Item 1. Financial Statements
ITEM 1. Financial Statements (unaudited)
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except for per share amounts) July 9, 2023 December 25, 2022
Assets:
Current assets:
Cash and cash equivalents $ 44,034 $ 48,826
Accounts receivable, net 12,723 21,427
Inventories 26,899 26,447
Income tax receivable 461 562
Prepaid expenses and other current assets 13,368 12,938
Restricted cash 12,213 9,380
Total current assets 109,698 119,580
Property and equipment, net 289,694 318,517
Operating lease assets, net 369,048 361,432
Intangible assets, net 17,944 17,727
Other assets, net 12,014 14,889
Total assets $ 798,398 $ 832,145
Liabilities and stockholders ' equity:
Current liabilities:
Accounts payable $ 25,890 $ 39,336
Accrued payroll and payroll-related liabilities 39,350 33,666
Unearned revenue 33,808 46,944
Current portion of operating lease obligations 49,213 47,394
Current portion of long-term debt 2,875 3,375
Accrued liabilities and other 53,208 49,498
Total current liabilities 204,344 220,213
Long-term debt 188,090 203,155
Long-term portion of operating lease obligations 391,370 393,157
Other non-current liabilities 11,568 13,831
Total liabilities 795,372 830,356
Commitments and contingencies (see Note 8. Commitments and Contingencies)
Stockholders ' equity:
Common stock; $ 0.001 par value: 45,000 shares authorized; 20,449 shares issued; 15,931 and 15,934 shares outstanding as of July 9, 2023 and December 25, 2022
20 20
Preferred stock, $ 0.001 par value: 3,000 shares authorized; no shares issued and outstanding as of July 9, 2023 and December 25, 2022
— —
Treasury stock 4,518 and 4,515 shares, at cost, as of July 9, 2023 and December 25, 2022
( 172,546 ) ( 182,810 )
Paid-in capital 229,098 238,803
Accumulated other comprehensive loss, net of tax ( 22 ) ( 34 )
Accumulated deficit ( 53,524 ) ( 54,190 )
Total stockholders' equity 3,026 1,789
Total liabilities and stockholders ' equity
$ 798,398 $ 832,145
See Notes to Condensed Consolidated Financial Statements
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RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Twelve Weeks Ended Twenty-Eight Weeks Ended
(in thousands, except for per share amounts) July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022
Revenues:
Restaurant revenue $ 293,281 $ 288,621 $ 700,174 $ 669,218
Franchise and other revenues 5,367 5,435 16,286 19,912
Total revenues 298,648 294,056 716,460 689,130
Costs and expenses:
Restaurant operating costs (excluding depreciation and amortization shown separately below):
Cost of sales 71,372 72,702 171,042 163,643
Labor 109,678 101,643 255,100 239,751
Other operating 51,842 52,003 123,892 119,867
Occupancy 23,482 22,980 53,283 53,579
Depreciation and amortization 15,756 17,637 37,581 41,556
Selling, general, and administrative expenses 26,864 32,095 61,387 66,475
Pre-opening and acquisition costs 4 235 586 297
Other charges (gains), net ( 10,607 ) 8,146 ( 848 ) 13,453
Total costs and expenses 288,391 307,441 702,023 698,621
Income (loss) from operations 10,257 ( 13,385 ) 14,437 ( 9,491 )
Other expense:
Interest expense, net and other 6,179 4,147 13,597 11,560
Income (loss) before income taxes 4,078 ( 17,532 ) 840 ( 21,051 )
Income tax provision (benefit) 156 434 176 496
Net income (loss) $ 3,922 $ ( 17,966 ) $ 664 $ ( 21,547 )
Earnings (loss) per share:
Basic $ 0.24 $ ( 1.13 ) $ 0.04 $ ( 1.37 )
Diluted $ 0.24 $ ( 1.13 ) $ 0.04 $ ( 1.37 )
Weighted average shares outstanding:
Basic 16,037 15,830 16,014 15,783
Diluted 16,291 15,830 16,367 15,783
Other comprehensive income (loss):
Foreign currency translation adjustment $ 4 $ ( 18 ) $ 11 $ ( 7 )
Other comprehensive income (loss), net of tax 4 ( 18 ) 11 ( 7 )
Total comprehensive income (loss) $ 3,926 $ ( 17,984 ) $ 675 $ ( 21,554 )
See Notes to Condensed Consolidated Financial Statements.
