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 ~~September 30, 2018~~March 31, 2019



¨	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~~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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "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	¨	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. ¨

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

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	FRGI	The NASDAQ Global Select Market

As of ~~October 31, 2018,~~May 1, 2019, Fiesta Restaurant Group, Inc. had ~~27,256,842~~27,452,222 shares of its common stock, $0.01 par value, outstanding.

FIESTA RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED ~~SEPTEMBER 30, 2018~~MARCH 31, 2019



		Page
PART I FINANCIAL INFORMATION

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

	Condensed Consolidated Balance Sheets as of ~~September~~March 31, 2019 and December 30, 2018 ~~and December 31, 2017~~	4

	Condensed Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~	5

	Condensed Consolidated Statements of Changes in Stockholders' Equity for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~	6

	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~	7

	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2	~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations	2120

Item 3	Quantitative and Qualitative Disclosures About Market Risk	4033

Item 4	Controls and Procedures	4033

PART II OTHER INFORMATION

Item 1	Legal Proceedings	4033

Item 1A	Risk Factors	4033

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	4133

Item 3	Defaults Upon Senior Securities	4134

Item 4	Mine Safety Disclosures	4134

Item 5	Other Information	4134

Item 6	Exhibits	4235

PART I—I. FINANCIAL INFORMATION

ITEM 1—1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FIESTA RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

September 30, 2018 December 31, 2017
ASSETS
Current assets:
Cash $ 5,743
$ 3,599
Accounts receivable 9,462
9,830
Inventories 2,761
2,880
Prepaid rent 3,360
3,300
Income tax receivable 16,059
11,334
Prepaid expenses and other current assets 6,970
10,105
Total current assets 44,355
41,048
Property and equipment, net 235,609
234,561
Goodwill 123,484
123,484
Deferred income taxes 9,376
17,232
Other assets 7,074
6,988
Total assets $ 419,898
$ 423,313
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 106
$ 98
Accounts payable 16,042
20,293
Accrued payroll, related taxes and benefits 11,813
11,776
Accrued real estate taxes 6,525
5,860
Other current liabilities 15,052
21,817
Total current liabilities 49,538
59,844
Long-term debt, net of current portion 71,664
76,425
Deferred income—sale-leaseback of real estate 20,765
23,466
Other non-current liabilities 30,474
32,062
Total liabilities 172,441
191,797
Commitments and contingencies

Stockholders' equity:
Common stock, $0.01 par value; 100,000,000 shares authorized, 27,258,395 and 27,086,958 shares issued, respectively, and 26,865,639 and 26,847,458 shares outstanding, respectively 270
268
Additional paid-in capital 169,465
166,823
Retained earnings 80,206
64,425
Treasury stock, at cost; 97,358 shares (2,484 ) —
Total stockholders' equity 247,457
231,516
Total liabilities and stockholders' equity $ 419,898
$ 423,313



	March 31, 2019			December 30, 2018
ASSETS
Current assets:
Cash	$	5,018		$	5,258
Accounts receivable	10,286			8,505
Inventories	2,764			2,842
Prepaid rent	118			3,375
Income tax receivable	16,853			17,857
Prepaid expenses and other current assets	13,220			6,562
Total current assets	48,259			44,399
Property and equipment, net	225,270			231,328
Operating lease right-of-use assets	264,951			—
Goodwill	123,484			123,484
Deferred income taxes	6,131			10,383
Other assets	8,336			9,065
Total assets	$	676,431		$	418,659
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	95		$	108
Accounts payable	14,577			16,410
Accrued payroll, related taxes and benefits	11,360			10,086
Accrued real estate taxes	2,801			5,871
Other current liabilities	31,098			14,086
Total current liabilities	59,931			46,561
Long-term debt, net of current portion	83,594			79,636
Deferred income—sale-leaseback of real estate	—			19,899
Operating lease liabilities	269,424			—
Other non-current liabilities	8,540			32,504
Total liabilities	421,489			178,600
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 20,000,000 shares authorized, no shares issued	—			—
Common stock, $0.01 par value; 100,000,000 shares authorized, 27,453,911 and 27,259,212 shares issued, respectively, and 26,769,005 and 26,858,988 shares outstanding, respectively	270			270
Additional paid-in capital	171,081			170,290
Retained earnings	88,559			72,268
Treasury stock, at cost; 270,627 and 112,358 shares, respectively	(4,968		)	(2,769		)
Total stockholders' equity	254,942			240,059
Total liabilities and stockholders' equity	$	676,431		$	418,659

FIESTA RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2019 AND APRIL 1, 2018 ~~AND OCTOBER 1, 2017~~

(In thousands, except share and per share data)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017			March 31, 2019			April 1, 2018
Revenues:
Restaurant sales	$	173,966		$	158,100		$	518,951		$	505,082		$	165,181		$	168,833
Franchise royalty revenues and fees	682			591			2,008			1,840			671			651
Total revenues	174,648			158,691			520,959			506,922			165,852			169,484
Costs and expenses:
Cost of sales	56,021			49,151			166,275			150,827			50,510			53,565
Restaurant wages and related expenses (including stock-based compensation expense of $6, $9, $56 and $44, respectively)	47,943			44,649			142,103			139,050
Restaurant wages and related expenses (including stock-based compensation expense of $27 and $17, respectively)													45,036			46,483
Restaurant rent expense	9,129			9,104			26,861			27,881			11,745			8,892
Other restaurant operating expenses	27,294			24,856			75,398			73,560			21,763			23,450
Advertising expense	6,472			5,885			18,046			17,716			5,521			6,213
General and administrative (including stock-based compensation expense of $732, $938, $2,588 and $2,723, respectively)	13,284			12,057			41,023			46,751
General and administrative (including stock-based compensation expense of $765 and $872, respectively)													15,071			14,919
Depreciation and amortization	9,739			8,483			27,908			26,265			9,548			8,999
Pre-opening costs	223			544			1,481			1,878			401			381
Impairment and other lease charges	6,417			15,905			6,539			59,081			(338		)	(662		)
Closed restaurant rent expense, net of sublease income													1,424			—
Other expense (income), net	47			469			(3,132		)	1,721			702			366
Total operating expenses	176,569			171,103			502,502			544,730			161,383			162,606
Income (loss) from operations	(1,921		)	(12,412		)	18,457			(37,808		)
Income from operations													4,469			6,878
Interest expense	924			672			2,979			1,910			1,234			1,069
Income (loss) before income taxes	(2,845		)	(13,084		)	15,478			(39,718		)
Benefit from income taxes	(4,892		)	(4,827		)	(246		)	(14,241		)
Net income (loss)	$	2,047		$	(8,257	)	$	15,724		$	(25,477	)
Income before income taxes													3,235			5,809
Provision for income taxes													946			1,625
Net income													$	2,289		$	4,184
Earnings per common share:
Basic	$	0.08		$	(0.31	)	$	0.58		$	(0.95	)	$	0.08		$	0.15
Diluted	0.08			(0.31		)	0.58			(0.95		)	0.08			0.15
Weighted average common shares outstanding:
Basic	26,954,285			26,845,568			26,900,716			26,811,610			26,842,704			26,874,016
Diluted	26,958,874			26,845,568			26,905,391			26,811,610			26,845,077			26,879,831

FIESTA RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2019 AND APRIL 1, 2018 ~~AND OCTOBER 1, 2017~~

(In thousands, except share data)

(Unaudited)


	Common Stock				Additional Paid-In Capital				Retained Earnings			Treasury Stock				Total Stockholders' Equity			Common Stock				Additional Paid-In Capital			Retained Earnings		Treasury Stock			Total Stockholders' Equity
	Shares		Amount					Shares				Treasury Stock			Amount								Additional Paid-In Capital			Retained Earnings		Treasury Stock			Total Stockholders' Equity
Balance at January 1, 2017	26,755,640		$	267	Additional Paid-In Capital			$	Retained Earnings	163,204		$	100,704			Total Stockholders' Equity		$	—		$	264,175
Balance at December 31, 2017																			26,847,458		$	268	$	166,823		$	64,425	$	—		$	231,516
Stock-based compensation	—		—		2,767				—			—				2,767			—		—		889			—		—			889
Vesting of restricted shares	91,169		1		—				—			—				1			76,578		1		(1		)	—		—			—
Cumulative effect of adopting a new accounting standard	—		—		73				(47		)	—				26			—		—		—			57		—			57
Net loss	—		—		—				(25,477		)	—				(25,477		)
Balance at October 1, 2017	26,846,809		$	268	$	166,044			$	75,180		$	—			$	241,492
Purchase of treasury stock																			(18,406	)								(349		)	(349		)
Net income																			—		—		—			4,184		—			4,184
Balance at April 1, 2018																			26,905,630		$	269	$	167,711		$	68,666	$	(349	)	$	236,297

Balance at December 31, 2017	26,847,458		$	268	$	166,823			$	64,425		$	—			$	231,516
Balance at December 30, 2018																			26,858,988		$	270	$	170,290		$	72,268	$	(2,769	)	$	240,059
Stock-based compensation	—		—		2,644				—			—				2,644			—		—		792			—		—			792
Vesting of restricted shares	115,539		2		(2		)		—			—				—			68,286		—		(1		)	—		—			(1		)
Cumulative effect of adopting a new accounting standard (Note 1)	—		—		—				57			—				57			—		—		—			14,002		—			14,002
Purchase of treasury stock	(97,358	)	—		—				—			(2,484		)		(2,484		)	(158,269	)	—		—			—		(2,199		)	(2,199		)
Net income	—		—		—				15,724			—				15,724			—		—		—			2,289		—			2,289
Balance at September 30, 2018	26,865,639		$	270	$	169,465			$	80,206		$	(2,484	)		$	247,457
Balance at March 31, 2019																			26,769,005		$	270	$	171,081		$	88,559	$	(4,968	)	$	254,942

FIESTA RESTAURANT GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2019 AND APRIL 1, 2018 ~~AND OCTOBER 1, 2017~~

(In thousands)

(Unaudited)


	Nine Months Ended						Three Months Ended
	September 30, 2018			October 1, 2017			March 31, 2019			April 1, 2018
Operating activities:
Net income (loss)	$	15,724		$	(25,477	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net income							$	2,289		$	4,184
Adjustments to reconcile net income to net cash provided by operating activities:
(Gain) loss on disposals of property and equipment	(1,167		)	1,020			(13		)	129
Stock-based compensation	2,644			2,767			792			889
Impairment and other lease charges	6,539			59,081			(338		)	(662		)
Depreciation and amortization	27,908			26,265			9,548			8,999
Amortization of deferred financing costs	203			231			67			68
Amortization of deferred gains from sale-leaseback transactions	(2,698		)	(2,703		)	—			(899		)
Deferred income taxes	7,856			(16,886		)	—			1,348
Changes in other operating assets and liabilities	(12,721		)	3,355			(4,597		)	(5,167		)
Net cash provided by operating activities	44,288			47,653			7,748			8,889
Investing activities:
Capital expenditures:
New restaurant development	(17,897		)	(23,994		)	(3,839		)	(4,765		)
Restaurant remodeling	(234		)	(2,280		)	(171		)	(333		)
Other restaurant capital expenditures	(15,536		)	(7,650		)	(5,015		)	(5,895		)
Corporate and restaurant information systems	(6,256		)	(4,615		)	(2,512		)	(4,175		)
Total capital expenditures	(39,923		)	(38,539		)	(11,537		)	(15,168		)
Proceeds from disposals of properties	4,676			—			1,774			1,813
Proceeds from insurance recoveries	813			—			—			180
Net cash used in investing activities	(34,434		)	(38,539		)	(9,763		)	(13,175		)
Financing activities:
Borrowings on revolving credit facility	18,000			7,000			11,000			15,000
Repayments on revolving credit facility	(23,000		)	(16,000		)	(7,000		)	(10,000		)
Principal payments on capital leases	(76		)	(66		)
Principal payments on finance/capital leases							(26		)	(23		)
Financing costs associated with issuance of debt	(150		)	—			—			(150		)
Payments to purchase treasury stock	(2,484		)	—			(2,199		)	(349		)
Net cash used in financing activities	(7,710		)	(9,066		)
Net cash provided by financing activities							1,775			4,478
Net change in cash	2,144			48			(240		)	192
Cash, beginning of period	3,599			4,196			5,258			3,599
Cash, end of period	$	5,743		$	4,244		$	5,018		$	3,791
Supplemental disclosures:
Interest paid on long-term debt	$	2,505		$	1,756		$	1,685		$	516
Interest paid on lease financing obligations	—			83
Accruals for capital expenditures	5,338			7,950			4,589			3,428
Income tax payments (refunds), net	(3,360		)	3,003			(58		)	(17		)
Capital lease obligations incurred	322			—
Non-cash reduction of lease financing obligations	—			1,664
Non-cash reduction of assets under lease financing obligations	—			1,193
Finance/capital lease obligations incurred							—			322

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

Table of Contents

FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

1. Basis of Presentation

Business Description. Fiesta Restaurant Group, Inc. ("Fiesta Restaurant Group" or "Fiesta") owns, operates and franchises two 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 ~~September 30, 2018,~~March 31, 2019, the Company owned and operated ~~150~~139 Pollo Tropical^® restaurants and ~~171~~164 Taco Cabana^® restaurants. ~~The~~All of the Pollo Tropical restaurants ~~included 141~~are located in Florida and ~~9 located in Georgia. All~~all of the Taco Cabana restaurants are located in Texas. At ~~September 30, 2018,~~March 31, 2019, the Company franchised a total of 3031 Pollo Tropical restaurants and eight Taco Cabana restaurants. The franchised Pollo Tropical restaurants included 17 in Puerto Rico, four in Panama, two in Guyana, one in the Bahamas, ~~five~~six on college campuses and one at a hospital in Florida. The franchised Taco Cabana restaurants included six 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 December ~~31, 2017~~30, 2018 contained 52 weeks. The three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~ each contained thirteen ~~and thirty-nine weeks, respectively.~~weeks. The fiscal year ending December ~~30, 2018~~29, 2019 will contain 52 weeks.

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~ have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~ 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 December ~~31, 2017~~30, 2018 included in the Company's Annual Report on Form 10-K for the fiscal year ended December ~~31, 2017.~~30, 2018. The December ~~31, 2017~~30, 2018 balance sheet data is derived from those audited financial statements.

~~Reclassification.~~ Write-offs of site development costs were reclassified from general and administrative expense to other expense (income), net in the condensed consolidated statement of operations to conform with the current year presentation.

Guidance Adopted in ~~2018.~~2019. In ~~May 2014,~~February 2016, and in subsequent updates, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. ~~2014-09,~~2016-02, ~~Revenue from Contracts with Customers~~Leases (Topic 842) ~~(Topic 606)~~("ASC 842"), which ~~supersedes~~requires lessee recognition of lease assets and lease liabilities on the ~~guidance in former Topic 605,~~ ~~Revenue Recognition~~,balance sheet and ~~requires entities to recognize revenue when control~~disclosure of ~~the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.~~key information about leasing arrangements. The Company adopted this new accounting standard and all the related amendments as of ~~January 1,~~December 31, 2018 using the modified retrospective method, with certain optional practical expedients including the transition practical expedient package, which among other things does not require reassessment of lease classification. The Company elected the transition method that allows it to initially apply the new standard at the adoption date and ~~recognized~~recognize a ~~total cumulative effect~~cumulative-effect adjustment to ~~increase~~the opening balance of retained earnings ~~by less than $0.1 million, which consisted~~in the period of a $0.3 million increase related to gift card breakage and a $0.3 million decrease related to initial franchise and area development fees, as a result of adopting the standard. The new standard did not impact the Company’s recognition of revenue from Company-owned and operated restaurants or its recognition of sale-based royalties from restaurants operated by franchisees.adoption. The comparative period information has not been restated and continues to be reported under the accounting standard in effect for ~~those periods. When compared~~that period.

