UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~October~~July 2, ~~2016~~2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-35373

FIESTA RESTAURANT GROUP, INC.

(Exact name of Registrant as specified in its charter)



Delaware	90-0712224
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
14800 Landmark Boulevard, Suite 500 Dallas, Texas	75254
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code: (972) 702-9300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on their Corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” ~~and~~, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨(Do not check if smaller reporting company)

		Smaller reporting company	¨
~~(Do not check if smaller reporting company)~~
		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Table of Contents

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of ~~November 3, 2016~~,August 2, 2017, Fiesta Restaurant Group, Inc. had ~~26,889,637~~27,089,625 shares of its common stock, $.01 par value, outstanding.

Table of Contents

FIESTA RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED ~~OCTOBER~~JULY 2, ~~2016~~2017



		Page
PART I FINANCIAL INFORMATION

Item 1	Interim Condensed Consolidated Financial Statements (Unaudited) - Fiesta Restaurant Group, Inc.:

	Condensed Consolidated Balance Sheets as of ~~October~~July 2, ~~2016~~2017 and January ~~3, 2016~~1, 2017	34

	Condensed Consolidated Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015~~July 3, 2016	45

	Condensed Consolidated Statements of Changes in Stockholders' Equity for the ~~Nine~~Six Months Ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015~~July 3, 2016	56

	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015~~July 3, 2016	67

	Notes to Unaudited Condensed Consolidated Financial Statements	78

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1519

Item 3	Quantitative and Qualitative Disclosures About Market Risk	3139

Item 4	Controls and Procedures	3139

PART II OTHER INFORMATION

Item 1	Legal Proceedings	3139

Item 1A	Risk Factors	3139

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	3239

Item 3	Defaults Upon Senior Securities	3239

Item 4	Mine Safety Disclosures	3239

Item 5	Other Information	3240

Item 6	Exhibits	3441

PART I—FINANCIAL INFORMATION

ITEM 1—INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FIESTA RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except share and per share amounts)

(Unaudited)


	October 2, 2016		January 3, 2016		July 2, 2017		January 1, 2017
ASSETS
Current assets:
Cash	$	4,862	$	5,281	$	4,426	$	4,196
Trade receivables	10,259		9,217		9,075		8,771
Inventories	2,875		2,910		2,367		2,865
Prepaid rent	3,539		3,163		3,345		3,575
Income tax receivable	2,153		7,448		584		3,304
Prepaid expenses and other current assets	2,842		3,219		9,443		4,231
Total current assets	26,530		31,238		29,240		26,942
Property and equipment, net	271,055		248,992		239,414		270,920
Goodwill	123,484		123,484		123,484		123,484
Deferred income taxes	15,258		8,497		29,023		14,377
Deferred financing costs, net	687		918
Other assets	2,473		2,516		5,082		5,842
Total assets	$	439,487	$	415,645	$	426,243	$	441,565
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	87	$	69	$	94	$	89
Accounts payable	23,608		12,405		18,135		16,165
Accrued payroll, related taxes and benefits	12,165		15,614		11,786		12,275
Accrued real estate taxes	7,584		6,121		5,164		6,924
Other liabilities	12,249		12,096		20,779		11,316
Total current liabilities	55,693		46,305		55,958		46,769
Long-term debt, net of current portion	67,446		72,612		62,375		71,423
Lease financing obligations	1,664		1,663		1,664		1,664
Deferred income—sale-leaseback of real estate	28,062		30,086		25,362		27,165
Other liabilities	25,735		20,997		32,082		30,369
Total liabilities	178,600		171,663		177,441		177,390
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01; authorized 100,000,000 shares, issued 26,896,611 and 26,829,220 shares, respectively, and outstanding 26,746,012 and 26,571,602 shares, respectively.	267		266
Common stock, par value $.01; authorized 100,000,000 shares, issued 27,089,482 and 26,884,992 shares, respectively, and outstanding 26,835,137 and 26,755,640 shares, respectively.					268		267
Additional paid-in capital	162,348		159,724		165,097		163,204
Retained earnings	98,272		83,992		83,437		100,704
Total stockholders' equity	260,887		243,982		248,802		264,175
Total liabilities and stockholders' equity	$	439,487	$	415,645	$	426,243	$	441,565

FIESTA RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND ~~NINE~~SIX MONTHS ENDED ~~OCTOBER~~JULY 2, ~~2016~~2017 AND ~~SEPTEMBER 27, 2015~~JULY 3, 2016

(In thousands of dollars, except share and per share amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended					Six Months Ended
Revenues:	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			July 2, 2017			July 3, 2016		July 2, 2017			July 3, 2016
Restaurant sales	$	181,592		$	171,469		$	538,366		$	505,795		$	172,005		$	180,835	$	346,982		$	356,774
Franchise royalty revenues and fees	664			636			2,099			2,085			619			697		1,249			1,435
Total revenues	182,256			172,105			540,465			507,880			172,624			181,532		348,231			358,209
Costs and expenses:
Cost of sales	54,726			55,409			163,383			160,755			50,728			54,607		101,676			108,657
Restaurant wages and related expenses (including stock-based compensation expense of $35, $40, $111, and $147, respectively)	47,503			44,183			139,536			127,156
Restaurant wages and related expenses (including stock-based compensation expense of ($74), $40, $35 and $76, respectively)													46,269			46,981		94,401			92,033
Restaurant rent expense	9,488			8,396			27,522			24,451			8,915			9,113		18,777			18,034
Other restaurant operating expenses	25,715			22,511			72,366			63,732			24,636			24,263		48,704			46,651
Advertising expense	7,506			4,831			21,507			15,529			4,292			7,006		11,831			14,001
General and administrative (including stock-based compensation expense of $330, $1,127, $2,523, and $3,056, respectively)	14,520			14,259			42,621			41,647
General and administrative (including stock-based compensation expense of $1,248, $1,218, $1,785 and $2,193, respectively)													19,140			14,253		35,148			28,101
Depreciation and amortization	9,513			7,596			26,474			21,844			8,596			8,625		17,782			16,961
Pre-opening costs	1,509			1,689			4,707			3,851			910			2,016		1,334			3,198
Impairment and other lease charges	18,513			387			18,607			481			10,762			82		43,176			94
Other income	—			(165		)	(238		)	(679		)
Other expense (income), net													654			10		798			(238		)
Total operating expenses	188,993			159,096			516,485			458,767			174,902			166,956		373,627			327,492
Income (loss) from operations	(6,737		)	13,009			23,980			49,113			(2,278		)	14,576		(25,396		)	30,717
Interest expense	542			493			1,635			1,345			654			535		1,238			1,093
Income (loss) before income taxes	(7,279		)	12,516			22,345			47,768			(2,932		)	14,041		(26,634		)	29,624
Provision for (benefit from) income taxes	(2,748		)	4,571			8,065			18,073			(772		)	5,125		(9,414		)	10,813
Net income (loss)	$	(4,531	)	$	7,945		$	14,280		$	29,695		$	(2,160	)	$	8,916	$	(17,220	)	$	18,811

Basic net income (loss) per share	$	(0.17	)	$	0.30		$	0.53		$	1.11		$	(0.08	)	$	0.33	$	(0.64	)	$	0.70
Diluted net income (loss) per share	$	(0.17	)	$	0.30		$	0.53		$	1.11		$	(0.08	)	$	0.33	$	(0.64	)	$	0.70
Basic weighted average common shares outstanding	26,716,219			26,557,940			26,658,739			26,494,599			26,815,015			26,654,280		26,794,560			26,629,999
Diluted weighted average common shares outstanding	26,716,219			26,565,575			26,665,091			26,501,951			26,815,015			26,660,269		26,794,560			26,636,145

FIESTA RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

~~NINE~~SIX MONTHS ENDED ~~OCTOBER~~JULY 2, ~~2016~~2017 AND ~~SEPTEMBER 27, 2015~~JULY 3, 2016

(In thousands of dollars, except share amounts)

(Unaudited)


	Number of			Additional					Total			Number of Common Stock Shares	Common Stock		Additional Paid-In Capital			Retained Earnings			Total Stockholders' Equity
	Common	Common		Paid-In			Retained		Stockholders'
	Stock Shares	Stock		Capital			Earnings		Equity
Balance at December 28, 2014	26,358,448	$	264	$	153,867		$	45,456	$	199,587
Stock-based compensation	—	—		3,203			—		3,203
Vesting of restricted shares and related tax benefit	210,983	2		1,525			—		1,527
Net income	—	—		—			29,695		29,695
Balance at September 27, 2015	26,569,431	$	266	$	158,595		$	75,151	$	234,012

Balance at January 3, 2016	26,571,602	$	266	$	159,724		$	83,992	$	243,982		26,571,602	$	266	$	159,724		$	83,992		$	243,982
Stock-based compensation	—	—		2,634			—		2,634			—	—		2,269			—			2,269
Vesting of restricted shares and related tax deficiency	174,410	1		(10		)	—		(9		)
Vesting of restricted shares												115,566	1		(1		)	—			—
Tax deficiency from stock-based compensation															(81		)				(81		)
Net income	—	—		—			14,280		14,280			—	—		—			18,811			18,811
Balance at October 2, 2016	26,746,012	$	267	$	162,348		$	98,272	$	260,887
Balance at July 3, 2016												26,687,168	$	267	$	161,911		$	102,803		$	264,981

Balance at January 1, 2017												26,755,640	$	267	$	163,204		$	100,704		$	264,175
Stock-based compensation												—	—		1,820			—			1,820
Vesting of restricted shares												79,497	1					—			1
Cumulative effect of adopting a new accounting standard (Note 1)															73			(47		)	26
Net loss												—	—		—			(17,220		)	(17,220		)
Balance at July 2, 2017												26,835,137	$	268	$	165,097		$	83,437		$	248,802

FIESTA RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

~~NINE~~SIX MONTHS ENDED ~~OCTOBER~~JULY 2, ~~2016~~2017 AND ~~SEPTEMBER 27, 2015~~JULY 3, 2016

(In thousands of dollars)

(Unaudited)


							Six Months Ended
	Nine Months Ended						July 2, 2017			July 3, 2016
	October 2, 2016			September 27, 2015
Cash flows from operating activities:
Net income	$	14,280		$	29,695
Net income (loss)							$	(17,220	)	$	18,811
Adjustments to reconcile net income to net cash provided from operating activities:
Loss (gain) on disposals of property and equipment	178			(236		)
Loss on disposals of property and equipment							931			25
Stock-based compensation	2,634			3,203			1,820			2,269
Impairment and other lease charges	18,607			481			43,176			94
Depreciation and amortization	26,474			21,844			17,782			16,961
Amortization of deferred financing costs	232			232			154			154
Amortization of deferred gains from sale-leaseback transactions	(2,687		)	(2,713		)	(1,803		)	(1,791		)
Deferred income taxes	(6,761		)	2,226			(14,646		)	—
Changes in other operating assets and liabilities	13,400			4,236			5,232			7,046
Net cash provided from operating activities	66,357			58,968			35,426			43,569
Cash flows from investing activities:
Capital expenditures:
New restaurant development	(52,828		)	(55,057		)	(18,796		)	(35,760		)
Restaurant remodeling	(956		)	(2,723		)	(961		)	(486		)
Other restaurant capital expenditures	(4,625		)	(5,197		)	(3,587		)	(1,995		)
Corporate and restaurant information systems	(4,634		)	(3,242		)	(2,809		)	(3,997		)
Total capital expenditures	(63,043		)	(66,219		)	(26,153		)	(42,238		)
Properties purchased for sale-leaseback	(2,663		)	—			—			(2,663		)
Proceeds from disposals of other properties							—			226
Proceeds from sale-leaseback transactions	3,642			—			—			3,642
Proceeds from disposals of other properties	226			149
Net cash used in investing activities	(61,838		)	(66,070		)	(26,153		)	(41,033		)
Cash flows from financing activities:
Excess tax benefit from vesting of restricted shares	211			1,527			—			120
Borrowings on revolving credit facility	14,400			23,500			5,000			9,400
Repayments on revolving credit facility	(19,500		)	(22,000		)	(14,000		)	(12,500		)
Principal payments on capital leases	(49		)	(40		)	(43		)	(28		)
Net cash (used in) provided by financing activities	(4,938		)	2,987
Net decrease in cash	(419		)	(4,115		)
Net cash used in financing activities							(9,043		)	(3,008		)
Net increase (decrease) in cash							230			(472		)
Cash, beginning of period	5,281			5,087			4,196			5,281
Cash, end of period	$	4,862		$	972		$	4,426		$	4,809
Supplemental disclosures:
Interest paid on long-term debt	$	1,393		$	1,263		$	1,149		$	921
Interest paid on lease financing obligations	$	106		$	105		$	71		$	71
Accruals for capital expenditures	$	9,591		$	5,325		$	5,872		$	6,093
Income tax payments, net	$	9,540		$	13,101		$	2,486		$	5,275

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars, except share and per share amounts)

1. Basis of Presentation

Business Description. Fiesta Restaurant Group, Inc. ("Fiesta Restaurant Group" or "Fiesta") owns, operates and franchises two fast-casual restaurant brands through its wholly-owned subsidiaries Pollo Operations, Inc. and its subsidiaries, Pollo Franchise, Inc. (collectively “Pollo Tropical”) and Taco Cabana, Inc. and its subsidiaries (collectively “Taco Cabana”). Unless the context otherwise requires, Fiesta and its subsidiaries, Pollo Tropical and Taco Cabana, are collectively referred to as the “Company”. At ~~October~~July 2, ~~2016,~~2017, the Company owned and operated ~~181~~153 Pollo Tropical^® restaurants and ~~164~~169 Taco Cabana^® restaurants. The Pollo Tropical restaurants ~~include 124~~included 134 located in Florida, 36six located in Texas 17and 13 located in ~~Georgia and four located in Tennessee.~~Georgia. The Taco Cabana restaurants ~~include 163~~included 168 located in Texas and one located in Oklahoma. At ~~October~~July 2, ~~2016,~~2017, the Company franchised a total of 3432 Pollo Tropical restaurants and seven Taco Cabana restaurants. The franchised Pollo Tropical restaurants ~~include~~included 17 in Puerto Rico, one in the Bahamas, ~~three~~two in ~~Trinidad & Tobago,~~Guyana, one in Venezuela, four in Panama, ~~two~~one in ~~Guatemala,~~Honduras, and six on college campuses and at a hospital in Florida. The franchised Taco Cabana restaurants ~~include~~included five in New Mexico and two on college campuses in Texas.

Basis of Consolidation. The unaudited condensed consolidated financial statements presented herein reflect the consolidated financial position, results of operations and cash flows of Fiesta and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended January ~~3, 2016~~1, 2017 contained 5352 weeks. The three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015~~July 3, 2016 each contained thirteen and ~~thirty-nine~~twenty six weeks, respectively. The fiscal year ending ~~January 1,~~December 31, 2017 will contain 52 weeks.

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015~~July 3, 2016 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015~~July 3, 2016 are not necessarily indicative of the results to be expected for the full year.

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended January ~~3, 2016~~1, 2017 included in the Company's Annual Report on Form 10-K for the fiscal year ended January ~~3, 2016.~~1, 2017. The January ~~3, 2016~~1, 2017 balance sheet data is derived from those audited financial statements.

Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect our own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:


•	Current Assets and Liabilities. The carrying values reported on the balance sheet of cash, accounts receivable and accounts payable approximate fair value because of the short maturity of those financial instruments.

•

Revolving Credit Borrowings. The fair value of outstanding revolving credit borrowings under the Company's senior credit facility, which is considered Level 2, is based on current LIBOR rates. ~~At October 2, 2016 and January 3, 2016, the~~The fair value and carrying value of the Company's senior credit facility were approximately ~~$65.9~~$60.9 million at July 2, 2017 and ~~$71.0~~$69.9 million ~~respectively.~~at January 1, 2017.

Long-Lived Assets. The Company assesses the recoverability of property and equipment and definite-lived intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. Impairment is reviewed when events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. See Note 3.

Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements. Estimates also affect the reported amounts of expenses

~~Table of Contents~~

~~FIESTA RESTAURANT GROUP, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(In thousands of dollars, except share and per share amounts)~~

during the reporting periods. Significant items subject to such estimates and assumptions include: accrued occupancy costs, insurance liabilities, evaluation for impairment of goodwill and long-lived assets and lease accounting matters. Actual results could differ from those estimates.

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands of dollars, except share and per share amounts)

Guidance Adopted in 2017. In March 2016, the Financial Accounting Standards Board issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), to simplify various aspects of the accounting and presentation of share-based payments, including the income tax effects of awards and forfeiture assumptions. In the first quarter of 2017, the Company prospectively adopted the amendments in this guidance that relate to the classification of excess tax benefits or tax benefit deficiencies from share-based payment arrangements in the statement of cash flows and income statement. Excess tax benefits from share-based payment arrangements result from share-based compensation windfall deductions in excess of compensation costs for financial reporting purposes and tax benefit deficiencies result from share-based compensation deduction shortfalls. During the six months ended July 2, 2017, the Company recognized $0.2 million of tax benefit deficiencies, which pursuant to the adopted guidance increased income tax expense and decreased net income by $0.2 million. Effective January 2, 2017, the Company elected to change its accounting policy to recognize forfeitures as they occur. The new forfeiture policy election was adopted using a modified retrospective approach with a $0.1 million cumulative-effect adjustment to beginning retained earnings in the first quarter of 2017 as a result of adopting the standard.