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RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ' EQUITY
(Unaudited)
Common Stock Treasury Stock Accumulated
Other
Comprehensive
Income/(Loss),
net of tax
Paid-in
Capital Accumulated Deficit
(in thousands) Shares Amount Shares Amount Total
Balance, December 25, 2022 20,449 $ 20 4,515 $ ( 182,810 ) $ 238,803 $ ( 34 ) $ ( 54,190 ) $ 1,789
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan — — ( 129 ) 5,330 ( 5,106 ) — — 224
Non-cash stock compensation — — — — 2,179 — — 2,179
Net income (loss) — — — — — — ( 3,256 ) ( 3,256 )
Other comprehensive income (loss), net of tax — — — — — 8 — 8
Balance, April 16, 2023 20,449 $ 20 4,386 $ ( 177,480 ) $ 235,876 $ ( 26 ) $ ( 57,445 ) $ 945
Issuance of common stock, $ 0.001 par value, net of stock issuance costs
— — — — — — — —
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan — — ( 250 ) 9,933 ( 8,297 ) — — 1,636
Acquisition of treasury stock — — 382 ( 4,999 ) — — — ( 4,999 )
Non-cash stock compensation — — — — 1,519 — — 1,519
Net income (loss) — — — — — — 3,922 3,922
Other comprehensive income (loss), net of tax — — — — — 4 — 4
Balance, July 9, 2023 20,449 $ 20 4,518 $ ( 172,546 ) $ 229,098 $ ( 22 ) $ ( 53,524 ) $ 3,026
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Common Stock Treasury Stock Accumulated
Other
Comprehensive
Income/(Loss),
net of tax
Paid-in
Capital Retained
Earnings
(in thousands) Shares Amount Shares Amount Total
Balance, December 26, 2021 20,449 $ 20 4,727 $ ( 192,803 ) $ 242,560 $ 1 $ 24,693 $ 74,471
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan — — ( 64 ) 2,781 ( 2,846 ) — — ( 65 )
Non-cash stock compensation — — — — 3,042 — — 3,042
Net income (loss) — — — — — — ( 3,581 ) ( 3,581 )
Other comprehensive income (loss), net of tax — — — — — 11 — 11
Balance, April 17, 2022 20,449 $ 20 4,663 $ ( 190,022 ) $ 242,756 $ 12 $ 21,112 $ 73,878
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan — — ( 113 ) 5,817 ( 5,691 ) — — 126
Non-cash stock compensation — — — — 2,542 — — 2,542
Net income (loss) — — — — — — ( 17,966 ) ( 17,966 )
Other comprehensive income (loss), net of tax — — — — — ( 18 ) — ( 18 )
Balance, July 10, 2022 20,449 $ 20 4,550 $ ( 184,205 ) $ 239,607 $ ( 6 ) $ 3,146 $ 58,562
See Notes to Condensed Consolidated Financial Statements.
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RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-Eight Weeks Ended
(in thousands) July 9, 2023 July 10, 2022
Cash flows from operating activities:
Net income (loss) $ 664 $ ( 21,547 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 37,581 41,556
Gift card breakage ( 5,342 ) ( 7,640 )
Asset impairment 2,387 10,861
Non-cash other charges (gains), net ( 619 ) ( 190 )
Stock-based compensation expense 3,691 5,571
(Gain) loss on sale of property, plant, and equipment ( 14,803 ) —
Other, net 251 2,783
Changes in operating assets and liabilities, net of business acquisition:
Accounts receivable 8,703 8,825
Income tax receivable 102 15,242
Inventories ( 225 ) ( 146 )
Prepaid expenses and other current assets ( 386 ) 2,707
Operating lease assets, net of liabilities ( 6,879 ) ( 7,547 )
Trade accounts payable and accrued liabilities 500 4,360
Unearned revenue ( 7,888 ) ( 8,232 )
Other operating assets and liabilities, net 488 ( 10,164 )
Net cash provided by operating activities 18,225 36,439
Cash flows from investing activities:
Purchases of property, equipment, and intangible assets ( 25,814 ) ( 15,893 )
Proceeds from sale-leaseback 28,451 —
Proceeds from sales of property and equipment and other investing activities 794 269
Acquisition of franchised restaurants ( 3,529 ) —
Net cash used in investing activities ( 98 ) ( 15,624 )
Cash flows from financing activities:
Borrowings of long-term debt — 282,151
Payments of long-term debt and finance leases ( 16,948 ) ( 265,744 )
Purchase of treasury stock ( 4,999 ) —
Debt issuance costs — ( 4,869 )
Proceeds related to real estate sale — 3,856
Proceeds from other financing activities, net 1,861 61
Net cash provided by (used in) financing activities ( 20,086 ) 15,455
Effect of exchange rate changes on cash — ( 6 )
Net change in cash and cash equivalents, and restricted cash ( 1,959 ) 36,264
Cash and cash equivalents, and restricted cash, beginning of period 58,206 22,750
Cash and cash equivalents, and restricted cash, end of period $ 56,247 $ 59,014
Supplemental disclosure of cash flow information
Income tax paid (refund received), net $ 104 $ ( 14,761 )
Interest paid, net of amounts capitalized $ 11,495 $ 7,462
Right of use assets obtained in exchange for operating lease obligations $ 34,928 $ 7,773
Right of use assets obtained in exchange for finance lease obligations $ 82 $ 541
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See Notes to Condensed Consolidated Financial Statements.
