FRGI Fiesta Restaurant Group, Inc. - 10-K

ITEM 1A. RISK FACTORS

You should carefully conside r the risks described below, as well as other information and data included in this Annual Report on Form 10-K. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties we face. Our business is also subject to general risks and uncertainties that affect many other companies, including overall economic and industry conditions. Additional risks and uncertainties not currently known to us or that we currently believe are not material also may impair our business, consolidated financial condition and results of operations.

Risks Related to Our Business

The market in which we compete is highly competitive, and we may not be able to compete effectively.

The restaurant industry is highly competitive. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low- and medium-priced fare. We also compete with delivered meal solutions, convenience stores, grocery stores and other restaurant retailers, including "ghost" or dark kitchens, where meals are prepared at separate premises rather than at a restaurant. Competition from food delivery services has also increased in recent years, particularly during and following COVID-19.

Pollo Tropical's competitors include national and regional chicken-based concepts as well as other types of quick-service and fast-casual restaurants. Many of our competitors or potential competitors have greater financial and other resources than we do, which may allow them to react to changes in pricing, marketing, and trends in the restaurant industry more quickly or effectively than we can. Additionally, to remain competitive, we have increasingly offered selected food items and combination meals at discounted prices. These pricing and other marketing strategies have had, and in the future may have, a negative impact on our sales and earnings. If our marketing efforts are unsuccessful, or if our restaurants are unable to compete effectively, our operations and financial performance could be adversely impacted.

Factors applicable to the quick-service and fast-casual restaurant segments may adversely affect our results of operations, which may cause a decrease in earnings and revenues.

The quick-service and fast-casual restaurant segments are highly competitive and can be materially adversely affected by many factors, including:

•    Changes in local, regional or national economic conditions;

•    Inflation;

•    Changes in demographic trends;

•    Changes in consumer tastes;

•    Changes in traffic patterns;

•    Increases in fuel prices and utility costs;

•    Consumer concerns about health, diet and nutrition;

•    Instances of food-borne or localized illnesses or other food safety issues;

•    Increases in the number of, and particular locations of, competing restaurants;

•    Changes in discretionary consumer spending;

•    Availability of key commodities such as beef, chicken, eggs and produce;

•    Increases in the cost of key commodities, such as beef, chicken, eggs and produce as well as the cost of paper goods and packaging;

•    The availability of hourly-paid employees and experienced restaurant managers including a decrease in the labor supply due to changes in immigration policy such as barriers for entry into, working in, or remaining in the United States;

•    Increased labor costs, including higher wages, unemployment insurance, unionization of restaurant employees and overtime requirements;

•    Increases in the cost of providing healthcare and related benefits to employees, including the impact of the Affordable Care Act;

•    Costs related to remaining competitive and current with regard to new technologies in our restaurants such as loyalty programs, gift cards, online ordering and credit card security; and

•    Regional weather conditions including hurricanes, windstorms and flooding, and other natural disasters.

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Our continued growth depends on our ability to open and operate new restaurants profitably, which in turn depends on our continued access to capital, and newly developed restaurants may not perform as we expect and there can be no assurance that our growth and development plans will be achieved.

While we have limited the number of new restaurants which we plan to open in the near term, our continued growth still depends on our ability to develop additional Pollo Tropical restaurants. Development involves substantial risks, including the following:

• Developed restaurants that do not achieve desired revenue or cash flow levels or other operating and performance targets once opened;

• The inability to recruit and retain managers and other employees necessary to staff each new restaurant;

• Incurring substantial unrecoverable costs in the event a development project is abandoned prior to completion or a new restaurant is closed due to poor financial performance;

• Changes in general economic and business conditions;

• The inability to fund development;

• Increasing development costs or development costs that exceed budgeted amounts;

• Delays in completion of construction;

• The inability to obtain all necessary zoning and construction permits;

• The inability to identify, or the unavailability of, suitable sites on acceptable leasing or purchase terms; and

• Changes in governmental rules and regulations or enforcement thereof.

Our long-term development plans will require additional management, operational and financial resources. For example, we will be required to recruit managers and other personnel for each new restaurant. We cannot ensure that we will be able to manage our expanding operations effectively and our failure to do so could adversely affect our results of operations.

In addition, to maintain our competitive positioning and improve our sales and overall performance, we have launched an effort to improve our existing restaurants through remodels, upgrades and regular maintenance. If the costs associated with these activities are higher than projected, restaurants are closed for periods longer than anticipated or such remodels do not perform as forecasted, we may not realize an acceptable return on investment, which could have a negative effect on our results of operations.

Our ability to open new restaurants and to grow, as well as our ability to meet other anticipated capital needs, may depend on our continued access to external financing, including borrowing under our senior secured revolving credit facility, which we refer to as the "senior credit facility." There can be no assurance that we will have access to the capital we need at acceptable terms or at all, which could materially adversely affect our business. In addition, while we do not currently have any borrowings under our senior credit facility, our need to manage our indebtedness levels to ensure continued compliance with financial leverage ratio covenants under our senior credit facility may reduce our ability to develop new restaurants.

Customer preferences and traffic could be adversely impacted by health concerns about certain food products, reports of food-borne illnesses or food safety issues, any of which could result in a decrease in demand for our products.

Customer preferences and traffic could be adversely impacted by health concerns or negative publicity about the consumption of particular food products, which could cause a decline in demand for those products and adversely impact our sales. Additionally, even with strong preventative controls and interventions, food safety risks cannot be completely eliminated in every restaurant as incidents of food-borne illnesses continue to occur in the restaurant industry and may result from the failure of restaurant employees or suppliers to follow our food safety policies and procedures, or from employees or guests entering our restaurant while ill and contaminating ingredients or surfaces. These problems, other food-borne illnesses (such as norovirus or hepatitis A), and injuries caused by the presence of foreign material could require us to temporarily close our restaurants. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and a decrease in customer traffic to our restaurants. Furthermore, any instances of food contamination, whether or not at our restaurants, could subject us or our suppliers to a food recall pursuant to the United States Food and Drug Administration's Food Safety Modernization Act.

Instances or reports, whether verified or not, of food-safety issues, such as food-borne illnesses, food tampering, food contamination or mislabeling, either during growing, manufacturing, packaging, storing or preparation, have in the past severely injured the reputations of companies in the food processing, grocery and quick-service and fast-casual restaurant sectors and could affect us as well. Any report linking us to food-borne illnesses or food tampering, contamination, mislabeling or other food-safety issues could damage our brand value and severely hurt sales of our food products and possibly lead to product liability claims, litigation (including class actions) or damages.

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An increase in food costs, including those caused by inflation, climate change, the COVID-19 pandemic, and global conflicts, could adversely affect our operating results.

Supply chain risk could increase our costs and limit the availability of ingredients and supplies important to the operation of our restaurants. Changes in the cost or availability of certain food products could affect our ability to offer a broad menu and maintain competitive prices and could materially adversely affect our profitability and reputation. The type, variety, quality and cost of produce, beef, poultry, cheese and other commodities can be subject to change and to factors beyond our control, including weather, governmental regulation, availability, seasonality and industry demand, each of which may affect our food costs or cause a disruption in our supply. We may not be able to anticipate and react to changing food costs through our purchasing practices and menu price adjustments in the future, and failure to do so could negatively impact our revenues and results of operations. Although we utilize a number of planning strategies to mitigate our risk, such as purchasing contracts to lock in the prices for a material portion of the food commodities used in our restaurants, these strategies may not fully insulate us from increases in commodity costs, which could adversely impact our profitability. We do not use financial instruments to hedge our risk against market fluctuations in the price of commodities at this time.

We could also be adversely affected by price increases specific to ingredients we have chosen due to their specific quality profile or related criteria, the markets for which are generally smaller and more concentrated than the markets for other commodity food products.

If a significant disruption in service or supply by any of our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on our business.

Our restaurants depend on frequent deliveries of ingredients and other products. For our Pollo Tropical restaurants, we have service agreements with our primary distributors of food and paper products. Performance Food Group, Inc., is our primary distributor of food and beverage products and supplies for our Pollo Tropical restaurants under a distribution services agreement that expires on July 27, 2024. We also currently rely on three suppliers for chicken for our Pollo Tropical restaurants under agreements that expire on December 31, 2023. There are many factors which could cause shortages or interruptions in the supply of our ingredients and products, including adverse weather, unanticipated demand, labor or distribution problems, food safety issues by our suppliers or distributors, cost, and the financial health of our suppliers. If we cannot replace or engage distributors or suppliers who meet our specifications in a short period of time, this could increase our expenses and cause shortages of food and other items at our restaurants, which could cause a restaurant to remove items from its menu. If such actions were to occur, customers could change their dining habits and affected restaurants could experience significant reductions in sales during the shortage or thereafter.

The success of our marketing programs and the impact of those of our competitors could have a material adverse effect on our results of operations and financial condition.

If our competitors increase spending on advertising and promotions, or our advertising and other marketing programs do not result in increased net sales or if the costs of advertising, media, or marketing increase greater than expected, or are less effective than our competitors, our profitability could be materially adversely affected.

Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse impact on our business.

There has been a marked increase in the use of social media platforms and similar devices, including video-sharing, social networking, and gaming and messaging platforms, giving users immediate access to a broad audience, which has significantly increased the speed and scale of distribution of information to a broad audience of consumers and others. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects, or business. The harm may be immediate without affording us an opportunity for redress or correction. The dissemination of information online could harm our business, prospects, financial condition, and results of operations, regardless of the information's accuracy.

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Use of social media is an important element of our marketing efforts and many of our competitors are expanding their use of social media and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with guests and brand relevance. As part of our marketing efforts, we expect to increasingly rely on social media platforms and internet-based communication platforms to attract and retain guests. We will also increase our investment in other digital marketing initiatives that allow us to reach our guests across multiple digital channels and build their awareness of, engagement with, and loyalty to our brands. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues, increased employee engagement or brand recognition. In addition, a variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about us, the association with influencers or online celebrities who become embroiled in controversy, platforms and business partners who experience challenges, exposure of personally identifiable information, fraud, or out-of-date information. The inappropriate use of social media vehicles by our guests or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.

Risks Related to Human Capital

If we are not able to hire, train, reward and retain qualified restaurant employees and/or appropriately maintain our workforce, our growth plan and profitability could be adversely affected.