2. Prepaid Expenses and Other ~~Liabilities~~Current Assets

~~Other liabilities,~~Prepaid expenses and other current assets, consist of the following:

October 2, 2016 January 3, 2016
Accrued workers' compensation and general liability claims $ 6,717
$ 5,540
Sales and property taxes 2,531
3,031
Accrued occupancy costs 934
980
Other 2,067
2,545
$ 12,249
$ 12,096



	July 2, 2017		January 1, 2017
Prepaid contract expenses	$	2,984	$	2,089
Assets held for sale⁽¹⁾	2,705		—
Other	3,754		2,142
	$	9,443	$	4,231

~~Other liabilities, long-term, consist of the following:~~

October 2, 2016 January 3, 2016
Accrued occupancy costs $ 17,602
$ 15,349
Deferred compensation 1,797
1,665
Accrued workers' compensation and general liability claims 1,910
697
Other 4,426
3,286
$ 25,735
$ 20,997

⁽¹⁾

~~Accrued occupancy costs include obligations pertaining to closed restaurant locations and accruals to expense operating lease rental payments on a straight-line basis over the lease term.~~

The following table presents the activity in the closed-store reserve, of which $1.0 million and $1.1 million are included in long-term accrued occupancy costs at October 2, 2016 and January 3, 2016, respectively, with the remainder in other current liabilities.

Nine Months Ended October 2, 2016 Year Ended January 3, 2016
Balance, beginning of period $ 1,832
$ 1,251
Provisions for restaurant closures —
554
Additional lease charges, net of (recoveries) —
258
Payments, net (411 ) (358 )
Other adjustments 122
127
Balance, end of period $ 1,543
$ 1,832

See Note 3.

3. Impairment of Long-Lived Assets and Other Lease Charges

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

A summary of impairment on long-lived assets and other lease charges recorded by segment is as follows:



	Three Months Ended				Six Months Ended
	July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
Pollo Tropical	$	10,536	$	—	$	42,607	$	—
Taco Cabana	226		82		569		94
	$	10,762	$	82	$	43,176	$	94

On April 24, 2017, the Company announced a Strategic Renewal Plan (the "Plan") to drive long-term shareholder value creation that included the closure of 30 Company-owned Pollo Tropical restaurants outside its core Florida markets. The Company closed all Pollo Tropical locations in Dallas-Fort Worth and Austin, Texas, and Nashville, Tennessee during the second quarter of

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands of dollars, except share and per share amounts)

~~A summary~~2017. The Company continues to own and operate 19 Pollo Tropical restaurants located outside of Florida, including 13 in Atlanta and six in south Texas. Up to two Pollo Tropical restaurants that closed in April 2017 in Texas may be rebranded as Taco Cabana restaurants.

In the first quarter of 2017, the Company recognized impairment ~~on long-lived assets and~~charges of $32.0 million with respect to the 30 closed restaurants, seven of which were impaired in 2016, as well as an additional impairment charge related to previously closed restaurants primarily as a result of the decision not to convert a location to a Taco Cabana restaurant. In the first quarter of 2017, the Company also recognized impairment charges of $0.3 million with respect to three Taco Cabana restaurants that it continues to operate.

In the second quarter of 2017, the Company recognized other lease charges, ~~recorded by segment is~~net of recoveries, of $6.7 million, primarily related to Pollo Tropical restaurants that were closed during the quarter. In addition, the Company recognized impairment charges of $3.8 million related to three closed Pollo Tropical restaurants as ~~follows:~~

Three Months Ended Nine Months Ended
October 2, 2016 September 27, 2015 October 2, 2016 September 27, 2015
Pollo Tropical $ 18,390
$ 387
$ 18,390
$ 387
Taco Cabana 123
—
217
94
$ 18,513
$ 387
$ 18,607
$ 481

Ina result of the decision not to convert the locations to Taco Cabana restaurants and $0.2 million with respect to four Taco Cabana restaurants that it subsequently closed in the third quarter of 2016, as part of a review of its strategic plan to enhance long-term shareholder value, the Company reviewed its restaurant portfolio and subsequently closed ten Pollo Tropical restaurants in the fourth quarter of 2016 including eight restaurants in Texas, one restaurant in Nashville, Tennessee, and one restaurant in Atlanta, Georgia. The Company plans to convert up to three of the closed restaurants in Texas to Taco Cabana restaurants. 2017.

Impairment and other lease charges for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016 primarily consisted~~2017 for Pollo Tropical consist of impairment charges of ~~$18.5~~$3.8 million ~~related to the closed restaurants~~ and ~~six additional Pollo Tropical restaurants~~$35.7 million, respectively, and ~~one Taco Cabana restaurant that the Company continues to operate.~~other lease charges, net of recoveries, of $6.7 million and $6.9 million, respectively. Impairment and other lease charges for the ~~nine~~three and six months ended ~~October~~July 2, ~~2016 also included other lease~~2017 for Taco Cabana consist of impairment charges of ~~$0.1~~$0.2 million ~~related to previously closed Pollo Tropical~~ and ~~Taco Cabana restaurants. The Company will recognize lease and other charges related to the closed restaurants in the fourth quarter of 2016.~~$0.6 million, respectively.

The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions, the Company’s history of using these assets in the operation of its business ~~the Company's plans to use this equipment in new restaurants that are scheduled to open in 2017 and 2018,~~ and the Company's expectation of how a market participant would value the ~~equipment.~~assets. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The Level 3 assets measured at fair value associated with impairment charges recorded during the ~~three and nine~~six months ended ~~October~~July 2, ~~2016~~2017 totaled ~~$8.6 million.~~

~~Impairment and other lease charges for the three and nine months ended September 27, 2015, consisted~~$9.5 million, which primarily consist of ~~a $0.3 million lease charge~~leasehold improvements related to the closure of a Pollo Tropical restaurant that was relocated to a superior site in the same trade area prior to the end of its lease term and lease charges, net of recoveries, totaling $0.1 million related to previously closed Pollo Tropical restaurants that may be rebranded as Taco Cabana restaurants and ~~for~~ the ~~nine months ended September 27, 2015 also included impairment charges totaling $0.1 million related to the suspension~~estimated fair value of owned properties.

The Company owns two of the Company's Cabana Grill concept. The Cabana Grill concept was an elevated, non-24-hour format for Taco Cabana that the Company tested outside of Texas. One of the Cabana Grill restaurants was converted to a Pollo Tropical ~~restaurant, and~~restaurants that were closed in the second ~~was closed.~~quarter of 2017. The carrying value of these restaurants, which are classified as held for sale, totaled $2.7 million at July 2, 2017. The Company is actively marketing these properties for sale.

4. Other Liabilities

Other liabilities, current, consist of the following:



	July 2, 2017		January 1, 2017
Accrued workers' compensation and general liability claims	$	6,539	$	4,838
Sales and property taxes	2,062		1,844
Accrued occupancy costs	6,891		2,161
Other	5,287		2,473
	$	20,779	$	11,316

Other liabilities, long-term, consist of the following:



	July 2, 2017		January 1, 2017
Accrued occupancy costs	$	22,676	$	20,172
Deferred compensation	1,121		2,027
Accrued workers’ compensation and general liability claims	4,029		4,030
Other	4,256		4,140
	$	32,082	$	30,369

Accrued occupancy costs include obligations pertaining to closed restaurant locations and accruals to expense operating lease rental payments on a straight-line basis over the lease term.

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands of dollars, except share and per share amounts)

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



	Six Months Ended July 2, 2017			Year Ended January 1, 2017
Balance, beginning of period	$	4,912		$	1,832
Provisions for restaurant closures	7,423			3,093
Additional lease charges, net of (recoveries)	(698		)	(237		)
Payments, net	(1,928		)	(806		)
Other adjustments	4,371			1,030
Balance, end of period	$	14,080		$	4,912

5. Stock-Based Compensation

During the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015,~~July 3, 2016, the Company granted certain employees ~~50,087~~182,522 and ~~24,401~~50,087 non-vested restricted shares, respectively, under the Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan (the "Fiesta Plan"). These shares generally vest and become non-forfeitable over a four year vesting period. The weighted average fair value at grant date for these non-vested shares issued ~~to employees~~ during the ~~nine~~six months ended ~~October~~July 2, 2017 and July 3, 2016 was $20.75 and ~~September 27, 2015 was~~ $35.25, ~~and $61.57,~~ respectively.

During the ~~nine~~six months ended ~~October~~July 2, 2017, the Company granted new non-employee directors 8,927 non-vested restricted shares, under the Fiesta Plan. These shares vest and become non-forfeitable over a five year vesting period. The weighted average fair value at grant date for these non-vested shares was $22.41.

During the three and six months ended July 2, 2017 and July 3, 2016, the Company granted non-employee directors 29,669 and ~~September 27, 2015,~~14,081 non-vested restricted shares, respectively, under the Fiesta Plan. The weighted average fair value at the grant date for restricted non-vested shares issued to directors during the three and six months ended July 2, 2017 and July 3, 2016 was $20.90 and $33.39. These shares vest and become non-forfeitable over a one year vesting period.

During the six months ended July 2, 2017 and July 3, 2016, the Company granted certain employees ~~5,762~~11,745 and ~~10,007~~5,762 restricted stock units, respectively, under the Fiesta Plan. The restricted stock units granted during the ~~nine~~six months ended ~~October~~July 2, 2017 and July 3, 2016 vest and become non-forfeitable at the end of a four year vesting period. The restricted stock units granted during the nine months ended September 27, 2015 vest and become non-forfeitable over a four year vesting period or, for certain units, at the end of a four year vesting period. The weighted average fair value at grant date for these restricted stock units issued to employees during the ~~nine~~six months ended ~~October~~July 2, 2017 and July 3, 2016 was $20.75 and ~~September 27, 2015 was~~ $35.25, ~~and $62.05,~~ respectively.

Also during the ~~nine~~three and six months ended ~~October~~July 2, ~~2016~~2017, the Company granted 92,171 restricted stock units under the Fiesta Plan to certain employees subject to continued service requirements and ~~September 27, 2015,~~market performance conditions:

The Company granted its Chief Executive Officer 72,290 restricted stock units, which vest and become non-forfeitable in four tranches over a four year vesting period subject to continued service and attainment of specified share prices of the Company's Common Stock during 20 consecutive trading days at any point during each year. Each tranche vests by the end of a one year period if the specified target stock price condition for that year is met. If the specified target stock price condition for any tranche is not met for the year, the cumulative unearned units will be rolled over to subsequent tranches on a pro rata basis. The number of shares into which these restricted stock units convert ranges from no shares, if the service and market performance conditions are not met, to 72,290 shares, if the service and market performance conditions are met in the fourth year. The weighted average fair value at grant date for these restricted stock units was $12.90.

The Company granted certain executives 19,881 restricted stock units, which vest and become non-forfeitable in March 2020 subject to market performance conditions. The weighted average fair value at grant date for these restricted stock units was $6.20.

During the six months ended July 3, 2016, the Company granted 33,691 ~~and 17,501~~ non-vested restricted shares ~~respectively,~~ and 33,691 ~~and 17,501~~ restricted stock units, respectively, under the Fiesta Plan to certain employees subject to performance conditions. The non-vested restricted shares vest and become non-forfeitable over a four year vesting period subject to the attainment of financial performance conditions. The restricted stock units vest and become non-forfeitable at the end of a three year vesting period. The number of shares into which the restricted stock units convert is based on the attainment of certain performance conditions and for the restricted stock units granted during the nine months ended October 2, 2016 and September 27, 2015, ranges from no shares, if the minimum performance condition is not met, to 67,382 and 35,002 shares, respectively, if the maximum performance condition is met. The weighted average fair value at grant date for both restricted non-

911

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands of dollars, except share and per share amounts)

~~vested~~which the restricted stock units convert is based on the attainment of certain financial performance conditions and for the restricted stock units granted during the six months ended July 3, 2016, ranges from no shares, if the minimum financial performance condition is not met, to 67,382 shares, if the maximum performance condition is met. The weighted average fair value at grant date for both restricted non-vested shares and restricted stock units subject to financial performance conditions granted during the ~~nine~~six months ended ~~October 2,~~July 3, 2016 ~~and September 27, 2015~~ was ~~$35.25 and $65.01, respectively.~~

During the nine months ended October 2, 2016 and September 27, 2015, the Company granted 14,081 and 8,698 non-vested restricted shares, respectively, to non-employee directors. The weighted average fair value at the grant date for restricted non-vested shares issued to directors during the nine months ended October 2, 2016 and September 27, 2015, was $33.39 and $54.06, respectively. These shares vest and become non-forfeitable over a one-year vesting period.$35.25.

Stock-based compensation expense for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 was ~~$0.4~~$1.2 million and ~~$2.6~~$1.8 million, respectively, and for the three and ~~nine~~six months ended ~~September 27, 2015~~July 3, 2016 was ~~$1.2~~$1.3 million and ~~$3.2~~$2.3 million, respectively. At ~~October~~July 2, ~~2016,~~2017, the total unrecognized stock-based compensation expense related to non-vested restricted shares and restricted stock units was approximately ~~$4.5~~$7.0 million. At ~~October~~July 2, ~~2016,~~2017, the remaining weighted average vesting period for non-vested restricted shares was ~~1.9~~3.0 years and ~~2.0 years for~~ restricted stock ~~units.~~

During the three and nine months ended October 2, 2016, a portion of the awards previously granted to the Company's Chief Executive Officer were modified and vested in connection with his retirement. The modification reduced stock compensation expense by $0.1 million.units was 2.1 years.

A summary of all non-vested restricted shares and restricted stock units activity for the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 is as follows:


	Non-Vested Shares				Restricted Stock Units				Non-Vested Shares				Restricted Stock Units
			Weighted				Weighted		Shares		Weighted Average Grant Date Price		Units		Weighted Average Grant Date Price
			Average				Average
			Grant Date				Grant Date
	Shares		Price		Units		Price
Outstanding at January 3, 2016	257,618		$	30.69	42,840		$	56.46
Outstanding at January 1, 2017									129,352		$	37.94	51,445		$	46.59
Granted	97,859		34.98		39,453		35.25		221,118		20.84		103,916		12.51
Vested/Released	(173,888	)	24.07		(522	)	51.23		(78,325	)	30.54		(1,172	)	51.54
Forfeited	(30,990	)	40.77		(24,751	)	45.73		(17,800	)	32.85		(5,556	)	37.43
Outstanding at October 2, 2016	150,599		$	38.16	57,020		$	46.48
Outstanding at July 2, 2017									254,345		$	25.71	148,633		$	23.06

The fair value of the restricted stock units subject to market performance conditions was estimated using the Monte Carlo simulation method. The fair value of the non-vested restricted shares and all other restricted stock units is based on the closing price on the date of grant.

6. Business Segment Information

The Company is engaged in the fast-casual restaurant industry, with two restaurant concepts (each of which is an operating segment): Pollo Tropical and Taco Cabana. Pollo Tropical restaurants offer a wide variety of freshly prepared ~~Caribbean-inspired~~tropical inspired food while our Taco Cabana restaurants offer a broad selection of ~~hand-made,~~ freshly prepared ~~and authentic~~ Mexican inspired food.

Each segment's accounting policies are the same as those ~~discussed~~described in the summary of significant accounting policies in Note 1 to the Company's audited financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended January ~~3, 2016. The Company reports more than one measure of segment profit or loss~~1, 2017. Prior to the ~~chief operating decision maker for~~second quarter of 2017, the ~~purposes of allocating resources to the segments and assessing their performance. The~~ primary measures of segment profit or loss used to assess performance and allocate resources ~~are~~were income (loss) before taxes and an Adjusted EBITDA measure, which iswas defined as earnings attributable to the applicable operating segment before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other income and expense. ~~Although~~

In 2017, the Company’s Board of Directors appointed a new Chief Executive Officer who initiated the Plan and uses an Adjusted EBITDA measure for the purpose of assessing performance and allocating resources to segments. The new Adjusted EBITDA measure used by the chief operating decision maker ~~uses Adjusted EBITDA as a measure~~includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of ~~segment profitability,~~the Company’s restaurants. Beginning in ~~accordance with Accounting Standards Codification 280, Segment Reporting,~~ the ~~following table includes segment income (loss) before taxes, which is~~second quarter of 2017, the primary measure of segment profit or loss ~~determined in accordance with~~used by the ~~measurement principles~~chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is now defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, stock-compensation expense, other expense (income), net, and certain significant items for each segment that management believes are ~~most consistent with~~related to strategic changes and/or are not related to the ~~principles used in measuring~~ongoing operation of the ~~corresponding amounts~~Company's restaurants as set forth in the ~~consolidated financial statements.~~reconciliation table below. The Company has included the presentation of Adjusted EBITDA for all periods presented.

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands of dollars, except share and per share amounts)

The “Other” column includes corporate-related items not allocated to reportable segments and consists primarily of corporate-owned property and equipment, miscellaneous prepaid costs, capitalized costs associated with the issuance of indebtedness, corporate cash accounts, a current income tax receivable, and advisory fees related to a previously proposed and terminated separation transaction.