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RED ROBIN GOURMET BURGERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Recent Accounting Pronouncements
Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries ("Red Robin" or the "Company"), primarily operates, franchises, and develops full-service restaurants in North America. As of July 9, 2023, the Company owned and operated 418 restaurants located in 39 states. The Company also had 91 franchised full-service restaurants in 14 states and one Canadian province. The Company operates its business as one operating and one reportable segment.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Red Robin and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for any interim period are not necessarily indicative of results for the full year.
The accompanying Condensed Consolidated Financial Statements of Red Robin have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements on Form 10-K have been condensed or omitted. The Condensed Consolidated Balance Sheet as of December 25, 2022 has been derived from the audited consolidated financial statements as of that date, but does not include all disclosures required for audited annual financial statements. For further information, please refer to and read these interim Condensed Consolidated Financial Statements in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 2022 filed with the SEC on February 28, 2023.
Our current, prior, and upcoming year periods, period end dates, and number of weeks included in the period are summarized in the table below:
Periods Period End Date Number of Weeks in Period
Current and Prior Fiscal Quarters:
First Quarter 2023
April 16, 2023 16
First Quarter 2022
April 17, 2022 16
Second Quarter 2023
July 9, 2023 12
Second Quarter 2022
July 10, 2022 12
Current and Prior Fiscal Years:
Fiscal Year 2023
December 31, 2023 53
Fiscal Year 2022
December 25, 2022 52
Upcoming fiscal year:
Fiscal Year 2024
December 29, 2024 52
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Immaterial Restatement of Prior Period Financial Statements
Subsequent to the issuance of the Company's financial statements as of and for the sixteen weeks ended April 16, 2023, the Company discovered a multi-year error in its calculation and recognition of revenue related to gift cards, primarily related to breakage revenue that had been recognized for bonus and discounted gift cards for which no or discounted monetary consideration was received, which resulted in the Company overstating total revenues by $ 0.2 million for the sixteen weeks ended April 16, 2023, $ 1.1 million for the year ended December 25, 2022, and $ 0.5 million for the twenty-eight weeks ended July 10, 2022. The period (rollover) impact of the error correction on net income (loss) for the year ended December 25, 2022 increased net loss by $ 1.1 million, and the cumulative impact of the error correction on unearned revenue was an increase of $ 3.6 million. Management has evaluated this misstatement and concluded it was not material to prior periods, individually or in the aggregate. However, correcting the cumulative effect of the error in the twelve and twenty-eight weeks ended July 9, 2023 would have had a significant effect on the results of operations for such periods. Therefore, the Company is correcting the relevant prior period Condensed Consolidated Financial Statements and related footnotes for this error for comparative purposes. The Company will also correct previously reported financial information for such immaterial errors in future filings, as applicable (see "Part II, Item 5. Other Information" below for additional information). Additionally, comparative prior period amounts in the applicable Notes to the Condensed Consolidated Financial Statements have been restated.
