 

 
9,513

          Impairment and other lease charges
 
18,390

 
123

 

 
18,513

          Interest expense
 
229

 
313

 

 
542

          Stock-based compensation expense in restaurant wages
 
18

 
17

 

 
35

                Total Non-general and administrative expense adjustments
 
24,974

 
3,629

 

 
28,603

     General and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Stock-based compensation expense
 
183

 
147

 

 
330

          Board and shareholder matter costs
 
119

 
89

 
74

 
282

          Write-off of site development costs
 
549

 
32

 

 
581

          Office restructuring and relocation costs
 
193

 

 

 
193

          Legal settlements and related costs
 
834

 

 

 
834

               Total General and administrative expense adjustments
 
1,878

 
268

 
74

 
2,220

Adjusted EBITDA:
 
$
13,782

 
$
9,762

 
$

 
$
23,544

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
October 1, 2017:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
(25,477
)
Provision for (benefit from) income taxes
 
 
 
 
 
 
 
(14,241
)
Income (loss) before taxes
 
$
(39,414
)
 
$
(304
)
 
$

 
$
(39,718
)
Add:
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Depreciation and amortization
 
16,705

 
9,560

 

 
26,265

          Impairment and other lease charges
 
56,336

 
2,745

 

 
59,081

          Interest expense
 
873

 
1,037

 

 
1,910

          Other expense (income), net
 
1,454

 
(195
)
 

 
1,259

          Stock-based compensation expense in restaurant wages
 
(4
)
 
48

 

 
44

          Unused pre-production costs in advertising expense
 
322

 
88

 

 
410

                Total Non-general and administrative expense adjustments
 
75,686

 
13,283

 

 
88,969

     General and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Stock-based compensation expense
 
1,542

 
1,181

 

 
2,723

          Terminated capital project
 
484

 
365

 

 
849

          Board and shareholder matter costs
 
2,136

 
1,612

 

 
3,748

          Write-off of site development costs
 
170

 
292

 

 
462

          Plan restructuring costs and retention bonuses
 
1,278

 
823

 

 
2,101

          Office restructuring and relocation costs
 
(152
)
 

 

 
(152
)
          Legal settlements and related costs
 
(473
)
 

 

 
(473
)
               Total General and administrative expense adjustments
 
4,985

 
4,273

 

 
9,258

Adjusted EBITDA:
 
$
41,257

 
$
17,252

 
$

 
$
58,509

 
 
 
 
 
 
 
 
 
October 2, 2016:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
14,280

Provision for (benefit from) income taxes
 
 
 
 
 
 
 
8,065

Income (loss) before taxes
 
$
4,235

 
$
18,932

 
$
(822
)
 
$
22,345

Add:
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Depreciation and amortization
 
17,043

 
9,431

 

 
26,474

          Impairment and other lease charges
 
18,390

 
217

 

 
18,607

          Interest expense
 
708

 
927

 

 
1,635

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

 
(238
)
          Stock-based compensation expense in restaurant wages
 
56

 
55

 

 
111

                Total Non-general and administrative expense adjustments
 
36,185

 
10,404

 

 
46,589

     General and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Stock-based compensation expense
 
1,408

 
1,115

 

 
2,523

          Board and shareholder matter costs
 
119

 
89

 
822

 
1,030

          Write-off of site development costs
 
796

 
81

 

 
877

          Office restructuring and relocation costs
 
539

 

 

 
539

          Legal settlements and related costs
 
550

 
(91
)
 

 
459

               Total General and administrative expense adjustments
 
3,412

 
1,194

 
822

 
5,428

Adjusted EBITDA:
 
$
43,832

 
$
30,530

 
$

 
$
74,362

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 nine months ended October 1, 2017 and for the three months ended October 2, 2016, 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 these periods. Weighted average outstanding restricted stock units totaling 11,489 shares for the nine months ended October 2, 2016 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
 
Nine Months Ended
 
October 1, 2017
 
October 2, 2016
 
October 1, 2017
 
October 2, 2016
Basic and diluted net income (loss) per share:
 
 
 
 
 
 
 
Net income (loss)
$
(8,257
)
 
$
(4,531
)
 
$
(25,477
)
 
$
14,280

Less: income allocated to participating securities

 

 

 
(138
)
Net income (loss) available to common shareholders
$
(8,257
)
 
$
(4,531
)
 
$
(25,477
)
 
$
14,142

Weighted average common shares, basic
26,845,568

 
26,716,219

 
26,811,610

 
26,658,739

Restricted stock units

 

 

 
6,352

Weighted average common shares, diluted
26,845,568

 
26,716,219

 
26,811,610

 
26,665,091

 
 
 
 
 
 
 
 
Basic net income (loss) per share
$
(0.31
)
 
$
(0.17
)
 
$
(0.95
)
 
$
0.53

Diluted net income (loss) per share
$
(0.31
)
 
$
(0.17
)
 
$
(0.95
)
 
$
0.53

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. In the third quarter of 2017, Pollo Tropical assigned one lease to a third party on a property where it no longer operates with a lease term expiring in 2033. The assignee is responsible for making the payments required by the lease. The Company is a guarantor under the lease.