Three Months Ended	Pollo Tropical		Taco Cabana		Other		Consolidated
July 2, 2017:
Restaurant sales	$	94,374	$	77,631	$	—	$	172,005
Franchise revenue	427		192		—		619
Cost of sales	28,956		21,772		—		50,728
Restaurant wages and related expenses	21,691		24,578		—		46,269
Restaurant rent expense	4,472		4,443		—		8,915
Other restaurant operating expenses	12,930		11,706		—		24,636
Advertising expense	2,011		2,281		—		4,292
General and administrative expense	10,782		8,358		—		19,140
Adjusted EBITDA	17,139		6,982		—		24,121
Depreciation and amortization	5,435		3,161		—		8,596
Capital expenditures	8,243		5,320		916		14,479
July 3, 2016:
Restaurant sales	$	101,879	$	78,956	$	—	$	180,835
Franchise revenue	508		189		—		697
Cost of sales	32,266		22,341		—		54,607
Restaurant wages and related expenses	23,980		23,001		—		46,981
Restaurant rent expense	4,825		4,288		—		9,113
Other restaurant operating expenses	13,701		10,562		—		24,263
Advertising expense	3,685		3,321		—		7,006
General and administrative expense	8,843		5,363		47		14,253
Adjusted EBITDA	14,588		10,528		—		25,116
Depreciation and amortization	5,428		3,197		—		8,625
Capital expenditures	20,468		3,633		1,346		25,447

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands of dollars, except share and per share amounts)



Six Months Ended	Pollo Tropical		Taco Cabana		Other		Consolidated
July 2, 2017:
Restaurant sales	$	193,684	$	153,298	$	—	$	346,982
Franchise revenue	876		373		—		1,249
Cost of sales	58,903		42,773		—		101,676
Restaurant wages and related expenses	45,737		48,664		—		94,401
Restaurant rent expense	9,847		8,930		—		18,777
Other restaurant operating expenses	26,319		22,385		—		48,704
Advertising expense	6,336		5,495		—		11,831
General and administrative expense	19,676		15,472		—		35,148
Adjusted EBITDA	31,861		13,476		—		45,337
Depreciation and amortization	11,518		6,264		—		17,782
Capital expenditures	16,906		8,016		1,231		26,153
July 3, 2016:
Restaurant sales	$	200,785	$	155,989	$	—	$	356,774
Franchise revenue	1,085		350		—		1,435
Cost of sales	63,870		44,787		—		108,657
Restaurant wages and related expenses	46,876		45,157		—		92,033
Restaurant rent expense	9,469		8,565		—		18,034
Other restaurant operating expenses	26,293		20,358		—		46,651
Advertising expense	7,447		6,554		—		14,001
General and administrative expense	16,528		10,825		748		28,101
Adjusted EBITDA	30,050		20,768		—		50,818
Depreciation and amortization	10,706		6,255		—		16,961
Capital expenditures	34,567		5,267		2,404		42,238
Identifiable Assets:
July 2, 2017	$	247,312	$	164,384	$	14,547	$	426,243
January 1, 2017	263,868		165,195		12,502		441,565

Three Months Ended Pollo Tropical Taco Cabana Other Consolidated
October 2, 2016:
Restaurant sales $ 103,353
$ 78,239
$ —
$ 181,592
Franchise revenue 474
190
—
664
Cost of sales 32,565
22,161
—
54,726
Restaurant wages and related expenses ⁽¹⁾
24,383
23,120
—
47,503
Restaurant rent expense 5,059
4,429
—
9,488
Other restaurant operating expenses 14,361
11,354
—
25,715
Advertising expense 5,026
2,480
—
7,506
General and administrative expense ⁽²⁾
9,091
5,355
74
14,520
Depreciation and amortization 6,337
3,176
—
9,513
Pre-opening costs 1,456
53
—
1,509
Impairment and other lease charges 18,390
123
—
18,513
Interest expense 229
313
—
542
Income (loss) before taxes (13,070 ) 5,865
(74 ) (7,279 )
Capital expenditures 18,146
2,791
(132 ) 20,805
September 27, 2015:
Restaurant sales $ 91,440
$ 80,029
$ —
$ 171,469
Franchise revenue 468
168
—
636
Cost of sales 31,054
24,355
—
55,409
Restaurant wages and related expenses ⁽¹⁾
20,984
23,199
—
44,183
Restaurant rent expense 4,158
4,238
—
8,396
Other restaurant operating expenses 11,741
10,770
—
22,511
Advertising expense 2,448
2,383
—
4,831
General and administrative expense ⁽²⁾
8,419
5,840
—
14,259
Depreciation and amortization 4,504
3,092
—
7,596
Pre-opening costs 1,597
92
—
1,689
Impairment and other lease charges 387
—
—
387
Interest expense 204
289
—
493
Income before taxes 6,567
5,949
—
12,516
Capital expenditures 22,960
3,847
(488 ) 26,319

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands of dollars, except share and per share amounts)

A reconciliation of consolidated net income (loss) to Adjusted EBITDA follows:

Nine Months Ended Pollo Tropical Taco Cabana Other Consolidated
October 2, 2016:
Restaurant sales $ 304,138
$ 234,228
$ —
$ 538,366
Franchise revenue 1,559
540
—
2,099
Cost of sales 96,435
66,948
—
163,383
Restaurant wages and related expenses ⁽¹⁾
71,259
68,277
—
139,536
Restaurant rent expense 14,528
12,994
—
27,522
Other restaurant operating expenses 40,654
31,712
—
72,366
Advertising expense 12,473
9,034
—
21,507
General and administrative expense⁽²⁾
25,619
16,180
822
42,621
Depreciation and amortization 17,043
9,431
—
26,474
Pre-opening costs 4,365
342
—
4,707
Impairment and other lease charges 18,390
217
—
18,607
Interest expense 708
927
—
1,635
Income (loss) before taxes 4,235
18,932
(822 ) 22,345
Capital expenditures 52,713
8,058
2,272
63,043
September 27, 2015:
Restaurant sales $ 267,898
$ 237,897
$ —
$ 505,795
Franchise revenue 1,626
459
—
2,085
Cost of sales 89,687
71,068
—
160,755
Restaurant wages and related expenses ⁽¹⁾
58,989
68,167
—
127,156
Restaurant rent expense 11,627
12,824
—
24,451
Other restaurant operating expenses 32,723
31,009
—
63,732
Advertising expense 6,710
8,819
—
15,529
General and administrative expense⁽²⁾
23,867
17,780
—
41,647
Depreciation and amortization 12,583
9,261
—
21,844
Pre-opening costs 3,611
240
—
3,851
Impairment and other lease charges 387
94
—
481
Interest expense 565
780
—
1,345
Income before taxes 29,065
18,703
—
47,768
Capital expenditures 55,104
9,505
1,610
66,219
Identifiable Assets:
October 2, 2016: 260,296
162,729
16,462
439,487
January 3, 2016 237,065
165,549
13,031
415,645



Three Months Ended	Pollo Tropical			Taco Cabana			Other			Consolidated
July 2, 2017:
Net income (loss)										$	(2,160	)
Provision for (benefit from) income taxes										(772		)
Income (loss) before taxes	$	(3,502	)	$	570		$	—		$	(2,932	)
Add:
Non-general and administrative expense adjustments:
Depreciation and amortization	5,435			3,161			—			8,596
Impairment and other lease charges	10,536			226			—			10,762
Interest expense	295			359			—			654
Other expense (income), net	744			(90		)	—			654
Stock-based compensation credit in restaurant wages	(45		)	(29		)	—			(74		)
Unused pre-production costs in advertising expense	—			88			—			88
Total Non-general and administrative expense adjustments	16,965			3,715			—			20,680
General and administrative expense adjustments:
Stock-based compensation expense	640			608			—			1,248
Terminated capital project	7			6			—			13
Board and shareholder matter costs	1,767			1,332			—			3,099
Write-off of site development costs	109			35			—			144
Plan restructuring costs and retention bonuses	1,153			716			—			1,869
Total General and administrative expense adjustments	3,676			2,697			—			6,373
Adjusted EBITDA:	$	17,139		$	6,982		$	—		$	24,121

July 3, 2016:
Net income (loss)										$	8,916
Provision for (benefit from) income taxes										5,125
Income (loss) before taxes	$	7,636		$	6,452		$	(47	)	$	14,041
Add:
Non-general and administrative expense adjustments:
Depreciation and amortization	5,428			3,197			—			8,625
Impairment and other lease charges	—			82			—			82
Interest expense	228			307			—			535
Other expense (income), net	—			10			—			10
Stock-based compensation expense in restaurant wages	21			19			—			40
Total Non-general and administrative expense adjustments	5,677			3,615			—			9,292
General and administrative expense adjustments:
Stock-based compensation expense	680			538			—			1,218
Board and shareholder matter costs	—			—			47			47
Write-off of site development costs	190			14			—			204
Office restructuring and relocation costs	346			—			—			346
Legal settlements and related costs	59			(91		)	—			(32		)
Total General and administrative expense adjustments	1,275			461			47			1,783
Adjusted EBITDA:	$	14,588		$	10,528		$	—		$	25,116

~~(1) Includes stock-based compensation expense~~

Table of ~~$35~~Contents

FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands of dollars, except share and ~~$111 for the three and nine months ended October 2, 2016, respectively, and $40 and $147 for the three and nine months ended September 27, 2015, respectively.~~per share amounts)

(2) Includes stock-based compensation expense of $330 and $2,523 for the three and nine months ended October 2, 2016, respectively, and $1,127 and $3,056 for the three and nine months ended September 27, 2015, respectively.



Six Months Ended	Pollo Tropical			Taco Cabana			Other			Consolidated
July 2, 2017:
Net income (loss)										$	(17,220	)
Provision for (benefit from) income taxes										(9,414		)
Income (loss) before taxes	$	(28,598	)	$	1,964		$	—		$	(26,634	)
Add:
Non-general and administrative expense adjustments:
Depreciation and amortization	11,518			6,264			—			17,782
Impairment and other lease charges	42,607			569			—			43,176
Interest expense	544			694			—			1,238
Other expense (income), net	888			(90		)	—			798
Stock-based compensation expense in restaurant wages	—			35			—			35
Unused pre-production costs in advertising expense	322			88			—			410
Total Non-general and administrative expense adjustments	55,879			7,560			—			63,439
General and administrative expense adjustments:
Stock-based compensation expense	955			830			—			1,785
Terminated capital project	484			365			—			849
Board and shareholder matter costs	2,225			1,678			—			3,903
Write-off of site development costs	162			292			—			454
Plan restructuring costs and retention bonuses	1,227			787			—			2,014
Legal settlements and related costs	(473		)	—			—			(473		)
Total General and administrative expense adjustments	4,580			3,952			—			8,532
Adjusted EBITDA:	$	31,861		$	13,476		$	—		$	45,337

July 3, 2016:
Net income (loss)										$	18,811
Provision for (benefit from) income taxes										10,813
Income (loss) before taxes	$	17,305		$	13,067		$	(748	)	$	29,624
Add:
Non-general and administrative expense adjustments:
Depreciation and amortization	10,706			6,255			—			16,961
Impairment and other lease charges	—			94			—			94
Interest expense	479			614			—			1,093
Other expense (income), net	(12		)	(226		)	—			(238		)
Stock-based compensation expense in restaurant wages	38			38			—			76
Total Non-general and administrative expense adjustments	11,211			6,775			—			17,986
General and administrative expense adjustments:
Stock-based compensation expense	1,225			968			—			2,193
Board and shareholder matter costs	—			—			748			748
Write-off of site development costs	247			49			—			296
Office restructuring and relocation costs	346			—			—			346
Legal settlements and related costs	(284		)	(91		)	—			(375		)
Total General and administrative expense adjustments	1,534			926			748			3,208
Adjusted EBITDA:	$	30,050		$	20,768		$	—		$	50,818

Table of Contents

FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands of dollars, except share and per share amounts)

7. Net Income (Loss) per Share

The Company computes basic net income (loss) per share by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during each period. Our non-vested restricted shares contain a non-forfeitable right to receive dividends on a one-to-one per share ratio to common shares and are thus considered participating securities. The impact of the participating securities is included in the computation of basic net income per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings attributable to common shares and participating securities according to dividends declared (whether paid or unpaid) and participation rights in ~~undistribute~~

~~Table of Contents~~

~~FIESTA RESTAURANT GROUP, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(In thousands of dollars, except share and per share amounts)~~

dundistributed earnings. Net income per common share is computed by dividing undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and non-vested restricted shares based on the weighted average shares outstanding during the period.

Diluted earnings per share reflects the potential dilution that could occur if our restricted stock units were to be converted into common shares. Restricted stock units with performance conditions are only included in the diluted earnings per share calculation to the extent that performance conditions have been met at the measurement date. We compute diluted earnings per share by adjusting the basic weighted average number of common shares by the dilutive effect of the restricted stock units, determined using the treasury stock method.

For the three and six months ended ~~October~~July 2, ~~2016,~~2017, all restricted stock units outstanding were excluded from the computation of diluted earnings per share because to do so would have been antidilutive as a result of the net loss in the ~~third quarter of 2016.~~three and six months ended July 2, 2017. Weighted average outstanding restricted stock units totaling ~~11,489~~13,990 and ~~3,214~~10,698 shares for the ~~nine~~three and six months ended ~~October 2,~~July 3, 2016, ~~and September 27, 2015,~~ respectively, were not included in the computation of diluted earnings per share because to do so would have been antidilutive.

The computation of basic and diluted net income (loss) per share is as follows:


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015			July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016
Basic and diluted net income per share:
Basic and diluted net income (loss) per share:
Net income (loss)	$	(4,531	)	$	7,945		$	14,280		$	29,695		$	(2,160	)	$	8,916		$	(17,220	)	$	18,811
Less: income allocated to participating securities	—			(81		)	(138		)	(359		)	—			(89		)	—			(183		)
Net income (loss) available to common stockholders	$	(4,531	)	$	7,864		$	14,142		$	29,336
Net income (loss) available to common shareholders													$	(2,160	)	$	8,827		$	(17,220	)	$	18,628
Weighted average common shares, basic	26,716,219			26,557,940			26,658,739			26,494,599			26,815,015			26,654,280			26,794,560			26,629,999
Restricted stock units	—			7,635			6,352			7,352			—			5,989			—			6,146
Weighted average common shares, diluted	26,716,219			26,565,575			26,665,091			26,501,951			26,815,015			26,660,269			26,794,560			26,636,145

Basic net income (loss) per common share	$	(0.17	)	$	0.30		$	0.53		$	1.11
Diluted net income (loss) per common share	$	(0.17	)	$	0.30		$	0.53		$	1.11
Basic net income (loss) per share													$	(0.08	)	$	0.33		$	(0.64	)	$	0.70
Diluted net income (loss) per share													$	(0.08	)	$	0.33		$	(0.64	)	$	0.70

8. Commitments and Contingencies

Lease Assignments. Taco Cabana has assigned three leases to various parties on properties where it no longer operates restaurants with lease terms expiring on various dates through 2029. The assignees are responsible for making the payments required by the leases. The Company is a guarantor under one of the leases, and it remains secondarily liable as a surety with respect to two of the leases. The maximum potential liability for future rental payments that the Company could be required to make under these leases at ~~October~~July 2, ~~2016~~2017 was ~~$1.7~~$1.5 million. The Company could also be obligated to pay property taxes and other lease related costs. The obligations under these leases will generally continue to decrease over time as the operating leases expire. The Company does not believe it is probable that it will be ultimately responsible for the obligations under these leases.

Legal Matters. The Company is a party to legal proceedings incidental to the conduct of business, including the matter described below. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters

Table of Contents

FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands of dollars, except share and per share amounts)

that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.

On November 24, 2015, Pollo Tropical received a legal demand letter alleging that assistant managers were misclassified as exempt from overtime wages under the Fair Labor Standards Act. On September 30, 2016, prior to any suit being filed, Pollo Tropical reached a settlement with seven named individuals and a proposed collective action class that will allow current and former assistant managers to receive notice and opt-in to the settlement. Pollo Tropical denies any liability or unlawful conduct. The Company has recorded a charge of $0.8 million to cover the estimated costs related to the settlement, including estimated payments to individuals that opt-in to the settlement, premium payments to named individuals, attorneys’ fees for the individuals' counsel, and related settlement administration costs. The charge does not include legal fees incurred by Pollo Tropical in defending

~~Table of Contents~~

~~FIESTA RESTAURANT GROUP, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(In thousands of dollars, except share and per share amounts)~~

the action. The settlement, which is subject to approval by an arbitrator and a judicial body, will result in dismissal with prejudice for the named individuals and all individuals that opt-in to the settlement.

On September 29, 2014, Daisy, Inc., an automotive repair shop in Cape Coral, Florida, filed a putative class action suit against Pollo Tropical in the United States District Court for the Middle District of Florida. The suit alleged that Pollo Tropical engaged in unlawful activity in violation of the Telephone Consumer Protection Act, § 227 et seq. occurring in December 2010 and January 2011. During the first quarter of 2016, Pollo Tropical reached a settlement with the plaintiff that resulted in dismissal of the case and paid all settlement claims.

The Company is also a party to various other litigation matters incidental to the conduct of business. The Company does not believe that the outcome of any of these matters will have a material effect on its consolidated financial statements.

9. Recent Accounting Pronouncements

In May 2014, and in subsequent updates, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the guidance in former Topic 605, Revenue Recognition, and provides for either a full retrospective adoption in which the standard is applied to all of the periods presented or a modified retrospective adoption in which the cumulative effect of initially applying the standard is recognized at the date of initial application. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope of other US GAAP requirements. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as property and equipment, including real estate. The Company is currently evaluating the impact of the provisions of Topic 606; however, the Company does not believe the standard will impact its recognition of revenue from company-owned restaurants or its recognition of franchise royalty revenues, which are based on a percent of gross sales. The Company expects the provisions to primarily impact ~~certain~~ franchise ~~revenues~~and development fees as well as gift card programs and does not expect the standard to have a material effect on its financial statements. The Company does not plan to early adopt the standard and plans to use the modified retrospective approach to adopt the standard. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2017.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessee recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required with an option to use certain practical expedients. The new guidance is required to be applied at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact on its financial statements. Although the impact is not currently estimable, the Company expects to recognize lease assets and lease liabilities for most of the leases it currently accounts for as operating leases. In addition, for the Company's leases that are classified as sale-leaseback transactions, the Company will be required to record an initial adjustment to retained earnings associated with the previously deferred gains, and for any future transactions, the gain, adjusted for any off-market terms, will be recorded immediately. Currently the Company amortizes sale-leaseback gains over the lease term. The Company is continuing its assessment, which may identify other impacts.