The Company has recognized lease liabilities and corresponding right-of-use ("ROU") lease assets for substantially all of the leases it previously accounted for as operating leases, including leases related to closed restaurant properties. The initial ROU assets were calculated as the present value of the remaining operating lease payments using the Company's incremental borrowing rate as of December 31, 2018, reduced by accrued occupancy costs such as certain closed-restaurant lease reserves, accrued rent (including accruals to expense operating lease payments on a straight-line basis), unamortized lease incentives and any unamortized sale-leaseback gains that resulted from off-market terms and increased by unamortized lease acquisition costs. Upon the adoption of ASC 842, the Company no longer records closed restaurant lease reserves, and ROU lease assets are reviewed for impairment with the Company's long-lived assets.

The Company elected the practical expedient to combine lease and non-lease components of real estate contracts, which resulted in classification of certain occupancy related expenses that are included in other restaurant operating expenses for periods prior to the ~~previous accounting policies,~~adoption of ASC 842 as restaurant rent expenses in the ~~impact~~consolidated statement of ~~adopting~~operations for periods subsequent to the ~~new standard was immaterial~~adoption of ASC 842. The Company separately presents rent expense related to ~~current~~its closed restaurant locations and ~~non-current other liabilities and~~any sublease income related to these closed restaurant locations within closed restaurant rent expense, net of sublease income in the consolidated statement of operations for periods subsequent to the adoption of ASC 842.

Table of Contents

FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

The Company recorded an initial adjustment to the opening balance of retained earnings ~~at January 1, 2018~~of $14.0 million associated with previously deferred gains on sale-leaseback transactions and ~~to net income for the three and nine months ended September 30, 2018. The adoption~~impairment of operating lease right-of-use assets as of the ~~new standard had no impact~~date of adoption. This adjustment consisted of $18.6 million in deferred gains on sale-leaseback transactions, net of a related deferred tax asset of $4.3 million and $0.2 million in impairment charges, net of tax. For any future sale-leaseback transactions, the ~~Company's consolidated statements of cash flows.~~gain (adjusted for any off-market terms) will be recognized immediately.

Revenue Recognition. Revenue is recognized upon transfer of promised products or services to customers in an amount that reflects the consideration the Company received in exchange for those products or services. Revenues from the Company's owned and operated restaurants are recognized when payment is tendered at the time of sale. Franchise royalty revenues are based on a percent of gross sales and are recorded as income when earned. Initial franchise fees and area development fees associated with new franchise agreements are not distinct from the continuing rights and services offered by the Company during the term of the

~~Table of Contents~~

~~FIESTA RESTAURANT GROUP, INC.~~

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

~~(Dollars in thousands, except per share data)~~

related franchise agreements and are recognized as income over the term of the related franchise agreements. A portion of the initial franchise fee is allocated to training services and is recognized as revenue when the Company completes the training services. ~~Prior to adopting Topic 606, the Company recognized initial franchise fees as revenue in the period that a franchised location opened for business. See Note 6—Business Segment Information.~~

~~Gift cards~~. The Company sells gift cards to its customers in its restaurants and through select third parties. The Company recognizes revenue from gift cards upon redemption by the customer. For unredeemed gift cards that the Company expects to be entitled to breakage, the Company recognizes expected breakage as revenue in proportion to the pattern of redemption by the customers. The gift cards have no stated expiration dates. Revenues from unredeemed gift cards and gift card liabilities, which are recorded in other current liabilities, are not material to the Company's financial statements. Prior to adopting Topic 606, the Company did not recognize breakage on its gift cards.

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 management's own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:


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

•

Revolving Credit Borrowings. The fair value of outstanding revolving credit borrowings under the Company's senior credit facility, which is considered Level 2, is based on current LIBOR rates. The fair value of the Company's senior credit facility was approximately ~~$69.9~~$82.0 million at ~~September 30, 2018,~~March 31, 2019, and ~~$75.0~~$78.0 million at December ~~31, 2017.~~30, 2018. The carrying value of the Company's senior credit facility was ~~$70.0~~$82.0 million at ~~September 30, 2018~~March 31, 2019 and ~~$75.0~~$78.0 million at December ~~31, 2017.~~30, 2018.

Long-Lived Assets. The Company assesses the recoverability of property and equipment and definite-lived intangible assets including right-of-use lease 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—Impairment of Long-Lived Assets.

Leases. The Company assesses whether an agreement contains a lease at inception. Operating leases are included within operating lease right-of-use assets, other current liabilities, and operating lease liabilities in the consolidated balance sheets. Finance leases are included within property and equipment, current portion of long-term debt, and long-term debt, net of current maturities in the consolidated balance sheets.

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any lease payments made in advance and is reduced by lease incentives received. As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate at commencement date in determining the present value of lease payments. Lease terms include options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company assumes options are reasonably certain to be exercised when such options are required to achieve a minimum 20-year lease term for new restaurant properties, and subsequent to the adoption of ASC842, when it incurs significant leasehold improvement costs near the end of a lease term. The Company uses judgment and available data to allocate consideration in a contract when it leases land and a building. The Company also uses judgment in determining its incremental borrowing rate, which includes selecting a yield curve based on a synthetic credit rating determined using a valuation model. Lease expense for lease payments is recognized on a straight-line basis over the lease term unless the related ROU asset has been adjusted for an impairment charge. The Company has real estate lease agreements with lease and non-lease components, which are accounted for as a single lease component. See Note 5—Leases.

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

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

contingent assets and liabilities at the dates of the financial statements. Estimates also affect the reported amounts of expenses during the reporting periods. Significant items subject to such estimates and assumptions include: accrued occupancy costs, insurance liabilities, evaluation for impairment of goodwill and long-lived assets and lease accounting matters. Actual results could differ from those estimates.

2. Prepaid Expenses and Other Current Assets

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


	September 30, 2018		December 31, 2017		March 31, 2019		December 30, 2018
Prepaid contract expenses	$	3,670	$	3,681	$	4,647	$	4,232
Assets held for sale⁽¹⁾	—		2,705		4,336		—
Other	3,300		3,719		4,237		2,330
	$	6,970	$	10,105	$	13,220	$	6,562

⁽¹⁾ ~~Two~~One closed Pollo Tropical restaurant and two Taco Cabana restaurant properties owned by the Company ~~that~~ were classified as held for sale as of ~~December~~March 31, ~~2017 were sold in 2018 for a total of $3.3 million.~~2019.

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~~FIESTA RESTAURANT GROUP, INC.~~

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

~~(Dollars in thousands, except per share data)~~

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

The Company reviews its long-lived assets, principally property and equipment and lease ROU assets, for impairment at the restaurant level. In addition to considering ~~management’s~~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~~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~~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~~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 (recoveries) recorded by segment is as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30, 2018		October 1, 2017		September 30, 2018		October 1, 2017		March 31, 2019			April 1, 2018
Pollo Tropical	$	3,295	$	13,729	$	3,439	$	56,336	$	(379	)	$	(541	)
Taco Cabana	3,122		2,176		3,100		2,745		41			(121		)
	$	6,417	$	15,905	$	6,539	$	59,081	$	(338	)	$	(662	)

The Company recognized impairment charges totaling $5.7 million in the three months ended September 30, 2018 related to management's ongoing assessment of the Company's restaurant portfolio in light of continued sales declines at certain underperforming restaurants. Impairment and other lease charges for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 for Pollo Tropical include impairment charges of ~~$3.4~~$0.4 million, ~~and $3.6 million, respectively,~~ related primarily to impairment of ~~three underperforming~~equipment from previously impaired restaurants ~~that the Company continues to operate~~ and a ~~benefit of $(0.1) million in net~~ lease charge recoveries benefit of $(0.7) million related to ~~certain~~ previously closed ~~restaurants due to adjustments to estimates of future~~restaurant lease ~~costs.~~terminations. Impairment and other lease charges for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 for Taco Cabana include impairment charges ~~of $2.4 million and $2.6 million, respectively,~~ related primarily to impairment of ~~five underperforming restaurants that the Company continues to operate~~equipment from previously impaired restaurants.

Impairment and other lease charges net of recoveries, of $0.7 million and $0.5 million, respectively, due primarily to lease charges related to an office relocation in the third quarter of 2018 and other lease charges, net of recoveries, related to certain previously closed restaurants due to adjustments to estimates of future lease costs.

~~In conjunction with the Strategic Renewal Plan to drive long-term shareholder value creation, Pollo Tropical recognized impairment charges of $15.6 million and $51.3 million~~ for the three ~~and nine~~ months ended ~~October~~April 1, ~~2017, respectively. In addition, Pollo Tropical recognized~~2018 primarily consist of a ~~$(1.9)~~$(0.6) million and a $(0.1) million net benefit related to lease charge recoveries for Pollo Tropical and ~~$5.0 million of lease charges, net of recoveries, for the three and nine months ended October 1, 2017, respectively. These charges were~~Taco Cabana, respectively, due primarily to ~~impairment and closures of underperforming Pollo Tropical restaurants in 2017 and the net benefit related to~~a lease ~~charge recoveries during the third quarter of 2017 was due to closed restaurant~~termination, a lease ~~terminations, assignments~~assignment, subleases and other adjustments to estimates of future lease costs. Impairment and other lease charges for Taco Cabana consisted of impairment charges of $0.9 million and $1.4 million for the three and nine months ended October 1, 2017, respectively, and other lease charges of $1.3 million for the three and nine months ended October 1, 2017. These charges were due primarily to impairment and closures of underperforming Taco Cabana restaurants in 2017.

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~~FIESTA RESTAURANT GROUP, INC.~~

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

~~(Dollars in thousands, except per share data)~~

The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions, the ~~Company’s~~Company's history of using these assets in the operation of its business and the Company's expectation of how a market participant would value the assets. In addition, for those restaurants reviewed for impairment where the Company owns the land and building, the Company utilized third-party information such as a broker quoted value to determine the fair value of the property. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The Level 3 assets measured at fair value associated with impairment charges recorded during the ~~nine~~three months ended September 30, 2018 and October 1, 2017 totaled $1.2 million and $13.5 million, respectively, which primarily consisted of equipment for the nine months ended September 30, 2018 and leasehold improvements related to Pollo Tropical restaurants that were or will be rebranded as Taco Cabana restaurants and the estimated fair value of owned properties for the nine months ended October 1, 2017.

~~4. Other Liabilities~~

~~Other current liabilities consist of the following:~~

September 30, 2018 December 31, 2017
Accrued workers' compensation and general liability claims $ 5,401
$ 5,083
Sales and property taxes 2,299
2,279
Accrued occupancy costs 4,959
7,813
Other 2,393
6,642
$ 15,052
$ 21,817

~~Other non-current liabilities consist of the following:~~

September 30, 2018 December 31, 2017
Accrued occupancy costs $ 20,007
$ 20,985
Deferred compensation 826
1,029
Accrued workers’ compensation and general liability claims 6,099
6,102
Other 3,542
3,946
$ 30,474
$ 32,062

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

The following table presents the activity in the closed-restaurant reserve, of which $3.3 million and $5.3 million are included in non-current accrued occupancy costs at September 30, 2018 and DecemberMarch 31, ~~2017, respectively, with the remainder in current accrued occupancy costs.~~

Nine Months Ended September 30, 2018 Year Ended December 31, 2017
Balance, beginning of period $ 12,994
$ 4,912
Provisions for restaurant closures —
8,767
Additional lease charges (recoveries), net 413
(1,301 )
Payments, net (5,741 ) (5,528 )
Other adjustments⁽¹⁾
388
6,144
Balance, end of period $ 8,054
$ 12,994

⁽¹⁾~~For the year ended December 31, 2017, includes the transfer of accruals to expense operating lease payments on a straight-line basis.~~

2019 had no value.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

4. Other Liabilities

Other current liabilities consist of the following:



	March 31, 2019		December 30, 2018
Accrued workers' compensation and general liability claims	$	5,394	$	4,886
Sales and property taxes	1,817		1,958
Accrued occupancy costs	1,705		4,554
Operating lease liabilities	19,191		—
Other	2,991		2,688
	$	31,098	$	14,086

Other non-current liabilities consist of the following:



	March 31, 2019		December 30, 2018
Accrued occupancy costs	$	78	$	21,534
Deferred compensation	869		867
Accrued workers' compensation and general liability claims	6,808		6,808
Other	785		3,295
	$	8,540	$	32,504

At December 30, 2018, accrued occupancy costs included obligations pertaining to closed restaurant locations and accruals to expense operating lease rental payments on a straight-line basis over the lease term. At March 31, 2019 accrued occupancy costs consisted of only current obligations pertaining to closed restaurant locations.

The following table presents the activity in the closed-restaurant reserve, of which $0.1 million and $4.4 million are included in non-current accrued occupancy costs at March 31, 2019 and December 30, 2018, respectively, with the remainder in current accrued occupancy costs. At March 31, 2019, all closed-restaurant reserves are included in current accrued occupancy costs.



	Three Months Ended March 31, 2019			Year Ended December 30, 2018
Balance, beginning of period	$	8,819		$	12,994
Provisions for restaurant closures	—			2,228
Additional lease charges (recoveries), net	(742		)	(152		)
Payments, net	(693		)	(6,778		)
Other adjustments⁽¹⁾	(5,708		)	527
Balance, end of period	$	1,676		$	8,819

⁽¹⁾As a result of adopting ASC 842 on December 31, 2018, the portion of the closed restaurant reserve related to operating lease rental payments was reclassified and included as a component of the related ROU assets. The portion of the closed restaurant reserve related to variable ancillary lease costs was not reclassified and was not included as a reduction to ROU assets.

5. Leases

The Company utilizes land and buildings in its operations under various operating and finance lease agreements. The Company does not consider any one of these individual leases material to the Company's operations. Initial lease terms are generally for 20 years and, in many cases, provide for renewal options and in most cases rent escalations. As of March 31, 2019, the Company's leases have remaining lease terms of 0.5 years to 22.6 years. Some of the Company's leases include options to extend the lease for up to 40 years. Certain leases require contingent rent, determined as a percentage of sales as defined by the terms of the applicable lease agreement. For most locations, the Company is obligated for occupancy related costs including payment of property taxes, insurance and utilities. Variable lease payments included in rent expense consist of such contingent rent, rent payments based on changes in an index and certain occupancy related costs, such as variable common area maintenance expense and property taxes. The Company is not subject to residual value guarantees under any of the lease agreements. Many of the Company's real estate leases contain usage restrictions, but do not contain financial covenants and restrictions.

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

Lease expense consisted of the following:



	Three Months Ended
	March 31, 2019
Operating lease cost	$	11,355

Finance lease costs:
Amortization of right-of-use assets	$	35
Interest on lease liabilities	55
Total finance lease costs	$	90

Variable lease costs	$	2,986
Sublease income	(748		)
Total lease costs	$	13,683

Supplemental balance sheet information related to leases is as follows:



	March 31, 2019
Operating Leases
Operating lease right-of-use assets	$	264,951

Other current liabilities	$	19,191
Operating lease liabilities	269,424
Total operating lease liabilities	$	288,615

Finance Leases
Property and Equipment, gross	$	2,373
Accumulated amortization	(1,158		)
Property and equipment, net	$	1,215

Current portion of long-term debt	$	95
Long-term debt, net of current portion	1,593
Total finance lease liabilities	$	1,688



Weighted Average Remaining Lease Term (in Years)
Operating leases	12.4
Finance leases	9.7

Weighted Average Discount Rate
Operating leases	7.70	%
Finance leases	13.87	%

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

Supplemental cash flow information related to leases is as follows:



	Three Months Ended
	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	10,852
Operating cash flows for finance leases	55
Financing cash flows for finance leases	26

Operating lease right-of-use assets obtained in exchange for lease liabilities:
Operating lease ROU assets	5,191

Operating lease right-of-use assets obtained and liabilities incurred as a result of adoption of ASC 842:
Operating lease ROU assets	265,547
Operating lease liabilities	288,763

Maturities of lease liabilities were as follows:



	Operating Leases			Finance Leases
2019	$	29,422		$	225
2020	43,456			327
2021	40,012			342
2022	38,590			342
2023	35,205			349
2024	31,488			350
Thereafter	247,190			1,278
Total lease payments	465,363			3,213
Less amount representing interest	(176,748		)	(1,525		)
Total discounted lease liabilities	288,615			1,688
Less current portion	(19,191		)	(95		)
Long-term portion of leases liabilities	$	269,424		$	1,593

As of March 31, 2019, the Company had five additional operating leases for restaurant properties and an additional operating lease for additional space at a corporate office that had not yet commenced. These operating leases will commence between fiscal year 2019 and fiscal year 2020 with lease terms of nine years to 15 years.

