What changed in this filing

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Item 1A. Risk Factors

2021-08-26 compared with 2020-08-24 · 179 added, 223 removed, 110 unchanged (79% of the section changed)

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In any such event, the trading price of our securities could decline and you could lose all or part of your investment.

Additionally, the COVID-19 pandemic has had, and is expected to continue to have, a material adverse impact on our business, financial condition, and results of operations, as well as those of many of our customers, suppliers, and local, national, and global economies.

The COVID-19 pandemic has also amplified many of the other risks discussed below to which we are subject.

We are unable to predict the extent to which the pandemic and its related impacts will adversely impact our business, financial condition, and results of operations as well as our stock price.

However, given the unpredictable, unprecedented, and fluid nature of the pandemic, it may also materially and adversely affect our business, financial condition, and results of operations in ways that are not currently anticipated by or known to us or that we do not currently consider to present significant risk.

The novel coronavirus (COVID-19) pandemic has materially disrupted and is expected to continue to materially disrupt for an extended period of time our business, operations, financial condition and results of operations.

The COVID-19 pandemic has had a material adverse effect on our business.

The COVID-19 pandemic, federal, state and local government responses to COVID-19, our guests’ responses to the pandemic, and our Company’s responses to the pandemic have all disrupted and will continue to disrupt our business and our industry.

In the United States, as well as globally, individuals are being encouraged to practice social distancing, restricted from gathering in groups, and in some areas are restricted from non-essential movements outside of their homes, all of which impacts our ability to operate our business.

Our fiscal 2020 results include the decline in Company sales compared to fiscal 2019 primarily due to the COVID-19 pandemic.

At the end of the third quarter of fiscal 2020, we temporarily closed all Company-owned restaurant dining and banquet rooms as we transitioned to an off-premise business model and temporarily delayed our expansion plans.

Beginning on April 27, 2020, we began to reopen certain dining room locations as permitted by governments.

At the end of fiscal 2020, as of June 24, 2020 , and more recently as of our first period of fiscal 2021 ended July 29, 2020 , 94.9% and 84.0% , respectively, of our Company-owned restaurant dining rooms or patios were open in a limited capacity.

In response to the pandemic, during the fourth quarter of fiscal 2020, we shifted to off-premise and then limited dining room re-opening based on regulatory requirements.

We also modified work hours for our team members, implemented enhanced safety protocols, and identified and implemented cost savings measures throughout our operations.

In fiscal 2020, we incurred approximately $12.2 million of expenses related to our response to the pandemic primarily related to employee relief payments, net of CARES Act employee retention tax credits, supplies such as sanitizer and face masks, and inventory spoilage.

We expect to incur higher ongoing expenses related to additional cleaning and safety supplies for the duration of the pandemic.

In response to the pandemic, during the fourth quarter of fiscal 2020, certain landlords have provided temporary rent concessions.

These concessions primarily relate to the deferral of certain fourth quarter of fiscal 2020 rent payments until future periods.

However, we have not reached agreement with all landlords

and, we cannot provide any assurances regarding whether similar concessions will be granted in the future.

Refer to Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 - Novel Coronavirus Pandemic within Part II, Item 8 - Financial Statements and Supplementary Data Notes to the Consolidated Financial Statements for more information regarding the financial impact of the pandemic.

Based on government mandates, it is also possible that we may have to close some or all of our re-opened dining rooms if the pandemic persists or worsens or if cases of COVID-19 increase in certain geographic areas, in each case reverting back to off-premise only model in such locations.

We cannot predict the speed at which we will be able to re-open our dining rooms at full capacity, or whether we will be able to do so at all, as this will depend in part on the actions of a number of governmental bodies over which we have no control.

The COVID-19 pandemic’s impact on the economy in general, globally, nationally and locally, could also adversely affect our guests’ financial condition, resulting in reduced spending at restaurants.

The COVID-19 pandemic and these responses have affected and will continue to adversely affect our guest traffic, sales and operating costs and we cannot predict how long the pandemic will last or what other government responses may occur.

Moreover, once restrictions are lifted, it is unclear whether guests will be comfortable dining out and, if so, how quickly guests will return to our restaurants, which may be a function of continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including job losses, and other factors that are beyond our control.

Any failure of consumers to return to pre-pandemic dining patterns could have a long-term material adverse impact on us and our future prospects.

The equity markets in the United States have been extremely volatile due to the COVID-19 pandemic and our stock price has fluctuated significantly and may continue to do so.

If the business interruptions caused by COVID-19 continue indefinitely or last longer than we expect, we may need to seek other sources of liquidity.

The COVID-19 pandemic has created significant disruption and extreme volatility in global capital markets and is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available on favorable terms, especially the longer the COVID-19 pandemic lasts, or available at all.

As discussed in this report, we have amended our revolving credit facility to preserve liquidity and allow us financial flexibility, including waiving of certain debt covenant compliance for a limited time.

In the fourth quarter of fiscal 2020, our Board of Directors voted to suspend the quarterly cash dividend and share repurchase program due to uncertainty surrounding the duration of closures of our dining rooms and other restrictions mandated by state and local governments in response to COVID-19.

Additionally, under the terms of our revolving credit facility, as recently amended, we are prohibited from making dividends, stock repurchases and investments from the fourth quarter of fiscal 2020 through the third quarter of fiscal 2021, and following this period, we will be subject to a $50.0 million aggregate limitation on dividends, stock repurchases and investments.

A material increase in our level of debt or material impairments of our assets could cause our debt to total cash flow ratio to exceed the maximum level permitted under the covenant in our revolving credit facility agreement.