We rely on our restaurant team members to consistently provide high-quality food and positive experiences to our guests. Staffing in our restaurants requires us to plan effectively. The market for qualified talent continues to be competitive and we must provide increasingly competitive wages, benefits and workplace conditions to retain qualified employees. We have experienced and may continue to experience challenges in recruiting and retaining restaurant employees and in maintaining full restaurant staffing in various locations, which has resulted and may continue to result in longer wait times for guest orders, temporary closures of the digital make line and decreased employee satisfaction. A shortage of qualified candidates who meet all legal work authorization requirements, our failure to recruit and retain new restaurant employees in a timely manner or higher than expected turnover levels could affect our ability to open new restaurants, maintain or grow sales at existing restaurants or meet our labor cost objectives. In addition, failure to adequately monitor and proactively respond to employee dissatisfaction could lead to poor guest satisfaction, higher turnover, litigation and unionization efforts, which could negatively impact our results of operations.

Increases in labor costs could adversely impact our operating results.

Given that labor is a primary component in the cost of operating our restaurants, our business has been and could continue to be adversely impacted by increased labor costs resulting from factors such as federal, state, or local laws related to prevailing wages or in other employee benefits costs (including costs associated with health insurance coverage or workers' compensation insurance) as well as higher wages and costs of other benefits necessary to attract, hire and retain employees at all levels in a highly competitive job market. Our ability to offset higher labor costs by increasing menu prices depends on the willingness of our guests to pay the higher prices and the perceived value of our meals relative to competitors. If competitive pressures or other factors prevent us from fully offsetting higher labor costs with increased menu prices, our profitability may decline which could adversely impact our operating results.

While our employees are not currently subject to a collective bargaining agreement, if a significant portion of our employees were to become unionized and covered by a collective bargaining agreement, our labor costs could increase. Potential changes in labor laws could increase the likelihood of some or all of our employees being subjected to greater organized labor influence, which could have an adverse effect on our business and operating results by imposing requirements that could potentially increase our costs.

Our failure to comply with various applicable federal and state employment and labor laws and regulations could have an adverse impact on our business.

Various federal and state labor laws govern the relationship with our employees and affect operating costs. These laws include employee classification as exempt/non-exempt for overtime and other purposes, minimum wage requirements, unemployment tax rates, workers' compensation rates, immigration status and other wage and benefit requirements. In addition, states in which we operate are considering or have already adopted new immigration laws or enforcement programs, and the U.S. Congress and Department of Homeland Security from time to time consider and may implement changes to federal immigration laws, regulations or enforcement programs as well. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. We currently participate in the E-Verify program, an Internet-based, free program run by the United States

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government to verify employment eligibility, in states in which participation is required. However, use of the E-Verify program does not guarantee that we will properly identify all applicants who are ineligible for employment. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized we could experience adverse publicity that negatively impacts our brand and may make it more difficult for us to hire and keep qualified employees. Termination of a significant number of employees who are found to be unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws.

Although we believe that compliance with these laws has not had a material adverse effect on our operations to date, we may experience material difficulties or failures with respect to compliance with such laws in the future. Complying with these laws and regulations subjects us to substantial expense and non-compliance could expose us to significant liabilities. For example, lawsuits have been filed against us in the past and may be filed against us in the future alleging violations of federal and state laws regarding employee wages and payment of overtime, meal and rest breaks, employee classification, employee record-keeping and related practices with respect to our employees. We may incur legal costs to defend any such lawsuits, and we could suffer losses from, these and similar cases, and the amount of such losses or costs could be significant.

In addition, the amount that we pay our restaurant employees will likely be impacted by minimum wage laws. To the extent implemented, federal, state, and local proposals that increase minimum wage requirements or mandates or impact other employee matters could, to the extent implemented, materially increase our labor and other costs. For example, the state of Florida recently approved a minimum wage increase effective in September of 2021 which will increase the minimum wage gradually over a period of five years. Our ability to respond to minimum wage increases by increasing menu prices depends on the willingness of our guests to pay higher prices and recognize our perceived value relative to competitors. Our distributors and suppliers could also be affected by higher minimum wage, benefit standards and compliance costs, which could result in higher costs for goods and services supplied to us.

Additionally, while our employees are not currently covered by any collective bargaining agreements, union organizers may in the future organize our employees and those of other restaurant companies. If a significant portion of our employees were to become covered by collective bargaining agreements, our labor costs could increase, and it could negatively impact our culture and reduce our flexibility to attract and retain top performing employees. Labor unions have attempted, and likely will continue to attempt, to attract media attention to their organizing efforts in our restaurants, and their organizing efforts may include claims that we mistreat or undervalue our employees. Despite our efforts to provide more accurate information about our policies and practices, these messages may dissuade guests from patronizing our restaurants and could adversely impact our results of operations.

Cybersecurity Risks

Cybersecurity breaches or other privacy or data security incidents that expose confidential guest, personal employee and other material, confidential information that is stored in our systems in connection with our electronic processing of credit and debit card transactions or security breaches of confidential employee information that is stored in our systems or by third parties on our behalf may adversely affect our business.

We rely heavily on information technology systems across our operations, including point-of-sale processing in our restaurants, gift and loyalty cards, online business, and various other processes and transactions. Our ability to effectively manage our business and coordinate the preparation and sale of our products depends significantly on the reliability and capacity of these systems. We expect to expand our utilization of technology throughout our business and the failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could cause reduced efficiency of our operations, and significant capital investments could be required to remediate the problem which could adversely affect our business. Any intentional attack or an unintentional event that results in unauthorized access to systems to disrupt operations, corrupt data or steal or expose confidential information or intellectual property that compromises the information of our guests or employees could result in widespread negative publicity, damage to our reputation, a loss of guests, disruption of our business and legal liabilities. As our reliance on technology has grown, the scope and severity of risks posed to our systems from cybersecurity threats has increased. The techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are often not recognized until attacks are launched or have been in place for a period of time. We continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, malware and other events that could have a security impact; however there can be no assurance that these measures will be effective.

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A significant amount of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information of their guests has been stolen. We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our guests' credit or debit card information. Any such claim or proceeding, or any adverse publicity resulting from these allegations, may have a material adverse effect on us and our restaurants.

From time to time we have been, and likely will continue to be, the target of cybersecurity and other security threats. We may in the future become subject to other legal proceedings or governmental investigations for purportedly fraudulent transactions arising out of the actual or alleged theft of our consumers' credit or debit card information or if consumer or employee information is obtained by unauthorized persons or used inappropriately. Any such claim or proceeding, or any adverse publicity resulting from such an event, may have a material adverse effect on our business and we may incur significant remediation costs.

If we fail to comply with privacy and data protection laws, we could be subject to government enforcement actions, private litigation and adverse publicity.

A cybersecurity breach also could result in a violation of applicable privacy and other laws, and subject us to private consumer, business partner, or securities litigation and governmental investigations and proceedings, any of which could result in our exposure to material civil or criminal liability. For example, many jurisdictions have adopted regulations which require companies to meet certain requirements regarding the handling of personal data and provide a private right of action for data breaches. These laws also typically require companies that process information on customers to make new disclosures to consumers about their data collection, use and sharing practices, allow consumers to opt out of certain data sharing with third parties and the right for consumers to request deletion of personal information. If we become subject to such laws in the markets in which we operate and we fail, or are perceived to have failed, to properly respond to security breaches of our or third party's information technology systems or fail to properly respond to consumer requests under such laws, we could experience reputational damage, adverse publicity, loss of consumer confidence, reduced sales and profits, complications in executing our growth initiatives and regulatory and legal risk, including criminal penalties or civil liabilities.

Compliance with current and future applicable privacy, cybersecurity and related laws can be costly and time-consuming. We make significant investments in technology, third-party services and internal personnel to develop and implement systems and processes that are designed to anticipate cyber-attacks and to prevent or minimize breaches of our information technology systems or data loss, but these security measures cannot provide assurance that we will be successful in preventing such breaches or data loss. In addition, media or other reports of existing or perceived security vulnerabilities in our systems or those of our third-party business partners or service providers can also adversely impact our brand and reputation and materially impact our business, even if no breach has been attempted or has occurred.

The regulatory environment related to privacy and data security is changing at an ever-increasing pace, with new and increasingly rigorous requirements applicable to our business. In addition, the issues regulated by privacy laws (such as advertising and marketing, children, biometric, employee, and health related information) have expanded, as have the number of city, state, federal and international governmental bodies and agencies that have recently passed or are currently considering privacy legislation or regulatory rulemaking. Where not limited by preemption, many states have passed or are considering adopting stricter versions of federal privacy laws (e.g., state level statutes similar to the Telephone Consumer Protection Act of 1991 ("TCPA"), the Health Insurance Portability and Accountability Act, and the Children’s Online Privacy Protection Act of 1998 ("COPPA")). Private service providers also have implemented mandatory privacy requirements impacting businesses, like Pollo Tropical, that wish to utilize services available on their platforms. As a result, we face rapidly increasing compliance costs in order to modify our operations and business practices to comply with applicable laws, regulations and other requirements which may materially impact our business.

Our digital business, which we expect to grow as a percentage of sales, is subject to risks.

Since 2020, we continue to see an increase in the number of digital orders, which includes delivery and customer pickup. Depending on which ordering platform a digital order is placed—our platform or the platform of a third-party delivery service—the delivery fee we collect from the guest may be less than the actual delivery cost, which has a negative impact on our profitability. While we have implemented a menu price increase to partially offset higher delivery costs, this higher menu prices may cause some guests to shift their purchases to other restaurants offered on the platform. As our digital business grows, we are increasingly reliant on third-party delivery companies, which maintain control over data regarding guests that use their platform and over the customer experience. If a third-party delivery company driver fails to make timely deliveries or fails to deliver the complete order, our guests may attribute the bad customer experience to our brands and could stop ordering from us. The ordering and payment platforms used by these third-parties, or our mobile app or online ordering system, could be interrupted by technological failures, user errors, cyber-attacks or other factors, which could adversely impact sales through

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these channels and negatively impact our overall sales and reputation. The third-party delivery business is intensely competitive, with a number of players competing for market share, online traffic capital, and delivery drivers. If the third-party delivery companies we utilize cease or curtail operations, increase their fees, or give greater priority or promotions on their platforms to our competitors, our delivery business and our sales may be negatively impacted. The delivery business has been consolidating and may continue to consolidate, and fewer third-party delivery companies may give them more leverage in negotiating the terms and pricing of contracts, which could negatively impact our profits from delivery orders.

Economic Risks

Our business is regional, and we therefore face risks related to reliance on certain markets as well as risks for other unforeseen events.