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

Minimum rent commitments due under capital and non-cancelable operating leases at December 30, 2018 were as follows:



	Operating		Capital
2019	$	44,427	$	323
2020	44,144		327
2021	41,396		342
2022	40,215		342
2023	36,587		349
Thereafter	264,704		1,646
Total minimum lease payments⁽¹⁾	$	471,473	3,329
Less amount representing interest			(1,585		)
Total obligations under capital leases			1,744
Less current portion			(108		)
Long-term debt under capital leases			$	1,636


(1)	Minimum operating lease payments include contractual rent payments for closed restaurants for which the Company is still obligated under the lease agreements and have not been reduced by minimum sublease rent of $41.4 million due in the future under non-cancelable subleases. See Note 4—Other Liabilities.

The Company subleases land and buildings related to closed restaurant locations and a closed office location under various operating sublease agreements. Initial sublease terms are generally for the period of time remaining on the head lease term and, in some cases, subleases provide for renewal options and in most cases rent escalations. As of March 31, 2019, the Company's subleases have remaining sublease terms of 3.1 years to 20.2 years. Some of the Company's subleases include options to extend the lease for up to 25 years. Variable lease payments included in sublease income consist of certain occupancy related costs, such as variable common area maintenance expense and property taxes where the Company makes the real estate payment and is reimbursed by the lessee. The sublease agreements do not include residual value guarantees. Consistent with the Company's real estate leases, many of the subleases contain usage restrictions, but do not contain financial covenants and restrictions.

The undiscounted cash flows to be received under operating subleases were as follows:



	Operating Leases
2019	$	2,064
2020	2,946
2021	3,055
2022	2,991
2023	2,951
2024	2,985
Thereafter	29,872
Total	$	46,864

6. Stockholders' Equity

Purchase of Treasury Stock

On February 26, 2018, the Company announced that its board of directors approved a share repurchase program for up to 1,500,000 shares of the Company's common stock. Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by the Company's board of directors. The Company repurchased ~~97,358~~158,269 shares of its common stock under the program in open market transactions during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 for ~~$2.5~~$2.2 million. The repurchased shares are held as treasury stock at cost.

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

Stock-Based Compensation

During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the Company granted certain employees ~~non-employee directors~~ and a ~~non-employee food and beverage~~ consultant a total of ~~187,747~~223,948 non-vested restricted shares under the Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan (the "Fiesta Plan"). The shares granted ~~to employees~~ generally vest and become non-forfeitable over a four-year vesting period. The shares granted to non-employee directors, the non-employee food and beverage consultant and a new non-employee director vest and become non-forfeitable over a one-, three- and five-year vesting period, respectively. The weighted average fair value at grant date for non-vested shares issued during the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and April 1, 2018 was $13.44 and ~~October 1, 2017 was $19.02 and $20.84~~$18.70 per share, respectively.

During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the Company granted a certain ~~executives~~executive a total of ~~112,169~~15,348 restricted stock units under the Fiesta Plan, which vest in ~~three~~two tranches over a ~~three-year~~two-year vesting period. The restricted stock units granted to ~~executives~~the executive are subject to continued service and attainment of specified share prices of the Company's common stock for a specified period of time within each vesting period. 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~~the first tranche is not met for the year, the cumulative unearned restricted stock units will be rolled over to the subsequent ~~tranches on a pro rata basis.~~tranche. For the restricted stock units granted ~~to executives~~ in the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, 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 ~~112,169~~15,348 shares, if the service and market performance conditions are met in the last vesting period. The weighted average fair value at grant date for the restricted stock units granted to executives in the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and April 1, 2018 was $1.76 and ~~October 1, 2017 was~~ $6.96 ~~and $12.13~~ per share, respectively.

During the nine months ended October 1, 2017, the Company granted certain employees restricted stock units under the Fiesta Plan. The restricted stock units granted during the nine months ended October 1, 2017 vest and become non-forfeitable at the end of a four-year vesting period. The weighted average fair value at grant date for these restricted stock units issued to employees during the nine months ended October 1, 2017 was $20.75 per share.

Stock-based compensation expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and April 1, 2018 was ~~$0.7~~$0.8 million and ~~$2.6 million, respectively, and for the three and nine months ended October 1, 2017 was~~ $0.9 ~~million and $2.8~~ million, respectively. At ~~September 30, 2018,~~March 31, 2019, the total unrecognized stock-based compensation expense related to non-vested restricted shares and restricted stock units was approximately ~~$5.8~~$6.6 million. At ~~September 30, 2018,~~March 31, 2019, the remaining weighted average vesting period for non-vested restricted shares was ~~2.7~~3.2 years and restricted stock units was ~~1.3~~1.4 years.

A summary of all non-vested restricted shares and restricted stock units activity for the three months ended March 31, 2019 is as follows:



	Non-Vested Shares				Restricted Stock Units
	Shares		Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value
Outstanding at December 30, 2018	287,866		$	20.70	231,112		$	12.44
Granted	223,948		13.44		15,348		1.76
Vested and released	(65,363	)	22.17		(3,124	)	62.05
Forfeited	(32,257	)	20.08		(65,336	)	15.22
Outstanding at March 31, 2019	414,194		$	16.53	178,000		$	9.62

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. The fair value of the restricted stock units subject to market conditions was estimated using the Monte Carlo simulation method. The assumptions used to value grant restricted stock units subject to market conditions are detailed below:



	2019			2018
Grant date stock price	$	14.66		$	18.70
Fair value at grant date	$	1.76		$	6.96
Risk free interest rate	2.53		%	2.40		%
Expected term (in years)	2			3
Dividend yield	—		%	—		%
Expected volatility	43.18		%	41.49		%

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

~~A summary of all non-vested restricted shares and restricted stock units activity for the nine months ended September 30, 2018 is as follows:~~

Non-Vested Shares Restricted Stock Units
Shares Weighted
Average
Grant Date
Fair Value Units Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2017 239,500
$ 24.81
143,946
$ 23.11
Granted 187,747
19.02
112,169
6.96
Vested and released (105,240 ) 25.62
(10,344 ) 45.76
Forfeited (26,609 ) 22.56
(13,851 ) 52.93
Outstanding at September 30, 2018 295,398
$ 20.66
231,920
$ 12.51

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.

6.7. Business Segment Information

The Company owns, operates and franchises two restaurant brands, Pollo Tropical^® and Taco Cabana^®, each of which is an operating segment. Pollo Tropical restaurants feature ~~24-hour~~fire-grilled and crispy citrus marinated chicken and other freshly prepared tropical inspired menu items, while Taco Cabana restaurants specialize in Mexican inspired food.

Each segment's accounting policies are 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 December ~~31, 2017.~~30, 2018. 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 defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, ~~stock-compensation~~closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company's restaurants as set forth in the reconciliation table below.

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~~FIESTA RESTAURANT GROUP, INC.~~

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

~~(Dollars in thousands, except per share data)~~

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 and a current income tax receivable.

Three Months Ended Pollo Tropical Taco Cabana Other Consolidated
September 30, 2018:
Restaurant sales $ 93,592
$ 80,374
$ —
$ 173,966
Franchise revenue 453
229
—
682
Cost of sales 31,219
24,802
—
56,021
Restaurant wages and related expenses⁽¹⁾
21,947
25,996
—
47,943
Restaurant rent expense 4,392
4,737
—
9,129
Other restaurant operating expenses 13,521
13,773
—
27,294
Advertising expense 3,413
3,059
—
6,472
General and administrative expense⁽²⁾
7,291
5,993
—
13,284
Adjusted EBITDA 12,544
2,493
—
15,037
Depreciation and amortization 5,438
4,301
—
9,739
Capital expenditures 4,621
7,489
525
12,635
October 1, 2017:
Restaurant sales $ 87,888
$ 70,212
$ —
$ 158,100
Franchise revenue 396
195
—
591
Cost of sales 28,527
20,624
—
49,151
Restaurant wages and related expenses⁽¹⁾
21,208
23,441
—
44,649
Restaurant rent expense 4,655
4,449
—
9,104
Other restaurant operating expenses 13,034
11,822
—
24,856
Advertising expense 4,980
905
—
5,885
General and administrative expense⁽²⁾
6,647
5,410
—
12,057
Adjusted EBITDA 9,396
3,776
—
13,172
Depreciation and amortization 5,187
3,296
—
8,483
Capital expenditures 6,302
5,471
613
12,386

~~Table of Contents~~

~~FIESTA RESTAURANT GROUP, INC.~~

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

~~(Dollars in thousands, except per share data)~~


Nine Months Ended	Pollo Tropical		Taco Cabana		Other		Consolidated
September 30, 2018:
Three Months Ended									Pollo Tropical		Taco Cabana		Other		Consolidated
March 31, 2019:
Restaurant sales	$	283,447	$	235,504	$	—	$	518,951	$	91,026	$	74,155	$	—	$	165,181
Franchise revenue	1,376		632		—		2,008		455		216		—		671
Cost of sales	93,716		72,559		—		166,275		28,298		22,212		—		50,510
Restaurant wages and related expenses⁽¹⁾	65,652		76,451		—		142,103		21,153		23,883		—		45,036
Restaurant rent expense	13,024		13,837		—		26,861		5,421		6,324		—		11,745
Other restaurant operating expenses	38,270		37,128		—		75,398		11,958		9,805		—		21,763
Advertising expense	9,859		8,187		—		18,046		3,032		2,489		—		5,521
General and administrative expense⁽²⁾	22,256		18,767		—		41,023		8,347		6,724		—		15,071
Adjusted EBITDA	42,520		9,652		—		52,172		14,317		2,895		—		17,212
Depreciation and amortization	16,117		11,791		—		27,908		5,213		4,335		—		9,548
Capital expenditures	17,656		21,400		867		39,923		7,145		4,037		355		11,537
October 1, 2017:
April 1, 2018:
Restaurant sales	$	281,572	$	223,510	$	—	$	505,082	$	94,478	$	74,355	$	—	$	168,833
Franchise revenue	1,272		568		—		1,840		464		187		—		651
Cost of sales	87,430		63,397		—		150,827		31,015		22,550		—		53,565
Restaurant wages and related expenses⁽¹⁾	66,945		72,105		—		139,050		22,156		24,327		—		46,483
Restaurant rent expense	14,502		13,379		—		27,881		4,297		4,595		—		8,892
Other restaurant operating expenses	39,353		34,207		—		73,560		12,115		11,335		—		23,450
Advertising expense	11,316		6,400		—		17,716		3,316		2,897		—		6,213
General and administrative expense⁽²⁾	26,161		20,590		—		46,751		8,042		6,877		—		14,919
Adjusted EBITDA	41,257		17,252		—		58,509		14,447		2,511		—		16,958
Depreciation and amortization	16,705		9,560		—		26,265		5,316		3,683		—		8,999
Capital expenditures	23,208		13,487		1,844		38,539		8,173		6,911		84		15,168
Identifiable Assets:
September 30, 2018	$	212,704	$	174,575	$	32,619	$	419,898
December 31, 2017	227,194		167,237		28,882		423,313
March 31, 2019									$	352,050	$	287,779	$	36,602	$	676,431
December 30, 2018									207,435		174,681		36,543		418,659

⁽¹⁾Includes stock-based compensation expense of $6$27 and ~~$56~~$17 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and April 1, 2018,, ~~respectively, and $9 and $44 for the three and nine months ended October 1, 2017,~~ respectively.

⁽²⁾Includes stock-based compensation expense of ~~$732~~$765 and ~~$2,588~~$872 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and April 1, 2018, ~~respectively, and $938 and $2,723 for the three and nine months ended October 1, 2017,~~ respectively.

1516

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

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

Three Months Ended Pollo Tropical Taco Cabana Consolidated
September 30, 2018:
Net income $ 2,047
Benefit from income taxes (4,892 )
Income (loss) before taxes $ 2,976
$ (5,821 ) $ (2,845 )
Add:
     Non-general and administrative expense adjustments:
          Depreciation and amortization 5,438
4,301
9,739
          Impairment and other lease charges 3,295
3,122
6,417
          Interest expense 448
476
924
          Other expense (income), net (29 ) 76
47
          Stock-based compensation expense in restaurant wages 4
2
6
                Total non-general and administrative expense adjustments 9,156
7,977
17,133
     General and administrative expense adjustments:
          Stock-based compensation expense 407
325
732
          Strategic Renewal Plan restructuring costs and retention bonuses 5
12
17
               Total general and administrative expense adjustments 412
337
749
Adjusted EBITDA $ 12,544
$ 2,493
$ 15,037

October 1, 2017:
Net loss $ (8,257 )
Benefit from income taxes (4,827 )
Loss before taxes $ (10,816 ) $ (2,268 ) $ (13,084 )
Add:
     Non-general and administrative expense adjustments:
          Depreciation and amortization 5,187
3,296
8,483
          Impairment and other lease charges 13,729
2,176
15,905
          Interest expense 329
343
672
          Other expense (income), net 574
(105 ) 469
          Stock-based compensation expense in restaurant wages (4 ) 13
9
                Total non-general and administrative expense adjustments 19,815
5,723
25,538
     General and administrative expense adjustments:
          Stock-based compensation expense 587
351
938
          Board and shareholder matter costs (89 ) (66 ) (155 )
          Strategic Renewal Plan restructuring costs and retention bonuses 51
36
87
          Office restructuring and relocation costs (152 ) —
(152 )
               Total general and administrative expense adjustments 397
321
718
Adjusted EBITDA $ 9,396
$ 3,776
$ 13,172

~~Table of Contents~~

~~FIESTA RESTAURANT GROUP, INC.~~

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

~~(Dollars in thousands, except per share data)~~


Nine Months Ended	Pollo Tropical			Taco Cabana			Consolidated
September 30, 2018:
Three Months Ended										Pollo Tropical			Taco Cabana			Other		Consolidated
March 31, 2019:
Net income							$	15,724										$	2,289
Benefit from income taxes							(246		)
Provision for income taxes																		946
Income (loss) before taxes										$	5,956		$	(2,721	)	$	—	$	3,235
Add:
Non-general and administrative expense adjustments:
Depreciation and amortization										5,213			4,335			—		9,548
Impairment and other lease charges										(379		)	41			—		(338		)
Interest expense										656			578			—		1,234
Closed restaurant rent expense, net of sublease income										1,144			280			—		1,424
Other expense (income), net										596			106			—		702
Stock-based compensation expense in restaurant wages										5			22			—		27
Total non-general and administrative expense adjustments										7,235			5,362			—		12,597
General and administrative expense adjustments:
Stock-based compensation expense										577			188			—		765
Restructuring costs and retention bonuses										549			66			—		615
Total general and administrative expense adjustments										1,126			254			—		1,380
Adjusted EBITDA										$	14,317		$	2,895		$	—	$	17,212