Additionally, certain of our restaurants have been further disrupted when a team member has been diagnosed with COVID-19 or exposed to a person with a confirmed positive diagnosis of COVID-19.

In the event a team member has been diagnosed with COVID-19, our policy requires temporary closure of the restaurant, quarantine of some or all of a restaurant’s employees and disinfection of the restaurant facilities.

Additionally, if a team member has direct contact with a friend or family member with a confirmed positive diagnosis of COVID-19, such team member must exclude himself or herself from work for a certain period of time.

If a significant percentage of our workforce is unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, our operations will be negatively impacted, potentially materially adversely affecting our liquidity, financial condition or results of operations.

If an outbreak is traced to one or more of our locations, it could impact our reputation and subject us to legal claims.

Additionally, we have implemented COVID-19 emergency pay policies and taken other employee compensation relief actions to support our restaurant team members during the COVID-19 business interruption, but those actions may not be sufficient to compensate our team members for the entire duration of any business interruption resulting from COVID-19.

Those team members might seek and find other employment during that interruption, which could materially adversely affect our ability to properly staff and reopen our dining rooms with experienced team members when permitted to do so by governments.

We have not experienced any significant issues related to suppliers, however, our suppliers could be adversely impacted by the COVID-19 pandemic.

If our suppliers’ employees are unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, or if the supply chain is disrupted for any other reason such as travel limitations and other restrictions on commerce, we could face shortages of food items or other supplies at our restaurants and our operations and sales could be adversely impacted by such supply interruptions.

Considering the significant uncertainty as to our ability to increase sales to levels we achieved before the COVID-19 pandemic based on aforementioned uncertainties and other known and unknown risks related to the pandemic, refer to Part I, Item 1 - Business Part II , Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations discussions on Liquidity for further information of our future growth.

Additionally, the impact of COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, may also precipitate or exacerbate other risks discussed in this Item 1A - Risk Factors and elsewhere in this report, any of which could have a material effect on us.

This situation is changing rapidly and additional effects may arise that we are not presently aware of or that we currently do not consider to present significant risks to our operations.

If we are not able to respond to and manage the impact of such events effectively, our business and financial condition will be negatively impacted.

Competition may adversely affect our operations and financial results.

The restaurant business is highly competitive as to price, service, restaurant location, convenience, and type and quality of food.

We compete within each market with locally-owned restaurants as well as national and regional restaurant chains.

The casual dining segment of the restaurant industry has not seen significant growth in customer traffic in recent years, and seen a significant decrease as a result of the COVID-19 pandemic.

If these trends continue, our ability to grow customer traffic at our restaurants (including through off-premise) will depend on our ability to increase our market share within the casual dining segment.

We also face competition from quick service and fast casual restaurants;

the convergence in grocery, deli and restaurant services;

and meal kit and food delivery providers.

We compete primarily on the quality, variety and value perception of menu items, as well as the quality and efficiency of service, the attractiveness of facilities and the effectiveness of advertising and marketing programs.

Although we may implement a number of business strategies, the success of new products, initiatives and overall strategies is highly difficult to predict.

If we are unable to compete effectively, our gross sales, guest traffic and profitability may decline.

Strategic and Operational Risks

If we are unable to successfully design and execute a business strategy plan, our gross sales and profitability may be adversely affected.

Our ability to increase revenues and profitability is dependent on designing and executing effective business strategies.

If we are delayed or unsuccessful in executing our strategies or if our strategies do not yield the desired results, our business, financial condition and results of operations may suffer.

Our ability to meet our business strategy plan is dependent upon, among other things, our and our franchisees’ ability to:

• Increase gross sales and operating profits at existing restaurants with food and beverage options desired by our guests;

• Evolve our marketing and branding strategies in order to appeal to guests;

• Innovate and implement technology initiatives that provide a unique digital guest experience;

• Identify adequate sources of capital to fund and finance strategic initiatives, including reimaging existing restaurants, new restaurant development and new restaurant equipment;

• Grow and expand operations, including identifying available, suitable and economically viable locations for new restaurants, or making strategic acquisitions;

• Improve the speed and quality of our service.

Changes in consumer preferences may decrease demand for food at our restaurants.

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Food safety incidents at our restaurants or in our industry or supply chain may adversely affect customer perception of our brands or industry and result in declines in sales and profits.

Regardless of the source or cause, any report of food-borne illnesses or other food safety issues at one of our restaurants or our franchisees’ restaurants could irreparably damage our brand reputations and result in declines in customer traffic and sales at our restaurants.

A food safety incident may subject us to regulatory actions and litigation, including criminal investigations, and we may be required to incur significant legal costs and other liabilities.

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Health concerns or outbreaks of disease in a food product could also reduce demand for particular menu offerings.

Even instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our competitors could result in negative publicity about the restaurant industry generally and adversely affect our sales or cause us to incur additional costs to implement food safety protocols beyond industry standards.

Even instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our competitors could result in negative publicity about the restaurant industry in general and adversely affect our sales or cause us to incur additional costs to implement food safety protocols beyond industry standards.

The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.

Global and domestic economic conditions negatively impact consumer discretionary spending and could have a material negative effect on our financial performance.

The restaurant industry is dependent upon consumer discretionary spending, which is negatively affected by global and domestic economic conditions, such as:

slow or negative growth, unemployment, credit conditions and availability, volatility in financial markets, inflationary pressures, weakness in the housing market, tariffs and trade barriers, pandemics or public health concerns, and changes in government and central bank monetary policies.