The maximum potential liability for future rental payments that the Company could be required to make under these leases at October 1, 2017 was $4.1 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.

Contingency Related to Insurance Recoveries. During the third quarter of 2017, Texas and Florida were struck by Hurricanes Harvey and Irma (the "Hurricanes"). 43 Taco Cabana and two Pollo Tropical Company-owned restaurants in the Houston metropolitan area and all 149 Pollo Tropical Company-owned restaurants in Florida and the Atlanta metropolitan area were closed and affected by the Hurricanes to varying degrees (e.g. property preparation and damages, inventory losses, payment of hourly employees while restaurants were closed, lost business related to temporary closures, limited menu and modified hours of operations). Other Texas markets where the Company operates Company-owned restaurants including San Antonio were also affected by Hurricane Harvey, but to a lesser degree. All of the restaurants that were closed have re-opened except for one Taco Cabana restaurant and two Pollo Tropical restaurants that remain closed in Houston. The Company maintains comprehensive insurance coverage on all of its restaurants including property, flood and business interruption and is in the process of assessing the extent of damage and loss, and expected insurance proceeds. In the third quarter of 2017, the Company recorded expected insurance proceeds of $0.2 million, which represents a portion of expected insurance proceeds for a Taco Cabana restaurant with extensive flood damage. The Company will record additional expected insurance proceeds related to this and other hurricane affected restaurants in future periods when the amounts are estimable or, for business interruption coverage for lost profit, at the time of final settlement.
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 and may identify other impacts.
Basis of Presentation (Policies)
9 Months Ended
Oct. 1, 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
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 nine months ended October 1, 2017 and October 2, 2016 each contained thirteen and thirty-nine 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 nine months ended October 1, 2017 and October 2, 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 nine months ended October 1, 2017 and October 2, 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.
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 nine months ended October 1, 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 and may identify other impacts.
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:
 
October 1, 2017
 
January 1, 2017
Prepaid contract expenses
$
3,455

 
$
2,089

Assets held for sale(1)
2,705

 

Other
2,374

 
2,142

 
$
8,534

 
$
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
 
Nine Months Ended
 
October 1, 2017
 
October 2, 2016
 
October 1, 2017
 
October 2, 2016
Pollo Tropical
$
13,729

 
$
18,390

 
$
56,336

 
$
18,390

Taco Cabana
2,176

 
123

 
2,745

 
217

 
$
15,905

 
$
18,513

 
$
59,081

 
$
18,607

Other Liabilities (Tables)
Other liabilities, current, consist of the following:
 
October 1, 2017
 
January 1, 2017
Accrued workers' compensation and general liability claims
$
6,796

 
$
4,838

Sales and property taxes
2,134

 
1,844

Accrued occupancy costs
7,296

 
2,161

Other
4,890

 
2,473

 
$
21,116

 
$
11,316

Other liabilities, long-term, consist of the following:
 
October 1, 2017
 
January 1, 2017
Accrued occupancy costs
$
21,551

 
$
20,172

Deferred compensation
992

 
2,027

Accrued workers’ compensation and general liability claims
4,028

 
4,030

Other
4,265

 
4,140

 
$
30,836

 
$
30,369

The following table presents the activity in the closed-restaurant reserve, of which $6.0 million and $3.1 million are included in long-term accrued occupancy costs at October 1, 2017 and January 1, 2017, respectively, with the remainder in current accrued occupancy costs.
 