April 1, 2018:
Net income																		$	4,184
Provision for income taxes																		1,625
Income (loss) before taxes	$	21,901		$	(6,423	)	$	15,478		$	8,128		$	(2,319	)	$	—	$	5,809
Add:
Non-general and administrative expense adjustments:
Depreciation and amortization	16,117			11,791			27,908			5,316			3,683			—		8,999
Impairment and other lease charges	3,439			3,100			6,539			(541		)	(121		)	—		(662		)
Interest expense	1,467			1,512			2,979			528			541			—		1,069
Other expense (income), net	(1,577		)	(1,555		)	(3,132		)	346			20			—		366
Stock-based compensation expense in restaurant wages	23			33			56			5			12			—		17
Total non-general and administrative expense adjustments	19,469			14,881			34,350			5,654			4,135			—		9,789
General and administrative expense adjustments:
Stock-based compensation expense	1,458			1,130			2,588			467			405			—		872
Board and shareholder matter costs	(328		)	(269		)	(597		)
Strategic Renewal Plan restructuring costs and retention bonuses	187			333			520
Legal settlements and related costs	(167		)	—			(167		)
Restructuring costs and retention bonuses										198			290			—		488
Total general and administrative expense adjustments	1,150			1,194			2,344			665			695			—		1,360
Adjusted EBITDA	$	42,520		$	9,652		$	52,172		$	14,447		$	2,511		$	—	$	16,958

October 1, 2017:
Net loss							$	(25,477	)
Benefit from income taxes							(14,241		)
Loss before taxes	$	(39,414	)	$	(304	)	$	(39,718	)
Add:
Non-general and administrative expense adjustments:
Depreciation and amortization	16,705			9,560			26,265
Impairment and other lease charges	56,336			2,745			59,081
Interest expense	873			1,037			1,910
Other expense (income), net	1,624			97			1,721
Stock-based compensation expense in restaurant wages	(4		)	48			44
Unused pre-production costs in advertising expense	322			88			410
Total non-general and administrative expense adjustments	75,856			13,575			89,431
General and administrative expense adjustments:
Stock-based compensation expense	1,542			1,181			2,723
Terminated capital project	484			365			849
Board and shareholder matter costs	2,136			1,612			3,748
Strategic Renewal Plan restructuring costs and retention bonuses	1,278			823			2,101
Office restructuring and relocation costs	(152		)	—			(152		)
Legal settlements and related costs	(473		)	—			(473		)
Total general and administrative expense adjustments	4,815			3,981			8,796
Adjusted EBITDA	$	41,257		$	17,252		$	58,509

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

7.8. Earnings Per Share

Basic earnings per share ("EPS") is computed by dividing net income ~~(loss)~~ applicable to common shares by the weighted average number of common shares outstanding during each period. 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 EPS pursuant to the two-class method. The two-class method of computing EPS is an earnings allocation formula that determines earnings attributable to common shares and participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. EPS 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 EPS reflects the potential dilution that could occur if the restricted stock units were to be converted into common shares. Restricted stock units with performance conditions are only included in the diluted EPS calculation to the extent that performance conditions have been met at the measurement date. Diluted EPS is computed 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.

Weighted average outstanding restricted stock units totaling ~~568 and 746~~1,061 shares were ~~not included~~excluded in the computation of diluted EPS for the three ~~and nine~~ months ended ~~September 30,~~April 1, 2018 ~~respectively,~~ because including them would have been antidilutive. For the three ~~and nine~~ months ended ~~October 1, 2017, all~~March 31, 2019, no shares of outstanding restricted stock units ~~outstanding~~ were excluded ~~from~~in the computation of diluted ~~EPS because including them would have been antidilutive as a result of the net loss in these periods.~~EPS.

The computation of basic and diluted EPS is as follows:


	Three Months Ended					Nine Months Ended					Three Months Ended
	September 30, 2018		October 1, 2017			September 30, 2018		October 1, 2017			March 31, 2019		April 1, 2018
Basic and diluted EPS:
Net income (loss)	$	2,047	$	(8,257	)	$	15,724	$	(25,477	)
Net income											$	2,289	$	4,184
Less: income allocated to participating securities	23		—			171		—			22		40
Net income (loss) available to common shareholders	$	2,024	$	(8,257	)	$	15,553	$	(25,477	)
Net income available to common shareholders											$	2,267	$	4,144
Weighted average common shares—basic	26,954,285		26,845,568			26,900,716		26,811,610			26,842,704		26,874,016
Restricted stock units	4,589		—			4,675		—			2,373		5,815
Weighted average common shares—diluted	26,958,874		26,845,568			26,905,391		26,811,610			26,845,077		26,879,831

Earnings per common share—basic	$	0.08	$	(0.31	)	$	0.58	$	(0.95	)	$	0.08	$	0.15
Earnings per common share—diluted	0.08		(0.31		)	0.58		(0.95		)	0.08		0.15

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

The maximum potential liability for future rental payments that the Company could be required to make under these leases at ~~September 30, 2018~~March 31, 2019 was ~~$3.7~~$3.5 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. ~~On November 24, 2015, Pollo Tropical received~~The Company is 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~~party to any suit being filed, Pollo Tropical reached a settlement with seven named individuals and a proposed collective action class that allowed current and former assistant managers to receive notice and opt-invarious litigation matters incidental to the ~~settlement. Pollo Tropical denies~~conduct of business. The Company does not believe that the outcome of any ~~liability or unlawful conduct.~~of these matters will have a material effect on its consolidated financial statements.

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FIESTA RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share data)

The settlement was approved by a Florida state judge on December 27, 2017 which resulted in dismissal with prejudice for the named individuals and all individuals that opted-in to the settlement. The Company reserved $0.8 million in 2016 to cover the estimated costs related to the settlement. During the second quarter of 2018, the Company paid all settlement claims costs and recognized a reduction in legal settlement costs of $0.2 million.

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

~~Contingency Related to Insurance Recoveries.~~ During the third quarter of 2017, Texas and Florida were struck by Hurricanes Harvey and Irma (the "Hurricanes"). Forty-three Taco Cabana restaurants in the Houston metropolitan area and all Pollo Tropical restaurants in Florida and the Atlanta metropolitan area were temporarily closed and affected by the Hurricanes to varying degrees (e.g. property preparation and damages, inventory losses, payments to hourly employees while restaurants were closed and lost business related to temporary closures). In 2017, the Company recorded certain expected insurance proceeds in accounts receivable of $0.7 million and $0.4 million for Pollo Tropical and Taco Cabana, respectively. In the nine months ended September 30, 2018, the Company received business interruption and property damage insurance settlement proceeds of $2.8 million and $1.4 million for Pollo Tropical and Taco Cabana, respectively, and recognized other income of $2.1 million and $1.0 million for Pollo Tropical and Taco Cabana, respectively, related to the Hurricanes. The Company has received a final settlement related to Hurricane Irma as of September 30, 2018 and expects to record additional insurance proceeds related to Hurricane Harvey at the time of final settlement.

~~9. Income Taxes~~

~~Tax Law Changes.~~ On December 22, 2017, the Tax Cuts and Jobs Act (the "Act"), which includes a provision that reduced the federal corporate income tax rate from 35.0% to 21.0% effective January 1, 2018, was signed into law. In accordance with generally accepted accounting principles, the enactment of this new tax legislation required the Company to revalue its net deferred income tax assets at the new corporate statutory rate of 21.0% as of the enactment date, which resulted in an adjustment to its deferred income taxes of $9.0 million with a corresponding increase to the provision for income taxes as a discrete item during the fourth quarter of 2017. In 2018, in conjunction with a cost segregation study conducted prior to filing its 2017 federal income tax return, the Company changed the depreciation method for certain assets for federal income tax purposes to accelerate tax deductions. Changes in the Company's 2017 federal income tax return from the amounts recorded as of December 31, 2017 were primarily the result of changing the depreciable lives of assets for federal income tax purposes. These changes allowed the Company to record an incremental benefit of $3.9 million during the third quarter of 2018.

On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the impact of the Act, that, in effect, allows entities to use a methodology similar to the measurement period in a business combination. Pursuant to the disclosure provisions of SAB 118, the Company continues to evaluate the impact of the Act on various matters. The actual impact of the Act on the Company may differ from the provisional amounts recognized based on its reasonable estimates due to, among other things, changes in assumptions made in the Company's interpretation of the Act, guidance related to application of the Act that may be issued in the future, and actions that the Company may take as a result of the expected impact of the Act. The Company will adjust the amounts recognized related to the Act if more information becomes available. The Company did not make any measurement period adjustments related to the Act in the nine months ended September 30, 2018.

10. Recent Accounting Pronouncements

~~In February 2016, and in subsequent updates, 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 Company intends to elect the transition method that allows it to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The comparative period information will not be restated and will continue to be reported under the accounting standard in effect for those periods. The Company is currently evaluating the impact of the new standard on its financial statements. Although the impact is not currently estimable, the Company expects to recognize right-of-use lease assets and lease liabilities for most of the leases it currently accounts for as operating leases. The right-of-use lease assets to be recognized will be adjusted by certain closed-restaurant lease reserves, accrued rent (including accruals to expense operating lease payments on a straight-line basis) and unamortized lease incentives upon the adoption of Topic 842. The Company intends to elect the transition practical expedient package as well as the practical expedient to combine lease

~~Table of Contents~~

~~FIESTA RESTAURANT GROUP, INC.~~

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

~~(Dollars in thousands, except per share data)~~

and non-lease components of the contracts, which may result in reclassification of certain occupancy related expenses to restaurant rent expenses in the consolidated statement of operations. In addition, the Company will be required to record an initial adjustment to retained earnings associated with previously deferred gains on sale-leaseback transactions and will no longer receive the benefit to rent expense from amortizing such previously deferred gains on sale-leaseback transactions beginning in 2019. For any future sale-leaseback transactions, the gain (adjusted for any off-market terms) will be recognized immediately. Currently the Company amortizes sale-leaseback gains over the lease term. The Company has not assessed the potential impact of Topic 842 on its covenant financial ratios as the Company's senior credit facility does not give effect to any change in GAAP arising out of Topic 842. The Company is continuing its assessment of the impact of Topic 842 and may identify other impacts.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill if the fair value of a reporting unit is less than the carrying amount of the reporting unit. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The guidance will be effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for any goodwill impairment tests after January 1, 2017. This standard may have an impact on the Company's financial statements if goodwill impairment is recognized in future periods.

In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance will be effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted and may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company does not expect the standard to have a material effect on its financial statements.

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

The following Management's Discussion and Analysis of financial condition and results of operations ("MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our 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 "Fiesta," "we," "our" and "us."

We use a 52–53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended December ~~31, 2017~~30, 2018 contained 52 weeks. The three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and April 1, 2018 ~~and October 1, 2017~~ each contained thirteen ~~and thirty-nine weeks, respectively.~~weeks. The fiscal year ending December ~~30, 2018~~29, 2019 will contain 52 weeks.

Company Overview

We own, operate and franchise two restaurant brands, Pollo Tropical^® and Taco Cabana^®, which ~~have approximately~~recently celebrated 30^th and 40 ~~years,~~^th anniversaries, respectively, of operating history and loyal customer bases. Our Pollo Tropical restaurants feature ~~24-hour~~fire-grilled and crispy citrus marinated chicken ~~offered bone-in or boneless, grilled or lightly battered and fried,~~ and other freshly prepared tropical inspired menu items, while our Taco Cabana restaurants specialize in Mexican inspired ~~food.~~food made fresh by hand. We believe that both brands offer distinct and unique flavors with broad appeal at a compelling value, which differentiates them in the competitive fast-casual and quick-service restaurant segments. Nearly all of our restaurants offer the convenience of drive-thru windows. As of ~~September 30, 2018,~~March 31, 2019, we owned and operated ~~150~~139 Pollo Tropical restaurants and ~~171~~164 Taco Cabana restaurants.

We franchise our Pollo Tropical restaurants primarily internationally and as of ~~September 30, 2018,~~March 31, 2019, we had 24 franchised Pollo Tropical restaurants located in Puerto Rico, the Bahamas, Panama and Guyana, and ~~five~~six licensed locations on college campuses and one 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 ~~September 30, 2018,~~March 31, 2019, we had six 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

~~Strategic Renewal Plan~~New Lease Accounting Standard

On ~~February 27, 2017,~~December 31, 2018, we ~~announced~~adopted Financial Accounting Standard Board ("FASB") Accounting Standard Update ("ASU") 2016-02, Leases (Topic 842) ("ASC 842"), which requires lessee recognition of lease assets and lease liabilities on the ~~appointment~~balance sheet and disclosure of ~~Richard C. Stockinger~~key information about leasing arrangements. The new lease accounting standard, ASC 842, had a significant impact on our results of operations because we had $18.6 million in sale leaseback gains that we no longer receive a benefit to rent expense from and we have a significant number of closed restaurants for which we had previous reserves that we can no longer use to offset our closed store rent payments. As a result of adopting this standard, substantially all previously deferred gains on sale-leaseback transactions were recognized as ~~Chief Executive Officer~~an adjustment to retained earnings and ~~President~~we will no longer receive the benefit to rent expense from amortizing previously deferred gains on sale-leaseback transactions. Additionally, prior to the adoption of ASC 842, we recorded closed restaurant reserves representing future minimum lease payments and ancillary costs from the date of the ~~Company, effective February 28, 2017. Shortly thereafter, we developed and began implementing~~restaurant closure to the ~~Strategic Renewal Plan designed to significantly improve our core business model and drive long-term shareholder value creation, consisting~~end of the ~~following: 1) revitalizing~~remaining lease term net of estimated sublease recoveries when a restaurant ~~performance~~closed and then recorded rent payments as a reduction to the closed restaurant reserves. As a result of adopting ASC 842, accrued rent included in ~~core markets; 2) managing capital~~these closed restaurant reserves was recorded as a reduction to operating lease right-of-use assets and ~~financial discipline; 3) establishing platforms for long-term growth; and 4) optimizing each brands'~~rent related to closed restaurants is now included within closed restaurant ~~portfolio. We believe the continued implementation~~rent expense, net of ~~the Strategic Renewal Plan in 2018, built on a number of foundational accomplishments in 2017, is positively impacting the operational and financial trajectory of the Company.~~

~~Hurricanes~~

~~During the third quarter of 2017, Texas and Florida were struck by Hurricanes Harvey and Irma (the "Hurricanes"). Forty-three Taco Cabana and two Pollo Tropical Company-owned restaurants~~sublease income in the ~~Houston metropolitan area~~condensed consolidated statement of operations. The comparative period information has not been restated and ~~all 149 Pollo Tropical Company-owned restaurants~~continues to be reported under the accounting standard in ~~Florida~~effect for that period.

Adopting ASC 842 reduced our net income and ~~the Atlanta metropolitan area were closed~~earnings per share by $1.7 million and ~~affected by the Hurricanes to varying degrees (e.g. property preparation~~$0.06 per share, respectively, and damage, inventory losses, payment of hourly restaurant employees while restaurants were closed, lost business related to temporary closures, limited menu and modified hours of operations). Other Texas markets where we operate Company-owned restaurants including San Antonio were also affected by Hurricane Harvey, but to a lesser degree.

~~We estimate that the Hurricanes negatively impacted~~reduced Adjusted EBITDA and ~~income (loss) from operations~~Restaurant-level Adjusted EBITDA by ~~approximately $3.0~~$0.4 million ~~to $4.0~~and $0.5 million for Pollo Tropical and ~~approximately $1.0 million to $1.5 million for~~ Taco Cabana, respectively, for the three months ended March 31, 2019. Amortization of deferred gains from sale-leaseback transactions for the three months ended April 1, 2018 totaled approximately $0.4 million and ~~negatively impacted comparable restaurant sales and transactions by approximately 5.5% to 6.5%~~$0.5 million for Pollo Tropical and ~~approximately 2.0% to 3.0% for~~ Taco Cabana, respectively. Closed restaurant rent expense, net of sublease income for the ~~third quarter of 2017.~~

~~Tax Changes~~

~~On December 22, 2017, the Tax Cuts~~three months ended March 31, 2019 totaled $1.1 million and Jobs Act (the "Act"), which includes a provision that reduced the federal corporate income tax rate from 35.0% to 21.0% effective January 1, 2018, was signed into law. In accordance with generally accepted accounting principles, the enactment of this new tax legislation required us to revalue our net deferred income tax assets at the new corporate statutory rate of 21.0% as of the enactment date in 2017. In 2018, in conjunction with a cost segregation study conducted prior to filing our 2017 federal income tax return, we changed the depreciation method for certain assets for federal income tax purposes to accelerate tax deductions. Changes in our 2017 federal income tax return from the amounts recorded as of December 31, 2017 were primarily the result of changing the depreciable lives of assets for federal income tax purposes. These changes allowed us to record an incremental benefit of $3.9$0.3 million for ~~the third quarter of 2018.~~Pollo Tropical and Taco Cabana, respectively.