In March 2016, the FASB issued ASU No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products (Topic 405-20), which creates an exception under Topic 405-20 to derecognize financial liabilities related to certain prepaid stored-value products using a breakage model consistent with the revenue breakage model in Topic 606. The new guidance will be effective concurrent with Topic 606, which is effective for the Company for interim and annual periods beginning after December 15, 2017. The Company does not expect this standard to have a material effect on its financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), to simplify various aspects of the accounting and presentation of share-based payments, including the income tax effects of awards and forfeiture assumptions. Currently, tax deductions in excess of compensation costs (excess tax benefits) are recorded in equity and tax deduction shortfalls (tax deficiencies), to the extent of previous excess tax benefits, are recorded in equity and then to income tax expense. Under the new guidance, all excess tax benefits and tax deficiencies will be recorded to income tax expense in the income statement, which could create volatility in the Company's income statement. The new guidance will also change the classification of excess tax benefits in the cash flow statement and impact the diluted earnings per share calculation. The guidance will be effective for interim and annual periods beginning after December 15, 2016, and early adoption is permitted. Different components of the guidance require prospective, retrospective and/or modified retrospective adoption. The Company is currently evaluating the impact on its financial statements and it is not currently estimable.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments, to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance will be effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted and a retrospective approach is required. The Company is currently evaluating the impact, if any, on its financial statements.

ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of ~~Financial Condition~~financial condition and ~~Results~~results of ~~Operations~~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 unaudited condensed consolidated financial statements and the accompanying financial statement notes. Any reference to restaurants refers to company-owned restaurants unless otherwise indicated. Throughout this MD&A, we refer to Fiesta Restaurant Group, Inc., together with its consolidated subsidiaries, as "we," "our" and "us."

We use a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended January ~~3, 2016~~1, 2017 contained 5352 weeks. The three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015~~July 3, 2016 each contained thirteen and ~~thirty-nine~~twenty six weeks, respectively. The fiscal year ending ~~January 1,~~December 31, 2017 will contain 52 weeks.

Company Overview

We own, operate and franchise two fast-casual restaurant brands, Pollo Tropical^® and Taco Cabana^®, which have almost 30 years and 40 years, respectively, of operating history and loyal customer bases in their core markets. Our Pollo Tropical restaurants offer a wide variety of freshly prepared ~~Caribbean-inspired~~tropical inspired food, while our Taco Cabana restaurants offer a broad selection of ~~hand-made,~~ freshly prepared ~~and authentic~~ Mexican inspired food. We believe that both brands are differentiated from other restaurant concepts and offer a unique dining experience. We are positioned within the value-oriented fast-casual restaurant segment, which combines the convenience and value of quick-service restaurants with the variety, food quality, décor and atmosphere more typical of casual dining restaurants. Our open display kitchen format allows guests to view and experience our food being freshly-prepared and cooked to order. Additionally, nearly all of our restaurants offer the convenience of drive-thru windows. As of ~~October~~July 2, ~~2016,~~2017, our company-owned restaurants included ~~181~~153 Pollo Tropical restaurants and ~~164~~169 Taco Cabana restaurants.

We franchise our Pollo Tropical restaurants primarily internationally and as of ~~October~~July 2, ~~2016,~~2017, we had 2826 franchised Pollo Tropical restaurants located in Puerto Rico, ~~Trinidad & Tobago,~~ the Bahamas, Venezuela, Panama, Honduras and ~~Guatemala,~~Guyana, and six licensed locations on college campuses and at a hospital in Florida. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets.

As of ~~October~~July 2, ~~2016,~~2017, we had five franchised Taco Cabana restaurants located in New Mexico and two non-traditional Taco Cabana licensed locations on college campuses in Texas.

Recent Events Affecting our Results of Operations

~~We have decided~~On April 24, 2017, we announced a Strategic Renewal Plan (the "Plan") to ~~suspend additional development~~drive long-term shareholder value creation.

Strategic Renewal Plan

The Plan consists of the following: 1) revitalizing restaurant performance in core markets; 2) managing capital and financial discipline; and 3) establishing platforms for long term growth.

As part of the Plan, we intend to relaunch the Pollo Tropical brand in October and the Taco Cabana brand shortly thereafter once the material aspects of the Plan are in place, including new and impactful creative advertising campaigns.

The items detailed below reflect our meaningful progress to date.

Revitalizing Restaurant Brands in Core Markets

The leadership team has met with the founders of Pollo Tropical ~~restaurants in Texas~~ and Taco Cabana to ~~review our strategy for development in~~identify the ~~state while~~principles that made each brand iconic; we continue to ~~build~~work with Chef Connie who created the original Taco Cabana recipes.

With the assistance of a culinary and food sourcing expert, we have reviewed all ingredients and recipes and have begun rolling out improvements to menu offerings through the use of high quality, natural ingredients. Almost 90% of each brand ~~awareness, affinity~~menu will be positively impacted by these improvements.

We are leveraging our scale and ~~off premise consumption through several initiatives. Based on a restaurant portfolio examination as part~~purchasing power to vertically integrate our chicken supply chain. We will ultimately control the feed and breed of ~~our strategic review process to enhance long-term shareholder value, we closed ten~~chickens purchased which will further differentiate Pollo Tropical in the competitive landscape.

New labor models are being tested at both brands. The intention is to optimize the guest experience by ensuring that restaurants are adequately staffed and that managers are intensely focused on the guest experience. We believe these new labor models should increase speed of service and transaction flow and improve the quality and consistency of hospitality.

Brand and guest research has been conducted and is being utilized to refine our operating and marketing initiatives.

Pollo Tropical has retained a new advertising agency and new creative advertising campaigns are being developed at both brands based on refined positioning, marketing and digital strategies.

We have developed a priority list of deferred maintenance needs that will be addressed this year and in 2018. We are also enhancing signage and adding exterior lighting to improve visibility.

We continue to reinforce strict adherence to cleanliness and food safety standards including engaging an outside firm to conduct food and safety audits at every restaurant four times per year.

New incentive based compensation plans have been rolled out to the Operations teams.

Regional chefs are being added to the field structure to ensure adherence to high quality operating and food safety standards.

Social media and guest feedback systems and processes are being revamped.

Music selection and systems are improved.

Managing Capital and Financial Discipline

We previously announced reductions in general and administrative expenses which will lower annualized costs by approximately $7.5 million. We continue to explore opportunities to operate more efficiently and to mitigate the investments being made to positively impact the guest experience.

A pricing elasticity analysis is underway to assist us in applying potential price increases in the fourth quarter ~~of 2016 including eight restaurants in Texas, one restaurant in Nashville, Tennessee and one restaurant in Atlanta, Georgia. We plan~~ to ~~convert up to three of the closed restaurants in Texas to Taco Cabana restaurants.~~

~~In addition to impairment charges associated~~mitigate restaurant-level investments that coincide with the ~~closed restaurants, we also recognized impairment charges with respect to six additional~~relaunch of both brands.

Nine Pollo Tropical restaurants and one Taco Cabana restaurant ~~that~~are being remodeled this year; three Pollo Tropical restaurants are nearing completion.

We closed 30 Company-owned Pollo Tropical locations in Texas, Tennessee and Georgia in April, as previously reported, and closed four Company-owned Taco Cabana locations in Texas in early July.

We have launched an improved preventative maintenance program to improve the longevity of our restaurant base.

Establishing Platforms for Growth

Restaurant prototypes for both brands are being redesigned to optimize signature brand touch points and the guest experience, and deliver attractive investment returns.

We are making progress establishing new digital capabilities including rolling out video menu boards this year and developing delivery, catering, online ordering and loyalty platforms for implementation in 2018.

We are currently testing outsourcing a call center to answer guest inquiries and take catering orders.

We are reformulating the positioning strategy for Pollo Tropical outside of core markets beginning with our six locations in southern Texas and 13 locations in Atlanta, Georgia.

Store Closures

We closed 30 Pollo Tropical restaurants in April 2017, including all Pollo Tropical locations in Dallas-Fort Worth and Austin, Texas, and Nashville, Tennessee, three Pollo Tropical locations in Georgia and eight Pollo Tropical locations in southern Texas. However, we continue to ~~operate.~~ own and operate 19 Pollo Tropical restaurants located outside of Florida, including 13 in Atlanta and six in south Texas in which we believe we can develop successful regional strategies for future Pollo Tropical expansion beyond Florida. Up to two Pollo Tropical restaurants that closed in April 2017 in Texas may be rebranded as Taco Cabana restaurants.

We closed four underperforming Taco Cabana restaurants in July 2017.

Impairment and other lease charges for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016 were $18.5 million. We will recognize lease~~2017 for Pollo Tropical consist of impairment charges of $3.8 million and $35.7 million, respectively, and other lease charges ~~related to the closed restaurants, which we anticipate will be between $2~~of $6.7 million and $4$6.9 million, inrespectively, net of recoveries. Impairment and other lease charges for the ~~fourth quarter~~three and six months ended July 2, 2017 for Taco Cabana consist of ~~2016 when the restaurants were closed.~~ impairment charges of $0.2 million and $0.6 million, respectively.

The 30 closed Pollo Tropical restaurants contributed approximately ~~$4.8~~$7.8 million in restaurant sales and $5.0 million in restaurant-level operating losses to income from operations, including $1.4 million of depreciation expense for the ~~nine~~six months ended ~~October~~July 2, ~~2016.~~2017.

~~Additionally, taking~~

Industry Conditions

The fast-casual restaurant industry experienced a continued general slowdown in 2016 that continued into ~~account~~ the ~~current~~second quarter of 2017, specifically in Florida and Texas. We believe the challenging market and industry conditions ~~we reevaluated~~in Florida and Texas and, in the ~~previously announced separation~~case of ~~Taco Cabana discussed~~Pollo Tropical, sales cannibalization from new restaurants on existing restaurants contributed to a decline in ~~our Annual Report on Form 10-K for~~comparable restaurant transactions and sales in the ~~fiscal year ended January 3, 2016~~first and ~~decided not to move forward with the separation transaction, concluding that continued brand ownership is in our shareholders’ best interest.~~second quarters of 2017.

Executive Summary - Consolidated Operating Performance for the Three Months Ended ~~October~~July 2, ~~2016~~2017

Our ~~third~~second quarter ~~2016~~2017 results and highlights include the following:

Net income (loss) decreased ~~$12.5~~$11.1 million to ~~$(4.5)~~$(2.2) million in the ~~third~~second quarter of ~~2016,~~2017, or ~~$(0.17)~~$(0.08) per diluted share, compared to net income of ~~$7.9~~$8.9 million, or ~~$0.30~~$0.33 per diluted share in the ~~third~~second quarter of ~~2015,~~2016, due primarily ~~due~~ to impairment and other lease charges, ~~related to sixteen Pollo Tropical locations, new restaurant performance,~~ lower comparable restaurant sales and higher ~~operating expenses.~~

general and administrative costs, partially offset by lower advertising expenses due to reduced broadcast media spend while we implemented initiatives related to the Plan.

Total revenues ~~increased 5.9%~~decreased 4.9% in the ~~third~~second quarter of 2017 to $172.6 million compared to $181.5 million in the second quarter of 2016, ~~to $182.3 million compared to $172.1 million in the third quarter of 2015,~~ driven primarily ~~by an increase in the number of company-owned restaurants, partially offset~~ by a decrease in comparable restaurant sales. Comparable restaurant sales decreased ~~4.1%~~4.7% for our Taco Cabana restaurants resulting primarily from a decrease in comparable ~~guest traffic~~restaurant transactions of ~~3.5%~~4.5% and a decrease in average check of ~~0.6%~~0.2%. Comparable restaurant sales decreased ~~1.0%~~7.7% for our Pollo Tropical restaurants resulting primarily from a decrease in comparable ~~guest traffic~~restaurant transactions of ~~2.5%~~10.0% partially offset by an increase in average check of ~~1.5%~~2.3%.

During the ~~third~~second quarter of 2017, we opened three company-owned Pollo Tropical restaurants and two Taco Cabana restaurants. We closed 30 company-owned Pollo Tropical restaurants during the second quarter of 2017. During the second quarter of 2016, we opened ~~nine company-owned Pollo Tropical restaurants. During the third quarter of 2015, we opened 14~~eleven company-owned Pollo Tropical restaurants and ~~one~~two Taco Cabana ~~restaurant and permanently closed one company-owned Pollo Tropical restaurant and one company-owned Taco Cabana restaurant.~~restaurants.

Consolidated Adjusted EBITDA decreased ~~$0.3~~$1.0 million in the ~~third~~second quarter of 2017 to $24.1 million compared to $25.1 million in the second quarter of 2016, ~~to $21.7 million compared to $22.0 million in the third quarter of 2015. Revenue growth in the third quarter of 2016 was offset~~driven primarily by ~~lower profitability as a result of new restaurant performance,~~ lower comparable restaurant ~~sales, higher operating expenses and the write-off of site costs related to locations that we decided not to develop.~~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".

Results of Operations

The following table summarizes the changes in the number and mix of Pollo Tropical and Taco Cabana company-owned and franchised restaurants.


	Pollo Tropical						Taco Cabana						Pollo Tropical						Taco Cabana
	Owned		Franchised		Total		Owned		Franchised		Total		Owned		Franchised		Total		Owned	Franchised	Total

January 1, 2017													177		35		212		166	7	173
New													3		2		5		1	—	1
Closed													—		(3	)	(3	)	—	—	—
April 2, 2017													180		34		214		167	7	174
New													3		1		4		2	—	2
Closed													(30	)	(3	)	(33	)	—	—	—
July 2, 2017													153		32		185		169	7	176

January 3, 2016	155		35		190		162		6		168		155		35		190		162	6	168
New	6		1		7		—		—		—		6		1		7		—	—	—
Closed	—				—		—		—		—		—		—		—		—	—	—
April 3, 2016	161		36		197		162		6		168		161		36		197		162	6	168
New	11		2		13		2		1		3		11		2		13		2	1	3
Closed	—		(1	)	(1	)	—		—		—		—		(1	)	(1	)	—	—	—
July 3, 2016	172		37		209		164		7		171		172		37		209		164	7	171
New	9		—		9		—		—		—
Closed	—		(3	)	(3	)	—		—		—
October 2, 2016	181		34		215		164		7		171

December 28, 2014	124		37		161		167		7		174
New	6		—		6		—		—		—
Closed	—		—		—		(3	)	—		(3	)
March 29, 2015	130		37		167		164		7		171
New	6		—		6		1		—		1
Closed	—		(2	)	(2	)	(2	)	(1	)	(3	)
June 28, 2015	136		35		171		163		6		169
New	14		—		14		1		—		1
Closed	(1	)	—		(1	)	(1	)	—		(1	)
September 27, 2015	149		35		184		163		6		169

Three Months Ended ~~October~~July 2, ~~2016~~2017 Compared to Three Months Ended ~~September 27, 2015~~July 3, 2016

The following table sets forth, for the three months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015,~~July 3, 2016, selected consolidated operating results as a percentage of consolidated restaurant sales and ~~selected~~select segment operating results as a percentage of applicable segment restaurant sales.


	Three Months Ended												Three Months Ended
	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015		July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
	Pollo Tropical				Taco Cabana				Consolidated				Pollo Tropical				Taco Cabana				Consolidated
Restaurant sales:
Pollo Tropical									56.9	%	53.3	%									54.9	%	56.3	%
Taco Cabana									43.1	%	46.7	%									45.1	%	43.7	%
Consolidated restaurant sales									100.0	%	100.0	%									100.0	%	100.0	%
Costs and expenses:
Cost of sales	31.5	%	34.0	%	28.3	%	30.4	%	30.1	%	32.3	%	30.7	%	31.7	%	28.0	%	28.3	%	29.5	%	30.2	%
Restaurant wages and related expenses	23.6	%	22.9	%	29.6	%	29.0	%	26.2	%	25.8	%	23.0	%	23.5	%	31.7	%	29.1	%	26.9	%	26.0	%
Restaurant rent expense	4.9	%	4.5	%	5.7	%	5.3	%	5.2	%	4.9	%	4.7	%	4.7	%	5.7	%	5.4	%	5.2	%	5.0	%
Other restaurant operating expenses	13.9	%	12.8	%	14.5	%	13.5	%	14.2	%	13.1	%	13.7	%	13.4	%	15.1	%	13.4	%	14.3	%	13.4	%
Advertising expense	4.9	%	2.7	%	3.2	%	3.0	%	4.1	%	2.8	%	2.1	%	3.6	%	2.9	%	4.2	%	2.5	%	3.9	%
Pre-opening costs	1.4	%	1.7	%	0.1	%	0.1	%	0.8	%	1.0	%	0.5	%	1.8	%	0.6	%	0.3	%	0.5	%	1.1	%

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

Total revenues ~~increased 5.9%~~decreased 4.9% to ~~$182.3~~$172.6 million in the ~~third~~second quarter of ~~2016~~2017 from ~~$172.1~~$181.5 million in the ~~third~~second quarter of ~~2015.~~2016. Restaurant sales ~~increased 5.9%~~decreased 4.9% to ~~$181.6~~$172.0 million in the ~~third~~second quarter of ~~2016~~2017 from ~~$171.5~~$180.8 million in the ~~third~~second quarter of ~~2015.~~2016.

The following table presents the primary drivers of the increase or decrease in restaurant sales for both Pollo Tropical and Taco Cabana for the ~~third~~second quarter of 2017 compared to the second quarter of 2016 ~~compared to the third quarter of 2015~~ (in millions).