The following tables reflect the effects of the correction on all affected line items of the Company's previously reported Condensed Consolidated Financial Statements presented in this Form 10-Q:
CORRECTED CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
December 25, 2022
(in thousands) As Previously Reported Adjustment As Corrected
Unearned revenue $ 43,358 $ 3,586 $ 46,944
Total current liabilities 216,627 3,586 220,213
Total liabilities 826,770 3,586 830,356
Accumulated deficit ( 50,604 ) ( 3,586 ) ( 54,190 )
Total stockholders' equity 5,375 ( 3,586 ) 1,789
CORRECTED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)
Twelve Weeks Ended July 10, 2022
Twenty-Eight Weeks Ended July 10, 2022
(in thousands, except per share amounts) As Previously Reported Adjustment As Corrected As Previously Reported Adjustment As Corrected
Restaurant revenue $ 288,657 $ ( 36 ) $ 288,621 $ 669,269 $ ( 51 ) $ 669,218
Franchise and other revenues 5,433 2 5,435 20,371 ( 459 ) 19,912
Total revenues 294,090 ( 34 ) 294,056 689,640 ( 510 ) 689,130
Loss before income taxes ( 17,498 ) ( 34 ) ( 17,532 ) ( 20,541 ) ( 510 ) ( 21,051 )
Net loss ( 17,932 ) ( 34 ) ( 17,966 ) ( 21,037 ) ( 510 ) ( 21,547 )
Net loss per share ( 1.13 ) — ( 1.13 ) ( 1.33 ) ( 0.04 ) ( 1.37 )
Total comprehensive loss ( 17,950 ) ( 34 ) ( 17,984 ) ( 21,044 ) ( 510 ) ( 21,554 )
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CORRECTED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ' EQUITY (unaudited)
Sixteen Weeks Ended April 16, 2023
(in thousands) Accumulated Deficit Total Shareholders' Equity
As Previously Reported
Balance, December 25, 2022 $ ( 50,604 ) $ 5,375
Net loss ( 3,100 ) ( 3,100 )
Balance, April 16, 2023 ( 53,704 ) 4,686
Adjustments
Balance, December 25, 2022 ( 3,586 ) ( 3,586 )
Net loss ( 156 ) ( 156 )
Balance, April 16, 2023 ( 3,741 ) ( 3,741 )
As Corrected
Balance, December 25, 2022 ( 54,190 ) 1,789
Net loss ( 3,256 ) ( 3,256 )
Balance, April 16, 2023 $ ( 57,445 ) $ 945
CORRECTED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ' EQUITY (unaudited)
Twenty-Eight Weeks Ended July 10, 2022
(in thousands) Retained Earnings/ (Accumulated Deficit) Total Shareholders' Equity
As Previously Reported
Balance, December 26, 2021 $ 27,196 $ 76,974
Net loss ( 3,105 ) ( 3,105 )
Balance, April 17, 2022 24,091 76,857
Adjustments
Balance, December 26, 2021 ( 2,503 ) ( 2,503 )
Net loss ( 476 ) ( 476 )
Balance, April 17, 2022 ( 2,979 ) ( 2,979 )
As Corrected
Balance, December 26, 2021 24,693 74,471
Net loss ( 3,581 ) ( 3,581 )
Balance, April 17, 2022 21,112 73,878
As Previously Reported
Balance, April 17, 2022 24,091 76,857
Net loss ( 17,932 ) ( 17,932 )
Balance, July 10, 2022 6,159 61,575
Adjustments
Balance, April 17, 2022 ( 2,979 ) ( 2,979 )
Net loss ( 34 ) ( 34 )
Balance, July 10, 2022 ( 3,013 ) ( 3,013 )
As Corrected
Balance, April 17, 2022 21,112 73,878
Net loss ( 17,966 ) ( 17,966 )
Balance, July 10, 2022 $ 3,146 $ 58,562
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CORRECTED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Twenty-Eight Weeks Ended July 10, 2022
(in thousands) As Previously Reported Adjustment As Corrected
Net income (loss) $ ( 21,037 ) $ ( 510 ) $ ( 21,547 )
Gift card breakage ( 8,099 ) 459 ( 7,640 )
Unearned revenue ( 8,283 ) 51 ( 8,232 )
2. Revenue
Disaggregation of revenue
In the following table, revenue is disaggregated by type of good or service (in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022
Restaurant revenue $ 293,281 $ 288,621 $ 700,174 $ 669,218
Franchise revenue 3,544 4,362 8,826 10,642
Gift card breakage 533 282 5,342 7,640
Other revenue 1,290 791 2,118 1,630
Total revenues $ 298,648 $ 294,056 $ 716,460 $ 689,130
Contract Liabilities
Components of Unearned revenue in the accompanying Condensed Consolidated Balance Sheets are as follows (in thousands):
July 9, 2023 December 25, 2022
Unearned gift card revenue $ 22,185 $ 35,837
Deferred loyalty revenue $ 11,623 $ 11,107
Revenue recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the redemption and breakage of gift cards that were included in the liability balance at the beginning of the fiscal year was as follows (in thousands):