As of January 1, 2023, all of our Company-owned Pollo Tropical restaurants were located in Florida. Furthermore, approximately two-thirds of our Company-owned Pollo Tropical restaurants were located in three counties in Florida which represents a significant amount of the brand's sales and Restaurant-level Operating Profit. Therefore, events and conditions specific to these regions, including economic conditions, state and local government regulations, weather conditions or other conditions affecting Florida and the tourism industry in Florida may have a material impact on the success of our restaurants in those locations.

Adverse weather conditions have impacted, and could in the future impact, guest traffic at our restaurants, cause the temporary underutilization of outdoor patio seating and, in more severe cases such as hurricanes, tornadoes or other natural disasters, cause temporary closures, sometimes for prolonged periods, which would negatively impact our restaurant sales. Changes in weather could result in construction delays, interruptions to the availability of utilities, and shortages or interruptions in the supply of food items and other supplies, which could increase our costs and could adversely impact our business. Some climatologists predict that the long-term effects of climate change and global warming may result in more severe, volatile weather or extended droughts, which could increase the frequency and duration of weather impacts on our operations.

Economic downturns may adversely impact consumer spending patterns.

Our business is dependent to a significant extent on national, regional and local economic conditions, particularly those that affect our guests that frequently patronize our restaurants. In particular, where our business is subject to factors which could reduce our guests' disposable income (such as by job losses, credit constraints and higher housing, tax, utility, gas, consumer credit or other costs) or where the perceived wealth of guests has decreased (because of circumstances such as lower residential real estate values, lower investment values, increased foreclosure rates, increased tax rates, social unrest, or other economic disruptions and governmental, political and budget concerns), our restaurants have in the past experienced, and may in the future experience, lower sales and guest traffic as guests choose lower-cost alternatives or choose alternatives to dining out. The resulting decrease in our guest traffic or average sales per transaction has had an adverse effect in the past, and could in the future have a material adverse effect, on our business.

Our expansion into new markets may present increased risks due to a lack of market awareness of our brands.

We have encountered and may continue to encounter difficulties developing restaurants outside of our more mature core markets. For example, we closed all Pollo Tropical restaurants in Texas, Tennessee and Georgia over the last four years. We may be unable to find attractive locations or successfully market our products as we attempt to expand beyond our existing markets, as the competitive circumstances and consumer characteristics in these new areas may differ substantially from those in areas in which we currently operate. It may be more challenging for us to attract guests to our restaurants in areas where there is a limited or a lack of market awareness of the Pollo Tropical brand. Restaurants opened in new markets where we have not reached media efficiency may open at lower sales volumes than restaurants opened in more mature markets, and may have lower restaurant-level operating margins than more mature markets. Sales at restaurants opened in new markets that are not yet media efficient have taken and may continue to take longer to reach average restaurant sales volumes, if at all, thereby adversely affecting our operating results, including the recognition of future impairment charges. Opening new restaurants in areas in which potential guests may not be familiar with our restaurants may include costs related to the opening and marketing of those restaurants that are substantially greater than those incurred by our restaurants in other areas. Even though we may incur substantial additional costs with respect to these new restaurants, they may attract fewer guests than our more established restaurants in existing markets. We may also not open a sufficient number of restaurants in new markets to adequately leverage distribution, supervision and marketing costs. As a result of the foregoing, we cannot ensure that we will be able to operate our new restaurants successfully or profitably outside our existing markets.

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Changes in accounting standards or the recognition of impairment or other charges may adversely affect our future results of operations.

New accounting standards or changes in financial reporting requirements, accounting principles or practices, including with respect to our critical accounting estimates, could adversely affect our future results. We may also be affected by the nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment or other charges that reduce our earnings. In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. These estimates are highly subjective and can be significantly impacted by many factors such as global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. If our estimates or underlying assumptions change in the future, we may be required to record impairment charges. If we experience any such changes, they could have a significant adverse effect on our reported results for the affected periods.

Legal Risks

Government regulation could adversely affect our financial condition and results of operations.

In connection with the operation of our business, we are subject to extensive federal, state, local, and foreign laws and regulations that are complex and vary from location to location, including those related to:

•    Franchise relationships;

•    Building construction and zoning requirements;

•    Nutritional content labeling and disclosure requirements;

•    Management and protection of the personal data of our employees and customers; and

•    Environmental matters.

Our restaurants are licensed and subject to regulation under federal, state, local and foreign laws, including business, health, fire, sales of alcohol and safety codes. For example, we are subject to the U.S. Americans with Disabilities Act, or ADA, and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas.

In addition, new government initiatives or changes to existing laws, such as the adoption and implementation of national, state, or local government proposals relating to increases in minimum wage rates, may increase our costs of doing business and adversely affect our results of operations.

If one of our employees sells alcoholic beverages to an intoxicated patron or to a minor, we may be liable to third parties for the acts of the patron or incur significant fines or penalties.

We serve alcoholic beverages at our restaurants and are subject to the "dram-shop" statutes of the jurisdictions in which we serve alcoholic beverages. "Dram-shop" statutes generally provide that serving alcohol to an intoxicated patron is a violation of the law.

In most jurisdictions, if one of our employees sells alcoholic beverages to an intoxicated patron we may be liable to third parties for the acts of the patron. We cannot guarantee that those patrons will not be served or that we will not be subject to liability for their acts. Our liquor liability insurance coverage may not be adequate to cover any potential liability and insurance may not continue to be available on commercially acceptable terms or at all, or we may face increased deductibles on such insurance. A significant dram-shop claim or claims could have a material adverse effect on us as a result of the costs of defending against such claims, paying deductibles and increased insurance premium amounts, implementing improved training and heightened control procedures for our employees, and paying any damages or settlements on such claims.

Additionally, we are subject to statutes of the jurisdictions in which we serve alcoholic beverages which prohibit us from selling or serving alcohol to minor patrons. These statutes generally provide that serving or selling alcohol to minors is a violation of the law, and will result in fines and other penalties including the suspension or loss of our license to sell alcohol in the future. If we were to incur a significant number of sale to minor violations the fines or penalties could have a material adverse effect on us.

We may incur significant liability or reputational harm if claims are brought against us or against our franchisees.

We or our franchisees may be subject to complaints, regulatory proceedings or litigation from guests or other persons alleging food-related illness, injuries suffered on our premises or other food quality, health, or operational concerns, including environmental claims. In addition, in recent years a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging, among other things, violations of federal and state law regarding workplace and employment

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matters, discrimination, harassment, wrongful termination and wage, rest break, meal break and overtime compensation issues and, in the case of certain restaurants, alleging that they have failed to disclose the health risks associated with high-fat or high sodium foods and that their marketing practices have encouraged obesity. We may also be subject to litigation or other actions initiated by governmental authorities, our employees and our franchisees, among others, based upon these and other matters. Adverse publicity resulting from such allegations or occurrences or alleged discrimination or other operating issues stemming from one of our locations, a number of our locations or our franchisees could adversely affect our business, regardless of whether the allegations are true, or whether we are ultimately held liable. Any cases filed against us could materially adversely affect us if we lose such cases and have to pay substantial damages or if we settle such cases. In addition, any such cases may materially and adversely affect our operations by increasing our litigation costs and diverting our attention and resources to address such actions. In addition, if a claim is successful, our insurance coverage may not cover or be adequate to cover all liabilities or losses and we may not be able to continue to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all. If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover such loss, liability or loss of income, there could be a material adverse effect on our results of operations.

Our franchisees or licensees could take actions that harm our reputation.

As of January 1, 2023, a total of 32 Pollo Tropical restaurants were owned and operated by our franchisees and licensees. We do not exercise control of the day-to-day operations of our franchisees and licensees and the number of franchised or licensed restaurants may increase in the future. While we attempt to ensure that franchisee-owned and licensee-owned restaurants maintain the same high operating standards as our Company-owned restaurants, one or more of these franchisees or licensees may fail to meet these standards. Any shortcomings at our franchisee-owned and licensee-owned restaurants could be attributed to our company as a whole and could adversely affect our reputation and damage our brands.

Federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials could expose us to liabilities, which could adversely affect our results of operations.

We are subject to a variety of federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous substances or other regulated materials, release of pollutants into the air, soil and water, and the remediation of contaminated sites.

Failure to comply with environmental laws could result in the imposition of fines or penalties, restrictions on operations by governmental agencies or courts of law, as well as investigatory or remedial liabilities and claims for alleged personal injury or damages to property or natural resources. Some environmental laws impose strict, and under some circumstances joint and several, liability for costs of investigation and remediation of contaminated sites on current and prior owners or operators of the sites, as well as those entities that send regulated materials to the sites. We cannot ensure that we have been or will be at all times in complete compliance with such laws, regulations and permits. Therefore, our costs of complying with current and future environmental, health and safety laws could adversely affect our results of operations.

Major developments on trade relations could have a material adverse effect on our business.

The current political climate has introduced uncertainty with respect to trade policies, tariffs and government regulations impacting trade between the United States and other countries. We source several of our ingredients, paper products and other materials used within our business from suppliers outside of the United States, including Asia, Central America and Mexico.

Significant developments in trade relations, such as the imposition of tariffs on items imported by us, could increase our costs and materially and adversely affect our consolidated financial results.

We are subject to all of the risks associated with leasing property subject to long-term non-cancelable leases.

The leases for our restaurant locations generally have initial terms of 10 to 20 years, and typically provide for renewal options in five-year increments as well as for rent escalations. Generally, our leases are "net" leases, which require us to pay all of the costs of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases.

From time to time we have, and may in the future, close or relocate a restaurant if a current location becomes less profitable as a result of adverse economic conditions or other factors. If the closures continue for a long period of time, we may not be able to recover our investment due to the high rental rates. Because substantially all of our restaurants operate in leased facilities, we may incur significant lease termination expenses when we close or relocate a restaurant and are often obligated to continue rent and other lease related payments after restaurant closure. We also may incur significant asset impairment and other charges in connection with closures and relocations. If the lease termination cost is significant, we may decide to keep underperforming restaurants open. Ongoing lease obligations at closed or underperforming restaurant locations could decrease

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our results of operations. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close restaurants in desirable locations which could adversely affect our results of operations.

Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.