Pollo Tropical:
Decrease in comparable restaurant sales	$	(0.8	)	$	(6.8	)
Incremental sales related to new restaurants, net of closed restaurants	12.7
Total increase	$	11.9
Decrease in sales related to closed restaurants, net of new restaurants				(0.7		)
Total decrease				$	(7.5	)

Taco Cabana:
Decrease in comparable restaurant sales	$	(3.2	)	$	(3.6	)
Incremental sales related to new restaurants, net of closed restaurants	1.4			2.3
Total decrease	$	(1.8	)	$	(1.3	)

Comparable restaurant sales for Pollo Tropical restaurants decreased ~~1.0%~~7.7% in the ~~third~~second quarter of ~~2016.~~2017. Comparable restaurant sales for Taco Cabana restaurants decreased ~~4.1%~~4.7% in the ~~third~~second quarter of ~~2016.~~2017. Restaurants are included in comparable restaurant sales after they have been open for 18 months. Increases or decreases in comparable restaurant sales result primarily from an increase or decrease in ~~guest traffic~~comparable restaurant transactions and in average check. The increase in average check is ~~primarily~~generally driven by menu price increases. For Pollo Tropical, a decrease in ~~guest traffic~~comparable restaurant transactions of ~~2.5%~~10.0% was partially offset by menu price increases that drove an increase in restaurant sales of ~~1.9%~~2.1% in the ~~third~~second quarter of ~~2016~~2017 as compared to the ~~third~~second quarter of ~~2015.~~2016. For Taco Cabana, ~~a decrease in guest traffic of 3.5% was~~comparable restaurant transactions decreased 4.5% and average check decreased 0.2% driven by unfavorable sales mix partially offset by menu price increases that ~~drove an increase in~~positively impacted restaurant sales ~~of 1.3%~~by 2.0% in the ~~third~~second quarter of ~~2016~~2017 as compared to the ~~third~~second quarter of ~~2015.~~2016. As a result of new restaurant openings, ~~expected~~ sales cannibalization of existing restaurants negatively impacted comparable restaurant sales for Pollo Tropical by ~~1.0%~~0.6% in the ~~third~~second quarter of ~~2016.~~2017. Comparable restaurant sales for both brands continue to be negatively impacted by the general fast-casual industrywide slowdown in restaurant ~~sales.~~sales in Florida and Texas. In addition, second quarter 2017 comparable restaurant sales for both brands were negatively impacted by our planned material reduction in advertising, including media and promotions, while we implemented initiatives related to the Plan.

~~Restaurants~~According to data reported by TDn2K’s Black Box Intelligence, in ~~newer markets that have not reached media efficiency generally have lower sales than restaurants~~the second quarter of 2017 comparable restaurant transactions in ~~mature, media-efficient markets. As a result,~~the fast casual segment declined 580 bps and 600 bps in Florida and Texas, respectively. Based on such data, Pollo Tropical ~~revenues are growing at a slower rate~~comparable restaurant transactions in Florida were approximately 370 basis points lower than fast casual restaurant peers and Taco Cabana comparable restaurant transactions in Texas were 150 basis points higher than fast casual restaurant peers.

Restaurant sales for Pollo Tropical for the ~~average number~~second quarter of ~~restaurants.~~2017 compared to the second quarter of 2016 were also negatively impacted by the restaurant closures that occurred in the fourth quarter of 2016 and the second quarter of 2017.

Franchise revenues remained relatively stable and ~~increased~~decreased by ~~less than~~ $0.1 million to $0.6 million in the second quarter of 2017 from $0.7 million in the ~~third~~second quarter of 2016 ~~from $0.6 million in the third quarter~~due to a net decrease of ~~2015.~~five franchised Pollo Tropical restaurants.

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 and beef, are generally purchased under contracts for future periods of up to one year.

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 minimum wage increases and increased 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, real estate taxes, sanitation, supplies and credit card fees.

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

Pre-opening costs include costs incurred prior to opening a restaurant, including restaurant employee wages and related expenses, travel expenditures, recruiting, training, promotional costs associated with the restaurant opening and rent, including any non-cash rent expense recognized during the construction period. Pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening.

The following tables present the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical and Taco Cabana for the ~~third~~second quarter of ~~2016~~2017 compared to the ~~third~~second quarter of ~~2015.~~2016. All percentages are stated as a percentage of applicable segment restaurant sales.



Pollo Tropical:
Cost of sales:
Menu price increases	(0.6	)%
Lower promotions and discounts	(0.3	)%
Lower commodity costs	(~~1.2~~0.2	)%
Other	0.1	%
Net decrease in cost of sales as a percentage of restaurant sales	(1.0	)%

Restaurant wages and related expenses:
Lower labor costs due to closure of restaurants	(0.6	)%
Lower incentive based compensation costs	(0.4	)%
Higher labor costs for comparable restaurants⁽¹⁾	0.3	%
Higher medical benefit costs	0.4	%
Other⁽¹⁾	(0.2	)%
Net decrease in restaurant wages and related costs as a percentage of restaurant sales	(0.5	)%

Other operating expenses:
Higher utility costs⁽¹⁾	0.3	%
Higher sanitation costs⁽¹⁾	0.2	%
Lower insurance costs	(0.5	)%
Other⁽¹⁾	0.3	%
Net increase in other restaurant operating expenses as a percentage of restaurant sales	0.3	%

Advertising expense:
Reduced advertising	(1.5	)%
Net decrease in advertising expense as a percentage of restaurant sales	(1.5	)%

Pre-opening costs:
Decrease in the number of restaurant openings	(1.3	)%
Net decrease in pre-opening costs as a percentage of restaurant sales	(1.3	)%

⁽¹⁾ Includes the impact of lower sales on fixed and semi-fixed costs.



Taco Cabana:
Cost of sales:
Menu price increases	(0.6	)%
Lower commodity costs	(0.3	)%
Sales mix	(0.8	)%
~~Menu price increases~~	~~(0.7~~	)%
~~Operating inefficiencies~~	~~0.4~~	%
Other	(0.2	)%
Net decrease in cost of sales as a percentage of restaurant sales	(~~2.5~~0.3	)%

Restaurant wages and related expenses:
Higher labor costs ~~and impact of lower sales volumes for comparable restaurants~~^{(1) (2)}	~~0.5~~2.7	%
Higher ~~labor~~medical benefit and payroll tax costs ~~and impact of lower sales volumes for new restaurants~~⁽¹⁾	~~0.9~~	%
~~Higher workers compensation costs~~	~~0.3~~0.4	%
Lower incentive bonus costs	(0.4	)%
~~Lower medical benefit costs~~	~~(0.7~~	)%
Other	~~0.1~~	%
~~Net increase in restaurant wages and related costs as a percentage of restaurant sales~~	~~0.7~~	%

~~Other operating expenses~~ ⁽¹⁾:
~~Higher repairs and maintenance costs~~	~~0.3~~	%
~~Higher credit card expenses~~	~~0.2~~	%
~~Higher real estate taxes generally related to new restaurants~~	~~0.4~~	%
~~Other~~	~~0.2~~	%
~~Net increase in other restaurant operating expenses as a percentage of restaurant sales~~	~~1.1~~	%

~~Advertising expense:~~
~~Increase in advertising~~	~~2.2~~	%
~~Net increase in advertising expense as a percentage of restaurant sales~~	~~2.2~~	%

~~Pre-opening costs:~~
~~Timing of restaurant openings~~	~~(0.3~~	)%
~~Net decrease in pre-opening costs as a percentage of restaurant sales~~	~~(0.3~~	)%

~~(1) Includes the impact of lower sales at newer restaurants.~~



~~Taco Cabana:~~
~~Cost of sales:~~
~~Lower commodity costs~~	~~(2.1~~	)%
~~Menu price increases~~	~~(0.4~~	)%
~~Lower operating inefficiencies~~	~~(0.2~~	)%
~~Higher promotions and discounts~~	~~0.5~~	%
~~Sales mix~~	~~0.4~~	%
~~Other~~	~~(0.3~~	)%
~~Net decrease in cost of sales as a percentage of restaurant sales~~	~~(2.1~~	)%

~~Restaurant wages and related expenses:~~
~~Impact of lower sales volumes and higher labor costs for comparable restaurants~~	~~1.5~~	%
~~Impact of closing lower sales volume restaurants, net of new restaurants~~	~~(0.1~~	)%
~~Lower workers compensation costs~~	~~(0.4~~	)%
~~Lower incentive bonus costs~~	~~(0.3~~	)%
~~Other~~	(0.1	)%
Net increase in restaurant wages and related costs as a percentage of restaurant sales	~~0.6~~2.6	%

Other operating expenses:
Higher repairs and maintenance costs⁽¹⁾	0.5	%
Higher operating supplies⁽¹⁾	0.3	%
Higher insurance costs⁽¹⁾	0.3	%
Higher real estate taxes⁽¹⁾	0.2	%
~~Higher insurance costs~~	~~0.4~~	%
Other⁽¹⁾	0.4	%
Net increase in other restaurant operating expenses as a percentage of restaurant sales	~~1.0~~1.7	%

Advertising expense:
~~Increase in~~Reduced advertising	~~0.2~~(1.3	)%
Net ~~increase~~decrease in advertising expense as a percentage of restaurant sales	~~0.2~~(1.3	)%

Pre-opening costs:
Timing of restaurant openings	0.3	%
Net ~~change~~increase in pre-opening costs as a percentage of restaurant sales	—0.3	%

⁽¹⁾Includes the impact of lower sales on fixed and semi-fixed costs.

⁽²⁾Includes the impact of higher wage rates and one-time initiatives related to the Plan.

Consolidated Restaurant Rent Expense. Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by amortization of gains on sale-leaseback transactions. Restaurant rent expense, as a percentage of total restaurant sales, increased to 5.2% in the ~~third~~second quarter of ~~2016~~2017 from ~~4.9%~~5.0% in the ~~third~~second quarter of ~~2015~~2016 primarily as a result of ~~new restaurants that generally have higher rent and lower sales, and~~ the impact of lower comparable restaurant ~~sales.~~sales, partially offset by the impact of the reversal of straight-line rent accruals for two closed restaurant leases that were terminated in the second quarter of 2017.

Consolidated 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 brands and the management oversight of the operation of our restaurants; and (2) legal, auditing and other professional fees and stock-based compensation expense.

General and administrative expenses were ~~$14.5~~$19.1 million in the ~~third~~second quarter of ~~2016~~2017 and $14.3 million in the ~~third~~second quarter of ~~2015,~~2016, and as a percentage of total revenues, general and administrative expenses ~~decreased~~increased to ~~8.0%~~11.1% in the ~~third~~second quarter of ~~2016~~2017 compared to ~~8.3%~~7.9% in the ~~third~~second quarter of ~~2015,~~2016, due primarily to higher ~~current year sales~~board and ~~lower incentive-based compensation costs. In addition, general~~shareholder matter costs and Plan restructuring costs and retention bonuses. General and administrative ~~expenses in the third~~expense for second quarter of ~~2016~~2017 included ~~a $0.8~~$3.1 million ~~charge for estimated~~of board and shareholder matter costs related to ~~a class action settlement plus legal fees~~shareholder activism and ~~other costs incurred in defending the action~~Chief Executive Officer and ~~a $0.6~~board member searches and $1.9 million ~~write-off of site development costs~~ related to ~~locations that we decided not to develop.~~Plan restructuring costs and retention bonuses. General and administrative expenses in the ~~third~~second quarter of ~~2015~~2016 included $0.4 million in severance and related costs associated with restructuring Pollo Tropical management in Miami, Florida and Dallas, Texas.

Adjusted EBITDA. In 2017, our Board of Directors appointed a ~~charge~~new Chief Executive Officer who initiated the Plan and uses an Adjusted EBITDA measure for ~~estimated costs~~the purpose of assessing performance and allocating resources to segments. The Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to ~~a class action settlement plus legal fees and other costs incurred in defending~~strategic changes and/or are not related to the ~~action totaling $0.9 million.~~ongoing operation of our restaurants.

~~Adjusted EBITDA.~~

Adjusted EBITDA, ~~which~~ is ~~one of~~ the ~~measures~~primary measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance and is defined as earnings attributable to the applicable segment before interest expense, income taxes, depreciation and amortization, impairment and other lease

charges, stock-based compensation expense, other expense (income), net and ~~other income and expense.~~ certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants.

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

Adjusted EBITDA for Pollo Tropical ~~was $12.1~~increased to $17.1 million in the ~~third~~second quarter of 2017 from $14.6 million in the second quarter of 2016 ~~and~~primarily due to the ~~third~~impact of closing underperforming restaurants in the second quarter of ~~2015~~2017, a decrease in advertising expense, pre-opening costs and cost of sales as a percentage of sales, partially offset by the impact of lower comparable restaurant sales. Adjusted EBITDA for Taco Cabana decreased to $7.0 million in the second quarter of 2017 from $10.5 million in the second quarter of 2016 primarily as a result of ~~an increase in revenues offset by lower profitability at new restaurants,~~ the impact of lower comparable restaurant sales, and higher restaurant wages, operating expenses and general and administrative costs, partially offset by a decrease in advertising expense and cost of sales as a percentage of sales. Consolidated Adjusted EBITDA decreased to $24.1 million in the ~~write-off~~second quarter of ~~site~~2017 from $25.1 million in the second quarter of 2016.

Restaurant-Level Adjusted EBITDA. We also use 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 Adjusted EBITDA excluding franchise royalty revenues and fees, pre-opening costs ~~related~~and general and administrative expenses (including corporate-level general and administrative expenses).

Restaurant-level Adjusted EBITDA for Pollo Tropical increased to ~~locations that we decided not~~$24.3 million in the second quarter of 2017 from $23.4 million in the second quarter of 2016 primarily due to ~~develop.~~the foregoing. Restaurant-level Adjusted EBITDA for Taco Cabana decreased to ~~$9.6~~$12.9 million in the ~~third~~second quarter of 2017 from $15.5 million in the second quarter of 2016 ~~from $9.9 million in the third quarter of 2015~~ primarily ~~due to the impact~~as a result of the ~~decrease in revenues. Consolidated~~foregoing. For a reconciliation from Adjusted EBITDA ~~decreased~~ to ~~$21.7 million in~~Restaurant-level Adjusted EBITDA, see the ~~third quarter~~heading entitled "Management's Use of ~~2016 from $22.0 million in the third quarter of 2015.~~Non-GAAP Financial Measures".

Depreciation and Amortization. Depreciation and amortization expense ~~increased to $9.5~~was $8.6 million in the ~~third~~second quarter of ~~2016 from $7.6 million in the third quarter of 2015 due primarily to increased depreciation related to new restaurant openings.~~2017 and 2016.

Impairment and Other Lease Charges. Impairment and Other Lease Charges increased to $10.8 million in the second quarter of 2017 from $0.1 million in the second quarter of 2016. As discussed under Recent Events Affecting our Results of Operations, on April 24, 2017, we ~~have reviewed our restaurant portfolio and subsequently closed ten~~announced the Plan to drive long-term shareholder value creation that included the closure of 30 Pollo Tropical restaurants inoutside our core Florida markets during the ~~fourth~~second quarter of ~~2016, three~~2017. We closed all our Company-owned Pollo Tropical locations in Dallas-Fort Worth and Austin, Texas, and Nashville, Tennessee. We continue to own and operate 19 Pollo Tropical restaurants located outside of ~~which~~Florida, including 13 in Atlanta, and six in south Texas. Up to two Pollo Tropical restaurants that closed in April 2017 in Texas may be ~~converted~~rebranded as Taco Cabana restaurants.

In the second quarter of 2017, we recognized other lease charges, net of recoveries, of $6.7 million, primarily related to Pollo Tropical restaurants that were closed during the quarter. In addition, we recognized additional impairment charges of $3.8 million related to three closed Pollo Tropical restaurants as a result of the decision not to convert the locations to Taco Cabana ~~restaurants. In~~restaurants and $0.2 million with respect to four Taco Cabana restaurants that we subsequently closed in the third quarter of 2016, we recognized an $18.5 million impairment charge related to the closed restaurants and six other Pollo Tropical restaurants and one Taco Cabana restaurant that we continue to operate. We will recognize related lease and other charges related to the closed restaurants, which we anticipate will be between $2 million and $4 million,2017. There is uncertainty in the ~~fourth quarter~~estimates of ~~2016.~~future lease costs and sublease recoveries. Actual costs and sublease recoveries could vary significantly from the estimated amounts and result in additional lease charges or recoveries, and such amounts could be material.

at the ~~specific~~restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values. 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 ~~management’s plans~~other operating cost assumptions. 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, which are subject to a high 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.

Many new restaurants in Pollo Tropical’s emerging markets have opened at lower sales volumes and have not yet achieved the sales volumes required to generate positive cash flows. Pollo Tropical's emerging markets have included Atlanta, Nashville and Texas. Subsequent to the ~~restaurants for which an impairment review was performed, we impaired 16~~restaurant closures discussed above, Pollo ~~Tropical restaurants~~Tropical’s emerging markets include Atlanta and ~~one Taco Cabana restaurant, as discussed above. In addition, for seven other Pollo Tropical restaurants and two Taco Cabana restaurants with~~south Texas. The combined carrying values of ~~$12.4~~the operating restaurants in Atlanta and south Texas are $20.6 million and ~~$1.6~~$12.2 million, respectively, as of July 2, 2017.