Twenty-Eight Weeks Ended
July 9, 2023 July 10, 2022
Gift card revenue $ 16,038 $ 18,023
3. Leases
The components of lease expense, including variable lease costs primarily consisting of common area maintenance charges and real estate taxes, are included in Occupancy on our Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) as follows (in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022
Operating lease cost $ 16,279 $ 16,422 $ 37,174 $ 38,111
Finance lease cost:
Amortization of right of use assets 221 238 549 580
Interest on lease liabilities 111 153 284 298
Total finance lease cost $ 332 $ 391 833 878
Variable lease cost 4,477 4,682 10,269 11,007
Total $ 21,088 $ 21,495 $ 48,276 $ 49,996
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Refer to Footnote 5, Other Charges (gains), net , for information regarding the sale-leaseback transaction during the twelve and twenty-eight weeks ended July 9, 2023.
4. Earnings (Loss) Per Share
Basic earnings (loss) per share amounts are calculated by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share amounts are calculated based upon the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. Potentially dilutive shares are excluded from the computation in periods in which they have an anti-dilutive effect. Diluted earnings per share reflects the potential dilution that could occur if holders of options exercised their options into common stock. As the Company was in a net income (loss) position for the twelve and twenty-eight weeks ended July 10, 2022, all potentially dilutive common shares are considered anti-dilutive.
The Company uses the treasury stock method to calculate the effect of outstanding stock options and awards. Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022
Basic weighted average shares outstanding 16,037 15,830 16,014 15,783
Dilutive effect of stock options and awards 254 — 353 —
Diluted weighted average shares outstanding 16,291 15,830 16,367 15,783
Awards excluded due to anti-dilutive effect on diluted income (loss) per share 560 983 577 806
5. Other Charges (Gains), net
Other charges (gains), net consisted of the following (in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 9, 2023 July 10, 2022 July 9, 2023 July 10, 2022
Gain on sale leaseback, net of expenses
$ ( 14,586 ) $ — $ ( 14,586 ) $ —
Litigation contingencies
1,240 ( 1,806 ) 5,540 ( 86 )
Restaurant closure costs, net
( 112 ) 930 1,638 1,879
Severance and executive transition
962 129 2,854 129
Asset impairment
1,693 8,739 2,387 10,861
Other
83 — 1,144 —
Closed corporate office costs, net of sublease income 113 — 175 —
Other financing costs
— 61 — 370
COVID-19 related charges
— 93 — 300
Other charges (gains), net $ ( 10,607 ) $ 8,146 $ ( 848 ) $ 13,453
During the second quarter of 2023, the Company sold nine restaurant properties for total proceeds of $ 28.5 million in a sale-leaseback transaction that resulted in a gain, net of expenses of $ 14.6 million. The net proceeds of $ 28.5 million are included within cash flows from investing activities on the Condensed Consolidated Statements of Cash Flows for the twenty-eight weeks ended July 9, 2023.
Litigation contingencies during the twelve and twenty-eight weeks ended July 9, 2023 and July 10, 2022 represent reserves for various in progress legal matters. Litigation contingencies during the twelve and twenty-eight weeks ended July 10, 2022 include the impact of cash proceeds received by the Company related to certain legal claims.
Restaurant closure costs (gains) include the ongoing restaurant operating costs of the Company-owned restaurants incurred for closed restaurants and closed restaurant lease termination gains or losses.
Severance and executive transition costs include one-time termination benefits related to a reduction in force of Team Members and costs associated with changes in leadership positions as a result of our strategic pivot and are accounted for in accordance with ASC Topic 420, Exit or Disposal Cost Obligations . The Company expects to make the remaining payments related to these benefits in 2023.