Executive Summary—Consolidated Operating Performance for the Three Months Ended ~~September 30, 2018~~March 31, 2019

Our ~~third~~first quarter ~~2018~~2019 results and highlights include the following:

We recognized net income of ~~$2.0~~$2.3 million, ~~in the third quarter of 2018,~~ or $0.08 per diluted share, in the first quarter of 2019 compared to a net ~~loss~~income of ~~$(8.3)~~$4.2 million, or ~~$(0.31)~~$0.15 per diluted share in the ~~third~~first quarter of ~~2017,~~2018, due primarily to ~~a decrease in impairment~~the adoption of ASC 842 discussed above and higher depreciation and amortization and other lease charges from $15.9 million in the third quarter of 2017 to $6.4 million in the third quarter of 2018, the impact of the Hurricanes in 2017, the effect of changing the depreciation method for certain assets for federal income tax purposes andoperating expenses, partially offset by lower advertising expenses ~~for Pollo Tropical.~~and lower cost of sales and restaurant wages and related expenses as a percentage of restaurant sales. In addition, ~~growth~~declines in comparable restaurant sales at both brands ~~positively~~negatively contributed to the ~~increase~~decrease in net income in the ~~third~~first quarter of 2018. The positive impact was offset by higher cost of sales at both brands in part attributable to the initiatives under the Strategic Renewal Plan to improve the guest experience, higher general and administrative expenses and higher advertising expenses for Taco Cabana as a result of the reduction of advertising in 2017 during the early stages of the Strategic Renewal Plan.2019.

Total revenues ~~increased 10.1%~~decreased 2.1% in the ~~third~~first quarter of 2019 to $165.9 million compared to $169.5 million in the first quarter of 2018, ~~to $174.6 million compared to $158.7 million in the third quarter of 2017,~~ driven by ~~an increase~~a decrease in comparable restaurant sales at both brands, and the net impact of opening new restaurants and closing 14 underperforming Pollo Tropical restaurants and 11 underperforming Taco Cabana restaurants in ~~2017.~~2018. Comparable restaurant sales ~~increased 6.5%~~decreased 2.6% for our Pollo Tropical restaurants resulting from a decrease in comparable restaurant transactions of 5.5% partially offset by an increase in average check of ~~5.2% and an increase in comparable restaurant transactions of 1.3%~~2.9%. Comparable restaurant sales ~~increased 12.2%~~decreased 0.5% for our Taco Cabana restaurants resulting from a decrease in comparable restaurant transactions of 4.1% partially offset by an increase in average check of ~~12.1% and an increase in comparable restaurant transactions of 0.1%~~3.6%.

Consolidated Adjusted EBITDA increased ~~$1.9~~$0.3 million (which includes the negative impact of an $0.8 million increase in rent expense as a result of adopting ASC 842) in the first quarter of 2019 to $17.2 million compared to $17.0 million in the ~~third~~first quarter of 2018, ~~to $15.0 million compared to $13.2 million in the third quarter of 2017,~~ driven primarily by ~~the impact~~improved restaurant operating margins related to lower cost of ~~the Hurricanes in 2017, higher comparable~~sales and restaurant wages as a percent of sales ~~at both brands~~ and lower advertising expenses, ~~at Pollo Tropical,~~ partially offset by higher ~~costs associated with the Strategic Renewal Plan to improve the guest experience, higher general~~repair and ~~administrative~~maintenance and other operating expenses and higher ~~advertising expenses at Taco Cabana.~~rent expense as a result of adopting ASC 842. 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."

During the ~~third~~first quarter of ~~2018,~~2019, we opened ~~one~~two Taco Cabana ~~restaurant~~restaurants in Texas, one of which was converted from a closed Pollo Tropical location. ~~During the third quarter of 2017, we opened two Pollo Tropical restaurants and three Taco Cabana restaurants and closed six Pollo Tropical restaurants and four Taco Cabana restaurants.~~

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
December 30, 2018												139	30	169	162	8	170
New												—	1	1	2	—	2
Closed												—	—	—	—	—	—
March 31, 2019												139	31	170	164	8	172

December 31, 2017	146		31		177		166		7	173		146	31	177	166	7	173
New	—		—		—		—		—	—		—	—	—	—	—	—
Closed	—		—		—		—		—	—		—	—	—	—	—	—
April 1, 2018	146		31		177		166		7	173		146	31	177	166	7	173
New	4		—		4		6		1	7
Closed	—		(1	)	(1	)	(2	)	—	(2	)
July 1, 2018	150		30		180		170		8	178
New	—		—		—		1		—	1
Closed	—		—		—		—		—	—
September 30, 2018	150		30		180		171		8	179

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
New	2		—		2		3		—	3
Closed	(6	)	—		(6	)	(4	)	—	(4	)
October 1, 2017	149		32		181		168		7	175

Three Months Ended ~~September 30, 2018~~March 31, 2019 Compared to Three Months Ended ~~October~~April 1, ~~2017~~2018

The following table sets forth, for the three months ended ~~September 30,~~March 31, 2019 and April 1, 2018, ~~and October 1, 2017,~~ selected consolidated operating results as a percentage of consolidated restaurant sales and select segment operating results as a percentage of applicable segment restaurant sales.


	Three Months Ended												Three Months Ended
	September 30, 2018		October 1, 2017		September 30, 2018		October 1, 2017		September 30, 2018		October 1, 2017		March 31, 2019		April 1, 2018		March 31, 2019		April 1, 2018		March 31, 2019		April 1, 2018
	Pollo Tropical				Taco Cabana				Consolidated				Pollo Tropical				Taco Cabana				Consolidated
Restaurant sales:
Pollo Tropical									53.8	%	55.6	%									55.1	%	56.0	%
Taco Cabana									46.2	%	44.4	%									44.9	%	44.0	%
Consolidated restaurant sales									100.0	%	100.0	%									100.0	%	100.0	%
Costs and expenses:
Cost of sales	33.4	%	32.5	%	30.9	%	29.4	%	32.2	%	31.1	%	31.1	%	32.8	%	30.0	%	30.3	%	30.6	%	31.7	%
Restaurant wages and related expenses	23.4	%	24.1	%	32.3	%	33.4	%	27.6	%	28.2	%	23.2	%	23.5	%	32.2	%	32.7	%	27.3	%	27.5	%
Restaurant rent expense	4.7	%	5.3	%	5.9	%	6.3	%	5.2	%	5.8	%	6.0	%	4.5	%	8.5	%	6.2	%	7.1	%	5.3	%
Other restaurant operating expenses	14.4	%	14.8	%	17.1	%	16.8	%	15.7	%	15.7	%	13.1	%	12.8	%	13.2	%	15.2	%	13.2	%	13.9	%
Advertising expense	3.6	%	5.7	%	3.8	%	1.3	%	3.7	%	3.7	%	3.3	%	3.5	%	3.4	%	3.9	%	3.3	%	3.7	%
Pre-opening costs	0.1	%	0.3	%	0.1	%	0.4	%	0.1	%	0.3	%	0.1	%	0.2	%	0.4	%	0.2	%	0.2	%	0.2	%

Consolidated Revenues. Revenues include restaurant sales and franchise royalty revenues and fees. Restaurant sales ~~consists~~consist 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 and the amortization of initial franchise fees and area development fees associated with the opening of new franchised restaurants. Restaurant sales are influenced by new restaurant openings, closures of restaurants and changes in comparable restaurant sales.

Total revenues ~~increased 10.1%~~decreased 2.1% to ~~$174.6~~$165.9 million in the ~~third~~first quarter of ~~2018~~2019 from ~~$158.7~~$169.5 million in the ~~third~~first quarter of ~~2017.~~2018. Restaurant sales ~~increased 10.0%~~decreased 2.2% to ~~$174.0~~$165.2 million in the ~~third~~first quarter of ~~2018~~2019 from ~~$158.1~~$168.8 million in the ~~third~~first quarter of ~~2017.~~2018.

The following table presents the primary drivers of the ~~increases~~decreases in restaurant sales for both Pollo Tropical and Taco Cabana for the ~~third~~first quarter of ~~2018~~2019 compared to the ~~third~~first quarter of ~~2017~~2018 (in millions).


Pollo Tropical:
Increase in comparable restaurant sales	$	5.3
Incremental sales related to new restaurants, net of closed restaurants	0.4
Total increase	$	5.7
Decrease in comparable restaurant sales			$	(2.3	)
Decrease in sales related to closed restaurants, net of new restaurants			(1.2		)
Total decrease			$	(3.5	)

Taco Cabana:
Increase in comparable restaurant sales	$	8.1
Decrease in comparable restaurant sales			$	(0.3	)
Incremental sales related to new restaurants, net of closed restaurants	2.1		0.1
Total increase	$	10.2
Total decrease			$	(0.2	)

Comparable restaurant sales for our Pollo Tropical restaurants increased 6.5% in the third quarter of 2018. Comparable restaurant sales for our Taco Cabana restaurants increased 12.2% in the third quarter of 2018. Restaurants are included in comparable restaurant sales after they have been open for 18 months.

Comparable restaurant sales decreased 2.6% and 0.5% for Pollo Tropical and Taco Cabana restaurants, respectively, in the first quarter of 2019. Increases or decreases in comparable restaurant sales result primarily from an increase or decrease in comparable restaurant transactions and in average check. The increase in average check is primarily driven by menu price increases.

For Pollo Tropical, ~~average check increased 5.2% and~~a decrease in comparable restaurant transactions ~~increased 1.3%~~of 5.5% was partially offset by an increase in average check of 2.9% in the ~~third~~first quarter of ~~2018~~2019 compared to the ~~third~~first quarter of ~~2017.~~2018. The increase in average check was driven primarily by menu price increases of ~~4.9%~~3.5%. As a result of new restaurant openings, sales cannibalization of existing restaurants negatively impacted comparable restaurant sales for Pollo Tropical by ~~0.4%~~1.0%.

For Taco Cabana, ~~average check increased 12.1% and~~a decrease in comparable restaurant transactions ~~increased 0.1%~~of 4.1% was partially offset by an increase in average check of 3.6% in the ~~third~~first quarter of ~~2018~~2019 compared to the ~~third~~first quarter of ~~2017.~~2018. The increase in average check was driven primarily by menu price increases of ~~7.7% as well as a change in sales mix,~~3.0% and the introduction of higher priced ~~promotions and new menu items related~~shareables. We believe the decline in comparable transactions is in part due to the repositioning of the brand. Comparable restaurant sales for Taco Cabana were negatively impacted by approximately 0.9% related to reduced overnight operating hours beginning in the last quarter of 2017.weather.

Franchise revenues ~~increased by $0.1 million to $0.7 million~~remained flat in the ~~third~~first quarter of ~~2018 from $0.6 million in~~2019 compared to the ~~third~~first quarter of ~~2017 due primarily to higher sales at franchised restaurants.~~2018.

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. In addition, for periods prior to December 31, 2018, other restaurant operating expenses include real estate taxes related to our leases characterized as operating leases.

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

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~~first quarter of ~~2018~~2019 compared to the ~~third~~first quarter of ~~2017.~~2018. All percentages are stated as a percentage of applicable segment restaurant sales:



Pollo Tropical:
Cost of ~~sales~~⁽¹⁾: sales:
Sales mix⁽²⁾	~~1.7~~0.7	%
Operating inefficiency	0.4	%
Menu ~~offering improvement costs offset by lower commodity costs~~	~~1.3~~	%
~~Operating efficiency~~price increases	(~~0.4~~1.1	)%
~~Menu price increases~~Lower commodity costs	(1.7	)%
Net ~~increase~~decrease in cost of sales as a percentage of restaurant sales	~~0.9~~(1.7	)%

Restaurant wages and related expenses:
~~Higher medical benefit~~Lower workers compensation costs	~~0.7~~	%
~~Lower labor costs due to restaurant closures, net of new restaurants~~	(~~0.3~~	)%
~~Impact of higher sales at comparable restaurants~~⁽³⁾⁽⁴⁾	~~(1.0~~0.2	)%
Other	(0.1	)%
Net decrease in restaurant wages and related costs as a percentage of restaurant sales	(~~0.7~~0.3	)%

Other operating expenses:
~~Hurricane preparation~~Higher repair and ~~repair costs~~maintenance	0.4	%
Real estate tax classification⁽¹⁾	(~~0.3~~0.9	)%
~~Lower utility costs~~Contracted cleaning services⁽⁴⁾⁽²⁾	~~(0.2~~	)%
~~Other~~	~~0.1~~	%
~~Net decrease in other restaurant operating expenses as a percentage of restaurant sales~~	~~(0.4~~	)%

~~Advertising expense:~~
~~Decreased advertising~~	~~(2.1~~	)%
~~Net decrease in advertising expense as a percentage of restaurant sales~~	~~(2.1~~	)%

~~Pre-opening costs:~~
~~Decrease in the number of restaurant openings~~	~~(0.2~~	)%
~~Net decrease in pre-opening costs as a percentage of restaurant sales~~	~~(0.2~~	)%

⁽¹⁾ ~~Includes costs related to the Strategic Renewal Plan.~~

⁽²⁾~~Includes the impact of Hurricane Irma in 2017.~~

⁽³⁾~~Includes the impact of Hurricane Irma in 2017, partially offset by higher wage rates.~~

⁽⁴⁾~~Includes the impact of higher sales on fixed and semi-fixed costs.~~



~~Taco Cabana:~~
~~Cost of sales~~⁽¹⁾:
~~Menu offering improvement and higher commodity costs~~	~~3.8~~	%
~~Operating inefficiency~~	~~0.7~~	%
~~Higher promotions and discounts~~	~~0.4~~	%
~~Lower rebates and discounts~~	~~0.2~~	%
~~Sales mix~~	~~(1.1~~	)%
~~Menu price increases~~	~~(2.5~~	)%
~~Net increase in cost of sales as a percentage of restaurant sales~~	~~1.5~~	%

~~Restaurant wages and related expenses:~~
~~Higher incentive bonus~~	~~0.3~~	%
~~Higher medical benefit costs~~	0.5	%
~~Impact of higher sales at comparable restaurants~~⁽²⁾⁽³⁾	~~(1.7~~	)%
~~Other~~	~~(0.2~~	)%
~~Net decrease in restaurant wages~~ Credit card expenses and ~~related costs as a percentage of restaurant sales~~	~~(1.1~~	)%

~~Other operating expenses:~~
~~Higher operating supplies~~⁽¹⁾⁽⁴⁾	~~0.3~~	%
~~Higher live entertainment costs~~delivery fees	0.2	%
~~Higher repair and maintenance costs~~	~~0.1~~	%
~~Lower utility costs~~⁽²⁾	~~(0.4~~	)%
Other	0.1	%
Net increase in other restaurant operating expenses as a percentage of restaurant sales	0.3	%

Advertising expense:
~~Increased~~Decreased advertising	~~2.5~~(0.2	)%
Net ~~increase~~decrease in advertising expense as a percentage of restaurant sales	~~2.5~~(0.2	)%

Pre-opening costs:
Decrease in the number of restaurant openings	(~~0.3~~0.1	)%
Net decrease in pre-opening costs as a percentage of restaurant sales	(~~0.3~~0.1	)%

⁽¹⁾~~Includes costs related~~ Real estate taxes are included in rent expense in 2019 due to the ~~Strategic Renewal Plan.~~adoption of ASC 842.