When economic conditions negatively affect consumer incomes, such as the ongoing COVID-19 pandemic, discretionary spending for restaurant visits will be challenged, our guest traffic may deteriorate and the average amount guests spend in our restaurants may be reduced.

This will negatively impact our revenues and also result in lower royalties collected, spreading fixed costs across a lower level of sales, and in turn, cause downward pressure on our profitability.

This could result in further reductions in staff levels, asset impairment charges and potential restaurant closures.

There is no assurance that any governmental plans related to the economy to restore fiscal responsibility or future plans to stimulate the economy will foster growth in consumer confidence, consumer incomes or consumer spending.

Unfavorable publicity relating to one or more of our restaurants in a particular brand may taint public perception of the brand.

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If we are unable to quickly and effectively respond to such reports, we may suffer declines in guest traffic which could materially impact our financial performance.

Employment and labor laws and regulations may increase the cost of labor for our restaurants.

We are subject to various federal, state and local employment and labor laws and regulations that govern employment and labor matters, including, employment discrimination, minimum wages, work scheduling, overtime, tip credits, tax reporting, working conditions, safety standards, family leave and immigration status.

Compliance with these laws and regulations can be costly, and a failure or perceived failure to comply with these laws could result in negative publicity or litigation.

Some states and localities have, and many others are contemplating, increases to their minimum wage and tip credit wage, and such increases can have a significant impact on our labor costs.

Similarly, any government actions related to employee compensation or employer liability in response to the COVID-19 pandemic, whether temporary or permanent, could also materially increase our costs.

In addition, new employment or labor laws may mandate additional benefits for employees or impose additional obligations that may adversely impact the costs of labor, the availability of labor and our business operations.

In addition, our suppliers may be affected by higher minimum wage standards or availability of labor, which may increase the price of goods and services they supply to us.

There are no assurances that a combination of cost management and price increases can offset all of the costs associated with compliance.

Governmental regulation may adversely affect our ability to maintain our existing and future operations and to open new restaurants.

We are subject to extensive federal, state, local and international laws and regulations, which vary from jurisdiction to jurisdiction and which increase our exposure to litigation and governmental proceedings.

Among other laws and regulations, we are subject to laws and regulations relating to the design and operation of facilities, minimum wage, licensing and regulation by alcoholic beverage control, health, sanitation, safety and fire agencies, nutritional content and menu labeling, including the Affordable Care Act, which requires restaurant companies such as ours to disclose calorie information on their menus.

Additionally, as a result of the COVID-19 pandemic, certain state and local jurisdictions are enacting certain health, safety and other regulations that impact or require us to modify our operations.

Compliance with these laws and regulations may lead to increased costs and operational complexity, changes in sales mix and profitability, and increased exposure to governmental investigations or litigation.

We cannot reliably anticipate any changes in guest behavior resulting from implementation of these laws.

We are also subject to federal and state environmental regulations, and although these have not had a material negative effect on our operations, we cannot ensure this will not occur in the future.

In particular, the United States and other foreign governments have increased focus on environmental matters such as climate change, greenhouse gases and water conservation.

These efforts could result in increased taxation or in future restrictions on or increases in costs associated with food and other restaurant supplies, transportation costs and utility costs, any of which could decrease our operating profits and/or necessitate future investments in our restaurant facilities and equipment to achieve compliance.

We are subject to federal and state laws and regulations which govern the offer and sale of franchises and which may supersede the terms of franchise agreements between us and our franchisees.

Failure to comply with such laws and regulations or to obtain or retain licenses or approvals to sell franchises could adversely affect us and our franchisees.

Due to our international franchising, we are also subject to governmental regulations throughout the world impacting the way we do business with our international franchisees.

These include antitrust and tax requirements, anti-boycott regulations, import/export/customs and other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act.

Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could adversely impact our business and financial performance.

The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and therefore have an adverse effect on our results of operations.

Failure to comply with the laws and regulatory requirements of federal, state, local, and international authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability.

Compliance with these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.

If we are unable to successfully design and execute a business strategy plan, our gross sales and profitability may be adversely affected.

Our ability to increase revenues and profitability is dependent on designing and executing effective business strategies.

If we are delayed or unsuccessful in executing our strategies or if our strategies do not yield the desired results, our business, financial condition and results of operations may suffer.

Our ability to meet our business strategy plan is dependent upon, among other things, our and our franchisees’ ability to:

Increase gross sales and operating profits at existing restaurants with food and beverage options desired by our guests;

Evolve our marketing and branding strategies in order to appeal to guests;

Innovate and implement technology initiatives that provide a unique digital guest experience;

Identify adequate sources of capital to fund and finance strategic initiatives, including reimaging of existing restaurants, new restaurant development and new restaurant equipment;

Grow and expand operations, including identifying available, suitable and economically viable locations for new restaurants, or making strategic acquisitions;

Improve the speed and quality of our service.

Our partnership with DoorDash is subject to risks, and our ability to grow sales through delivery orders is uncertain.

Our strategy for growth in fiscal 2021 is dependent in part on increased sales from guests that want our food delivered to them.

In the fourth quarter of fiscal year 2019, we entered into an agreement with DoorDash that allows DoorDash to be the exclusive third party delivery provider for Chili’s and Maggiano’s.

We currently rely on DoorDash for the ordering and payment platforms that receive guest orders and that send orders directly to our point of sale system.

These platforms could be damaged or interrupted by technological failures, cyber-attacks or other factors, which may

adversely impact our sales through these channels.