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The Company incurred a cumulative total of $ 5.0 million related to these one-time termination benefits. Approximately $ 2.1 million in one-time termination benefits was incurred and recorded in Other charges in the Consolidated Statements of Operations and Comprehensive Income (Loss) during the twenty-eight weeks ended July 9, 2023. A reconciliation of our termination benefits liability, which is included in Accrued liabilities and other current liabilities in our Condensed Consolidated Balance Sheets is as follows:
Termination Benefits
Balance as of December 25, 2022
$ 2,505
Charges 2,077
Cash Payments ( 3,947 )
Balance as of July 9, 2023
$ 635
The Company recognized non-cash impairment charges primarily related to restaurant assets at four Company-owned restaurants during the twelve and twenty-eight weeks ended July 9, 2023. Additionally, the Company recognized non-cash impairment charges related to subleasing additional space at the Company's closed corporate office during the twenty-eight weeks ended July 9, 2023. The Company recognized non-cash impairment charges related to restaurant assets at six and nine Company-owned restaurants for the twelve and twenty-eight weeks ended July 10, 2022, respectively.
Other primarily includes non-cash charges related to terminated capital projects and disposals, and certain insurance claim proceeds.
Closed corporate office, net of sublease income includes expense and sublease income related to a corporate office facility that was vacated and subleased.
Other financing costs include fees related to the entry by the Company into the new Credit Agreement (as defined below) on March 4, 2022 that were not capitalized with the closing of the Credit Facility. See Note 6. Borrowings.
COVID-19 related charges include the costs of purchasing personal protective equipment for restaurant Team Members and Guests and emergency sick pay provided to restaurant Team Members related to the COVID-19 pandemic.
6. Borrowings
Borrowings as of July 9, 2023 and December 25, 2022 are summarized below (in thousands):
July 9, 2023 Variable
Interest Rate December 25, 2022 Variable
Interest Rate
Revolving line of credit $ — $ 15,000 10.44 %
Term loan 197,500 12.12 % 199,000 9.81 %
Notes payable 875 875
Total borrowings 198,375 214,875
Less: unamortized debt issuance costs and discounts (1)
7,410 8,345
Less: current portion of long-term debt 2,875 3,375
Long-term debt $ 188,090 $ 203,155
Revolving line of credit unamortized deferred financing charges (1) :
$ 861 $ 988
(1) Loan origination costs associated with the Company's credit facility are included as deferred costs in Other assets, net for financing charges allocated to the Revolving line of credit, and Long-term debt for financing charges associated with the term loan in the accompanying Condensed Consolidated Balance Sheets.
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Credit Agreement
On March 4, 2022, the Company replaced its prior amended and restated credit agreement (the "Prior Credit Agreement") with a new Credit Agreement (the "Credit Agreement") by and among the Company, Red Robin International, Inc., as the borrower, the lenders from time to time party thereto, the issuing banks from time to time party thereto, Fortress Credit Corp., as Administrative Agent and as Collateral Agent and JPMorgan Chase Bank, N.A., as Sole Lead Arranger and Sole Bookrunner. The five-year $ 225.0 million Credit Agreement provides for a $ 25.0 million revolving line of credit and a $ 200.0 million term loan (collectively, the "Credit Facility"). The borrower maintains the option to increase the amount of borrowings available under the Credit Agreement in the future, subject to lenders’ participation, by up to an additional $ 40.0 million in the aggregate on the terms and conditions set forth in the Credit Agreement.
The Credit Facility will mature on March 4, 2027. No amortization is required with respect to the revolving Credit Facility. The term loans require quarterly principal payments in an aggregate annual amount equal to 1.0 % of the original principal amount of the term loan. The Credit Facility's interest rate references the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements and backed by U.S. Treasury securities, or the Alternate Base Rate ("ABR"), which represents the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.5 % per annum, or (c) one-month term SOFR plus 1.0 % per annum.
Red Robin International, Inc. is the borrower under the Credit Agreement, and certain of its subsidiaries and the Company are guarantors of borrower’s obligations under the Credit Agreement. Borrowings under the Credit Agreement are secured by substantially all of the assets of the borrower and the guarantors, including the Company, and are available to: (i) refinance certain existing indebtedness of the borrower and its subsidiaries, (ii) pay any fees and expenses in connection with the Credit Agreement, and (iii) provide for the working capital and general corporate requirements of the Company, the borrower and its subsidiaries, including permitted acquisitions and capital expenditures, but excluding restricted payments.