⁽²⁾ Partially offset by a reduction in hourly labor costs



Taco Cabana:
Cost of sales:
Menu offering improvement and higher commodity costs	0.5	%
Higher promotions and discounts	0.4	%
Menu price increases	(1.0	)%
Sales mix	(0.2	)%
Net decrease in cost of sales as a percentage of restaurant sales	(0.3	)%

Restaurant wages and related expenses:
Impact of higher sales at new restaurants⁽¹⁾	(0.2	)%
Lower medical benefit costs	(0.3	)%
Net decrease in restaurant wages and related costs as a percentage of restaurant sales	(0.5	)%

Other operating expenses:
Lower operating supplies	(0.2	)%
Lower utility costs	(0.3	)%
Real estate tax classification⁽²⁾	(1.7	)%
Other	0.2	%
Net decrease in other restaurant operating expenses as a percentage of restaurant sales	(2.0	)%

Advertising expense:
Decreased advertising	(0.5	)%
Net decrease in advertising expense as a percentage of restaurant sales	(0.5	)%

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

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

⁽³⁾⁽²⁾~~Includes~~Real estate taxes are included in rent expense in 2019 due to the ~~impact~~adoption of ~~Hurricane Harvey in 2017, partially offset by higher wage rates.~~

⁽⁴⁾~~Includes various small-wares, cleaning and other supplies.~~ASC 842.

Consolidated Restaurant Rent Expense. ~~Restaurant~~Beginning December 31, 2018, restaurant rent expense includes base rent, contingent rent and common area maintenance and property taxes related to our leases characterized as operating leases. For periods prior to the adoption of ASC 842 on December 31, 2018, 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, ~~decreased~~increased to ~~5.2%~~7.1% in the ~~third~~first quarter of 2019 from 5.3% in the first quarter of 2018 ~~from 5.8% in the third quarter of 2017~~ due primarily to an $0.8 million increase in rent expense as a result of no longer amortizing gains on sale-leaseback transactions, the ~~closure~~inclusion of ~~underperforming restaurants, which generally had higher rent~~property taxes and ~~lower sales,~~common area maintenance costs related to our leases characterized as operating leases, and the impact of ~~higher~~lower comparable restaurant sales.

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 ~~$13.3~~$15.1 million in the ~~third~~first quarter of ~~2018~~2019 and ~~$12.1~~$14.9 million in the ~~third~~first quarter of ~~2017,~~2018, and as a percentage of total revenues, general and administrative expenses ~~were 7.6%~~increased to 9.1% in the ~~third~~first quarter of ~~2018 and~~2019 compared to 8.8% in the ~~third~~first quarter of ~~2017,~~2018, due primarily to the impact of ~~higher~~lower total revenues on higher general and administrative expenses in the ~~third~~first quarter of ~~2018.~~2019. General and administrative expenses for the ~~third~~first quarter of 2019 included $0.6 million related to restructuring costs due to eliminated positions. General and administrative expenses for the first quarter of 2018 included ~~$0.4 million in costs related to discontinuing certain services and $0.4 million related to system implementation and project-oriented advisory services. General~~

and administrative expenses in the third quarter of 2017 included a reduction of $(0.2) million in board and shareholder matter costs, a benefit of $(0.2) million related to an adjustment related to costs associated with restructuring Pollo Tropical management in Miami, Florida and Dallas, Texas, and $0.1$0.5 million related to Strategic Renewal Plan restructuring costs and retention bonuses.

Adjusted EBITDA. Adjusted EBITDA is the 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, closed restaurant rent expense, net of sublease income, stock-based compensation expense, other expense (income), net and certain significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of our restaurants.

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 finance, legal, supply chain, human resources, construction, 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 ~~increased~~decreased to ~~$12.5~~$14.3 million (which includes the negative impact of a $0.4 million increase in rent expense as a result of adopting ASC 842) in the first quarter of 2019 from $14.4 million in the ~~third~~first quarter of 2018 ~~from $9.4 million in the third quarter of 2017~~ due primarily to the impact of ~~the Hurricanes and closing unprofitable restaurants in 2017, and higher comparable~~lower restaurant sales and ~~lower advertising~~higher rent and higher operating expenses ~~in 2018,~~as a percentage of restaurant sales, partially offset by anlower cost of sales and labor as a percentage of restaurant sales. Adjusted EBITDA for Taco Cabana increased to $2.9 million (which includes the negative impact of a $0.5 million increase in rent expense as a result of adopting ASC 842) in the first quarter of 2019 from $2.5 million in the first quarter of 2018 due primarily to lower cost of sales and labor as a percentage of restaurant sales and ~~general~~lower operating expenses and administrative expenses. Adjusted EBITDA for Taco Cabana decreased to $2.5 million in the third quarter of 2018 from $3.8 million in the third quarter of 2017 due primarily to higher cost of sales as a percentage of restaurant sales and higher advertising ~~operating and general and administrative expenses,~~expense, partially offset by ~~the impact of~~ higher ~~comparable restaurant sales in 2018 and the impact of Hurricane Harvey in 2017.~~rent. Consolidated Adjusted EBITDA increased to ~~$15.0~~$17.2 million in the ~~third~~first quarter of ~~2018~~2019 from ~~$13.2~~$17.0 million in the ~~third~~first quarter of ~~2017.~~2018.

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 and general and administrative expenses (including corporate-level general and administrative expenses).

Restaurant-level Adjusted EBITDA for Pollo Tropical ~~increased~~decreased to ~~$19.1~~$21.2 million (which includes the negative impact a $0.4 million increase in rent expense as a result of adopting ASC 842) in the first quarter of 2019 from $21.6 million in the ~~third~~first quarter of 2018 ~~from $15.5 million in the third quarter of 2017~~ primarily due to the foregoing. Restaurant-level Adjusted EBITDA for Taco Cabana ~~decreased~~increased to ~~$8.0~~$9.5 million (which includes the negative impact of a $0.5 million increase in rent expense as a result of adopting ASC 842) in the first quarter of 2019 from $8.7 million in the ~~third~~first quarter of 2018 ~~from $9.0 million in the third quarter of 2017~~ primarily as a result of the foregoing. For a reconciliation from Adjusted EBITDA to Restaurant-level Adjusted EBITDA, see the heading entitled "Management's Use of Non-GAAP Financial Measures."

Depreciation and Amortization. Depreciation and amortization expense increased to ~~$9.7~~$9.5 million in the ~~third~~first quarter of ~~2018~~2019 from ~~$8.5~~$9.0 million in the ~~third~~first quarter of ~~2017~~2018 due primarily to increased depreciation related to new restaurant openings and ongoing reinvestment and enhancements to our restaurants, 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 ~~decreased~~increased to ~~$6.4~~$(0.3) million in the ~~third~~first quarter of ~~2018~~2019 from ~~$15.9~~$(0.7) million in the ~~third~~first quarter of ~~2017.~~2018.

Impairment and other lease charges for the three months ended ~~September 30, 2018~~March 31, 2019 for Pollo Tropical include impairment charges of ~~$3.4~~$0.4 million related primarily to impairment of ~~three underperforming~~equipment from previously impaired restaurants, ~~that we continue to operate and~~offset by a ~~benefit of $(0.1) million in net~~ lease charge recoveries benefit of $(0.7) million related to ~~certain previously~~ closed ~~restaurants due to adjustments to estimates of future~~restaurant lease ~~costs.~~terminations. Impairment and other lease charges for the three months ended ~~September 30, 2018~~March 31, 2019 for Taco Cabana include impairment charges of $2.4 million related primarily to impairment of five underperforming restaurants that we continue to operate and other lease charges, net of recoveries, of $0.7 million, due primarily to lease charges related to an office relocation in the third quarter of 2018 and other lease charges, net of recoveries, related to previously closed restaurants due to adjustments to estimates of future lease costs.

less than $0.1 million. Impairment and other lease charges in the ~~third~~first quarter of ~~2017~~2018 primarily consisted of a $(0.6) million and a $(0.1) million net benefit related to lease charge recoveries for Pollo Tropical ~~included impairment charges of $15.6 million with respect~~and Taco Cabana, respectively, due primarily to ~~ten closed Pollo Tropical restaurants and two Pollo Tropical restaurants that we continue to operate, partially offset by~~ a ~~net benefit of $(1.9) million in other~~ lease ~~charge recoveries related to previously closed Pollo Tropical restaurants as~~termination, a ~~result of~~ lease ~~terminations, assignments~~assignment, subleases and other adjustments to estimates of future lease ~~costs, net of lease charges related to Pollo Tropical restaurants closed in September 2017. Impairment and other lease charges in the third quarter of 2017 for Taco~~

Cabana included impairment charges of $0.9 million for two Taco Cabana restaurants that we continue to operate and $1.3 million in other lease charges related to the closure of four Taco Cabana restaurants in July 2017.costs.

Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related trailing twelve month cash flows are below a certain threshold. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets 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 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.

For ~~four~~one Pollo Tropical ~~restaurants~~restaurant and ~~seven~~three Taco Cabana restaurants with combined carrying values of ~~$4.5~~$0.4 million and ~~$4.2~~$1.3 million, respectively, projected cash flows are not substantially in excess of their carrying values. In addition, ~~two Pollo Tropical restaurants with a combined carrying value of $3.1 million and two~~three Taco Cabana restaurants with a combined carrying value of ~~$3.1~~$4.6 million have initial sales volumes lower than expected, but do not have significant operating history to form a good basis for future projections. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material.

~~We continue to own~~Closed Restaurant Rent Expense, Net of Sublease Income. Closed restaurant rent expense, net of sublease income for the first quarter of 2019 consisted of closed restaurant rent and ~~operate 141 Pollo Tropical restaurants in Florida~~ancillary lease costs of $1.8 million and ~~nine Pollo Tropical restaurants in Georgia, three~~$0.4 million net of ~~which were impaired in 2018~~sublease income of $0.6 million and 2017, and continue to focus on revitalizing our core markets and brand repositioning outside of our core markets in Florida. Our long-term strategy is focused on profitably building our base business, growing new distribution channels, including delivery, catering, licensed and franchised locations, and new restaurants. We believe opportunities at both brands are being addressed as part of the Strategic Renewal Plan. Although we expect and have projected higher sales growth driven by the Strategic Renewal Plan$0.1 million for Pollo Tropical ~~restaurants in Georgia compared~~and Taco Cabana, respectively. Prior to ~~more mature markets,~~the adoption of ASC 842, we ~~may record an impairment charge in~~recorded closed restaurant reserves representing future ~~periods for some~~minimum lease payments and ancillary costs from the date of ~~these restaurants, which have~~the restaurant closure to the end of the remaining lease term net of estimated sublease recoveries when a ~~combined carrying value~~restaurant closed and then recorded rent payments as a reduction to the closed restaurant reserves. See "New Lease Accounting Standard" under "Recent Events Affecting our Results of ~~$9.1 million, if their performance does not improve as projected.~~Operations."

Other Expense (Income), Net. Other expense, net was ~~less than $0.1~~$0.7 million in the ~~third~~first quarter of ~~2018~~2019 and primarily consisted of ~~$0.3~~$0.5 million in ~~insurance recoveries related to Hurricane Irma offset by the write-off of site development costs of $0.1 million and~~ costs for the removal, transfer and storage of equipment from closed ~~restaurants of $0.2 million.~~restaurants. Other expense, net of ~~$0.5~~$0.4 million in the ~~third~~first quarter of ~~2017~~2018 primarily consisted of $0.3 million in costs for the removal, ~~of signs and equipment and equipment transfers~~transfer and storage ~~for~~of equipment from closed Pollo Tropical restaurants, and the write-off of site costs related to locations that we decided not to develop, partially offset by estimated insurance recoveries related to a Taco Cabana restaurant that was closed due to Hurricane Harvey damages.restaurants.

Interest Expense. Interest expense increased to ~~$0.9~~$1.2 million in the ~~third~~first quarter of ~~2018~~2019 from ~~$0.7~~$1.1 million in the ~~third~~first quarter of ~~2017~~2018 due primarily to higher interest rates and a higher borrowing level under our senior credit facility.

~~Benefit from~~Provision for Income Taxes. The effective tax rate was ~~172.0%~~29.2% and ~~36.9%~~28.0% for the ~~third~~first quarter of 2019 and 2018, ~~and 2017,~~ respectively. In accordance with generally accepted accounting principles, we revalued our net deferred income tax assets at the new corporate statutory rate of 21.0% in 2017 as a result of the Act. In 2018, in conjunction with a cost segregation study conducted prior to filing our 2017 federal income tax return, we changed the depreciation methodThe provision for certain assets for federal income tax purposes to accelerate tax deductions. Changes in our 2017 federal income tax return from the amounts recorded as of December 31, 2017 were primarily the result of changing the depreciable lives of assets for federal income tax purposes. These changes allowed us to record an incremental benefit of $3.9 million for the third quarter of 2018. The benefit from income taxes for the ~~third~~first quarter of ~~2018~~2019 was derived using an estimated annual effective tax rate of ~~23.4%~~24.5%, which excludes the discrete impact of a tax deficiency from the vesting of restricted shares of $0.2 million and an adjustment resulting from changes in our 2017 federal income tax return from the amounts recorded as of December 31, 2017 of $4.1 million, which includes the $3.9 million impact of revaluing changes in our deferred tax assets.

million. The ~~benefit from~~provision for income taxes for the ~~third~~first quarter of ~~2017~~2018 was derived using an estimated ~~effective~~ annual ~~income~~effective tax rate of ~~36.8%~~24.4%, which excluded the discrete impact of a tax deficiency from the vesting of restricted shares ~~and the tax benefit resulting from impairment and other lease charges~~ of $0.2 ~~million and $21.6 million, respectively.~~million.

Net ~~Income (Loss).~~Income. As a result of the foregoing, we had net income of ~~$2.0~~$2.3 million in the ~~third~~first quarter of ~~2018~~2019 compared to ~~a net loss of $8.3~~$4.2 million in the ~~third~~first quarter of ~~2017.~~

~~Nine Months Ended September 30, 2018 Compared to Nine Months Ended October 1, 2017~~

The following table sets forth, for the nine months ended September 30, 2018 and October 1, 2017, selected consolidated operating results as a percentage of consolidated restaurant sales and select segment operating results as a percentage of applicable segment restaurant sales:

Nine Months Ended
September 30, 2018 October 1, 2017 September 30, 2018 October 1, 2017 September 30, 2018 October 1, 2017
Pollo Tropical Taco Cabana Consolidated
Restaurant sales:
Pollo Tropical 54.6 % 55.7 %
Taco Cabana 45.4 % 44.3 %
Consolidated restaurant sales 100.0 % 100.0 %
Costs and expenses:
Cost of sales 33.1 % 31.1 % 30.8 % 28.4 % 32.0 % 29.9 %
Restaurant wages and related expenses 23.2 % 23.8 % 32.5 % 32.3 % 27.4 % 27.5 %
Restaurant rent expense 4.6 % 5.2 % 5.9 % 6.0 % 5.2 % 5.5 %
Other restaurant operating expenses 13.5 % 14.0 % 15.8 % 15.3 % 14.5 % 14.6 %
Advertising expense 3.5 % 4.0 % 3.5 % 2.9 % 3.5 % 3.5 %
Pre-opening costs 0.2 % 0.4 % 0.3 % 0.4 % 0.3 % 0.4 %

Total revenues increased 2.8% to $521.0 million in the nine months ended September 30, 2018 from $506.9 million in the nine months ended October 1, 2017. Restaurant sales increased 2.7% to $519.0 million in the nine months ended September 30, 2018 from $505.1 million in the nine months ended October 1, 2017.