We own certain common law trademark rights and a number of federal and international trademark and service mark registrations, including the Pollo Tropical name and logo, and proprietary rights relating to certain of our core menu offerings. We believe that our trademarks, service marks, trade dress and other proprietary rights are important to our success and our competitive position. We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights. If our efforts to protect our intellectual property are inadequate or if any third party misappropriates or infringes on our intellectual property either in print or on the internet, the value of our brands may be harmed which could have a material adverse effect on our business. We are aware of restaurants in foreign jurisdictions using menu items, logos or branding that we believe are based on our intellectual property and our ability to prevent these restaurants from using these elements may be limited in jurisdictions in which we are not operating. This could have an adverse impact on our ability to expand into other jurisdictions in the future.

We are not aware of any assertions that our trademarks or menu offerings infringe upon the proprietary rights of third parties, but we cannot ensure that third parties will not claim infringement by us in the future. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items in the future or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.

Our senior credit facility restricts our ability to engage in some business and financial transactions.

Our senior credit facility restricts our ability in certain circumstances to, among other things:

• Incur additional debt;

• Pay dividends and make other distributions on, redeem or repurchase, capital stock;

• Make investments or other restricted payments;

• Enter into transactions with affiliates;

• Sell all, or substantially all, of our assets;

• Create liens on assets to secure debt; or

• Effect a consolidation or merger.

These covenants limit our operational flexibility and could prevent us from taking advantage of business opportunities as they arise, growing our business or competing effectively which could adversely impact our business. In addition, our senior credit facility requires us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we cannot ensure that we will meet these tests.

Risks Related to Our Common Stock

We do not expect to pay any cash dividends for the foreseeable future, and our senior credit facility limits our ability to pay dividends to our stockholders.

We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. The absence of a dividend on our common stock may increase the volatility of the market price of our common stock or make it more likely that the market price of our common stock will decrease in the event of adverse economic conditions or adverse developments affecting our company. Our senior credit facility limits, and the debt instruments that we and our subsidiaries may enter into in the future may limit, our ability to pay dividends to our stockholders.

If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We cannot ensure that these analysts will publish research or reports about us or that any analysts that do so will not discontinue publishing research or reports about us in the future. If one or more analysts who cover us downgrade our stock, our stock price could decline rapidly. If analysts do not publish reports about us or if one or more analyst ceases coverage of our stock, we could lose visibility in the market, which in turn could cause our stock price to decline.

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Percentage ownership of our common stock may be diluted in the future.

Percentage ownership of our common stock may be diluted in the future because of equity awards that we expect will be granted to our directors, officers and employees. The Fiesta Restaurant Group, Inc. 2021 Stock Incentive Plan (and any successor stock incentive plan that we may adopt) provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock options, and other equity-based awards to our directors, officers and other employees, advisors and consultants. In addition, in the future we may also issue common stock or other securities to raise additional capital. Any new shares issued would dilute our existing shareholders.

Proxy contests threatened or commenced against us could be disruptive and costly, and adversely affect our business, operation results and financial condition.

Stockholders may from time to time attempt to effect changes, engage in proxy solicitations or advance stockholder proposals. Responding to proxy contests and related actions by activist stockholders can be costly and time-consuming, disrupt our operations, and divert the attention of our management and employees away from their regular duties and the pursuit of our business strategies, which could materially and adversely affect our business, operating results and financial conditions. Perceived uncertainties as to our future direction as a result of proxy contests and related actions by activist stockholders may lead to the perception of a change in the direction of our business, instability or lack of continuity. This may affect our relationship with current or potential suppliers, vendors, and other third parties, and make it more difficult to attract and retain management employees and executives which could adversely affect our business, operating results and financial condition. Further, proxy contests and related actions by activist stockholders could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.

Provisions in our restated certificate of incorporation and amended and restated bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Delaware corporate law and our restated certificate of incorporation and amended and restated bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

• Require that special meetings of our stockholders be called only by our board of directors or certain of our officers, thus prohibiting our stockholders from calling special meetings;

• Deny holders of our common stock cumulative voting rights in the election of directors, meaning that stockholders owning a majority of our outstanding common stock will be able to elect all of our directors;

• Authorize the issuance of "blank check" preferred stock that our board could issue to dilute the voting and economic rights of our common stock and to discourage a takeover attempt;

• Provide the approval of our board of directors or a supermajority of stockholders is necessary to make, alter or repeal our amended and restated bylaws and that approval of a supermajority of stockholders is necessary to amend, alter or change certain provisions of our restated certificate of incorporation;

• Establish advance notice requirements for stockholder nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

• Require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of financial condition and results of operations ("MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes. Any reference to restaurants refers to company-owned restaurants unless otherwise indicated.

We use a 52- or 53-week fiscal year ending on the Sunday closest to December 31. The fiscal years ended January 1, 2023 and January 2, 2022 each contained 52 weeks. The fiscal year ended January 3, 2021 contained 53 weeks. The next fiscal year to contain 53 weeks will be the fiscal year ending January 3, 2027.

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Company Overview

We own, operate and franchise the restaurant brand Pollo Tropical ® , which has nearly 35 years of operating history and a loyal customer base. Our Pollo Tropical restaurants feature fire-grilled and crispy citrus marinated chicken and other freshly prepared menu items. We believe the brand offers a distinct and unique flavor with broad appeal at a compelling value, which differentiates it in the competitive fast-casual and quick-service restaurant segments. All but one of our restaurants offer the convenience of drive-thru windows. As of January 1, 2023, we had 137 Company-owned Pollo Tropical restaurants, all of which are located in Florida.

We franchise our Pollo Tropical restaurants primarily in international markets, and as of January 1, 2023, we had 23 franchised Pollo Tropical restaurants located in Puerto Rico, Panama, Guyana, Ecuador, and the Bahamas, six on college campuses in Florida and locations at a hospital and two sports and entertainment stadiums in Florida. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets.

E vents Affecting Our Results of Operations

Hurricanes Ian and Nicole

During the second half of 2022, Florida was struck by Hurricanes Ian and Nicole (the "Hurricanes"). In an effort to ensure the safety of our team members, select Pollo Tropical restaurants in the storm's path were closed in preparation and as a result of these Hurricanes. There was no significant facilities damage to Company-owned restaurants and we expect to file insurance claims upon completion of the final assessment of damages and losses.

Due to the business disruption related to the Hurricanes, the Company incurred expenses totaling $0.5 million for spoiled inventory and for incremental labor costs from paying hourly employees for scheduled time not worked due to temporary restaurant closures. We estimate that the Hurricanes negatively impacted loss from operations by approximately $1.8 million and negatively impacted comparable restaurant sales and transactions by approximately 0.8% and 0.6%, respectively, for the year ended January 1, 2023.

Labor Challenges and Inflationary Factors

Throughout much of 2022, labor supply shortages impacted the entire restaurant industry as well as our operations. Hours of operations were limited across multiple channels due to labor shortages. In response to this challenge, we increased recruiting resources and offered additional payment incentives at the most affected locations as well as new hire sign-on bonuses. In addition, we benchmark our operations team wage rates and benefits on an ongoing basis to ensure our total compensation is market-competitive and the 2022 and 2023 hourly wage rates are above the required minimum levels for the State of Florida. As a result of our efforts and as overall labor supply improved, our staffing levels improved and stabilized during the second half of 2022 which enabled an increase in operating hours across all channels. Overall staffing levels at the end of the fourth quarter of 2022 recovered to the approximate staffing levels experienced in the first half of 2021 prior to the labor supply issues, although a small number of select locations continue to experience labor shortages. As a result of the improved staffing levels, the remaining payment incentives are targeted to be phased out in the first quarter of 2023.

Inflationary factors have been experienced primarily in food costs and other operating costs categories. Commodity costs as a percentage of net sales increased 4.9% in the year ended January 1, 2023 compared to the year ended January 2, 2022. Utilities costs as a percentage of net sales also increased 0.4% in 2022 compared to 2021 primarily due to higher energy prices in 2022.

Pricing action has been taken to offset labor, food and other operating cost increases. In order to maintain value perceptions with our customers, we implemented a phased approach to menu price increases and took lower pricing increases on items purchased by value-conscious customers including our "Pollo Time" promotional items. Price increases include a 5.0% increase in March 2022, a 1.4% increase in June 2022, and a 4.0% increase in September 2022. As a result of this phased approach to menu price increases, margin improvement is trailing the impact of cost increases noted above, with improved margins expected in future quarters compared to the year ended January 1, 2023 , barring unforeseen changes in our cost structure and operating environment.

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COVID-19 Pandemic

The novel coronavirus (COVID-19) pandemic has affected and may continue to affect the restaurant industry and the economy. The impacts were most severe in 2020 and have improved over 2021 and 2022. Based on current conditions, we do not expect sales trends to significantly deteriorate further as a direct result of COVID-19. However, labor shortages may negatively impact sales trends and there can be no assurance that sales trends will not deteriorate further. We have implemented measures to control costs to mitigate any negative impact from the COVID-19 pandemic and labor shortages.

Executive Summary—Consolidated Operating Performance for the Year Ended January 1, 2023

Our fiscal year 2022 results include the following:

• We recognized net loss of $(14.6) million, or $(0.58) per diluted share, in 2022 compared to net income of $10.4 million, or $0.40 per diluted share in 2021, due primarily to the impact of income from discontinued operations of $18.5 million in 2021 compared to $1.1 million in 2022. The loss in 2022 was primarily the result of higher cost of sales, restaurant operating expenses and general and administrative expenses. Higher Pollo Tropical commodity costs, labor costs, insurance costs, utilities costs, general and administrative expenses, and repair and maintenance costs in 2022 were partially offset by increased comparable restaurant sales at Pollo Tropical.

• We recognized a loss from continuing operations of $(15.7) million, or $(0.62) per diluted share, in 2022 compared to a loss from continuing operations of $(8.1) million, or $(0.31) per diluted share, in 2021 primarily as a result of the foregoing.

• Total revenues increased 8.4% in 2022 to $387.4 million from $357.3 million in 2021, driven primarily by an increase in comparable restaurant sales at Pollo Tropical. Comparable restaurant sales increased 9.1% for our Pollo Tropical restaurants resulting from an increase in the net impact of product/channel mix and pricing of 15.2%, partially offset by a decrease in comparable restaurant transactions of 6.1%.

• Consolidated Adjusted EBITDA decreased $3.2 million for the year ended January 1, 2023 to $21.8 million compared to $25.0 million for the year ended January 2, 2022, driven primarily by higher commodity costs, labor costs, insurance costs, utilities costs, general and administrative expenses, and repair and maintenance costs, partially offset by higher restaurant sales. Consolidated Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see "Management's Use of Non-GAAP Financial Measures."