DoorDash generally fulfills delivery orders through drivers that are independent contractors.

Additionally, consumers’ ability to immediately post opinions on social media platforms to a broad audience of consumers and other interested persons, often without filters or checks on accuracy of the content posted, may be adverse to our interests and may harm our performance, prospects or business, regardless of the information’s accuracy.

The use of social media vehicles by our guests or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.

Our ability to grow sales through delivery orders is uncertain.

Part of our strategy for growth is dependent on increased sales from guests that want our food delivered to them.

We currently rely on third-party delivery providers for the ordering and payment platforms that receive guest orders and that send orders directly to our point of sale system.

These platforms could be damaged or interrupted by technological failures, cyber-attacks or other factors, which may adversely impact our sales through these channels.

Delivery providers generally fulfills delivery orders through drivers that are independent contractors.

These drivers may make errors, fail to make timely deliveries, damage our food or poorly represent our brands, which may lead to customer disappointment, reputational harm and unmet sales expectations.

Our sales may also be adversely impacted if there is a shortage in drivers that are willing and available to make deliveries from our restaurants.

Because we have partnered exclusively with DoorDash, our delivery business and growth expectations may be negatively impacted if DoorDash is not able to effectively compete with other restaurant delivery providers for end consumers, capital, and delivery drivers or DoorDash ceases or reduces operations.

Delivery, as well as other DoorDash offerings that we may test, are relatively new services, and it is difficult for us to anticipate the level of sales they may generate, operational challenges we may face or the experiences our guests will have with these offerings.

These factors may adversely impact our sales and our brand reputation.

We also incur additional costs associated with delivery orders, and it is possible that these orders could cannibalize more profitable in-restaurant visits or carry out orders.

Additionally, we have certain virtual brands that are only available through DoorDash.

We rely on DoorDash to market and deliver certain offerings from our Chili’s and Maggiano’s kitchens.

In addition to the delivery and technological risks discussed above, because certain offerings are only available through the DoorDash platform, if we have to transition to a different third party delivery provider, our sales on such offerings would temporarily be diminished, and it is possible that we would not generate the same level of profitability with a different provider.

Our sales may also be adversely impacted if there is a shortage of drivers that are willing and available to make deliveries from our restaurants.

We also incur additional costs associated with delivery orders, and it is possible that these orders could cannibalize more profitable in-restaurant visits or To-Go orders.

Additionally, we have certain virtual brands that are only available through third-party platforms.

We rely on DoorDash and Google Food Ordering to market and deliver certain offerings from our Chili’s and Maggiano’s kitchens.

In addition to the delivery and technological risks discussed above, because certain offerings are only available through third-party platforms, if we have to transition to a different third-party delivery provider, our sales on such offerings would temporarily be diminished, and it is possible that we would not generate the same level of profitability with a different provider.

Loss of key management personnel could hurt our business and limit our ability to operate and grow successfully.

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There is active competition for quality management personnel and hourly team members.

If we experience high turnover, we may experience higher labor costs and have a shortage of adequate management personnel required for future growth.

Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could materially adversely impact our business.

There has been a marked increase in the use of social media and similar platforms which allow individual access to a broad audience of consumers and other interested persons.

Many social media platforms immediately publish the content their subscribers and participants’ post, often without filters or checks on accuracy of the content posted.

Information posted on such platforms at any time may be adverse to our interests and may harm our performance, prospects or business, regardless of the information’s accuracy.

As part of our marketing strategy, we rely on search engine marketing, social media and new technology platforms to attract and retain guests and maintain brand relevance.

Our strategy and initiatives may not be successful, resulting in expenses incurred without improvement in guest traffic or brand relevance.

In addition, a variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about us, exposure of personally identifiable information, fraud, or out-of-date information.

The inappropriate use of social media vehicles by our guests or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.

We are exposed to risks related to cyber security and protection of confidential information, and failure to protect the integrity and security of payment card or individually identifiable information of our guests and teammates or confidential and proprietary information of the Company could damage our reputation and expose us to loss of revenues, increased costs and litigation.

Our technology systems contain personal, financial and other information that is entrusted to us by our guests and team members, as well as financial, proprietary and other confidential information related to our business, and a significant portion of our restaurant sales are by credit or debit cards.

If our technology systems, or those of third party services providers we rely upon, are compromised as a result of a cyber-attack (including whether from circumvention of security systems, denial-of-service attacks, hacking, “phishing” attacks, computer viruses, ransomware, malware, or social engineering) or other external or internal method, it could result in an adverse and material impact on our reputation, operations, and financial condition.

The cyber risks we face range from cyber-attacks common to most industries, to attacks that target us due to the confidential consumer information we obtain through our electronic processing of credit and debit card transactions.

Such security breaches could also result in litigation or governmental investigation against us, as well as the imposition of penalties.

These impacts could also occur if we are perceived either to have had an attack or to have failed to properly respond to an incident.

To conduct our operations, we regularly move data across national borders, and consequently are subject to a variety of continuously evolving and developing laws and regulations regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data.

The use and disclosure of such information is regulated at the federal, state and international levels, and these laws, rules and regulations are subject to change and increased enforcement activity and are increasing in complexity and number.

For example, the California Consumer Privacy Act, or CCPA, which became effective on January 1, 2020, imposes new responsibilities on us for the handling, disclosure and deletion of personal information for consumers who reside in California.

The CCPA permits California to assess potentially significant fines for violating CCPA and creates a right for individuals to bring class action suits seeking damages for violations.