On March 4, 2022, Red Robin International, Inc., the Company, and the guarantors also entered into a Pledge and Security Agreement (the “Security Agreement”) granting to the Administrative Agent a first priority security interest in substantially all of the assets of the borrower and the guarantors to secure the obligations under the Credit Agreement. This new Security Agreement replaced the existing security agreement, dated January 10, 2020, which was entered into in connection with the Prior Credit Agreement.
Red Robin International, Inc. as the borrower is obligated to pay customary fees to the agents, lenders and issuing banks under the Credit Agreement with respect to providing, maintaining, or administering, as applicable, the credit facilities.
In connection with entry into the new Credit Agreement, the Company’s Prior Credit Agreement was terminated. In connection with such termination and new borrowings under the new Credit Agreement, the Company paid off all outstanding borrowings, accrued interest, and fees under the Prior Credit Agreement.
On July 17, 2023, the Company amended the Credit Agreement (the “Credit Agreement Amendment”) to remove the previously included $ 50.0 million aggregate cap (the “Prior Cap”) on sale-leasebacks of Company-owned real property. Pursuant to the Credit Agreement Amendment, it also was agreed that (i) the Company may reinvest in the business within 360 days of receipt the net proceeds of sale-leasebacks to the extent that such proceeds are equal to or less than the amount of the Prior Cap and (ii) the Company shall make a mandatory prepayment with the net proceeds of sale-leasebacks to the extent that such proceeds exceed the amount of the Prior Cap. Additionally, the prepayment premium associated with any mandatory prepayments derived from the net proceeds of sale-leasebacks that exceed the Prior Cap is reduced by the Credit Agreement Amendment to a premium equal to 50 % of the prepayment premium otherwise applicable. The Amendment also made certain other conforming changes to the Existing Credit Agreement to effect the foregoing.
The summary descriptions of the Credit Agreement, the Credit Agreement Amendment, and the Security Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of the Credit Agreement, the Credit Agreement Amendment, and the Security Agreement, respectively, which have been filed as exhibits to the Company’s Current Reports on Form 8-K filed with the Securities and Exchange Commission on March 10, 2022, with respect to the Credit Agreement and the Security Agreement, and July 19, 2023, with respect to the Credit Agreement Amendment.
During the first quarter of 2022, the Company expensed approximately $ 1.7 million of deferred financing charges related to the extinguishment of the Prior Credit Agreement on March 4, 2022. These charges were recorded to interest expense, net and other on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the twenty-eight weeks ended July 10, 2022. In association with the execution of the new Credit Agreement, the Company recognized $ 4.8 million of deferred financing charges, and $ 6.1 million of original issuance discount.
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7. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying amounts of the Company's cash and cash equivalents, accounts receivable, accounts payable, and current accrued expenses and other liabilities approximate fair value due to the short-term nature or maturity of the instruments.
The Company maintains a rabbi trust to fund obligations under a deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities and carried at fair value and are included in Other assets, net in the accompanying consolidated balance sheets. Fair market value of mutual funds is measured using level 1 inputs (quoted prices for identical assets in active markets).
The following tables present the Company's assets measured at fair value on a recurring basis included in Other assets, net on the accompanying Condensed Consolidated Balance Sheets as of July 9, 2023 and December 25, 2022 (in thousands):
July 9, 2023 Level 1 Level 2 Level 3
Assets:
Investments in rabbi trust $ 2,994 $ 2,994 $ — $ —
Total assets measured at fair value $ 2,994 $ 2,994 $ — $ —
December 25, 2022 Level 1 Level 2 Level 3
Assets:
Investments in rabbi trust $ 4,250 $ 4,250 $ — $ —
Total assets measured at fair value $ 4,250 $ 4,250 $ — $ —
Other than as disclosed in Note 9. Acquisition of Franchised Restaurants, as of July 9, 2023, the Company had no financial assets or liabilities that were measured using level 3 inputs. The Company also had no non-financial assets or liabilities that were required to be measured on a recurring basis.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized or disclosed at fair value on the Condensed Consolidated Financial Statements on a nonrecurring basis include items such as property, plant and equipment, right of use assets, and other intangible assets. These assets are measured at fair value if determined to be impaired.
The Company has measured non-financial assets for impairment using continuing and projected future cash flows, which were based on significant inputs not observable in the market and thus represented a level 3 fair value measurement. See Note 5. Other Charges (Gains), net.