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 months ended September 30, 2018 compared to the nine months ended October 1, 2017 (in millions):

Pollo Tropical:
Increase in comparable restaurant sales $ 9.2
Decrease in sales related to closed restaurants, net of new restaurants (7.3 )
Total increase $ 1.9

Taco Cabana:
Increase in comparable restaurant sales $ 9.2
Incremental sales related to new restaurants, net of closed restaurants 2.8
Total increase $ 12.0

~~Comparable restaurant sales for Pollo Tropical restaurants increased 3.6% in the nine months ended September 30,~~ 2018. ~~Comparable restaurant sales for Taco Cabana restaurants increased 4.3% in the nine months ended September 30, 2018.~~

For Pollo Tropical, average check increased 4.3%, partially offset by a decrease in comparable restaurant transactions of 0.7% in the nine months ended September 30, 2018 compared to the nine months ended October 1, 2017. The increase in average check was driven primarily by menu price increases of 4.1%. As a result of new restaurant openings, sales cannibalization of existing restaurants negatively impacted comparable restaurant sales for Pollo Tropical by 0.3% in the nine months ended September 30, 2018 compared to the nine months ended October 1, 2017.

For Taco Cabana, average check increased 10.6%, partially offset by a decrease in comparable restaurant transactions of 6.3% in the nine months ended September 30, 2018 compared to the nine months ended October 1, 2017. We eliminated deep discounting in connection with the repositioning of the brand as part of the Strategic Renewal Plan, which negatively impacted comparable restaurant transactions. The increase in average check was driven primarily by menu price increases of 6.9% as well as a change in sales mix, higher priced promotions and new menu items related to the repositioning of the brand. Comparable restaurant sales for Taco Cabana in the nine months ended September 30, 2018 were negatively impacted by approximately 1.4% related to reduced overnight operating hours beginning in the last quarter of 2017.

Franchise revenues increased to $2.0 million in the nine months ended September 30, 2018 from $1.8 million in the nine months ended October 1, 2017 due primarily to higher sales at franchised restaurants.

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 months ended September 30, 2018 compared to the nine months ended October 1, 2017. All percentages are stated as a percentage of applicable segment restaurant sales.



~~Pollo Tropical:~~
~~Cost of sales~~⁽¹⁾:
~~Menu offering improvement costs offset by lower commodity costs~~	~~2.5~~	%
~~Sales mix~~	~~0.6~~	%
~~Operating inefficiency~~	~~0.3~~	%
~~Menu price increases~~	~~(1.4~~	)%
~~Net increase in cost of sales as a percentage of restaurant sales~~	~~2.0~~	%

~~Restaurant wages and related expenses:~~
~~Higher labor costs for comparable restaurants~~⁽¹⁾⁽²⁾	~~0.5~~	%
~~Lower workers compensation costs~~	~~(0.1~~	)%
~~Lower labor costs due to restaurant closures, net of new restaurants~~	~~(1.1~~	)%
~~Other~~	~~0.1~~	%
~~Net decrease in restaurant wages and related costs as a percentage of restaurant sales~~	~~(0.6~~	)%

~~Other operating expenses:~~
~~Higher repairs and maintenance costs~~⁽¹⁾	~~0.3~~	%
~~Lower insurance costs~~	~~(0.1~~	)%
~~Lower utilities costs~~⁽³⁾	~~(0.2~~	)%
~~Lower real estate taxes~~⁽³⁾	~~(0.3~~	)%
~~Other~~	~~(0.2~~	)%
~~Net decrease in other restaurant operating expenses as a percentage of restaurant sales~~	~~(0.5~~	)%

~~Advertising expense:~~
~~Decreased advertising~~⁽⁴⁾	~~(0.5~~	)%
~~Net decrease in advertising expense as a percentage of restaurant sales~~	~~(0.5~~	)%

~~Pre-opening costs:~~
~~Decrease in the number of restaurant openings~~	~~(0.2~~	)%
~~Net decrease in pre-opening costs as a percentage of restaurant sales~~	~~(0.2~~	)%

⁽¹⁾~~Includes costs related to the Strategic Renewal Plan.~~

⁽²⁾~~Includes the impact of higher wage rates.~~

⁽³⁾~~Includes the impact of restaurant closures in 2017.~~

⁽⁴⁾~~Advertising expenses in 2017 included the impact of a one-time write-off of unused pre-production costs.~~



~~Taco Cabana:~~
~~Cost of sales~~⁽¹⁾:
~~Menu offering improvement and higher commodity costs~~	~~4.4~~	%
~~Lower rebates and discounts~~	~~0.2~~	%
~~Operating inefficiency~~	~~1.0~~	%
~~Lower promotions and discounts~~	~~(0.4~~	)%
~~Sales mix~~	~~(0.6~~	)%
~~Menu price increases~~	~~(2.2~~	)%
~~Net increase in cost of sales as a percentage of restaurant sales~~	~~2.4~~	%

~~Restaurant wages and related expenses:~~
~~Higher medical benefit costs~~	~~0.5~~	%
~~Higher incentive bonus~~	~~0.2~~	%
~~Impact of higher sales at comparable restaurants~~⁽²⁾⁽³⁾	~~(0.4~~	)%
~~Other~~	~~(0.1~~	)%
~~Net increase in restaurant wages and related costs as a percentage of restaurant sales~~	~~0.2~~	%

~~Other operating expenses:~~
~~Higher repairs and maintenance costs~~⁽¹⁾	~~0.3~~	%
~~Higher operating supplies~~⁽¹⁾	~~0.2~~	%
~~Lower insurance costs~~	~~(0.1~~	)%
~~Other~~	~~0.1~~	%
~~Net increase in other restaurant operating expenses as a percentage of restaurant sales~~	~~0.5~~	%

~~Advertising expense:~~
~~Increased advertising~~	~~0.6~~	%
~~Net increase in advertising expense as a percentage of restaurant sales~~	~~0.6~~	%

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

⁽¹⁾~~Includes costs related to the Strategic Renewal Plan.~~

⁽²⁾~~Includes the impact of higher wage rates and an increase in overtime hours.~~

⁽³⁾~~Includes the impact of higher sales on fixed and semi-fixed costs.~~

~~Consolidated Restaurant Rent Expense~~. Restaurant rent expense, as a percentage of total restaurant sales, decreased to 5.2% in the nine months ended September 30, 2018 from 5.5% in the nine months ended October 1, 2017 primarily due to the closure of underperforming restaurants in 2017, which generally had higher rent and lower sales and the impact of higher comparable restaurant sales.

General and administrative expenses were $41.0 million in the nine months ended September 30, 2018 and $46.8 million in the nine months ended October 1, 2017 and, as a percentage of total revenues, general and administrative expenses decreased to 7.9% in the nine months ended September 30, 2018 compared to 9.2% in the nine months ended October 1, 2017 due primarily to lower board and shareholder matter costs and Strategic Renewal Plan restructuring costs and retention bonuses. General and administrative expense for the nine months ended September 30, 2018 included the benefit of fee reductions and final insurance recoveries totaling $0.6 million related to 2017 shareholder activism costs and reductions to final settlement amounts related to a litigation matter of $0.2 million, partially offset by $0.5 million in Strategic Renewal Plan restructuring costs and retention bonuses, $0.4 million in costs related to discontinuing certain services and $0.8 million related to system implementation and project-oriented advisory services. General and administrative expenses in the nine months ended October 1, 2017 included $3.7 million in board and shareholder matter costs related to shareholder activism matters and Chief Executive Officer and board member searches, $2.1 million related to Strategic Renewal 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 and a benefit of $(0.2) million adjustment related to costs associated with restructuring Pollo Tropical management in Miami, Florida and Dallas, Texas.

~~Adjusted EBITDA~~. Adjusted EBITDA for Pollo Tropical increased to $42.5 million in the nine months ended September 30, 2018 from $41.3 million in the nine months ended October 1, 2017 due primarily to the impact of the Hurricanes and closing unprofitable restaurants in 2017, higher comparable restaurant sales and lower advertising expenses, partially offset by an increase in cost of sales as a percentage of restaurant sales and higher repair and maintenance costs primarily driven by the initiatives under the Strategic Renewal Plan to improve the guest experience. Adjusted EBITDA for Taco Cabana decreased to $9.7 million in the nine months ended September 30, 2018 from $17.3 million in the nine months ended October 1, 2017 due primarily to the impact of higher cost of sales as a percentage of restaurant sales and higher advertising expenses, repairs and maintenance costs primarily driven by the initiatives under the Strategic Renewal Plan, restaurant wages and related expenses and general and administrative expenses, partially offset by higher comparable restaurant sales. Consolidated Adjusted EBITDA decreased to $52.2 million in the nine months ended September 30, 2018 from $58.5 million in the nine months ended October 1, 2017.

~~Restaurant-level Adjusted EBITDA~~. Restaurant-level Adjusted EBITDA for Pollo Tropical increased to $62.9 million in the nine months ended September 30, 2018 from $62.3 million in the nine months ended October 1, 2017 due primarily to the foregoing. Restaurant-level Adjusted EBITDA for Taco Cabana decreased to $27.4 million in the nine months ended September 30, 2018 from $34.2 million in the nine months ended October 1, 2017 as a result of the foregoing. For a reconciliation from Adjusted EBITDA to Restaurant-level Adjusted EBITDA, see the heading entitled "Management's Use of Non-GAAP Financial Measures."

~~Depreciation and Amortization.~~ Depreciation and amortization expense increased to $27.9 million in the nine months ended September 30, 2018 from $26.3 million in the nine months ended October 1, 2017 due primarily to increased depreciation related to new restaurant openings and ongoing reinvestment and enhancements to our restaurants, 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 decreased to $6.5 million in the nine months ended September 30, 2018 from $59.1 million in the nine months ended October 1, 2017.~~

Impairment and other lease charges in the nine months ended September 30, 2018 for Pollo Tropical include impairment charges of $3.6 million related primarily to impairment of three underperforming restaurants that we continue to operate, and a benefit of $(0.1) million in net lease charge recoveries related to certain previously closed restaurants due to adjustments to estimates of future lease costs. Impairment and other lease charges for the nine months ended September 30, 2018 for Taco Cabana include impairment charges of $2.6 million related primarily to impairment of five underperforming restaurants that we continue to operate, and other lease charges, net of recoveries, of $0.5 million, due primarily to lease charges related to an office relocation in the third quarter of 2018 and other lease charges, net of recoveries, related to previously closed restaurants due to adjustments to estimates of future lease costs.

Impairment and other lease charges for the nine months ended October 1, 2017 for Pollo Tropical consisted of impairment charges of $51.3 million and other lease charges, net of recoveries, of $5.0 million. Impairment charges are related to 40 restaurants closed in 2017, seven of which were impaired in 2016, and two restaurants that we continue to operate, as well as an additional impairment charge related to a restaurant closed in 2016 as a result of the decision not to convert the location to a Taco Cabana restaurant. Other lease charges, net of recoveries, are related to restaurants closed in 2017 as well as previously closed restaurants. Impairment and other lease charges for the nine months ended October 1, 2017 for Taco Cabana consisted of impairment charges of $1.4 million and other lease charges, net of recoveries, of $1.3 million. Impairment charges are related to four Taco Cabana restaurants that were closed in 2017 and three Taco Cabana restaurants that we continue to operate. Other lease charges, net of recoveries, are related to restaurants closed in 2017 as well as previously closed restaurants.

~~Other Expense (Income), Net.~~ Other income, net was $3.1 million in the nine months ended September 30, 2018 and primarily consisted of $3.1 million in insurance recoveries related to the Hurricanes and total gains of $1.2 million on the sales of three restaurant properties, partially offset by the write-off of site development costs of $0.5 million and costs for the removal, transfer and storage of equipment from closed restaurants of $0.7 million. Other expense, net of $1.7 million in the nine months ended October 1, 2017 primarily consisted of costs related to the removal of signs and equipment for closed Pollo Tropical restaurants, severance for restaurant employees and the write-off of site costs related to locations that we decided not to develop, partially offset by estimated insurance recoveries related to a Taco Cabana restaurant that was closed due to Hurricane Harvey damages and expected business interruption insurance proceeds related to a Taco Cabana restaurant that was temporarily closed due to a fire.

~~Interest Expense.~~ Interest expense increased to $3.0 million in the nine months ended September 30, 2018 from $1.9 million in the nine months ended October 1, 2017 due to higher interest rates and a higher borrowing level under our senior credit facility.

~~Benefit from Income Taxes.~~ The effective tax rate was (1.6)% for the nine months ended September 30, 2018 and 35.9% for the nine months ended October 1, 2017. In accordance with generally accepted accounting principles, we revalued our net deferred income tax assets at the new corporate statutory rate of 21.0% in 2017 as a result of the Act. In 2018, in conjunction with a cost segregation study conducted prior to filing our 2017 federal income tax return, we changed the depreciation method for certain assets for federal income tax purposes to accelerate tax deductions. Changes in our 2017 federal income tax return from the amounts recorded as of December 31, 2017 were primarily the result of changing the depreciable lives of assets for federal income tax purposes. These changes allowed us to record an incremental benefit of $3.9 million for the third quarter of 2018. The benefit from income taxes for the nine months ended September 30, 2018 was derived using an estimated annual effective tax rate of 23.4%, which excludes the discrete impact of a tax deficiency from the vesting of restricted shares of $0.2 million and an adjustment resulting from changes in our 2017 federal income tax return from the amounts recorded as of December 31, 2017 of $4.1 million, which includes the $3.9 million impact of revaluing changes in our deferred tax assets. The benefit from income taxes for the nine months ended October 1, 2017 was derived using an estimated effective annual income tax rate of 36.8%, excluding the discrete impact of a tax deficiency from the vesting of restricted shares and the tax benefit resulting from impairment and other lease charges of $0.2 million and $21.6 million, respectively.

~~Net Income (Loss).~~ ~~As a result of the foregoing, we had net income of $15.7 million in the nine months ended September 30, 2018 compared to a net loss of $(25.5) million in the nine months ended October 1, 2017.~~

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 and availability of borrowings under our senior credit facility 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 by operating activities in the first ~~nine~~three months of 2019 and 2018 ~~and 2017~~ was ~~$44.3~~$7.7 million and ~~$47.7~~$8.9 million, respectively. The decrease in net cash provided by operating activities in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was primarily driven by the decrease in ~~Adjusted EBITDA~~net income and the timing of payments.

Investing Activities. Net cash used in investing activities in the first ~~nine~~three months of 2019 and 2018 ~~and 2017~~ was ~~$34.4~~$9.8 million and ~~$38.5~~$13.2 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 ~~repair,~~ 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 (dollars in thousands).


	Pollo Tropical		Taco Cabana		Other		Consolidated		Pollo Tropical		Taco Cabana		Other		Consolidated
Nine Months Ended September 30, 2018:
Three Months Ended March 31, 2019:
New restaurant development	$	9,439	$	8,458	$	—	$	17,897	$	2,723	$	1,116	$	—	$	3,839
Restaurant remodeling	18		216		—		234		171		—		—		171
Other restaurant capital expenditures⁽¹⁾	6,029		9,507		—		15,536		3,260		1,755		—		5,015
Corporate and restaurant information systems	2,170		3,219		867		6,256		991		1,166		355		2,512
Total capital expenditures	$	17,656	$	21,400	$	867	$	39,923	$	7,145	$	4,037	$	355	$	11,537
Number of new restaurant openings	4		7		—		11		—		2				2
Nine Months Ended October 1, 2017:
Three Months Ended April 1, 2018:
New restaurant development	$	15,863	$	8,131	$	—	$	23,994	$	3,171	$	1,594	$	—	$	4,765
Restaurant remodeling	2,243		37		—		2,280		150		183		—		333
Other restaurant capital expenditures⁽¹⁾	4,033		3,617		—		7,650		3,289		2,606		—		5,895
Corporate and restaurant information systems	1,069		1,702		1,844		4,615		1,563		2,528		84		4,175
Total capital expenditures	$	23,208	$	13,487	$	1,844	$	38,539	$	8,173	$	6,911	$	84	$	15,168
Number of new restaurant openings	8		6				14		—		—				—

⁽¹⁾Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and April 1, 2018, ~~and October 1, 2017,~~ total restaurant repair and maintenance expenses were approximately ~~$17.7~~$5.5 million and ~~$15.6~~$5.3 million, respectively.