As privacy and information security laws and regulations change or cyber risks evolve pertaining to data, we may incur significant additional costs in technology, third-party services and personnel to maintain systems designed to anticipate and prevent cyber-attacks.

As further described below, the Company experienced a cyber security incident at some Chili’s locations in fiscal 2018 .

As a result of the incident, we have taken certain additional preventative measures to reduce cyber risks.

However, we cannot provide assurance that our security frameworks and measures will be successful in preventing future cyber-attacks or data loss.

In addition, we expect the cost to maintain cyber liability insurance in the future will materially increase as a result of the incident.

We have incurred and in the future may incur costs and reputational harm resulting from the unauthorized access or acquisition of confidential consumer information related to our electronic processing of credit and debit card transactions.

On May 12, 2018, we issued a public statement notifying guests that we had discovered that credit and debit card numbers and related payment card information may have been acquired from Chili’s locations without authorization as a result of a malware attack.

The Company engaged third-party forensic firms and cooperated with law enforcement to investigate the matter.

Based on the investigation of our third-party forensic experts, we believe most Company-owned Chili’s restaurants were impacted by the malware during time frames that vary by restaurant, but we believe in each case began no earlier than March 21, 2018 and ended no later than April 22, 2018.

As a result of the incident, we have been assessed with financial responsibility by certain payment card companies for card issuer losses, card replacement costs and other charges issued by payment card companies.

In addition, we are the defendant in a purported class action lawsuit, alleging that we negligently failed to provide adequate security to protect the payment card information of the plaintiffs, causing those individuals to suffer financial losses.

In the future we may become subject to additional claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also become subject to additional lawsuits or proceedings relating to the incident.

While we do not acknowledge responsibility to pay any such amounts imposed or demanded, these proceedings and demands may result in significant related settlement costs.

Since the incident, through June 24, 2020 , we have incurred total cumulative costs of $8.0 million related to the cyber security incident, and expect to incur primarily legal expenses associated with the incident in future periods.

Although we maintain cyber liability insurance, we are not able to reliably forecast all of the losses that may occur as a result of the incident or whether such costs will be covered by insurance.

If losses exceed our cyber liability insurance coverage such excess losses could have a material adverse effect on our financial condition or results of operations in future periods.

See Part II, Item 8 - Financial Statements and Supplementary Data , Notes to the Consolidated Financial Statements , Note 18 - Commitments and Contingencies of this Annual Report on Form 10-K for additional information regarding the financial impact of this cyber security incident.

Further, the incident may have a negative impact on our reputation and cause guests to lose confidence in our ability to safeguard their information.

We are unable to definitively determine the impact to our relationship with our guests and whether we will need to engage in significant promotional or other activities to rebuild our relationship with our guests.

If the Company experiences another cyber security incident in the future, we believe it will be even more difficult to regain the trust of our guests and to rebuild our reputation.

We are experiencing and may continue to experience challenges in recruiting and retaining team members in various locations.

These challenges may result in higher labor costs, increased turnover and a shortage of adequate management personnel and hourly team members required for operations and for future growth, which can lead to lower guest satisfaction and decreased profitability.

Our results can be adversely affected by events, such as adverse weather conditions, natural disasters, climate change, pandemics such as the COVID-19 pandemic or other catastrophic events.

Adverse weather conditions, natural disasters, climate change or catastrophic events, such as terrorist acts, can adversely impact restaurant sales.

Natural disasters such as earthquakes, hurricanes, and severe adverse weather conditions, climate change and health pandemics (such as COVID-19) whether occurring in the United States or abroad, can keep customers in the affected area from dining out, adversely affect consumer spending and confidence levels and supply availability and costs, cause damage to or closure of restaurants and result in lost opportunities for our restaurants.

Our receipt of proceeds under any insurance we maintain with respect to some of these risks may be delayed or the proceeds may be insufficient to cover our losses fully.

Measures implemented to reduce the spread of COVID-19 have adversely affected workforces, customers, consumer sentiment, economies and financial markets, and, along with decreased consumer spending, have led to an economic downturn in many of our markets.

As a result of COVID-19, we and many of our franchisees experienced reduced operating hours and dining-room closures, some of which are still fully or partially continuing.

While many markets have reopened for dine-in guests, the capacity may be limited, and local conditions may lead again to

closures or increased limitations.

As a result of COVID-19, restaurant traffic and system-wide sales were negatively impacted.

Refer to Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, Revenues for more information.

We cannot predict the duration or scope of the COVID-19 pandemic or when operations will cease to be affected by it.

Because a large portion of our restaurant operating costs are fixed or semi-fixed in nature, the loss of sales during these periods hurts our and our franchisees’ operating margins and can result in restaurant operating losses and our loss of royalties.

The COVID-19 pandemic is ongoing and has the potential to negatively impact our future financial results and depending on the duration and scope, such impact could be material.

Shortages or interruptions in the availability and delivery of food and other products may increase costs or reduce revenues.

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natural disasters such as floods, droughts and hurricanes;

health epidemics or pandemics (such as COVID-19);

shortages in the availability of truck drivers;

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For example, declines in oil prices may increase levels of unemployment and cause other economic pressures that result in lower sales and profits at our restaurants in oil market regions of Texas and surrounding areas.

Litigation could have a material adverse impact on our business and our financial performance.

We are subject to lawsuits, administrative proceedings and claims that arise in the regular course of business or out of special circumstances.

These matters typically involve claims by guests, team members and others regarding issues such as food-borne illness, food safety, premises liability, compliance with wage and hour requirements, work-related injuries, discrimination, harassment, disability and other operational issues common to the food service industry, as well as contract disputes and intellectual property infringement matters.