We have initiated operational and transactional growth plans and enhancements related to the ~~projected~~Plan to drive improved performance in the Atlanta and south Texas markets and will continue to evaluate their long-term viability. Our estimates of future cash flows ~~exceeded~~assume these plans will succeed and sales will reach levels required to generate cash flows that exceed the ~~restaurant's~~ carrying value byof the restaurants. Our cash flow projections include, among other things, significant sales growth as the result of the introduction of broadcast media, dedicated sales positions to build our catering business, increased frequency with a ~~small margin.~~high quality guest experience and the launch of our loyalty program, third party delivery and local store marketing. If these assumptions change in the future or 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. ~~Although we may review a restaurant for impairment before it has been open for twelve months, we generally review a restaurant for impairment after we have twelve months of cash flow and~~

Three operating ~~cost data. We have fourteen~~ Pollo Tropical restaurants open prior to 2016 in markets outside of Florida with a combined carrying value of $4.8 million had projected cash flows that exceed the restaurant's carrying value by a small margin. In addition, six operating Pollo Tropical restaurants that were opened in 2016 in markets outside of Florida with a combined carrying value of $10.7 million have ~~been open less~~initial sales volumes lower than ~~twelve~~expected, but do not have significant operating history to form a good basis for future projections. The nine restaurants contributed approximately $1.7 million in restaurant-level operating losses to income from operations, including $0.9 million in depreciation expense for the six months ~~and have~~ended July 2, 2017. In addition, two Taco Cabana restaurants with a combined carrying value of $2.0 million had projected cash flows that exceed the restaurant’s carrying value by a small margin. For these restaurants, if expected performance improvements described above are not ~~been reviewed for impairment. These restaurants will~~realized, an impairment charge may be ~~reviewed for impairment~~recognized in future periods, ~~when we have sufficient sales~~ and ~~cash flow history on which to base future projections.~~such charge could be material.

Other ~~Income.~~Expense (Income), Net. Other ~~income of $0.2~~expense (income), net was $0.7 million in the ~~third~~second quarter of ~~2015~~2017 and primarily consisted of costs related to the removal of signs and equipment for closed Pollo Tropical restaurants and severance for restaurant employees, partially offset by expected business interruption ~~insurance~~ proceeds ~~for~~related to a ~~Pollo Tropical location~~Taco Cabana restaurant that was temporarily closed due to a fire.

Interest Expense. Interest expense ~~was~~increased to $0.7 million in the second quarter of 2017 from $0.5 million in the ~~third~~second quarter of 2016 ~~and in the third quarter of 2015.~~primarily due to higher interest rates on borrowings under our revolving credit facility.

Provision for (Benefit from) Income Taxes. The effective tax rate was 26.3% and 36.5% for the second quarter of 2017 and 2016, respectively. The benefit from income taxes for the second quarter of 2017 was derived using an estimated annual effective tax rate of 37.3%, which excludes the discrete impact of a tax benefit deficiency from the vesting of restricted shares and the tax benefit resulting from impairment and other lease charges of $0.1 million and $3.9 million, respectively. The provision for income taxes for the second quarter of 2016 was derived using an estimated effective annual income tax rate ~~excluding~~of 36.5%. As discussed in Note 1, tax benefit deficiencies and excess tax benefits created upon the vesting of restricted shares are now recorded as a discrete ~~items, of 36.3% for~~item within the ~~third quarter of 2016 and 37.8% for the third quarter of 2015. The effective annual~~ income tax ~~rate decreased in the third quarter of 2016 compared~~provision. These amounts were previously recorded as an adjustment to ~~the third quarter of 2015 due primarily to the reinstatement of Work Opportunity Tax Credits.~~Additional paid-in capital.

Net ~~Income.~~Income (Loss). As a result of the foregoing, we had a net loss of ~~$(4.5)~~$2.2 million in the ~~third~~second quarter of ~~2016~~2017 compared to net income of ~~$7.9~~$8.9 million in the ~~third~~second quarter of ~~2015.~~2016.

~~Nine~~Six Months Ended ~~October~~July 2, ~~2016~~2017 Compared to ~~Nine~~Six Months Ended ~~September 27, 2015~~July 3, 2016

The following table sets forth, for the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015,~~July 3, 2016, selected consolidated operating results as a percentage of consolidated restaurant sales and ~~selected~~select segment operating results as a percentage of applicable segment restaurant sales:


	Nine Months Ended												Six Months Ended
	October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015		October 2, 2016		September 27, 2015		July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
	Pollo Tropical				Taco Cabana				Consolidated				Pollo Tropical				Taco Cabana				Consolidated
Restaurant sales:
Pollo Tropical									56.5	%	53.0	%									55.8	%	56.3	%
Taco Cabana									43.5	%	47.0	%									44.2	%	43.7	%
Consolidated restaurant sales									100.0	%	100.0	%									100.0	%	100.0	%
Costs and expenses:
Cost of sales	31.7	%	33.5	%	28.6	%	29.9	%	30.3	%	31.8	%	30.4	%	31.8	%	27.9	%	28.7	%	29.3	%	30.5	%
Restaurant wages and related expenses	23.4	%	22.0	%	29.1	%	28.7	%	25.9	%	25.1	%	23.6	%	23.3	%	31.7	%	28.9	%	27.2	%	25.8	%
Restaurant rent expense	4.8	%	4.3	%	5.5	%	5.4	%	5.1	%	4.8	%	5.1	%	4.7	%	5.8	%	5.5	%	5.4	%	5.1	%
Other restaurant operating expenses	13.4	%	12.2	%	13.5	%	13.0	%	13.4	%	12.6	%	13.6	%	13.1	%	14.6	%	13.1	%	14.0	%	13.1	%
Advertising expense	4.1	%	2.5	%	3.9	%	3.7	%	4.0	%	3.1	%	3.3	%	3.7	%	3.6	%	4.2	%	3.4	%	3.9	%
Pre-opening costs	1.4	%	1.3	%	0.1	%	0.1	%	0.9	%	0.8	%	0.4	%	1.4	%	0.4	%	0.2	%	0.4	%	0.9	%

Total revenues ~~increased 6.4%~~decreased 2.8% to ~~$540.5~~$348.2 million in the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 from ~~$507.9~~$358.2 million in the ~~nine~~six months ended ~~September 27, 2015.~~July 3, 2016. Restaurant sales ~~increased 6.4%~~decreased 2.7% to ~~$538.4~~$347.0 million in the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 from ~~$505.8~~$356.8 million in the ~~nine~~six months ended ~~September 27, 2015.~~July 3, 2016.

The following table presents the primary drivers of the increase or decrease in restaurant sales for both Pollo Tropical and Taco Cabana for the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 compared to the ~~nine~~six months ended ~~September 27, 2015~~July 3, 2016 (in millions):


Pollo Tropical:
Decrease in comparable restaurant sales	$	(2.0	)	$	(12.8	)
Incremental sales related to new restaurants, net of closed restaurants	38.2			5.7
Total increase	$	36.2
Total decrease				$	(7.1	)

Taco Cabana:
Decrease in comparable restaurant sales	$	(5.0	)	$	(7.0	)
Incremental sales related to new restaurants, net of closed restaurants	1.3			4.3
Total decrease	$	(3.7	)	$	(2.7	)

Comparable restaurant sales for Pollo Tropical restaurants decreased ~~0.8%~~7.2% in the ~~nine~~six months ended ~~October~~July 2, ~~2016.~~2017. Comparable restaurant sales for Taco Cabana restaurants decreased ~~2.1%~~4.6% in the ~~nine~~six months ended ~~October~~July 2, ~~2016.~~2017. For Pollo Tropical, a decrease in ~~guest traffic~~comparable restaurant transactions of 1.7% was partially offset by menu price increases that drove an increase in restaurant sales of 1.2% in the nine months ended October 2, 2016 as compared to the nine months ended September 27, 2015. For Taco Cabana, a decrease in guest traffic of 3.3%9.5% was partially offset by menu price increases that drove an increase in restaurant sales of 2.1% in the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 as compared to the ~~nine~~six months ended ~~September 27, 2015.~~July 3, 2016. For Taco Cabana, comparable restaurant transactions decreased 4.3% and average check decreased 0.3% driven by unfavorable sales mix partially offset by menu price increases that drove an increase in restaurant sales of 2.1% in the six months ended July 2, 2017 as compared to the six months ended July 3, 2016. As a result of new restaurant openings, ~~expected~~ sales cannibalization of existing restaurants negatively impacted comparable restaurant sales for Pollo Tropical by ~~1.6%~~0.7% in the ~~nine~~six months ended ~~October~~July 2, ~~2016.~~2017. Comparable restaurant sales for both brands continue to be negatively impacted by the general industrywide slowdown in restaurant sales. In addition, comparable restaurant sales for the six months ended July 2, 2017 for both brands were negatively impacted by our planned material reduction in advertising, including media and promotions, while we implemented initiatives related to the Plan.

~~Restaurants~~According to data reported by TDn2K’s Black Box Intelligence, for the first six months of 2017 comparable restaurant transactions in ~~newer markets that have not reached media efficiency generally have lower sales than restaurants~~the fast casual segment declined 620 bps in ~~mature, media-efficient markets. As a result,~~both Florida and Texas. Based on such data, Pollo Tropical ~~revenues are growing at a slower rate~~comparable restaurant transactions in Florida were approximately 250 basis points lower than ~~the average number of restaurants.~~fast casual restaurant peers and Taco Cabana comparable restaurant transactions in Texas were 190 basis points higher than fast casual restaurant peers.

Franchise revenues ~~were $2.1~~decreased to $1.2 million in the ~~nine~~six months ended ~~October~~July 2, ~~2016 and $2.1~~2017 from $1.4 million in ~~nine~~six months ended ~~September 27, 2015.~~

July 3, 2016 primarily due to the closure of six franchised Pollo Tropical restaurants in 2017.

The following tables present the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical and Taco Cabana for the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 compared to the ~~nine~~six months ended ~~September 27, 2015.~~July 3, 2016. All percentages are stated as a percentage of applicable segment restaurant sales.



Pollo Tropical:
Cost of sales:
~~Lower commodity costs~~Menu price increases	(~~1.1~~0.7	)%
~~Sales mix~~Lower commodity costs	(~~1.0~~0.3	)%
~~Menu price increases~~Lower promotions and discounts	(~~0.4~~0.2	)%
~~Operating inefficiencies~~Improved operating efficiency	~~0.6~~(0.2	%
~~Other~~	~~0.1~~	)%
Net decrease in cost of sales as a percentage of restaurant sales	(~~1.8~~1.4	)%

Restaurant wages and related expenses:
~~Higher labor costs and impact of lower sales volumes for comparable restaurants~~	~~0.5~~	%
Higher labor costs ~~and impact of lower sales volumes for new restaurants~~⁽¹⁾	~~0.9~~0.3	%
~~Higher workers compensation costs~~	~~0.2~~	%
~~Lower incentive bonus costs~~	~~(0.2~~	)%
Net increase in restaurant wages and related costs as a percentage of restaurant sales	~~1.4~~	%

~~Other operating expenses~~⁽²⁾:
~~Higher repairs and maintenance costs~~	~~0.5~~	%
~~Higher real estate taxes generally related to new restaurants~~	~~0.4~~	%
~~Other~~	0.3	%
~~Net increase in other restaurant operating expenses as a percentage of restaurant sales~~	~~1.2~~	%

~~Advertising expense:~~
~~Increase in advertising~~	~~1.6~~	%
~~Net increase in advertising expense as a percentage of restaurant sales~~	~~1.6~~	%

~~Pre-opening costs:~~
~~Timing of restaurant openings~~	~~0.1~~	%
~~Net increase in pre-opening costs as a percentage of restaurant sales~~	~~0.1~~	%

~~(1) Includes additional restaurant managers in training that will be deployed to new restaurants as they open.~~

~~(2) Includes the impact of lower sales at newer restaurants.~~



~~Taco Cabana:~~
~~Cost of sales:~~
~~Lower commodity costs~~	~~(1.1~~	)%
~~Menu price increases~~	~~(0.6~~	)%
~~Menu board changes~~	~~0.3~~	%
~~Operating inefficiencies~~	~~0.2~~	%
~~Other~~	~~(0.1~~	)%
~~Net decrease in cost of sales as a percentage of restaurant sales~~	~~(1.3~~	)%

~~Restaurant wages and related expenses:~~
~~Higher labor costs and impact of lower sales volumes for comparable restaurants~~	~~1.1~~	%
~~Impact of closing lower sales volume restaurants, net of new restaurants~~	~~(0.2~~	)%
~~Lower medical benefit costs~~	~~(0.3~~	)%
~~Other~~	~~(0.2~~	)%
~~Net increase in restaurant wages and related costs as a percentage of restaurant sales~~	~~0.4~~	%

Other operating expenses:
Higher ~~repairs and maintenance~~utility costs⁽¹⁾	0.3	%
~~Higher insurance costs~~	~~0.2~~	%
~~Lower utilities~~	~~(0.2~~	)%
Other⁽¹⁾	0.2	%
Net increase in other restaurant operating expenses as a percentage of restaurant sales	0.5	%

Advertising expense:
~~Increase in~~Reduced advertising	~~0.2~~(0.4	)%
Net ~~increase~~decrease in advertising expense as a percentage of restaurant sales	~~0.2~~(0.4	)%

Pre-opening costs:
Decrease in the number of restaurant openings	(1.0	)%
Net ~~change~~decrease in pre-opening costs as a percentage of restaurant sales	—(1.0	)%

⁽¹⁾Includes the impact of lower sales on fixed and semi-fixed costs.



Taco Cabana:
Cost of sales:
Lower commodity costs	(0.9	)%
Menu price increases	(0.6	)%
Higher promotions and discounts	0.4	%
Sales mix	0.3	%
Net decrease in cost of sales as a percentage of restaurant sales	(0.8	)%

Restaurant wages and related expenses:
Higher labor costs^{(1) (2)}	2.5	%
Higher medical benefit and payroll tax costs⁽¹⁾	0.3	%
Net increase in restaurant wages and related costs as a percentage of restaurant sales	2.8	%

Other operating expenses:
Higher repairs and maintenance costs⁽¹⁾	0.4	%
Higher real estate taxes⁽¹⁾	0.3	%
Higher operating supplies⁽¹⁾	0.2	%
Higher insurance costs⁽¹⁾	0.2	%
Other⁽¹⁾	0.4	%
Net increase in other restaurant operating expenses as a percentage of restaurant sales	1.5	%

Advertising expense:
Reduced advertising	(0.6	)%
Net decrease in advertising expense as a percentage of restaurant sales	(0.6	)%

Pre-opening costs:
Timing of restaurant openings	0.2	%
Net increase in pre-opening costs as a percentage of restaurant sales	0.2	%

⁽¹⁾Includes the impact of lower sales on fixed and semi-fixed costs.

⁽²⁾Includes the impact of higher wage rates and one-time initiatives related to the Plan.

Consolidated Restaurant Rent Expense. Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by amortization of gains on sale-leaseback transactions. Restaurant rent expense, as a percentage of total restaurant sales, increased to 5.4% in the six months ended July 2, 2017 from 5.1% in the ~~nine~~six months ended ~~October 2,~~July 3, 2016 ~~from 4.8% in the nine months ended September 27, 2015~~ primarily as a result of the impact of lower comparable restaurant sales and the impact of new restaurants that generally have higher rent and lower ~~sales, and the impact of lower comparable restaurant~~ sales.

Consolidated General and Administrative Expenses. General and administrative expenses were ~~$42.6~~$35.1 million in the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~$41.6~~$28.1 million in the ~~nine~~six months ended ~~September 27, 2015,~~July 3, 2016 and, as a percentage of total revenues, general and administrative expenses ~~decreased~~increased to ~~7.9%~~10.1% in the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 compared to ~~8.2%~~7.8% in the ~~nine~~six months ended ~~September 27, 2015~~July 3, 2016 due primarily to higher ~~current year sales~~board and ~~lower incentive-based compensation costs. In addition, general~~shareholder matter costs, Plan restructuring costs and retention bonuses and charges for terminated capital projects. General and administrative expense for the six months ended July 2, 2017 included $3.9 million of board and shareholder matter costs related to shareholder activism and Chief Executive Officer and board member searches, $2.0 million related to Plan restructuring costs and retention bonuses and $0.8 million in charges for terminated capital projects, partially offset by a benefit of $0.5 million related to litigation matters. General and administrative expenses infor the ~~nine~~six months ended ~~October 2,~~July 3, 2016 included ~~$0.5~~$0.7 million in ~~severance~~board and ~~relocation~~shareholder matter costs ~~associated with transitioning our Pollo Tropical headquarters from Miami, Florida to Dallas, Texas, $0.8 million in advisory fees~~ related to the previously proposed and terminated separation transaction ~~discussed under Recent Events Affecting our Results of Operations, a $0.9~~and $0.4 million ~~charge for estimated~~in severance and related costs ~~related to a class action settlement plus legal fees~~associated with restructuring Pollo Tropical management in Miami, Florida and ~~other costs incurred in defending the action~~Dallas, Texas, partially offset by a benefit of $0.4 million ~~reduction in prior year legal settlement costs and a $0.8 million write-off of site development costs~~ related to locations that we decided not to develop. General and administrative expenses in the nine months ended September 27, 2015 included a charge for estimated costs related to a class action settlement plus legal fees and other costs incurred in defending the action totaling $1.1 million.litigation matters.

Adjusted ~~EBITDA.~~ EBITDA. Adjusted EBITDA, ~~which~~ is ~~one of~~ the ~~measures~~primary measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance and is defined as earnings attributable to the applicable segment before interest expense, income taxes, depreciation and amortization, impairment and other lease charges,

~~charges,~~ stock-based compensation expense, other expense (income), net and ~~other income and expense.~~ certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants.