• Income from discontinued operations decreased $17.4 million for the year ended January 1, 2023 to $1.1 million compared to $18.5 million for the year ended January 2, 2022, driven primarily by the impact of the gain on the sale of Taco Cabana and related costs in 2021. Income from discontinued operations for the year ended January 1, 2023 was primarily due to insurance proceeds received, partially offset by workers compensation and general liability claims.

Results of Operations

Unless otherwise noted, this discussion of operating results relates to our continuing operations.

The following table summarizes the changes in the number and mix of Pollo Tropical Company-owned and franchised restaurants in each fiscal year:

Owned

Franchised

Total

Owned

Franchised

Total

Owned

Franchised

Total

Beginning of year

New

Closed

End of year

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The following table sets forth, for the years ended January 1, 2023, January 2, 2022 and January 3, 2021, selected operating results as a percentage of restaurant sales:

Year Ended

January 1, 2023

January 2, 2022

January 3, 2021

Costs and expenses:

Cost of sales

Restaurant wages and related expenses

Restaurant rent expense

Other restaurant operating expenses

Advertising expense

Revenues. Revenues include restaurant sales and franchise royalty revenues and fees. Restaurant sales consist of food and beverage sales, net of discounts, at our restaurants. Franchise royalty revenues and fees represent ongoing royalty payments that are determined based on a percentage of franchisee sales and the amortization of initial franchise fees and area development fees associated with the opening of new franchised restaurants. Restaurant sales are influenced by new restaurant openings, closures of restaurants and changes in comparable restaurant sales.

Total revenues increased 8.4% to $387.4 million in 2022 from $357.3 million in 2021, while the 2021 total revenues represent an increase of 13.3% from $315.4 million in 2020. Restaurant sales increased 8.6% to $385.9 million in 2022 from $355.5 million in 2021, while 2021 restaurant sales represent an increase of 13.2% from $314.1 million in 2020.

The following table presents the primary drivers of the increase or decrease in restaurant sales for Pollo Tropical (in millions):

Increase in comparable restaurant sales

Decrease in sales related to closed restaurants, including temporary and partial closures

Additional week in 2020

Total increase

Restaurants are included in comparable restaurant sales after they have been open for 18 months. Restaurants are excluded from comparable restaurant sales for any fiscal month in which the restaurant was closed for more than five days. Comparable restaurant sales are compared to the same period in the prior year. For comparative purposes, the calculation of the changes in comparable restaurant sales is based on a 52-week fiscal year. Restaurant sales for the extra week in the fiscal year ended January 3, 2021 have been excluded for purposes of calculating the change in comparable company-owned restaurant sales. Comparable restaurant sales in 2020 were negatively impacted by governmental restrictions, closed dining rooms, reductions in operating hours and reduced staffing as a result of COVID-19 . We believe our significant mix of dine-in sales prior to the pandemic had a negative impact on comparable restaurant sales.

Comparable restaurant sales increased 9.1% for Pollo Tropical restaurants in 2022. Increases or decreases in comparable restaurant sales result primarily from an increase or decrease in comparable restaurant transactions and in average check. Changes in average check are primarily driven by menu price increases net of discounts and promotions and changes in sales channel and sales mix.

An increase in the net impact of pricing and product/channel mix of 15.2% was partially offset by a decrease in comparable restaurant transactions of 6.1% in 2022 compared to 2021. The increase in pricing and product/channel mix was driven primarily by menu price increases of 14.4% and increases in dine-in and delivery average check. We estimate that Hurricanes Ian and Nicole negatively impacted comparable restaurant sales and transactions by approximately 0.8% and 0.6%, respectively, in 2022. We believe staffing challenges had a negative impact on sales trends driven by reduced operating hours and sales channels in 2022. Comparable restaurant sales in 2022 were also negatively impacted by remodels and refreshes that temporarily closed dine-in and counter take-out operations.

Comparable restaurant sales increased 16.0% for Pollo Tropical in 2021. An increase in the net impact of product/channel mix and pricing of 11.8% was coupled with an increase in comparable restaurant transactions of 4.2% in 2021 compared to 2020. The increase in product/channel mix and pricing was driven primarily by increases in delivery and drive-thru average

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check and sales channel penetration, and menu price increases of 4.6%. We believe restaurant sales were negatively impacted by staffing challenges and reduced operating hours and sales channels due to labor shortages in 2021. Comparable restaurant sales in adequately staffed markets increased 18.7% in 2021 compared to 2020.

Franchise revenues decreased $0.4 million to $1.4 million in 2022 compared to 2021 due primarily to a temporary decrease in franchise royalty fees while a franchise agreement was being renegotiated. Franchise revenues increased $0.5 million to $1.8 million in 2021 compared to 2020 due to higher sales at franchised restaurants in 2021 primarily as a result of the impact of COVID-19 in 2020.

Operating costs and expenses. Operating costs and expenses include cost of sales, restaurant wages and related expenses, other restaurant expenses and advertising expenses. Cost of sales consists of food, paper and beverage costs including packaging costs, less rebates and purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities, including chicken, are generally purchased under contracts for future periods of up to one year. Continuing inflation pressure is expected in 2023 compared to 2022 for certain food, packaging and utility costs and we are planning additional pricing measures to offset any ongoing inflationary cost increases.

Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related taxes and benefits are subject to inflation, including from factors such as labor supply and changing market conditions, as well as minimum wage increases and changes in costs for health insurance, workers' compensation insurance and state unemployment insurance.

Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are utilities, repairs and maintenance, general liability insurance, sanitation, supplies and credit card and delivery fees.

Advertising expense includes all promotional expenses including television, radio, billboards and other sponsorships and promotional activities and agency fees.

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The following table presents the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical. All percentages are stated as a percentage of restaurant sales.

Cost of sales:

Higher commodity costs

Sales mix

Higher (lower) promotions and discounts

Menu price increases

Operating inefficiencies (efficiencies)

Other (1)

Net increase (decrease) in cost of sales as a percentage of restaurant sales

Restaurant wages and related expenses:

Higher (lower) labor costs including special incentive pay and sign-on bonuses in 2021 (2)

Higher (lower) incentive bonus (3)

Lower medical benefits costs

Higher payroll taxes and workers' compensation costs

Higher labor costs due to higher wage rates and overtime partially offset by the impact of higher restaurant sales (4)

Other (1)

Net increase (decrease) in restaurant wages and related expenses as a percentage of restaurant sales

Other operating expenses:

Higher repairs and maintenance costs

Higher insurance costs

Higher utilities costs in 2022 and impact of higher restaurant sales in 2021 vs. 2020

Higher delivery fee expense due to higher delivery channel sales

Other (1)

Net increase in other restaurant operating expenses as a percentage of restaurant sales

Advertising expense:

Increased advertising

Net increase in advertising expense as a percentage of restaurant sales

(1)    Other consists of any other driver with an impact of less than 20 basis points.

(2)    Change in 2022 compared to 2021 and 2021 compared to 2020 primarily includes the impact of special incentive pay offered in 2021.

(3)    Primarily due to guaranteed bonus payments due to staffing challenges. Guaranteed bonus payments, which were lower in 2020, are included in other labor costs in 2020.

(4)    Higher wage rates and overtime pay due in part to labor shortages in 2022 and 2021.

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Restaurant Rent Expense . Restaurant rent expense includes base rent, contingent rent and common area maintenance and property taxes related to our leases characterized as operating leases. Restaurant rent expense, as a percentage of total restaurant sales, decreased to 6.2% in 2022 from 6.6% in 2021, due primarily to the impact of higher comparable restaurant sales which were partially offset by higher rental costs related to renewed leases. Restaurant rent expense, as a percentage of total restaurant sales, was 6.6% in 2021 compared to 7.2% in 2020, due primarily to the impact of higher comparable restaurant sales which were partially offset by higher rental costs related to sale-leasebacks and lease renewals.

General and Administrative Expenses. General and administrative expenses are comprised primarily of (1) salaries and expenses associated with the development and support of our Company and brand and the management oversight of the operation of our restaurants; and (2) legal, auditing and other professional fees, corporate system costs, and stock-based compensation expense.

General and administrative expenses increased to $52.3 million in 2022 from $45.5 million in 2021, and as a percentage of total revenues, were 13.5% in 2022 and 12.7% in 2021 due primarily to increased professional fees, higher employee costs and other suppo rt costs, partially offset by higher total revenue. General and administrative expenses include $7.3 million in non-recurring expenses comprised of $2.7 million of general and administrative efficiency initiative costs, which includes $1.6 million related to the acceleration and write-off of costs related to an accounting system implementation, $2.0 million of professional fees, $1.4 million of restructuring costs primarily related to the departure of our former CEO, and $1.2 million of digital platform costs.

General and administrative expenses increased to $45.5 million in 2021 from $39.8 million in 2020, and as a percentage of total revenues, were 12.7% in 2021 and 12.6% in 2020 due primarily to higher digital platform costs, higher continuing mobile app development and maintenance costs and higher incentive and other support center costs including additional costs related to the sale of Taco Cabana, partially offset by higher total revenues. General and administrative expenses include corporate overhead costs allocated to Taco Cabana that are not included in discontinued operations. General and administrative expenses in 2021 also included $3.3 million related to digital platform costs. General and administrative expense in 2020 included $0.7 million related to severance costs associated with positions eliminated in response to the COVID-19 pandemic, $0.4 million related to digital and brand repositioning costs, and $0.1 million related to search fees for senior executive positions.

Consolidated Adjusted EBITDA. Consolidated Adjusted EBITDA, a non-GAAP financial measure, is the primary measure of profit or loss used by our chief operating decision maker for purposes of assessing performance and is defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges (recoveries), goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants.

Consolidated Adjusted EBITDA may not necessarily be comparable to other similarly titled captions of other companies due to differences in methods of calculation. Consolidated Adjusted EBITDA includes an allocation of certain general and administrative expenses associated with administrative support for executive management, information systems and certain finance, legal, supply chain, human resources, development, and other administrative functions. For a discussion of our use of Consolidated Adjusted EBITDA and a reconciliation from net income (loss) to Consolidated Adjusted EBITDA, see the heading titled "Management's Use of Non-GAAP Financial Measures."

Consolidated Adjusted EBITDA decreased to $21.8 million, or 5.6% of total revenues, in 2022 from $25.0 million, or 7.0% of total revenues, in 2021 due primarily to higher commodity costs and sales mix within cost of sales, repair and maintenance costs, insurance costs, and utilities costs, partially offset by the impact of menu price increases and higher restaurant sales.