It is also possible that t eam members, guests or others could make claims against the Company as a result of the COVID-19 pandemic, and the nature and scope of such matters, if any, is unknown because the pandemic is novel.

Our franchise activity also creates a risk of us being named as a joint employer of workers of franchisees for alleged violations of labor and wage laws.

We could be adversely affected by negative publicity and litigation costs resulting from these claims, regardless of their validity.

Significant legal fees and costs in complex class action litigation or an adverse judgment or settlement that is not insured or is in excess of insurance coverage could have a material adverse effect on our financial position and results of operations.

The success of our franchisees is important to our future growth.

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These risks include:

Difficulties in achieving consistency of product quality and service as compared to United States operations;

• Difficulties in achieving consistency of product quality and service as compared to domestic operations;

• Changes to recipes and menu offerings to meet cultural norms;

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• Differences, changes or uncertainties in economic, regulatory, legal, cultural, social and political conditions.

The phase-out of LIBOR could increase our interest expense and have a material adverse effect on us.

Borrowings under our revolving credit facility use LIBOR, the basic rate of interest used in lending between banks on the London interbank market, as a benchmark for establishing the applicable interest rate.

The Financial Conduct Authority of the United Kingdom has announced that it plans to phase out LIBOR by the end of 2021.

It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021.

Whether another alternative reference rate attains market traction as a LIBOR replacement tool remains in question.

Although our borrowing arrangements provide for alternative base rates, those alternative base rates historically would often have led to increased interest rates, in some cases significantly higher, than those we paid based on LIBOR, and may similarly be higher in the future.

Therefore, if, or when, LIBOR ceases to exist, we will likely need to agree upon a replacement index with our lenders as part of refinancing our existing indebtedness upon its maturity, and the interest rate thereunder will likely change.

The consequences of the phase out of LIBOR cannot be entirely predicted at this time.

For example, we may not be successful in amending our borrowing arrangements to provide for a replacement rate.

If any new or alternative base rate for calculating interest with respect to our outstanding indebtedness may not be as favorable or perform in the same manner as LIBOR and could lead to an increase in our interest expense or could impact our ability to refinance some or all of our existing indebtedness.

In addition, the transition process may involve, among other things, increased volatility or illiquidity in financial markets, which could also have an adverse effect on us whether or not any replacement rate applicable to our borrowings is affected.

Any such effects of the transition away from LIBOR, as well as other unforeseen impacts, may result in increased interest expense and other expenses, difficulties, complications or delays in connection with future financing efforts or otherwise have a material adverse impact on our business, financial condition, and results of operations.

Downgrades in our credit ratings could impact our ability to access capital and materially adversely affect our business, financial condition and results of operations.

Credit rating agencies have, and in the future may, change their credit rating for us, among other things, based on the performance of our business, our capital strategies or their overall view of our industry.

There can be no assurance that any rating assigned to our currently outstanding public debt securities will remain in effect for any given period of time or that any such ratings will not be further lowered, suspended or withdrawn entirely by a rating agency if, in that agency’s judgment, circumstances so warrant, particularly during the COVID-19 pandemic.

A downgrade of our credit ratings could, among other things:

Increase our cost of borrowing;

Limit our ability to access capital;

Result in more restrictive covenants in agreements governing the terms of any future indebtedness that we may incur, including restrictions on our ability to pay distributions or repurchase shares;

Require us to provide collateral for any future borrowings;

Adversely affect the market price of our outstanding debt securities.

In the fourth quarter of fiscal 2020, S&P lowered our corporate credit rating to B+ with negative outlook.

Moody’s also lowered us to a corporate family rating B1 with negative outlook.

The downgrades were a result of the COVID-19 impact on the restaurant sector that has been one of the sectors most significantly affected given its sensitivity to consumer demand and sentiment, and the unprecedented precautionary measures implemented by state and local governments, including temporary closures.

These ratings and our current credit condition affect, among other things, our ability to access new capital.

Negative changes to these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt.

Our credit ratings could be further lowered, or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, financial condition, results of operations, and liquidity.

In particular, a weakening of our financial condition, including any further increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, could result in a credit rating downgrade or change in outlook, or could otherwise increase our cost of borrowing.

Inflation and fluctuations in energy costs may increase our operating expenses.

We have experienced impact from inflation and fluctuations in utility and energy costs.

Inflation has caused added food, labor and benefits costs and increased our operating expenses.

Fluctuations and increases in utility and energy costs have also increased our operating expenses on regional and national levels, including through suppliers putting pressure on margins by passing on higher prices for petroleum-based fuels.

As operating expenses rise, we, to the extent permitted by competition, recover costs by raising menu prices, or by implementing alternative products, processes or cost reduction procedures.

We cannot ensure, however, we will be able to continue to recover increases in operating expenses due to inflation in this manner.

Challenges to the retail industry may negatively affect guest traffic at our restaurants.

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Decreases in total tenant occupancy in retail centers and changes in guest visits to the retail centers in which we are located, whether as a result of the COVID-19 pandemic or otherwise, may negatively affect guest traffic at our restaurants.

We are dependent on information technology and any material failure in the operation or security of that technology or our ability to execute a comprehensive business continuity plan could impair our ability to efficiently operate our business.

We rely on information systems across our operations, including, for example, point-of-sale processing in our restaurants, management of our supply chain, collection of cash, payment of obligations, and various other processes and procedures.

Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems.