Cash used in investing activities in the first ~~nine~~three months of 2019 and 2018 included net proceeds from the ~~sales~~sale of ~~three~~one restaurant ~~properties~~property in each period of ~~$4.7~~$1.8 million. In addition, we received property damage insurance proceeds totaling $0.8 million related to a closed Taco Cabana restaurant that suffered flood damages due to Hurricane Harvey and a Taco Cabana restaurant that was temporarily closed due to a fire.

In 2018, we expect to open seven new Company-owned Pollo Tropical restaurants in Florida and seven new Company-owned Taco Cabana restaurants in Texas, including five conversions from closed Pollo Tropical restaurants to Taco Cabana restaurants, one of which was completed in the third quarter of 2018. Total capital expenditures in ~~2018~~2019 are expected to be ~~at the high-end of $60.0~~$45.0 million to ~~$70.0~~$55.0 million including ~~$22.0~~$11.0 million to ~~$25.0~~$14.0 million for the development of new restaurants.

Financing Activities. Net cash ~~used in~~provided by financing activities in the first ~~nine~~three months of ~~2018~~2019 was ~~$7.7~~$1.8 million and included net revolving credit ~~borrowing repayments~~borrowings under our senior credit facility of ~~$5.0~~$4.0 million ~~combined with $2.5~~offset by $2.2 million in payments to repurchase our common stock. Net cash ~~used in~~provided by financing activities in the first ~~nine~~three months of ~~2017~~2018 included net revolving credit ~~borrowing repayments~~borrowings under our senior credit facility of ~~$9.0 million.~~$5.0 million partially offset by $0.3 million in payments to purchase treasury stock.

Senior Credit Facility. Our senior credit facility provides for aggregate revolving credit borrowings of up to $150.0 million (including up to $15.0 million available for letters of credit) and matures on November 30, 2022. The senior credit facility also provides for potential incremental increases of up to $50.0 million to the revolving credit borrowings available under the senior credit facility. On ~~September 30, 2018,~~March 31, 2019, there were ~~$70.0~~$82.0 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 0.75% to 1.50% based on our Adjusted Leverage Ratio~~

~~(with a margin of 1.25% as of September 30, 2018), or~~

~~2) the LIBOR Rate plus the applicable margin of 1.75% to 2.50% based on our Adjusted Leverage Ratio (with a~~

~~margin of 2.25% as of September 30, 2018).~~


1)	the Alternate Base Rate plus the applicable margin of 0.75% to 1.50% based on our Adjusted Leverage Ratio (with a margin of 1.00% as of March 31, 2019), or


2)	the LIBOR Rate plus the applicable margin of 1.75% to 2.50% based on our Adjusted Leverage Ratio (with a margin of 2.00% as of March 31, 2019).

In addition, the senior credit facility requires us to pay (i) a commitment fee based on the applicable Commitment Fee ~~margin~~rate of 0.25% to 0.35%, based on our Adjusted Leverage Ratio, (with a ~~margin~~rate of 0.30% as of ~~September 30, 2018)~~March 31, 2019) 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’~~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 subject to breakage costs as defined in the senior credit facility agreement. 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 (subject to certain exceptions), (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 ~~September 30, 2018,~~March 31, 2019, we were in compliance with the covenants under our senior credit facility. After reserving ~~$4.0~~$3.7 million for letters of credit issued under the senior credit facility, ~~$76.0~~$64.3 million was available for borrowing under the senior credit facility at ~~September 30, 2018.~~March 31, 2019.

Off-Balance Sheet Arrangements and Contractual Obligations

We have no off-balance sheet arrangements. Prior to the adoption of ASC 842, off-balance sheet arrangements ~~other than~~consisted of our operating leases, which are primarily for our restaurant ~~properties.~~properties, and are now included in other current liabilities and operating lease liabilities on the condensed consolidated balance sheet as of March 31. 2019.

There have been no significant changes outside the ordinary course of business to our contractual obligations since December ~~31, 2017.~~30, 2018. 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 December ~~31, 2017.~~30, 2018.

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 "Basis of Presentation" footnote in the notes to our consolidated financial statements for the year ended December ~~31, 2017~~30, 2018 included in our Annual Report on Form 10-K for the fiscal year ended December ~~31, 2017.~~30, 2018. 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~~three months ended ~~September 30, 2018.~~March 31, 2019 other than the lease accounting policy included below.

Lease Accounting. As discussed in Note 5 to our condensed consolidated financial statements, we adopted ASU 2016-02: Leases (ASC 842), the new lease accounting standard, as of as of December 31, 2018 using the modified retrospective method, with certain optional practical expedients including the transition practical expedient package, which among other things does not require reassessment of lease classification. Judgments made by management for our lease obligations include the determination of our incremental borrowing rate, the determination of stand alone selling prices used to allocate the consideration in the contract, and the length of the lease term, which includes the determination of renewal options that are reasonably assured. The lease term can affect the classification of a lease as finance or operating for accounting purposes, the amount of the lease liability and corresponding right-of-use lease asset recognized, the term over which related leasehold improvements for each restaurant are amortized and any rent holidays and/or changes in rental amounts for recognizing rent expense over the term of the lease. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.

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

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 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.

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 defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, ~~stock-compensation~~closed restaurant rent expense, net of sublease income, stock-based 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 finance, legal, supply chain, human resources, construction and other administrative functions. See Note 67 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 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 Restaurant-level Adjusted EBITDA (i) provide useful information about our operating performance and period-over-period changes, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also these measures may not be comparable to similarly titled captions of other companies.

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

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

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

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

such financial information does not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges and gains (such as impairment and other lease charges, closed restaurant rent expense, net of sublease income, 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 (in thousands):


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017			March 31, 2019			April 1, 2018

Net income (loss)	$	2,047		$	(8,257	)	$	15,724		$	(25,477	)
Benefit from income taxes	(4,892		)	(4,827		)	(246		)	(14,241		)
Income (loss) before taxes	(2,845		)	(13,084		)	15,478			(39,718		)
Net income													$	2,289		$	4,184
Provision for income taxes													946			1,625
Income before taxes													3,235			5,809
Add:
Non-general and administrative expense adjustments:
Depreciation and amortization	9,739			8,483			27,908			26,265			9,548			8,999
Impairment and other lease charges	6,417			15,905			6,539			59,081			(338		)	(662		)
Interest expense	924			672			2,979			1,910			1,234			1,069
Closed restaurant rent expense, net of sublease income													1,424			—
Other expense (income), net	47			469			(3,132		)	1,721			702			366
Stock-based compensation expense in restaurant wages	6			9			56			44			27			17
Unused pre-production costs in advertising expense⁽¹⁾	—			—			—			410
Total non-general and administrative expense adjustments	17,133			25,538			34,350			89,431			12,597			9,789
General and administrative expense adjustments:
Stock-based compensation expense	732			938			2,588			2,723			765			872
Terminated capital project⁽²⁾	—			—			—			849
Board and shareholder matter costs⁽³⁾	—			(155		)	(597		)	3,748
Strategic Renewal Plan restructuring costs and retention bonuses⁽⁴⁾	17			87			520			2,101
Office restructuring and relocation costs	—			(152		)	—			(152		)
Legal settlements and related costs⁽⁵⁾	—			—			(167		)	(473		)
Restructuring costs and retention bonuses⁽¹⁾													615			488
Total general and administrative expense adjustments	749			718			2,344			8,796			1,380			1,360
Consolidated Adjusted EBITDA	$	15,037		$	13,172		$	52,172		$	58,509		$	17,212		$	16,958

⁽¹⁾~~Unused pre-production costs for the nine months ended October 1, 2017, include costs for advertising pre-production that were not used.~~

⁽²⁾~~Terminated capital project costs for the nine months ended October 1, 2017, include costs related to the write-off of a capital project that was terminated in the first quarter of 2017.~~

⁽³⁾Board and shareholder matter costs for the nine months ended September 30, 2018 include fee reductions and final insurance recoveries related to 2017 shareholder activism costs. Board and shareholder matter costs for the three and nine months ended and October 1, 2017 include fees related to shareholder activism and CEO and board member searches.

⁽⁴⁾~~Strategic Renewal Plan restructuring~~Restructuring costs and retention bonuses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 include severance related to eliminated positions. Restructuring costs and retention bonuses for the three months ended April 1, 2018 ~~and October 1, 2017,~~ include severance related to the Strategic Renewal Plan and reduction in force and bonuses paid to certain employees for retention purposes.

⁽⁵⁾~~Legal settlements and related costs for the nine months ended September 30, 2018and nine months ended October 1, 2017, include reductions to final settlement amounts and 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		Pollo Tropical		Taco Cabana
September 30, 2018:
March 31, 2019:
Adjusted EBITDA	$	12,544	$	2,493	$	14,317	$	2,895
Restaurant-level adjustments:
Add: Pre-opening costs	134		89		86		315
Add: Other general and administrative expense⁽¹⁾	6,878		5,657		7,221		6,470
Less: Franchise royalty revenue and fees	453		229		455		216
Restaurant-level Adjusted EBITDA	$	19,103	$	8,010	$	21,169	$	9,464

October 1, 2017:
April 1, 2018:
Adjusted EBITDA	$	9,396	$	3,776	$	14,447	$	2,511
Restaurant-level adjustments:
Add: Pre-opening costs	230		314		224		157
Add: Other general and administrative expense⁽¹⁾	6,250		5,089		7,377		6,182
Less: Franchise royalty revenue and fees	396		195		464		187
Restaurant-level Adjusted EBITDA	$	15,480	$	8,984	$	21,584	$	8,663

Nine Months Ended	Pollo Tropical		Taco Cabana
September 30, 2018:
Adjusted EBITDA	$	42,520	$	9,652
Restaurant-level adjustments:
Add: Pre-opening costs	699		782
Add: Other general and administrative expense⁽¹⁾	21,105		17,573
Less: Franchise royalty revenue and fees	1,376		632
Restaurant-level Adjusted EBITDA	$	62,948	$	27,375

October 1, 2017:
Adjusted EBITDA	$	41,257	$	17,252
Restaurant-level adjustments:
Add: Pre-opening costs	1,013		865
Add: Other general and administrative expense⁽¹⁾	21,345		16,610
Less: Franchise royalty revenue and fees	1,272		568
Restaurant-level Adjusted EBITDA	$	62,343	$	34,159

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

Forward Looking Statements

~~This Quarterly Report~~Matters discussed in this report and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, expressed or implied, regarding our intention to repurchase shares from time to time under the share repurchase program and the source of funding of such repurchases, our anticipated growth, operating results, future earnings per share, plans, objectives, and the impact of our investments in our Strategic Renewal Plan (the "Plan") and other business initiatives on ~~Form 10-Q contains "forward-looking"~~future sales and earnings, contain 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"~~amended, (the "Exchange Act"). These statements are ~~any statements~~often identified by the words "believe," "positioned," "estimate," "project," "plan," "goal," "target," "assumption," "continue," "intend," "expect," "future," "anticipate," and other similar expressions, whether in the negative or the affirmative, 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 offact. These 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~~that are difficult to ~~predict. Therefore, actual outcomes~~predict, and ~~results may differ materially from what is expressed or forecasted in such~~you should not place undue reliance on our forward-looking ~~statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause~~statements. Our actual results toand the timing of certain events could differ materially from those ~~expressed or implied by the~~anticipated in these forward-looking statements ~~or "cautionary statements," include,~~as a result of certain factors, including, but ~~are~~ not limited ~~to:~~

~~Increases~~to, those set forth under "Risk Factors" and elsewhere in ~~food~~this report and in our other ~~commodity costs;~~

~~Risks associated~~public filings with ~~the expansion of our business, including increasing 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;~~

A decrease in the labor supply to us or our key suppliers due to market competition and changes in immigration policy including barriers to immigrants entering, working in, or remaining in the United States;

~~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;~~

~~Cyber security breaches;~~

~~General economic conditions, particularly in the retail sector;~~

~~Competitive conditions;~~

~~Weather conditions including hurricanes, windstorms and flooding, and other natural disasters;~~

~~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 Securities and Exchange Commission ("SEC"). All forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this report or other periodic reports represent our estimates as of the date made and should not be relied upon as representing our estimates as of any ~~other national~~subsequent date. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or ~~international calamity; and~~otherwise.

~~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—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 December ~~31, 2017~~30, 2018 with respect to our market risk sensitive instruments.

ITEM 4—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 Chief Executive Officer and Interim Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~September 30, 2018.~~March 31, 2019.

Changes in Internal Control over Financial Reporting. In connection with the adoption of ASU 2016-02: Leases (ASC 842) as of December 31, 2018, we modified certain processes and internal controls related to our leases. No other change occurred in our internal control over financial reporting during the ~~third~~first quarter of ~~2018~~2019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART ~~II—~~II. OTHER INFORMATION

Item 1. Legal Proceedings

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 allowed current and former assistant managers to receive notice and opt-in to the settlement. Pollo Tropical denies any liability or unlawful conduct. The settlement was approved by a Florida state judge on December 27, 2017 which resulted in dismissal with prejudice for the named individuals and all individuals that opted-in to the settlement. We reserved $0.8 million in 2016 to cover the estimated costs related to the settlement. During the second quarter of 2018, we paid all settlement claims costs and recognized a reduction in legal settlement costs of $0.2 million.

We are ~~also~~ a party to various ~~other~~ litigation matters incidental to the conduct of 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 December ~~31, 2017~~30, 2018 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 December ~~31, 2017.~~30, 2018.

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

On February 26, 2018, we announced that our board of directors approved a share repurchase program for up to 1.5 million shares of our common stock. Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume, general market

and economic conditions, and other corporate considerations. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by our board of directors.

The following table sets forth information with respect to repurchases of our common stock during the quarter ended ~~September 30, 2018:~~March 31, 2019:

Period
Total Number of
Shares Purchased⁽¹⁾
Average Price
Paid
per Share Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs Maximum Number of Shares that
May Yet Be Purchased
Under the Plans or
Programs
July 2, 2018 to July 29, 2018 —
$ —
—
1,457,095
July 30, 2018 to September 2, 2018 1,035
28.25
1,035
1,456,060
September 3, 2018 to September 30, 2018 53,418
28.12
53,418
1,402,642
Total 54,453

54,453



Period	Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
December 31, 2018 to February 3, 2019	—	$	—	—	1,387,642
February 4, 2019 to March 3, 2019	—	—		—	1,387,642
March 4, 2019 to March 31, 2019	158,269	13.88		158,269	1,229,373
Total	158,269	$	13.88	158,269

⁽¹⁾ Shares purchased in open market transactions.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

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




Exhibit No.

31.1		Chief Executive ~~Officer’s~~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~~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~~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~~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		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

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 5, 2018~~May 6, 2019	/S/ RICHARD C. STOCKINGER
	(Signature)
	Richard C. Stockinger Chief Executive Officer

Date: ~~November 5, 2018~~	/S~~/ LYNN S. SCHWEINFURTH~~
	~~(Signature)~~
	~~Lynn S. Schweinfurth~~ ~~Senior Vice President, Chief Financial Officer and Treasurer~~

~~Date: November 5, 2018~~May 6, 2019	/S/ CHERI L. KINDER
	(Signature)
	Cheri L. Kinder Interim Chief Financial Officer and Treasurer, Vice President, Corporate Controller and Chief Accounting Officer

4336



	Nine Months Ended September 30, 2018			Year Ended December 31, 2017
Balance, beginning of period	$	12,994		$	4,912
Provisions for restaurant closures	—			8,767
Additional lease charges (recoveries), net	413			(1,301		)
Payments, net	(5,741		)	(5,528		)
Other adjustments⁽¹⁾	388			6,144
Balance, end of period	$	8,054		$	12,994