Nine Months Ended October 1, 2017
 
Year Ended January 1, 2017
Balance, beginning of period
$
4,912

 
$
1,832

Provisions for restaurant closures
7,857

 
3,093

Additional lease charges, net of (recoveries)
(1,616
)
 
(237
)
Payments, net
(3,526
)
 
(806
)
Other adjustments(1)
5,507

 
1,030

Balance, end of period
$
13,134

 
$
4,912


(1) Includes the transfer of accruals to expense operating lease payments on a straight-line basis.
Stock-Based Compensation (Tables)
A summary of all non-vested restricted shares and restricted stock units activity for the nine months ended October 1, 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

 
13.10

Vested/Released
(89,739
)
 
29.99

 
(1,430
)
 
51.51

Forfeited
(20,093
)
 
32.16

 
(8,647
)
 
35.43

Outstanding at October 1, 2017
240,638

 
$
24.82

 
145,284

 
$
23.25

A summary of all non-vested restricted shares and restricted stock units activity for the nine months ended October 1, 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

 
13.10

Vested/Released
(89,739
)
 
29.99

 
(1,430
)
 
51.51

Forfeited
(20,093
)
 
32.16

 
(8,647
)
 
35.43

Outstanding at October 1, 2017
240,638

 
$
24.82

 
145,284

 
$
23.25

Business Segment Information (Tables)
Three Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
October 1, 2017:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
87,888

 
$
70,212

 
$

 
$
158,100

Franchise revenue
 
396

 
195

 

 
591

Cost of sales
 
28,527

 
20,624

 

 
49,151

Restaurant wages and related expenses
 
21,208

 
23,441

 

 
44,649

Restaurant rent expense
 
4,655

 
4,449

 

 
9,104

Other restaurant operating expenses
 
13,034

 
11,822

 

 
24,856

Advertising expense
 
4,980

 
905

 

 
5,885

General and administrative expense
 
6,655

 
5,410

 

 
12,065

Adjusted EBITDA
 
9,396

 
3,776

 

 
13,172

Depreciation and amortization
 
5,187

 
3,296

 

 
8,483

Capital expenditures
 
6,302

 
5,471

 
613

 
12,386

October 2, 2016:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
103,353

 
$
78,239

 
$

 
$
181,592

Franchise revenue
 
474

 
190

 

 
664

Cost of sales
 
32,565

 
22,161

 

 
54,726

Restaurant wages and related expenses
 
24,383

 
23,120

 

 
47,503

Restaurant rent expense
 
5,059

 
4,429

 

 
9,488

Other restaurant operating expenses
 
14,361

 
11,354

 

 
25,715

Advertising expense
 
5,026

 
2,480

 

 
7,506

General and administrative expense
 
9,091

 
5,355

 
74

 
14,520

Adjusted EBITDA
 
13,782

 
9,762

 

 
23,544

Depreciation and amortization
 
6,337

 
3,176

 

 
9,513

Capital expenditures
 
18,146

 
2,791

 
(132
)
 
20,805


 
Nine Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
October 1, 2017:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
281,572

 
$
223,510

 
$

 
$
505,082

Franchise revenue
 
1,272

 
568

 

 
1,840

Cost of sales
 
87,430

 
63,397

 

 
150,827

Restaurant wages and related expenses
 
66,945

 
72,105

 

 
139,050

Restaurant rent expense
 
14,502

 
13,379

 

 
27,881

Other restaurant operating expenses
 
39,353

 
34,207

 

 
73,560

Advertising expense
 
11,316

 
6,400

 

 
17,716

General and administrative expense
 
26,331

 
20,882

 

 
47,213

Adjusted EBITDA
 
41,257

 
17,252

 

 
58,509

Depreciation and amortization
 
16,705

 
9,560

 

 
26,265

Capital expenditures
 
23,208

 
13,487

 
1,844

 
38,539

October 2, 2016:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
304,138

 
$
234,228

 
$

 
$
538,366

Franchise revenue
 
1,559

 
540

 

 
2,099

Cost of sales
 
96,435

 
66,948

 

 
163,383

Restaurant wages and related expenses
 
71,259

 
68,277

 

 
139,536

Restaurant rent expense
 
14,528

 
12,994

 

 
27,522

Other restaurant operating expenses
 
40,654

 
31,712

 

 
72,366

Advertising expense
 
12,473

 
9,034

 

 
21,507

General and administrative expense
 
25,619

 
16,180

 
822

 
42,621

Adjusted EBITDA
 
43,832

 
30,530

 

 
74,362

Depreciation and amortization
 
17,043

 
9,431

 

 
26,474

Capital expenditures
 
52,713

 
8,058

 
2,272

 
63,043

Identifiable Assets:
 
 
 
 
 
 
 
 
October 1, 2017
 
$
234,433

 
$
166,368

 
$
16,996

 
$
417,797

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
October 1, 2017:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
(8,257
)
Provision for (benefit from) income taxes
 
 
 
 
 
 
 
(4,827
)
Income (loss) before taxes
 
$
(10,816
)
 
$
(2,268
)
 
$

 
$
(13,084
)
Add:
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Depreciation and amortization
 
5,187

 
3,296