The failure of these systems to operate effectively, problems with maintenance, upgrading or transitioning to replacement systems, or a breach in security of these systems could cause delays in customer service and reduce efficiency in our operations.

Additionally, our corporate systems and processes and corporate support for our restaurant operations are handled primarily at our restaurant support center.

We have disaster recovery procedures and business continuity plans in place to address most events of a crisis nature, including tornadoes and other natural disasters, and back up and off-site locations for recovery of electronic and other forms of data and information.

However, if we are unable to fully implement our disaster recovery plans, we may experience delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support field operations and other breakdowns in normal communication and operating procedures that could have a material adverse effect on our financial condition, results of operation and exposure to administrative and other legal claims.

Inflation and fluctuations in energy costs may increase our operating expenses.

We have in the past, and are currently experiencing the impacts of inflation and fluctuations in utility and energy costs.

Inflation has caused added food, labor and benefits costs and increased our operating expenses.

As operating expenses rise, we, to the extent permitted by competition, recover costs by raising menu prices, or by implementing alternative products, processes or cost reduction procedures.

We cannot ensure, however, we will be able to continue to recover increases in operating expenses due to inflation in this manner.

Failure to protect our service marks or other intellectual property could harm our business.

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Failure of third parties to provide adequate services could have an adverse effect on our results of operations, financial condition or ability to accomplish our financial and management reporting.

Information and Technology Related Risks

If our technology systems, or those of third-party services providers we rely upon, are compromised as a result of a cyber-attack (including whether from circumvention of security systems, denial-of-service attacks, hacking, “phishing” attacks, computer viruses, ransomware, malware, or social engineering) or other external or internal method, it could result in an adverse and material impact on our reputation, operations, and financial condition.

Such security breaches could also result in litigation or governmental investigation against us, as well as the imposition of penalties.

These impacts could also occur if we are perceived either to have had an attack or to have failed to properly respond to an incident.

The CCPA permits California to assess potentially significant fines for violating CCPA regulations and creates a right for individuals to bring class action suits seeking damages for violations.

For example, the Company experienced a cyber security incident at some Chili’s locations in fiscal 2018.

As a result of the incident, we have taken certain additional preventative measures to reduce cyber risks.

However, we cannot provide assurance that our security frameworks and measures will be successful in preventing future cyber-attacks or data loss.

Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems.

The failure of these systems to operate effectively, problems with maintenance, upgrading or transitioning to replacement systems or a breach in security of these systems could cause delays in customer service and reduce efficiency in our operations.

Additionally, our corporate systems and processes and corporate support for our restaurant operations are handled primarily at our restaurant support center.

and other breakdowns in normal communication and operating procedures that could have a material adverse effect on our financial condition, results of operation and exposure to administrative and other legal claims.

Financial Risks

The phase-out of LIBOR could increase our interest expense and have a material adverse effect on us.

In July 2017, the Financial Conduct Authority of the United Kingdom, which regulates LIBOR, announced that it planned to phase out LIBOR by the end of 2021.

On March 5, 2021, however, ICE Benchmark Administration, the administrator of LIBOR, announced its intention to cease the publication of all settings of non-U.S.

dollar LIBOR and only the one-week and two-month U.S.

dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S.

dollar LIBOR settings being discontinued after June 30, 2023.

Whether another alternative reference rate attains market traction as a LIBOR replacement tool remains in question.

Therefore, when LIBOR ceases to exist, we will likely need to agree upon a replacement index with our lenders, and the interest rate thereunder will likely change.

The consequences of the phase out of LIBOR cannot be entirely predicted at this time.

For example, we may not be successful in amending our borrowing arrangements to provide for a replacement rate.

Any new or alternative base rate for calculating interest with respect to our outstanding indebtedness may not be as favorable or perform in the same manner as LIBOR and could lead to an increase in our interest expense or could impact our ability to refinance some or all of our existing indebtedness.

Downgrades in our credit ratings could impact our ability to access capital and materially adversely affect our business, financial condition and results of operations.

A downgrade of our credit ratings could, among other things:

• Increase our cost of borrowing;

• Limit our ability to access capital;

• Result in more restrictive covenants in agreements governing the terms of any future indebtedness that we may incur, including restrictions on our ability to pay distributions or repurchase shares;

• Require us to provide collateral for any future borrowings;

• Adversely affect the market price of our outstanding debt securities.

These ratings and our current credit condition affect, among other things, our ability to access new capital.

Negative changes to these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt agreement.

In particular, a weakening of our financial condition, including any further increase in our leverage or

decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, could result in a credit rating downgrade or change in outlook, or could otherwise increase our cost of borrowing.

Declines in the market price of our common stock or changes in other circumstances that may indicate an impairment of goodwill could adversely affect our financial position and results of operations.

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Interim goodwill impairment tests are also required when events or circumstances change between annual tests that would more likely than not reduce the fair value of our reporting units below their carrying value.

capitalization as a result of the COVID-19 pandemic could indicate that an impairment loss may have been incurred.

Based on our assessment during the third quarter we determined that our goodwill and indefinite-lived intangible assets were not impaired at that time.

Additionally, we updated the assessment during the fourth quarter of fiscal 2020 and determined no triggering event existed based on improved market value and actual results compared to forecast for the third quarter of fiscal 2020.

Although no triggering event had been identified in our regular goodwill impairment assessment performed at the end of the second quarter of fiscal 2020, we determined during the third quarter of fiscal 2020 that the reduced cash flow projections and the significant decline in our market capitalization as a result of the COVID-19 pandemic could indicate that an impairment loss may have been incurred.