Consolidated Adjusted EBITDA decreased to $25.0 million, or 7.0% of total revenues, in 2021 from $26.0 million, or 8.2% of total revenues, in 2020 due primarily to the impact of higher restaurant sales and improved cost of sales margins, partially offset by higher labor costs, delivery fees, repair and maintenance costs, advertising and general and administrative costs, and the impact of the extra week in 2020 .

Restaurant-level Operating Profit . We also use Restaurant-level Operating Profit (previously presented as Restaurant-level Adjusted EBITDA), a non-GAAP financial measure, as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Consolidated Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs and general and administrative expenses (including corporate-level general and administrative expenses).

Restaurant-level Operating Profit was $59.4 million, or 15.4% of restaurant sales, $62.8 million, or 17.7% of restaurant sales, and $60.8 million, or 19.4% of restaurant sales, in 2022, 2021 and 2020, respectively. The changes in Restaurant-level Operating Profit were primarily due to the foregoing. In addition, we estimate the additional week of sales in our fiscal 2020

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had a $2.0 million unfavorable impact on Restaurant-level Operating Profit in 2021 compared to 2020. For a reconciliation from loss from operations to Restaurant-level Operating Profit, see the heading titled "Management's Use of Non-GAAP Financial Measures."

Depreciation and Amortization. Depreciation and amortization expense decreased to $20.1 million in 2022 from $20.6 million in 2021 due primarily to decreased depreciation related to impairment of assets from underperforming restaurants that have been made since 2021, partially offset by an increase in depreciation related to ongoing reinvestment and enhancements to our restaurants. Depreciation and amortization expense decreased to $20.6 million in 2021 from $22.0 million in 2020 due primarily to decreased depreciation as a result of entering into sale-leaseback transactions for several owned restaurant locations and impairing closed restaurant assets, partially offset by an increase in depreciation related to ongoing reinvestment and enhancements to our restaurants.

Impairment and Other Lease Charges (Recoveries). Impairment and other lease charges (recoveries) decreased to $1.4 million in 2022 from $1.5 million in 2021.

Impairment and other lease charges (recoveries) in 2022 include impairment charges of $2.3 million related primarily to the impairment of assets from eight underperforming Pollo Tropical restaurants, partially offset by net gains from lease terminations and a lease term reassessment of $(0.9) million.

Impairment and other lease charges (recoveries) decreased to $1.5 million in 2021 from $8.0 million in 2020. Impairment and other lease charges in 2021 include impairment charges of $2.1 million related primarily to the impairment of assets from five underperforming Pollo Tropical restaurants and impairment of equipment from previously closed restaurants, partially offset by net gains form lease terminations $(0.6) million.

Impairment and other lease charges (recoveries) in 2020 include impairment charges of $7.3 million related primarily to the impairment of assets from three underperforming Pollo Tropical restaurants, two of which we closed in the third quarter of 2020, the write-down of saucing islands and self-service soda machines that were removed from dining rooms as a result of COVID-19 and the write-down of assets held for sale to their fair value less costs to sell, and lease termination charges of $0.9 million for restaurant locations we decided not to develop, net of a gain from lease terminations of $(0.2) million.

Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related trailing twelve-month cash flows are below a certain threshold. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets, exclusive of operating lease payments, to their respective carrying values, excluding operating lease liabilities. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset group's carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, and for right-of-use lease assets, current market lease rent and discount rates, which are subject to a hig h degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.

For two Pollo Tropical restaurants with combined carrying values (excluding right-of-use lease assets) of $1.1 million, projected cash flows are not substantially in excess of their carrying values. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material.

Closed Restaurant Ren t Expense, Net of Sublease Income. Closed restaurant rent expense, net of sublease income was $1.9 million in 2022 and consisted of closed restaurant rent and ancillary lease costs of $8.5 million net of sublease income of $(6.5) million.

Closed restaurant rent expense, net of sublease income was $3.0 million in 2021 and consisted of closed restaurant rent and ancillary lease costs of $9.1 million net of sublease income of $(6.1) million.

Closed restaurant rent expense, net of sublease income was $4.3 million in 2020 and consisted of closed restaurant rent and ancillary lease costs of $9.2 million net of sublease income of $(4.9) million.

Other (Income) Expense , Net. Other (income) expense, net, was $(0.6) million in 2022 and primarily consisted of net proceeds from a legal settlement of $(0.8) million, partially offset by other closed restaurant related costs. Other expense (income), net, was $0.5 million in 2021 and primarily consisted of costs for the removal, transfer and storage of equipment from closed restaurants. Other (income) expense, net, in 2020 primarily consisted of total gains of $(3.3) million on the sale-leaseback of five restaurant properties and the sale of three restaurant properties, partially offset by $0.5 million in costs for the

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removal, transfer and storage of equipment from closed restaurants and other closed restaurant costs and $0.7 million for the write-off of site development costs.

Loss from Operations. As a result of the foregoing, we had a loss from operations of $(14.4) million, or (3.7)% of restaurant sales, in 2022 compared to a loss from operations of $(6.6) million, or (1.9)% of restaurant sales, in 2021 and a loss from operations of $(10.1) million, or (3.2)% of restaurant sales, in 2020.

Interest Expense. Interest expense decreased $0.1 million to $0.3 million in 2022 from 2021. Interest expense increased $0.1 million to $0.4 million in 2021 from 2020. Interest charges related to our senior credit facility and former amended senior credit facility are included in discontinued operations for 2021 and 2020. In 2022, interest charges related to our undrawn revolving credit facility are included in continuing operations.

Provision for (Benefit from) Income Taxes. The effective tax rate was (6.6)% for the year ended January 1, 2023, and (15.5)% for the year ended January 2, 2022. The provision for income taxes for 2022 includes changes in the valuation allowance as a result of originating temporary differences during the year.

The effective tax rate was (15.5)% for 2021 and 67.5% for 2020. The provision for income taxes for 2021 includes changes in the valuation allowance as a result of originating temporary differences during the year and a reserve for unrecognized tax benefits. The benefit from income taxes for 2020 includes a benefit related to the carryback of net operating losses and reclassifying certain assets as qualified improvement property as permitted by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and other changes to depreciation methods for certain assets made in conjunction with a cost segregation study conducted prior to filing our 2019 federal income tax return, as well as a decrease to the valuation allowance on our deferred tax assets related to changes in our deferred tax assets and liabilities.

The CARES Act, which was signed into law on March 27, 2020, includes provisions that allow net operating losses arising in 2018, 2019, and 2020 to be carried back for up to five years and includes technical amendments that are retroactive to 2018 which permit certain assets to be classified as qualified improvement property and expensed immediately.

Income (Loss) from Discontinued Operations, Net of Tax. All revenues, costs and expenses and income taxes attributable to Taco Cabana have been aggregated within income (loss) from discontinued operations, net of tax, in the consolidated statements of operations for all periods presented. Income from discontinued operations, net of tax, was $1.1 million in 2022 compared to $18.5 million in 2021 and a loss from discontinued operations, net of tax, of $(6.8) million in 2020. Income from discontinued operations, net of tax, for the year ended January 1, 2023 was primarily due to insurance proceeds received, partially offset by workers compensation and general liability claims. Taco Cabana results of operations are included through August 15, 2021 for the year ended January 2, 2022 compared to a full year in 2020 due to the sale of Taco Cabana on August 16, 2021.

A gain of $25.0 million was recognized on the sale of Taco Cabana in 2021. See Note 2 of the Notes to our Consolidated Financial Statements .

Net (Loss) Income. As a result of the foregoing, we had a net loss of $(14.6) million, or (3.8)% of total revenue, in 2022 compared to net income of $10.4 million, or 2.9% of total revenue, in 2021 and a net loss of $(10.2) million, or (3.2)% of total revenue, in 2020.

Liquidity and Capital Resources

Unless otherwise noted, this discussion of liquidity and capital resources relates to our combined operations.

We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. Although, as a result of our substantial cash balance, we did not have a working capital deficit at January 1, 2023 , we have the ability to operate with a substantial working capital deficit (and we have historically operated with a working capital deficit) because:

• Restaurant operations are primarily cond ucted on a cash basis;

• Rapid turnover results in a limited investment in inventories; and

• Cash from sales is usually received before related liabilities for supplies and payroll become due.

Operating Activities . Net cash provided by operating activities for 2022, 2021, and 2020 was $15.4 million, $14.1 million and $40.3 million, respectively. The $1.4 million increase in net cash provided by operating activities in 2022 compared to 2021 was primarily driven by timing of payments, partially offset by a decrease in Consolidated Adjusted EBITDA,

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contributions from discontinued operations in 2021, and the receipt of income tax refunds in 2021. The $26.2 million decrease in net cash provided by operating activities in 2021 compared to 2020 was driven primarily by the timing of payments, including the impact of the timing of payments related to Taco Cabana and vendor and landlord payment term renegotiations in 2020, and a decrease in Consolidated Adjusted EBITDA. The impact of extended vendor payment terms in 2020 was partially offset by the payment of January 2021 rent in fiscal 2020 as a result of the 53 rd week in fiscal 2020.

Investing Activities. Net cash used in investing activities in 2022 was $19.1 million. Net cash provided by investing activities and 2021 and 2020 was $59.8 million and $8.4 million, respectively. Capital expenditures are typically the largest component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling/reimaging, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems.

The following table sets forth our capital expenditures from continuing operations for the periods presented (dollars in thousands):

Pollo

Tropical

Other

Continuing Operations

Year ended January 1, 2023:

New restaurant development

Restaurant remodeling

Other restaurant capital expenditures (1)

Corporate and restaurant information systems

Total capital expenditures

Number of new restaurant openings

Year ended January 2, 2022:

New restaurant development

Restaurant remodeling

Other restaurant capital expenditures (1)

Corporate and restaurant information systems

Total capital expenditures

Number of new restaurant openings

Year ended January 3, 2021:

New restaurant development

Restaurant remodeling

Other restaurant capital expenditures (1)

Corporate and restaurant information systems

Total capital expenditures

Number of new restaurant openings

(1) Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the years ended January 1, 2023, January 2, 2022 and January 3, 2021, total restaurant repair and maintenance expenses were approximately $15.5 million, $12.5 million, and $9.3 million, respectively.