Adjusted EBITDA for Pollo Tropical ~~decreased~~increased to ~~$41.8~~$31.9 million in the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 from ~~$44.0~~$30.1 million in the ~~nine~~six months ended ~~September 27, 2015~~July 3, 2016 primarily due to the impact of closing underperforming restaurants in the second quarter of 2017, a decrease in advertising expense, pre-opening costs and cost of sales as a ~~result~~percentage of sales, partially offset by the impact of lower ~~profitability at new restaurants,~~comparable restaurant sales. Adjusted EBITDA for Taco Cabana decreased to $13.5 million in the six months ended July 2, 2017 from $20.8 million in the six months ended July 3, 2016 primarily due to the impact of lower comparable restaurant sales, and higher restaurant wages, operating expenses and ~~the write-off of site~~general and administrative costs, ~~related to locations that we decided not to develop. Adjusted EBITDA for Taco Cabana~~ ~~increased~~ ~~to $30.5 million in the nine months ended October 2, 2016 from $30.0 million in the nine months ended September 27, 2015 primarily due to~~partially offset by a decrease in cost of sales as a percentage of ~~sales driven by menu price increases and lower commodity costs partially offset by the impact of the decrease in revenues.~~sales. Consolidated Adjusted EBITDA decreased to ~~$71.5~~$45.3 million in the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 from ~~$74.0~~$50.8 million in the ~~nine~~six months ended ~~September 27, 2015 primarily~~July 3, 2016.

Restaurant-Level Adjusted EBITDA. We also use Restaurant-level Adjusted EBITDA, a ~~result~~non-GAAP financial measure, as a supplemental measure to evaluate the performance and profitability of our restaurants in the ~~decrease in~~aggregate, which is defined as 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 Adjusted EBITDA for Pollo Tropical remained relatively stable and was $46.9 million in the six months ended July 2, 2017 and July 3, 2016. Restaurant-level Adjusted EBITDA ~~and $0.8~~for Taco Cabana decreased to $25.2 million in ~~advisory fees related~~six months ended July 2, 2017 from $30.6 million in the six months ended July 3, 2016 primarily due to the ~~previously proposed separation transaction discussed under Recent Events Affecting our Results~~foregoing. For a reconciliation from Adjusted EBITDA to Restaurant-level Adjusted EBITDA, see the heading entitled "Management's Use of ~~Operations.~~Non-GAAP Financial Measures".

Depreciation and Amortization. Depreciation and amortization expense increased to ~~$26.5~~$17.8 million in the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 from ~~$21.8~~$17.0 million in the ~~nine~~six months ended ~~September 27, 2015~~July 3, 2016 due primarily to increased depreciation related to new restaurant ~~openings.~~openings, partially offset by a decrease in depreciation as a result of impairing closed restaurant assets.

Impairment and Other Lease Charges. Impairment and Other Lease Charges increased to $43.2 million in the six months ended July 2, 2017 from $0.1 million in the six months ended July 3, 2016. As discussed under ~~Recent~~"Recent Events Affecting our Results of ~~Operations,~~Operations", on April 24, 2017, we ~~have reviewed our restaurant portfolio and subsequently closed ten~~announced the Plan to drive long-term shareholder value creation that included the closure of 30 Pollo Tropical restaurants inlocated outside our core Florida markets during the ~~fourth~~second quarter of ~~2016, three~~2017. We closed all of ~~which~~our Company-owned Pollo Tropical locations in Dallas-Fort Worth and Austin, Texas, and Nashville, Tennessee. We continue to own and operate 19 Pollo Tropical restaurants located outside of Florida, including 13 in Atlanta, and six in south Texas. Up to two Pollo Tropical restaurants that closed in April 2017 in Texas may be ~~converted to~~rebranded as Taco Cabana restaurants. In

For the ~~third quarter of 2016,~~six months ended July 2, 2017, we recognized ~~an $18.5~~impairment charges of $35.7 million ~~impairment charge~~and other lease charges, net of recoveries, of $6.9 million, for Pollo Tropical, primarily related to the ~~closed restaurants~~restaurant closures discussed above. Impairment and other lease charges for the six ~~other Pollo Tropical restaurants and one~~months ended July 2, 2017 for Taco Cabana ~~restaurant~~were $0.6 million and consisted primarily of impairment recognized related to three Taco Cabana restaurants that we will continue to ~~operate. We will recognize related lease~~operate and ~~other charges related to the~~four Taco Cabana restaurants that we subsequently closed ~~restaurants, which we anticipate will be between $2 million and $4 million,~~in July 2017. There is uncertainty in the ~~fourth quarter~~estimates of ~~2016.~~future lease costs and sublease recoveries. Actual costs and sublease recoveries could vary significantly from the estimated amounts and result in additional lease charges or recoveries, and such amounts could be material.

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. ~~After reviewing~~We determine if there is impairment at the ~~specific~~restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values. 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 ~~management’s plans~~other operating cost assumptions. 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, which are subject to a high 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.

Other ~~Income.~~Expense (Income) Net. Other expense (income) net was $0.8 million in the six months ended July 2, 2017 and primarily consisted of costs related to the removal of signs and equipment for closed Pollo Tropical restaurants and severance for restaurant employees, partially offset by expected business interruption proceeds related to a Taco Cabana restaurant that was temporarily closed due to a fire. Other income of $0.2 million in the ~~nine~~six months ended ~~October 2,~~July 3, 2016 primarily consisted of additional proceeds related to a location that closed in 2015 as a result of an eminent domain proceeding. Other income of $0.7 million in the nine months ended September 27, 2015 primarily consisted of a previously deferred gain from a sale-leaseback transaction that was recognized upon termination of the lease as a result of an eminent domain proceeding and expected business interruption insurance proceeds for a Pollo Tropical location that was temporarily closed due to a fire.

Interest Expense. Interest expense increased to ~~$1.6~~$1.2 million in the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 from ~~$1.3~~$1.1 million in the ~~nine~~six months ended ~~September 27, 2015.~~July 3, 2016 primarily due to higher interest rates related to borrowings under our revolving credit facility.

Provision for Income Taxes. The effective tax rates were 35.3% for the six months ended July 2, 2017 and 36.5% for the six months ended July 3, 2016. The benefit from income taxes for the six months ended July 2, 2017 was derived using an estimated annual effective tax rate of 37.3%, which excludes the discrete impact of a tax benefit deficiency from the vesting of restricted shares and the tax benefit resulting from impairment and other lease charges of $0.2 million and $15.8 million, respectively. The provision for income taxes for the six months ended July 3, 2016 was derived using an estimated effective annual income tax rate ~~excluding~~of 36.5%. As discussed in Note 1, tax benefit deficiencies and excess tax benefits created upon the vesting of restricted shares are now recorded as a discrete ~~items, of 36.3% for~~item within the ~~nine months ended October 2, 2016 and 37.8% for the nine months ended September 27, 2015. The effective annual~~ income tax ~~rate decreased in the nine months ended October 2, 2016 compared~~provision. These amounts were previously recorded as an adjustment to ~~the nine months ended September 27, 2015 due primarily to the reinstatement of Work Opportunity Tax Credits.~~Additional paid-in capital.

Net ~~Income.~~Income (Loss). As a result of the foregoing, we had net ~~income~~loss of ~~$14.3~~$17.2 million in the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 compared to net income of ~~$29.7~~$18.8 million in the ~~nine~~six months ended ~~September 27, 2015.~~July 3, 2016.

Liquidity and Capital Resources

We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. We are able to operate with a substantial working capital deficit because:

restaurant operations are primarily conducted on a cash basis;

rapid turnover results in a limited investment in inventories; and

cash from sales is usually received before related liabilities for food, supplies and payroll become due.

Capital expenditures and payments related to our lease obligations represent significant liquidity requirements for us. We believe cash generated from our operations, availability of borrowings under our senior credit facility and proceeds from any sale-leaseback transactions which we may choose to do will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months.

Operating Activities. Net cash provided byfrom operating activities in the first ~~nine~~six months of 2017 and 2016 ~~and 2015~~ was ~~$66.4~~$35.4 million and ~~$59.0~~$43.6 million, respectively. The ~~increase~~decrease in net cash provided byfrom operating activities in the first ~~nine~~six months of ~~2016~~2017 was primarily driven by the decrease in Adjusted EBITDA and increase in deferred income taxes, partially offset by the timing of payments.

Investing Activities. Net cash used in investing activities in the first ~~nine~~six months of 2017 and 2016 ~~and 2015~~ was ~~$61.8~~$26.2 million and ~~$66.1~~$41.0 million, respectively. Capital expenditures are 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 for the periods presented (in thousands).


	Pollo Tropical		Taco Cabana		Other		Consolidated		Pollo Tropical		Taco Cabana		Other		Consolidated
Nine Months Ended October 2, 2016:
Six Months Ended July 2, 2017:
New restaurant development	$	48,857	$	3,971	$	—	$	52,828	$	13,878	$	4,918	$	—	$	18,796
Restaurant remodeling	956		—		—		956		934		27		—		961
Other restaurant capital expenditures⁽¹⁾	1,508		3,117		—		4,625		1,546		2,041		—		3,587
Corporate and restaurant information systems	1,392		970		2,272		4,634		548		1,030		1,231		2,809
Total capital expenditures	$	52,713	$	8,058	$	2,272	$	63,043	$	16,906	$	8,016	$	1,231	$	26,153
Number of new restaurant openings	26		2				28		6		3		—		9
Nine Months Ended September 27, 2015:
Six Months Ended July 3, 2016:
New restaurant development	$	51,175	$	3,882	$	—	$	55,057	$	32,572	$	3,188	$	—	$	35,760
Restaurant remodeling	826		1,897		—		2,723		486		—		—		486
Other restaurant capital expenditures⁽¹⁾	2,078		3,119		—		5,197		659		1,336		—		1,995
Corporate and restaurant information systems	1,025		607		1,610		3,242		850		743		2,404		3,997
Total capital expenditures	$	55,104	$	9,505	$	1,610	$	66,219	$	34,567	$	5,267	$	2,404	$	42,238
Number of new restaurant openings	26		2				28		17		2		—		19

⁽¹⁾Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~September 27, 2015,~~July 3, 2016, total restaurant repair and maintenance expenses were approximately ~~$14.1~~$9.6 million and ~~$11.4~~$9.2 million, respectively.

~~For~~In 2017, we expect to open nine new Company-owned Pollo Tropical restaurants in Florida and six new Company-owned Taco Cabana restaurants in Texas, including one Pollo Tropical restaurant closed in October 2016 that we ~~anticipate~~plan to convert to a Taco Cabana restaurant. In addition, up to three Pollo Tropical restaurants in Texas that ~~total~~were previously closed in October 2016 and April 2017 may be converted to Taco Cabana restaurants in 2018. Total capital expenditures ~~will range from $82.0~~in 2017 are expected to be $60.0 million to ~~$85.0~~$70.0 million. Capital expenditures in ~~2016~~2017 are expected to include ~~$65.0~~$22.0 million to ~~$67.0~~$25.0 million for development of new restaurants, and purchase of related real estate. For 2016 we anticipate opening a total of 31 new company-owned Pollo Tropical restaurants and four new company-owned Taco Cabana restaurants, of which 26 Pollo Tropical and two Taco Cabana restaurants have been opened through October 2, 2016. Our capital expenditures in 2016 are also expected to include expenditures of approximately ~~$10.0~~$22.0 million to ~~$11.0~~$26.0 million for the ongoing reinvestment in our Pollo Tropical and Taco Cabana restaurants for ~~remodeling costs and~~ capital maintenance expenditures, ~~and~~ approximately ~~$7.0 million of other expenditures.~~

In 2017, the Company expects to open 12 to 13 new Company-owned Pollo Tropical restaurants in Florida and 8 to 10 new Company-owned Taco Cabana restaurants in Texas. Up to three of the new Company-owned Taco Cabana restaurant openings will be Pollo Tropical restaurants that were converted to Taco Cabana restaurants. Total capital expenditures in 2017 are expected

~~to be $57.0~~$2.0 million to ~~$68.0 million. Capital expenditures in 2017 are expected to include $35.0 million to $43.0~~$3.0 million for ~~development of new restaurants~~remodeling costs and ~~purchase of related real estate. Our capital expenditures in 2017 are also expected to include expenditures of~~ approximately $14.0 million to $16.0 million ~~for the ongoing reinvestment in our Pollo Tropical and Taco Cabana restaurants for remodeling costs and capital maintenance expenditures and approximately $8.0 million to $9.0 million~~ of other ~~expenditures.~~expenditures which primarily includes information technology and systems projects and indoor video menu boards.

In the first ~~nine~~six months of 2016, cash used in investing activities also included $2.7 million for the purchase of a property for a sale-leaseback, ~~and~~partially offset by proceeds of $3.6 million from a sale-leaseback transaction related to our restaurant ~~properties, the net proceeds from which were $3.6 million.~~properties.

Financing Activities. Net cash used in financing activities in the first ~~nine~~six months of ~~2016~~2017 was ~~$4.9~~$9.0 million and included net revolving credit borrowing repayments under our senior credit facility of ~~$5.1 million and excess tax benefits of $0.2~~$9.0 million. Net cash ~~provided by~~used in financing activities in the first ~~nine~~six months of ~~2015 was $3.0 million and~~2016 primarily included net revolving credit ~~borrowings~~borrowing repayments under our senior credit facility of ~~$1.5~~$3.1 million, ~~and~~partially offset by the excess tax benefit from vesting of restricted shares of ~~$1.5~~$0.1 million.

Senior Credit Facility. Our senior credit facility provides for aggregate revolving credit borrowings of up to $150 million (including up to $15 million available for letters of credit) and matures on December 11, 2018. The senior credit facility also provides for potential incremental increases of up to $50 million to the revolving credit borrowings available under the senior credit facility. On ~~October~~July 2, ~~2016,~~2017, there were ~~$65.9~~$60.9 million in outstanding revolving credit borrowings under our senior credit facility.

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

1) the Alternate Base Rate plus the applicable margin of 0.50% to 1.50% based on our Adjusted Leverage Ratio

(with a margin of ~~0.50%~~0.75% as of ~~October~~July 2, ~~2016)~~2017), or

2) the LIBOR Rate plus the applicable margin of 1.50% to 2.50% based on our Adjusted Leverage Ratio (with a

margin of ~~1.50% at October~~1.75% as of July 2, ~~2016)~~2017).

In addition, the senior credit facility requires us to pay (i) a commitment fee based on the applicable Commitment Fee margin of 0.25% to 0.45%, based on our Adjusted Leverage Ratio, (with a margin of ~~0.25% at October~~0.30% as of July 2, ~~2016)~~2017) and the unused portion of the facility and (ii) a letter of credit fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit.

All obligations under the senior credit facility are guaranteed by all of our material domestic subsidiaries. In general, our obligations under our senior credit facility and our subsidiaries’ obligations under the guarantees are secured by a first priority lien and security interest on substantially all of our assets and the assets of our material subsidiaries (including a pledge of all of the capital stock and equity interests of our material subsidiaries), other than certain specified assets, including real property owned by us or our subsidiaries.

The outstanding borrowings under the senior credit facility are prepayable without penalty (other than customary breakage costs). The senior credit facility requires us to comply with customary affirmative, negative and financial covenants, including, without limitation, those limiting our and our subsidiaries’ ability to (i) incur indebtedness, (ii) incur liens, (iii) loan, advance, or make acquisitions and other investments or other commitments to construct, acquire or develop new restaurants (subject to certain exceptions), (iv) pay dividends, (v) redeem and repurchase equity interests, (vi) conduct asset and restaurant sales and other dispositions (subject to certain exceptions), (vii) conduct transactions with affiliates and (viii) change our business. In addition, the senior credit facility will require us to maintain certain financial ratios, including minimum Fixed Charge Coverage and maximum Adjusted Leverage Ratios (all as defined under 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 of $5.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

As of ~~October~~July 2, ~~2016,~~2017, we were in compliance with the covenants under our senior credit facility. After reserving ~~$5.2~~$4.9 million for letters of credit issued under the senior credit facility, ~~$78.9~~$84.2 million was available for borrowing under the senior credit facility at ~~October~~July 2, ~~2016.~~2017.

We are in the process of refinancing our revolving credit facility which is expected to be completed before the end of 2017.

Off-Balance Sheet Arrangements and Contractual Obligations

We have no off-balance sheet arrangements other than our operating leases, which are primarily for our restaurant properties and not recorded on our consolidated balance sheet.

There have been no significant changes outside the ordinary course of business to our contractual obligations since January ~~3, 2016.~~1, 2017. Information regarding our contractual obligations is included under "Contractual Obligations" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended January ~~3, 2016.~~1, 2017.

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 changes in the Federal and state hourly minimum wage rates as well as changes in payroll related taxes, including Federal and state unemployment taxes. 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.

Application of Critical Accounting Policies

Our unaudited interim condensed 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 the “Significant Accounting Policies” footnote in the notes to our consolidated financial statements for the year ended January ~~3, 2016~~1, 2017 included in our Annual Report on Form 10-K for the fiscal year ended January ~~3, 2016.~~1, 2017. 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. There have been no material changes affecting our critical accounting policies for the ~~nine~~six months ended ~~October~~July 2, ~~2016.~~2017.

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 and income from operations ~~and income before income taxes~~ 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. 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, earnings per share, cash flows from operating activities or other financial information determined under GAAP.

Prior to the second quarter of 2017, Adjusted EBITDA isand Consolidated Adjusted EBITDA were defined as earnings before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, ~~stock-based compensation~~stock-compensation expense and other expense (income), net. In 2017, our Board of Directors appointed a new Chief Executive Officer who initiated the Plan and uses an Adjusted EBITDA measure for the purpose of assessing performance and allocating resources to our segments. The Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants. Beginning in the second quarter of 2017, the primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is now defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and ~~expense.~~amortization, impairment and other lease charges, stock-compensation expense, other expense (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants as set forth in the reconciliation table below. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain ~~accounting,~~finance, legal, supply chain, human resources, development and other administrative functions. See Note 6 to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

We also use Restaurant-level Adjusted EBITDA as a supplemental measure to evaluate the performance and profitability of our restaurants in the aggregate, which is defined as 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 Adjusted EBITDA is also a non-GAAP financial measure.