Based on our assessment, we determined that our goodwill and indefinite-lived intangible assets were not impaired.

We performed our annual goodwill impairment test in the second quarter of fiscal 2021 and no indicators of impairment were identified.

Additionally, no indicators of impairment were identified through the end of fiscal 2021.

This assessment is predicated on our ability to continue to operate dining and banquet rooms, and generate off-premise sales at our restaurants.

Management’s judgment about the short and long term impacts of the pandemic could change as additional facts become known and therefore affect these conclusions.

We will continue to monitor and evaluate our results and evaluate the likelihood of any potential impairment charges at our restaurants and reporting units.

It is possible that a change in circumstances such as the decline in the market price of our common stock or changes in consumer spending levels, or in the numerous variables associated with the judgments, assumptions and estimates made in assessing the appropriate valuation of our goodwill, could negatively impact the valuation of our brands and create the potential for a non-cash charge to recognize impairment losses on some or all of our goodwill.

We will continue to monitor and evaluate our results and evaluate the likelihood of any potential impairment charges at our reporting units.

It is possible that a change in circumstances such as the decline in the market price of our common stock or changes in consumer spending levels, or in the numerous variables associated with the judgments, assumptions and estimates made in assessing the appropriate valuation of our goodwill, could negatively impact the valuation of our brands and create the potential for the recognition of impairment losses on some or all of our goodwill.

If we were required to write down a portion of our goodwill and record related non-cash impairment charges, our financial position and results of operations would be adversely affected.

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An impairment charge is required when the carrying value of the asset exceeds the estimated fair value.

For example, in the fourth quarter of fiscal year 2020, we recognized $14.5 million of long-lived asset and lease asset impairment charges as a result of decreased cash flows and it is possible that we may incur similar charges in greater amounts in the future.

Refer to Note 2 - Novel Coronavirus Pandemic within Part II, Item 8 - Financial Statements and Supplementary Data Notes to the Consolidated Financial Statements for more information.

For example, in fiscal 2021, we recognized $3.0 million of long-lived asset and lease asset impairment charges as a result of decreased cash flows and it is possible that we may incur similar charges in greater amounts in the future.

Refer to Note 1 - Nature of Operations and Summary of Significant Accounting Policies within Part II, Item 8 - Financial Statements and Supplementary Data Notes to Consolidated Financial Statements for more information.

The projection of future cash flows used in the analyses requires the use of judgment and a number of estimates and projections of future operating results.

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If impairment charges are significant, our financial position and results of operations could be adversely affected.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price .

We are subject to the internal control requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which require management to assess the effectiveness of our internal control over financial reporting and our independent auditors to attest to the effectiveness of our internal control over financial reporting.

Our processes for designing and implementing effective internal controls involve continuous effort that requires us to anticipate and react to changes in our business as well as in the economic and regulatory environments.

As a result, we expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.

We cannot assure you that the measures we will take as part of this effort will be sufficient to maintain effective internal control over our financial reporting.

Failure to maintain effective internal controls could result in consolidated financial statements that do not accurately reflect our financial condition, cause investors to lose confidence in our reported financial information, or result in regulatory scrutiny, penalties or shareholder litigation, all of which could have a negative effect on the trading price of our common stock.

Legal and Regulatory Risks

Litigation could have a material adverse impact on our business and our financial performance.

We are subject to lawsuits, administrative proceedings and claims that arise in the regular course of business or out of special circumstances.

It is also possible that team members, guests or others could make claims against the Company as a result of the COVID-19 pandemic, and the nature and scope of such matters, if any, is unknown because the pandemic is novel.

Our franchise activity also

creates a risk of us being named as a joint employer of workers of franchisees for alleged violations of labor and wage laws.

We could be adversely affected by negative publicity and litigation costs resulting from these claims, regardless of their validity.

Our business and operation could be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to incur significant expenses, hinder execution of investment strategy and impact our stock price.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company.

Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing in publicly traded companies recently.

Publicly traded companies also may become the target of shareholder activism, which could take many form or arise in a variety of situations.

Due to the potential volatility of our stock price and for a variety of other reasons, we may become the target of securities litigation or shareholder activism.

Securities litigation and shareholder activism, including potential proxy contests, could result in substantial costs and

legal fees and divert management’s and our board of directors’ attention and resources from our business.

Securities litigation and shareholder activism, including potential proxy contests, could result in substantial costs and legal fees and divert management’s and our Board of Directors’ attention and resources from our business.

Additionally, such securities litigation and shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain qualified personnel.

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These measures may discourage investment in our common stock and may delay or discourage acquisitions that would result in our stockholders receiving a premium for their shares over the then-current market price.

Employment and labor laws and regulations may increase the cost of labor for our restaurants.

Compliance with these laws and regulations can be costly, and a failure or perceived failure to comply with these laws could result in negative publicity or litigation.

Some states and localities have, and many others are contemplating, increases to their minimum wage and tip credit wage, and such increases can have a significant impact on our labor costs.

In addition, our suppliers may be affected by higher minimum wage standards or availability of labor, which may increase the price of goods and services they supply to us.

There are no assurances that a combination of cost management and price increases can offset all of the costs associated with compliance.

Governmental regulation may adversely affect our ability to maintain our existing and future operations and to open new restaurants.

Additionally, as a result of the COVID-19 pandemic, certain state and local jurisdictions are enacting certain health, safety and other regulations that impact or require us to modify our operations.

Compliance with these laws and regulations may lead to increased costs and operational complexity,

changes in sales mix and profitability, and increased exposure to governmental investigations or litigation.