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The following table sets forth our capital expenditures from discontinued operations for the periods presented (dollars in thousands):

Taco

Cabana

Year ended January 2, 2022:

New restaurant development

Restaurant remodeling

Other restaurant capital expenditures (1)

Corporate and restaurant information systems

Total capital expenditures

Number of new restaurant openings

Year ended January 3, 2021:

New restaurant development

Restaurant remodeling

Other restaurant capital expenditures (1)

Corporate and restaurant information systems

Total capital expenditures

Number of new restaurant openings

(1) Excludes restaurant repair and maintenance expenses included in income (loss) from discontinued operations in our consolidated financial statements. For the years ended January 2, 2022 and January 3, 2021, total restaurant repair and maintenance expenses were approximately $5.5 million and $8.1 million, respectively.

Cash provided by investing activities from continuing operations in 2020 included net proceeds of $13.3 million from the sale-leaseback of five restaurant properties and $5.3 million from the sale of an additional three restaurant properties.

Cash provided by investing activities from discontinued operations in 2022 included net proceeds from insurance recoveries of $0.3 million. Net cash provided by investing activities from discontinued operations in 2021 included net proceeds of $74.9 million from the sale of Taco Cabana, $3.1 million from the sale-leaseback of two restaurant properties and $1.3 million from the sale of an additional restaurant property. Net cash provided by investing activities from discontinued operations in 2020 included net proceeds of $4.0 million from the sale-leaseback of two restaurant properties and $4.3 million from the sale of an additional three restaurant properties.

Total capital expenditures in 2023 are expected to be between $22.0 million and $28.0 million.

Financing Activities. Net cash used in financing activities in 2022 was $1.2 million and primarily consisted of payments to repurchase our common stock of $0.9 million and payments of tax withholdings related to net share settlements of $0.2 million.

Net cash used in financing activities in 2021 included term loan borrowing repayments under our senior credit facility of $75.0 million, $9.4 million in payments to repurchase our common stock, a $2.2 million payment for a premium associated with extinguishment of the term loan under our senior credit facility and $0.2 million in principal payments on finance leases.

Net cash used in financing activities in 2020 included net revolving credit borrowing repayments under our former amended senior credit facility of $75.0 million, $3.0 million in payment of debt issuance costs associated with our former amended senior credit facility and senior credit facility combined with $3.7 million in payments to repurchase our common stock, partially offset by proceeds of $73.5 million under our senior credit facility.

Senior Credit Facility. On November 23, 2020, we terminated our former amended senior secured revolving credit facility, referred to as the "former senior credit facility," and entered into a new senior secured credit facility, which is referred to as the "senior credit facility." The senior credit facility was comprised of a term loan facility (the "term loan facility") of $75.0 million and a revolving credit facility (the "revolving credit facility") of up to $10.0 million and matures on November 23, 2025. The senior credit facility also provides for potential incremental term loan borrowing increases of up to $37.5 million in the aggregate, subject to, among other items, compliance with a minimum Total Leverage Ratio and other terms specified in the senior credit facility. As required by the terms of the senior credit facility, the proceeds from the sale of Taco Cabana were used to fully repay our outstanding term loan borrowings on August 16, 2021. The early repayment was subject to a 103% loan prepayment premium.

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The senior credit facility provides that we must maintain minimum Liquidity (as defined in the senior credit facility) of $20.0 million (the "Liquidity Threshold") until January 3, 2022. The senior credit facility also provides that we are not required to be in compliance with the Total Leverage Ratio under the senior credit facility until the earlier of January 3, 2022, or the date in which Liquidity is less than the Liquidity Threshold. We will be permitted to exercise equity cure rights with respect to compliance with the Total Leverage Ratio subject to certain restrictions as set forth in the senior credit facility.

Borrowings under the senior credit facility bear interest at a rate per annum, at our option, equal to either (all terms as defined in the senior credit facility):

1)    the Base Rate plus the Applicable Margin of 6.75% with a minimum Base Rate of 2.00%, or

2)    the LIBOR (or Benchmark Replacement) Rate plus the Applicable Margin of 7.75%, with a minimum LIBOR (or Benchmark Replacement) Rate of 1.00%.

In addition, the senior credit facility requires us to pay a commitment fee of 0.50% per annum on the daily amount of the unused portion of the revolving credit facility.

The outstanding borrowings under the revolving credit facility are prepayable without penalty or premium (other than customary breakage costs). The outstanding borrowings under the term loan facility were voluntarily prepayable by us, and the term loan facility provided that each of the following required a mandatory prepayment of outstanding term loan borrowings by us as follows: (i) 100% of any cash Net Proceeds (as defined in the senior credit facility) in excess of $2.0 million individually or in the aggregate over the term of the senior credit facility in respect of any Casualty Event (as defined in the senior credit facility) affecting collateral provided that we were permitted to reinvest such Net Proceeds in accordance with the senior credit facility, (ii) 100% of any Net Proceeds of a Specified Equity Contribution (as defined in the senior credit facility), (iii) 100% of any cash Net Proceeds from the issuance of debt issued by us or our subsidiaries other than Permitted Debt (as defined in the senior credit facility), (iv) 100% of any Net Proceeds from the Disposition (as defined in the senior credit facility) of certain assets individually, or in the aggregate, in excess of $2.0 million in any fiscal year provided that we were permitted to reinvest such Net Proceeds in accordance with the senior credit facility and (v) beginning with the fiscal year ending January 2, 2022, an amount equal to the Excess Cash Flow (as defined in the senior credit facility) in accordance with the senior credit facility.

Our senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of our indebtedness having an outstanding principal amount in excess of $5.0 million which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

The senior credit facility contains certain covenants, including, without limitation, those limiting our ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of our business in any material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends.

Our obligations under the senior credit facility are secured by all of our and our subsidiaries' assets (including a pledge of all of the capital stock and equity interests of our subsidiaries).

Under the senior credit facility, the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include, without limitation, payment default, covenant defaults, bankruptcy type defaults, defaults on other indebtedness, certain judgments or upon the occurrence of a change of control (as specified in the senior credit facility).

As of January 1, 2023, we were in compliance with the financial covenants under our senior credit facility. At January 1, 2023, $10.0 million was available for borrowing under the revolving credit facility.

Share Repurchase Plan

In 2018, our board of directors approved a share repurchase program for up to 1.5 million shares of our common stock. In 2019, our board of directors approved increases to the share repurchase program of an additional 1.5 million shares of our common stock. Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume, general market and economic conditions, and other corporate consideratio ns. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by our board of directors.

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Cash Requirements

Our significant cash requirements within the next twelve months include working capital requirements, operating lease obligations and capital expenditures, as well as purchase obligations and insurance liabilities. We believe our cash reserves, cash generated from our operations, and availability of borrowings under our senior credit facility will provide sufficient cash availability to cover our anticipated working capital needs and capital expenditures for the next twelve months. We used the net proceeds from the sale of Taco Cabana to repay all of the outstanding term loan borrowings under our senior credit facility in 2021.

Our significant cash requirements under our various contractual obligations and commitments include:

•    O perating Lease Obligations. See Note 8 of the Notes to our Consolidated Financial Statements for information on our operating and finance lease obligations and the amount and timing of future payments.

• Capital Expenditures. See Investing Activities subsection in this MD&A under the heading titled Liquidity and Capital Resources.

•     Insurance Liabilities. Insurance liabilities include obligations associated with employee health care, workers' compensation claims and general liability claims, all of which have some inherent uncertainty as to the amount and timing of payments and were reflected on our Consolidated Balance Sheet as of January 1, 2023. See Note 7 of the Notes to our Consolidated Financial Statements for more information about our insurance liabilities.

• Purchase Obligations. Purchase obligations include agreements to purchase goods or services that are legally binding on us and that specify all significant terms.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Inflation

The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses and energy costs. Labor costs in our restaurants are impacted by a number of factors such as labor supply and changing market conditions, as well as changes in the federal and state hourly minimum wage rates as well as changes in payroll related taxes, including federal and state unemployment taxes. Labor supply across other industries also negatively impacts the costs of supplies, commodities, logistics, and utilities. We typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to fully offset such inflationary cost increases in the future.

Critical Accounting Estimates

Our Consolidated Financial Statements and accompanying Notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in Note 1—Basis of Presentation in the Notes to our Consolidated Financial Statements. Critical accounting estimates are those that require application of management's most difficult, subjective, or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. These estimates involve a significant level of estimation uncertainty and are reasonably likely to have a material impact of the financial condition or results of operations.

Sales recognition at our restaurants is straightforward as customers pay for products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 60 days. The earnings reporting process is covered by our system of internal controls and generally does not require significant management estimates and judgments. However, critical accounting estimates and judgments, as noted below, are inherent in the assessment and recording of insurance liabilities, the valuation of goodwill for impairment, assessing impairment of long-lived assets, lease accounting matters and the valuation of deferred income tax assets. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions.

Insurance Liabilities.  We are insured for workers' compensation, general liability and medical insurance claims under policies where we pay all claims, subject to annual stop-loss limitations both for individual claims and for general liability, medical insurance and certain workers' compensation claims in the aggregate. At January 1, 2023 and January 2, 2022, we had $8.8 million and $9.5 million, respectively, accrued for these insurance claims. We record insurance liabilities based on historical and industry trends, which are continually monitored, with the assistance of actuaries, and adjust accruals as

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warranted by changing circumstances. Since there are estimates and assumptions inherent in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on historical trends or the severity of the claims, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities and those adjustments could be material.

Evaluation of Goodwill.  We must evaluate our recorded goodwill for impairment annually or more frequently when events and circumstances indicate that the carrying amount may be impaired. We have elected to conduct our annual impairment review of goodwill assets as of the last day of our fiscal year. We may first qualitatively assess goodwill impairment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This qualitative analysis is performed by examining key events and circumstances affecting fair value. If it is determined it is more likely than not that the reporting unit's fair value is not greater than its carrying amount, we perform a quantitative assessment. We adopted ASU No. 2017-04,  Simplifying the Test for Goodwill Impairment  ("ASU 2017-04") in 2019, which eliminates the requirement to calculate the implied fair value of goodwill if the fair value of a reporting unit is less than the carrying amount of the reporting unit. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

In performing a quantitative assessment for impairment, we compare the net book value of our reporting unit to its estimated fair value. In determining the estimated fair value of the reporting unit, we employ a combination of a discounted cash flow analysis based on management's best estimates of future cash flows and one or two market-based approaches. The results of these analyses are corroborated with other value indicators where available, such as comparable company earnings multiples. This evaluation of goodwill requires us to make estimates and assumptions to determine the fair value of our reporting unit including projections regarding future operating results, anticipated growth rates, the weighted average cost of capital used to discount projected cash flows, and market multiples.