Management believes that Adjusted EBITDA for our segments, Consolidated Adjusted EBITDA and Restaurant-Level Adjusted EBITDA, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of net income (loss) to Consolidated Adjusted EBITDA and Adjusted EBITDA to ~~net income~~Restaurant-Level Adjusted EBITDA (i) provide useful information about our operating performance and period-over-period ~~growth,~~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 of such ~~non-GAAP~~ 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, other income and expense and stock-based compensation expense) have recurred and may recur.

A reconciliation from consolidated net income (loss) to Consolidated Adjusted EBITDA ~~follows:~~follows (in thousands):


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
(Dollars in thousands)	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015
													July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016

Net income (loss)	$	(4,531	)	$	7,945		$	14,280		$	29,695		$	(2,160	)	$	8,916		$	(17,220	)	$	18,811

Provision for (benefit from) income taxes													(772		)	5,125			(9,414		)	10,813
Income (loss) before taxes													(2,932		)	14,041			(26,634		)	29,624
Add:
Non-general and administrative expense adjustments:
Depreciation and amortization	9,513			7,596			26,474			21,844			8,596			8,625			17,782			16,961
Impairment and other lease charges	18,513			387			18,607			481			10,762			82			43,176			94
Interest expense	542			493			1,635			1,345			654			535			1,238			1,093
Provision for (benefit from) income taxes	(2,748		)	4,571			8,065			18,073
Other expense (income), net													654			10			798			(238		)
Stock-based compensation credit in restaurant wages													(74		)	40			35			76
Unused pre-production costs in advertising expense⁽¹⁾													88			—			410			—
Total Non-general and administrative expense adjustments													20,680			9,292			63,439			17,986
General and administrative expense adjustments:
Stock-based compensation expense	365			1,167			2,634			3,203			1,248			1,218			1,785			2,193
Other income	—			(165		)	(238		)	(679		)

Adjusted EBITDA:
Pollo Tropical	$	12,087		$	12,120		$	41,828		$	43,993
Taco Cabana	9,641			9,874			30,451			29,969
Fiesta	(74		)	—			(822		)	—
Consolidated	$	21,654		$	21,994		$	71,457		$	73,962
Terminated capital project⁽²⁾													13			—			849			—
Board and shareholder matter costs⁽³⁾													3,099			47			3,903			748
Write-off of site development costs⁽⁴⁾													144			204			454			296
Plan restructuring costs and retention bonuses⁽⁵⁾													1,869			—			2,014			—
Office restructuring and relocation costs⁽⁶⁾													—			346			—			346
Legal settlements and related costs⁽⁷⁾													—			(32		)	(473		)	(375		)
Total General and administrative expense adjustments													6,373			1,783			8,532			3,208
Consolidated Adjusted EBITDA:													$	24,121		$	25,116		$	45,337		$	50,818

⁽¹⁾Unused pre-production costs for the three and six months ended July 2, 2017, include costs for advertising pre-production that will not be used.

⁽²⁾Terminated capital project costs for the three and six months ended July 2, 2017, include costs related to the write-off of a capital project that was terminated in the first quarter.

⁽³⁾Board and shareholder matter costs for the three and six months ended July 2, 2017, include fees related to shareholder activism and CEO and board member searches. Board and shareholder matter costs for the three and six months ended July 3, 2016, include fees related to the previously proposed and terminated separation transaction.

⁽⁴⁾Write-off of site development costs for the three and six months ended July 2, 2017 and July 3, 2016, includes the write-off of site costs related to locations that we decided not to develop.

⁽⁵⁾Plan restructuring costs and retention bonuses for the three and six months ended July 2, 2017, include severance related to the Plan and reduction in force and bonuses paid to certain employees for retention purposes.

⁽⁶⁾Office restructuring and relocation costs for the three and six months ended July 3, 2016, include severance and relocation costs associated with restructuring Pollo Tropical management in Miami, Florida and Dallas, Texas.

⁽⁷⁾Legal settlements and related costs for the three and six months ended July 2, 2017 and July 3, 2016, include benefits related to litigation matters.

A reconciliation from Adjusted EBITDA to Restaurant-Level Adjusted EBITDA follows (in thousands):



Three Months Ended	Pollo Tropical		Taco Cabana
July 2, 2017:
Adjusted EBITDA:	$	17,139	$	6,982
Restaurant-Level Adjustments:
Add: Pre-opening costs	451		459
Add: Other general and administrative expense⁽¹⁾	7,106		5,661
Less: Franchise royalty revenue and fees	427		192
Restaurant-Level Adjusted EBITDA:	$	24,269	$	12,910

July 3, 2016:
Adjusted EBITDA:	$	14,588	$	10,528
Restaurant-Level Adjustments:
Add: Pre-opening costs	1,795		221
Add: Other general and administrative expense⁽¹⁾	7,568		4,902
Less: Franchise royalty revenue and fees	508		189
Restaurant-Level Adjusted EBITDA:	$	23,443	$	15,462

Six Months Ended	Pollo Tropical		Taco Cabana
July 2, 2017:
Adjusted EBITDA:	$	31,861	$	13,476
Restaurant-Level Adjustments:
Add: Pre-opening costs	783		551
Add: Other general and administrative expense⁽¹⁾	15,096		11,520
Less: Franchise royalty revenue and fees	876		373
Restaurant-Level Adjusted EBITDA:	$	46,864	$	25,174

July 3, 2016:
Adjusted EBITDA:	$	30,050	$	20,768
Restaurant-Level Adjustments:
Add: Pre-opening costs	2,909		289
Add: Other general and administrative expense⁽¹⁾	14,995		9,898
Less: Franchise royalty revenue and fees	1,085		350
Restaurant-Level Adjusted EBITDA:	$	46,869	$	30,605

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking statements” are any statements that are not based on historical information. Statements other than statements of historical facts included herein, including, without limitation, statements regarding our future financial position and results of operations, business strategy, budgets, projected costs and plans and objectives of management for future operations, are “forward-looking statements.” Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” or “continue” or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or “cautionary statements,” include, but are not limited to:

Increases in food and other commodity costs;

Risks associated with the expansion of our business, including increasing real estate and construction costs;

Risks associated with food borne illness or other food safety issues, including negative publicity through traditional

and social media;

Our ability to manage our growth and successfully implement our business strategy;

Labor and employment benefit costs, including the impact of increases in federal and state minimum wages, increases in exempt status salary levels and healthcare costs imposed by the Affordable Care Act;

Cyber security breaches;

General economic conditions, particularly in the retail sector;

Competitive conditions;

Weather conditions;

Significant disruptions in service or supply by any of our suppliers or distributors;

Increases in employee injury and general liability claims;

Changes in consumer perception of dietary health and food safety;

Regulatory factors;

Fuel prices;

The outcome of pending or future legal claims or proceedings;

Environmental conditions and regulations;

Our borrowing costs;

The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties;

The risk of an act of terrorism or escalation of any insurrection or armed conflict involving the United States or any other national or international calamity; and

Factors that affect the restaurant industry generally, including product recalls, liability if our products cause injury, ingredient disclosure and labeling laws and regulations.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

We purchase certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements have been negotiated in advance to minimize price volatility. Where possible, we use these types of purchasing techniques to control costs as an alternative to using financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases that are significant and appear to be long-term in nature by adjusting our menu pricing. However, long-term increases in commodity prices may result in lower restaurant-level operating margins.

There were no material changes from the information presented in Item 7A included in our Annual Report on Form 10-K for the year ended January ~~3, 2016~~1, 2017 with respect to our market risk sensitive instruments.

ITEM 4—CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures. We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our ~~Interim~~ Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our ~~Interim~~ Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~October~~July 2, ~~2016.~~2017.

Changes in Internal Control over Financial Reporting. No change occurred in our internal control over financial reporting during the ~~third~~second quarter of ~~2016~~2017 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are a party to various ~~other~~ litigation matters incidental to the conduct of our business. We do not believe that the outcome of any of these matters will have a material adverse effect on our business, results of operations or financial condition.

Item 1A. Risk Factors

Part 1 - Item 1A of our Annual Report on Form 10-K for the fiscal year ended January ~~3, 2016~~1, 2017 describes important factors that could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-Q or presented elsewhere by management from time-to-time. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January ~~3, 2016.~~1, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

On November 4, 2016, Fiesta Restaurant Group, Inc. (the "Company") entered into separate agreements with each of Danny K. Meisenheimer (the "Meisenheimer Agreement"), the Company's Interim Chief Executive Officer and President, Lynn Schweinfurth (the "Schweinfurth Agreement"), the Company's Senior Vice President and Chief Financial Officer, and Joseph A. Zirkman (the "Zirkman Agreement"), the Company's Senior Vice President, General Counsel and Secretary, providing for (i) certain retention bonus payments and (ii) certain severance payments upon a termination of employment with the Company.

The Meisenheimer Agreement provides that Mr. Meisenheimer is entitled to a retention bonus payment of (a) $175,000 (the "Meisenheimer 2016 Bonus") payable in February 2017; provided that if Mr. Meisenheimer (i) voluntary resigns as an employee of the Company other than for Good Reason (as defined in the Meisenheimer Agreement) or gives notice of such resignation any time during the twelve month period following the payment date of the Meisenheimer 2016 Bonus or (ii) if Mr. Meisenheimer voluntary resigns as an employee of the Company other than for Good Reason any time prior to December 31, 2017 and fails to provide at least six months prior written notice of such voluntary resignation, Mr. Meisenheimer shall repay the Meisenheimer 2016 Bonus to the Company, and (b) $175,000 less any amount related to short term incentive compensation received by Mr. Meisenheimer under the Company's Executive Bonus Plan (as defined in the Meisenheimer Agreement) (the "Meisenheimer 2017 Bonus") payable in February 2018, provided that Mr. Meisenheimer remains employed with the Company through the payment date of the Meisenheimer 2017 Bonus. The Meisenheimer Agreement also provides that upon a termination of Mr. Meisenheimer's employment by the Company without Cause (as defined in the Meisenheimer Agreement), termination of Mr. Meisenheimer's employment by Mr. Meisenheimer with Good Reason (other than in the case of a material diminution of Mr. Meisenheimer's authority, duties or responsibilities) and termination of Mr. Meisenheimer's employment by Mr. Meisenheimer for any reason during the period that is between six months and twelve months following the commencement date of employment of a new Chief Executive Officer of the Company, Mr. Meisenheimer is entitled to (i) an amount equal to two times Mr. Meisenheimer' s highest annual base salary in effect prior to the date Mr. Meisenheimer's employment is terminated and (ii) an amount equal to a pro rata portion of the aggregate bonus under the Company's Executive Bonus Plan for the year in which Mr. Meisenheimer's employment is terminated (plus earned and unpaid bonus amounts under the Company's Executive Bonus Plan for the year prior to the year in which Mr. Meisenheimer's employment is terminated). The Meisenheimer Agreement terminates on December 31, 2018 (the "Initial Term") and if renewed by the Company upon 90 days written notice prior to the expiration of the Initial Term, on December 31, 2019 unless terminated sooner in accordance with the terms of the Meisenheimer Agreement. A copy of the Meisenheimer Agreement is attached as Exhibit 10.1 hereto and incorporated by reference herein. Additionally, Mr. Meisenheimer's base salary has been increased from $288,400 to $330,000 effective October 1, 2016 (the date that Mr. Meisenheimer became interim Chief Executive Officer and President of the Company).

The Schweinfurth Agreement provides that Ms. Schweinfurth is entitled to a retention bonus payment of (a) $150,000 (the "Schweinfurth 2016 Bonus") payable in February 2017; provided that if Ms. Schweinfurth (i) voluntary resigns as an employee of the Company other than for Good Reason (as defined in the Schweinfurth Agreement) or gives notice of such resignation any time during the twelve month period following the payment date of the Schweinfurth 2016 Bonus or (ii) if Ms. Schweinfurth voluntary resigns as an employee of the Company other than for Good Reason any time prior to December 31, 2017 and fails to provide at least six months prior written notice of such voluntary resignation, Ms. Schweinfurth shall repay the Schweinfurth 2016 Bonus to the Company, and (b) $150,000 less any amount related to short term incentive compensation received by Ms. Schweinfurth under the Company's Executive Bonus Plan (as defined in the Schweinfurth Agreement) (the "Schweinfurth 2017 Bonus") payable in February 2018, provided that Ms. Schweinfurth remains employed with the Company through the payment date of the Schweinfurth 2017 Bonus. The Schweinfurth Agreement also modifies and supersedes the severance bonus arrangements contained in the letter agreement dated June 19, 2012 (the "Schweinfurth Letter Agreement") between the Company and Ms. Schweinfurth, and provides that upon a termination of Ms. Schweinfurth's employment by the Company without Cause (as defined in the Schweinfurth Agreement) or termination of Ms. Schweinfurth's employment by Ms. Schweinfurth with Good Reason, Ms. Schweinfurth is entitled to (i) an amount equal to one times Ms. Schweinfurt's highest annual base salary in effect prior to the dateNone

Ms. Schweinfurth's employment is terminated and (ii) an amount equal to a pro rata portion of the aggregate bonus under the Company's Executive Bonus Plan for the year in which Ms. Schweinfurth's employment is terminated (plus any earned and unpaid bonus amounts under the Company's Executive Bonus Plan for the year prior to the year in which Ms. Schweinfurth's employment is terminated). The Schweinfurth Agreement terminates (other than the severance bonus provisions which shall survive any such termination, consistent with the terms of the Schweinfurth Letter Agreement) on December 31, 2018 and if renewed by the Company upon 90 days written notice prior to the expiration of the Initial Term, on December 31, 2019, unless terminated sooner in accordance with the terms of the Schweinfurth Agreement. A copy of the Schweinfurth Agreement is attached as Exhibit 10.2 hereto and incorporated by reference herein.

The Zirkman Agreement provides that Mr. Zirkman is entitled to a retention bonus payment of (a) $100,000 (the "Zirkman 2016 Bonus") payable in February 2017; provided that if Mr. Zirkman (i) voluntary resigns as an employee of the Company other than for Good Reason (as defined in the Zirkman Agreement) or gives notice of such resignation any time during the twelve month period following the payment date of the Zirkman 2016 Bonus or (ii) if Mr. Zirkman voluntary resigns as an employee of the Company other than for Good Reason any time prior to December 31, 2017 and fails to provide at least six months prior written notice of such voluntary resignation, Mr. Zirkman shall repay the Zirkman 2016 Bonus to the Company, and (b) $100,000 less any amount related to short term incentive compensation received by Mr. Zirkman under the Company's Executive Bonus Plan (as defined in the Zirkman Agreement) (the "Zirkman 2017 Bonus") payable in February 2018, provided that Mr. Zirkman remains employed with the Company through the payment date of the Zirkman 2017 Bonus. The Zirkman Agreement also provides that upon a termination of Mr. Zirkman's employment by the Company without Cause (as defined in the Zirkman Agreement) or termination of Mr. Zirkman's employment by Mr. Zirkman with Good Reason, Mr. Zirkman is entitled to (i) an amount equal to one times Mr. Zirkman 's highest annual base salary in effect prior to the date Mr. Zirkman's employment is terminated and (ii) an amount equal to a pro rata portion of the aggregate bonus under the Company's Executive Bonus Plan for the year in which Mr. Zirkman's employment is terminated (plus any earned and unpaid bonus amounts under the Company's Executive Bonus Plan for the year prior to the year in which Mr. Zirkman's employment is terminated). The Zirkman Agreement terminates on December 31, 2018 and if renewed by the Company upon 90 days written notice prior to the expiration of the Initial Term, on December 31, 2019, unless terminated sooner in accordance with the terms of the Zirkman Agreement. A copy of the Zirkman Agreement is attached as Exhibit 10.3 hereto and incorporated by reference herein.

Item 6. Exhibits

(a) The following exhibits are filed as part of this report.




Exhibit No.

~~10.1~~3.1		~~Agreement dated as~~Certificate of ~~November 4, 2016 between~~Amendment to Restated Certificate of Incorporation of Fiesta Restaurant Group, Inc. ~~and Danny K. Meisenheimer.+~~

~~10.2~~3.2		~~Agreement dated as~~Amendment to Amended and Restated Bylaws of ~~November 4, 2016 between~~ Fiesta Restaurant Group, Inc. ~~and Lynn Schweinfurth.+~~

~~10.3~~10.1		Retention Bonus Agreement dated as of November 4,9, 2016 between Joseph Brink and Fiesta Restaurant Group, Inc. ~~and Joseph A. Zirkman.+~~

~~10.4~~		~~Agreement dated as of September 27, 2016 between Fiesta Restaurant Group, Inc. and Timothy P. Taft.~~+

31.1		Chief Executive Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.

31.2		Chief Financial Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.

32.1		Chief Executive Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.

32.2		Chief Financial Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

+ Compensatory plan or arrangement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	FIESTA RESTAURANT GROUP, INC.

Date: ~~November~~August 7, ~~2016~~2017	/S/ ~~DANNY K. MEISENHEIMER~~RICHARD C. STOCKINGER
	(Signature)
	~~Danny K. Meisenheimer~~Richard C. Stockinger ~~Interim~~ Chief Executive Officer

Date: ~~November~~August 7, ~~2016~~2017	/S/ LYNN S. SCHWEINFURTH
	(Signature)
	Lynn S. Schweinfurth Senior Vice President, Chief Financial Officer and Treasurer

Date: ~~November~~August 7, ~~2016~~2017	/S/ CHERI L. KINDER
	(Signature)
	Cheri L. Kinder Vice President, Corporate Controller

3542



	Nine Months Ended October 2, 2016			Year Ended January 3, 2016
Balance, beginning of period	$	1,832		$	1,251
Provisions for restaurant closures	—			554
Additional lease charges, net of (recoveries)	—			258
Payments, net	(411		)	(358		)
Other adjustments	122			127
Balance, end of period	$	1,543		$	1,832