We performed a qualitative assessment, which included examining key events and circumstances affecting fair value, for our annual impairment review as of January 1, 2023, and determined it was more likely than not that the Pollo Tropical reporting unit's fair value was greater than its carrying amount. As of January 1, 2023, our Pollo Tropical reporting unit goodwill has a carrying value of $56.3 million. See Note 5 of the Notes to our Consolidated Financial Statements .

We estimate the fair value of the Pollo Tropical reporting unit significantly exceeds its carrying value as of January 1, 2023. The estimates and assumptions used to determine and assess fair value may differ from actual future events and if these estimates or related projections change significantly in the future, we may be required to record material impairment charges for goodwill assets.

Impairment of Long-lived Assets.  We assess the potential impairment of long-lived assets, principally property and equipment and operating lease right-of-use assets, whenever events or changes in circumstances indicate that the carrying value of the restaurant asset group may not be recoverable. In addition to considering management's plans, known regulatory/governmental actions and damage due to acts of God (hurricanes, tornadoes, etc.), we consider an event indicating that the carrying value may not be recoverable 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. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values. We have elected to exclude operating lease payments and liabilities from future cash flows and carrying values, respectively, in the comparison. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. Our estimates of future cash flows are highly subjective judgments based on internal projections and knowledge of our operations, historical performance and current trends in sales and restaurant operating costs. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions and, for right-of-use lease assets, current market lease rent and discount rates, which are subject to a high degree of judgment. If these estimates or assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.

For two Pollo Tropical restaurants with combined carrying values (excluding right-of-use lease assets) of $1.1 million, projected cash flows are not substantially in excess of their carrying values. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material. See Note 6 of the Notes to our Consolidated Financial Statements.

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Lease Accounting.  Judgments made by management for our lease obligations include the determination of our incremental borrowing rate, the determination of standalone selling prices used to allocate the consideration in the contract, and the length of the lease term, which includes the determination of renewal options that are reasonably assured. The lease term can affect the classification of a lease as finance or operating for accounting purposes, the amount of the lease liability and corresponding right-of-use lease asset recognized, the term over which related leasehold improvements for each restaurant are amortized and any rent holidays and/or changes in rental amounts for recognizing rent expense over the term of the lease. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.

We use our estimated incremental borrowing rate in determining the present value of lease payments for purposes of determining lease classification and recording lease liabilities and lease assets on our consolidated balance sheet. Our incremental borrowing rate is determined based on a synthetic credit rating, determined using a valuation model, adjusted to reflect a secured credit rating and a developed spread curve, if applicable, applied to a risk-free rate yield curve. If the estimate of our incremental borrowing rate was changed, our operating lease assets and liabilities could differ materially. Changes in the determination of our incremental borrowing rate could also have an impact on the depreciation and interest expense recognized for finance leases. See Note 8 of the Notes to our Consolidated Financial Statements.

Valuation of Deferred Income Tax Assets. Deferred tax assets and liabilities, which represent temporary differences between the financial statement and tax basis of assets and liabilities, are measured using enacted tax rates expected to apply to the years in which those differences are expected to be recovered or settled. Deferred tax assets are recognized to the extent we believe these assets will more likely than not be realized. A valuation allowance is established to reduce the carrying amount of deferred tax assets if we believe it is more likely than not that a portion or all of the tax benefit from these deferred tax assets will not be realized. The realization of a deferred tax asset is dependent on the generation of sufficient taxable income in future periods, and the reversal of existing taxable temporary differences in the applicable periods. In evaluating the realizability of our deferred tax assets, we perform an assessment of positive and negative evidence. The weight given to negative and positive evidence is commensurate only to the extent that such evidence can be objectively verified. Objective historical evidence is given greater weight than subjective evidence such as forecasts of future taxable income. We considered three years of cumulative operating income (loss) in evaluating the objective evidence that historical results provide. Objective negative evidence limits our ability to consider other subjective evidence, such as our future earnings projections. Based on our evaluation of all available positive and negative evidence, and placing greater weight on the objective evidence, we determined that it is more likely than not that our deferred tax assets will not be fully realized in future periods. In 2019, we determined that it was more likely than not that the deferred tax assets would not be fully realized and established a valuation allowance against federal and state deferred tax assets. Based on changes in our deferred tax assets and liabilities in 2020, adjustments to our valuation allowance totaling $0.4 million were recorded in 2020 resulting in a valuation allowance of $9.7 million as of January 3, 2021. Based on changes in our deferred tax assets and liabilities in 2021, adjustments to our valuation allowance totaling $0.2 million were recorded in 2021 resulting in a valuation allowance of $9.9 million as of January 2, 2022. Based on changes in our deferred tax assets and liabilities in 2022, adjustments to our valuation allowance totaling $6.4 million were recorded in 2022 resulting in a valuation allowance of $16.3 million as of January 1, 2023. If we generate sufficient taxable income in the future to fully utilize the tax benefits of the deferred tax assets on which a valuation allowance was recorded, a portion or all of the valuation allowance could be reversed, which would decrease our tax expense in the period or periods in which the valuation allowance is reversed. We will continue to monitor and evaluate the positive and negative evidence considered in arriving at the above conclusion in order to assess whether such conclusion remains appropriate in future periods. Separate valuation allowances, not subject to the critical accounting estimates, for the income tax capital loss generated on the sale of Taco Cabana in 2021 and a foreign tax credit have been established as we do not expect to generate sufficient future taxable income related to those tax attributes. See Note 10 of the Notes to our Consolidated Financial Statements.

New Accounting Pronouncements

See Note 1 of the Notes to our Consolidated Financial Statements for a discussion of recently issued and adopted accounting standards.

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Management's Use of Non-GAAP Financial Measures

Consolidated Adjusted EBITDA is a non-GAAP financial measure. We use Consolidated Adjusted EBITDA in addition to net income (loss) and income (loss) from operations to assess our performance, and we believe it is important for investors to be able to evaluate us using the same measures used by management. We believe this measure is an important indicator of our operational strength and the performance of our business and it provides a view of operations absent non-cash activity and items that are not related to the ongoing operation of our restaurants or affect comparability period over period. Consolidated Adjusted EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges (recoveries), goodwill impairment, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants as set forth in the reconciliation table below. Consolidated Adjusted EBITDA as calculated by us is not necessarily comparable to similarly titled measures reported by other companies and should not be considered as an alternative to net income (loss), earnings (loss) per share, cash flows from operating activities or other financial information determined under GAAP.

We also use Restaurant-level Operating Profit (previously presented as Restaurant-level Adjusted EBITDA) as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as Consolidated Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs, and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-level Operating Profit margin is derived by dividing Restaurant-level Operating Profit by restaurant sales. Restaurant-level Operating Profit is also a non-GAAP financial measure.

Management believes that Consolidated Adjusted EBITDA and Restaurant-level Operating Profit, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and reconciliation of income (loss) from operations to Restaurant-level Operating Profit (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies.

All such financial measures have important limitations as analytical tools. These limitations include the following:

• Such financial information does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;

• Such financial information does not reflect interest expense or the cash requirements necessary to service payments on our debt;

• Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and such financial information does not reflect the cash required to fund such replacements; and

• Such financial information does not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges and gains (such as impairment and other lease charges (recoveries), closed restaurant rent expense, net of sublease income, other income and expense, and stock-based compensation expense) have recurred and may recur.

Table of Contents

A reconciliation from consolidated net income (loss) to Consolidated Adjusted EBITDA follows (in thousands). All amounts are from continuing operations unless otherwise indicated.

Year Ended

January 1, 2023

January 2, 2022

January 3, 2021

Net (loss) income

Loss (income) from discontinued operations

Provision for (benefit from) income taxes

Loss from continuing operations before taxes

Add:

Non-general and administrative adjustments:

Depreciation and amortization

Impairment and other lease charges (recoveries)

Interest expense

Closed restaurant rent expense, net of sublease income (1)

Other (income) expense, net

Stock-based compensation expense

Total non-general and administrative adjustments

General and administrative adjustments:

Stock-based compensation expense

Non-recurring professional fees (2)

G&A efficiency initiatives (3)

Restructuring costs and retention bonuses (4)

Digital costs (5)

Total general and administrative adjustments

Consolidated Adjusted EBITDA

Total revenues

Net (loss) income as a percentage of total revenues

Consolidated Adjusted EBITDA as a percentage of total revenues

(1)     Closed restaurant rent, net of sublease income, for the years ended January 1, 2023, January 2, 2022 and January 3, 2021 primarily consists of closed restaurant lease costs of $8.5 million, $9.1 million and $9.2 million, respectively, partially offset by sublease income of $(6.5) million, $(6.1) million and $(4.9) million, respectively.

(2)    Non-recurring professional fees consist of costs related to growth initiatives.

(3)    G&A efficiency initiatives consist of non-recurring retention bonus costs and costs related to the acceleration and write-off of costs related to accounting system implementation.

(4)    Restructuring costs and retention bonuses for the year ended January 1, 2023 include severance costs related to the departure of our former Chief Executive Officer and eliminated positions related to the accounting outsourcing. Restructuring costs and retention bonuses for the year ended January 3, 2021 include severance costs related to eliminated positions related to terminations in response to the COVID-19 pandemic.

(5)     Digital costs for the years ended January 1, 2023, January 2, 2022 and January 3, 2021 include costs related to enhancing the digital experience for our customers.

Table of Contents

A reconciliation from income (loss) from operations to Restaurant-level Operating Profit follows (in thousands). All amounts are from continuing operations unless otherwise indicated.

Year Ended

January 1, 2023

January 2, 2022

January 3, 2021

January 1, 2023:

Loss from operations

Add:

Non-general and administrative adjustments:

Depreciation and amortization

Impairment and other lease charges (recoveries)

Closed restaurant rent expense, net of sublease income

Other expense (income), net

Stock-based compensation expense

Total non-general and administrative adjustments

General and administrative adjustments:

Stock-based compensation expense

Non-recurring professional fees

G&A efficiency initiatives

Restructuring costs and retention bonuses

Digital costs

Total general and administrative adjustments

Consolidated Adjusted EBITDA

Restaurant-level adjustments:

Add: Other general and administrative expense (1)

Less: Franchise royalty revenue and fees

Restaurant-level Operating Profit

Restaurant sales

Loss from operations as a percentage of restaurant sales

Restaurant-level Operating Profit as a percentage of restaurant sales

(1)     Excludes general and administrative adjustments included in Consolidated Adjusted EBITDA.

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