We impaired long-lived restaurant assets with a carrying value (including right of use lease assets) of $ 11.4 million, recognizing an impairment expense of $ 1.7 million during the twelve and twenty-eight weeks ended July 9, 2023 related to the net book value of these long-lived restaurant assets. We determined the fair value of these long-lived assets to be $ 9.7 million in the twelve and twenty-eight weeks ended July 9, 2023. Additionally, we impaired long-lived assets at the Company's closed corporate office with a carrying value (including right of use lease assets) of $ 1.0 million, recognizing an impairment expense of $ 0.7 million during the twenty-eight weeks ended July 9, 2023, related to the net book value of these long-lived restaurant assets. We determined the fair value of these long-lived assets to be $ 0.3 million in the twenty-eight weeks ended July 9, 2023. The impairments were recorded as a result of quantitative impairment analyses.
Disclosures of Fair Value of Other Assets and Liabilities
The Company's liability under its credit facility is carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. As of July 9, 2023, the fair value of the credit facility was approximately $ 196.7 million and the principal amount carrying value was $ 197.5 million. The credit facility term loan is reported net of $ 7.4 million in unamortized discount and debt issuance costs in the Condensed Consolidated Balance Sheet as of July 9, 2023. The carrying value of the credit facility was $ 214.0 million and the fair value of the credit facility was $ 205.1 million as of December 25, 2022. The interest rate on the credit facility represents a level 2 fair value input.
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8. Commitments and Contingencies
Because litigation is inherently unpredictable, assessing contingencies related to litigation is a complex process involving highly subjective judgment about potential outcomes of future events. When evaluating litigation contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the availability of appellate remedies, insurance coverage related to the claim or claims in question, the presence of complex or novel legal theories, and the ongoing discovery and development of information important to the matter. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated, or unrelated to possible outcomes, and as such are not meaningful indicators of our potential liability or financial exposure. Accordingly, we review the adequacy of accruals and disclosures each quarter in consultation with legal counsel, and we assess the probability and range of possible losses associated with contingencies for potential accrual in the Condensed Consolidated Financial Statements. However, the ultimate resolution of litigated claims may differ from our current estimates.
In the normal course of business, there are various claims in process, matters in litigation, and other contingencies, certain of which are covered by insurance policies. While it is not possible to predict the outcome of these suits, legal proceedings, and claims with certainty, management is of the opinion that adequate provision for potential losses associated with these matters has been made in the financial statements and that the ultimate resolution of any one of these matters will not have a material adverse effect on our financial position and results of operations. A significant increase in the number of these claims, or one or more successful claims resulting in greater liabilities than we currently anticipate, could materially and adversely affect our business, financial condition, results of operations, and cash flows.
As of July 9, 2023, we had a balance of $ 10.1 million for loss contingencies included within Accrued liabilities and other on our Condensed Consolidated Balance Sheet. In the normal course of business, there are various claims in process, matters in litigation, administrative proceedings, and other contingencies. These include employment related claims and class action lawsuits, claims from Guests or Team Members alleging illness, injury, food quality, health, or operational concerns, and lease and other commercial disputes. We increased our estimate of loss contingency liabilities by approximately $ 1.2 million for the twelve weeks ended July 9, 2023 and $ 5.5 million for the twenty-eight weeks ended July 9, 2023 related to changes during the second quarter in the status of ongoing litigation matters. We ultimately may be subject to greater or less than the accrued amount for this and other matters.
As of July 9, 2023, we had non-cancellable purchase commitments to certain vendors who provide food and beverages and other supplies to our restaurants, for an aggregate of $ 127.7 million. We expect to fulfill our commitments under these agreements in the normal course of business, and as such, no liability has been recorded.
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9. Acquisition of Franchised Restaurants
On April 17, 2023, the Company acquired certain assets and liabilities of five restaurants from one of its U.S. franchisees for cash consideration of $ 3.5 million. The pro forma impact of this acquisition and the operating results of the acquired restaurants are not presented as the impact was not material to reported results.
The acquisition was accounted for using the purchase method as defined in ASC 805, Business Combinations . The goodwill arising from the acquisition consists largely of the benefit of the assembled workforce of the acquired restaurants. The goodwill generated by the acquisition is not amortizable for book purposes but is amortizable and deductible for tax purposes. The Company allocated the purchase price to the fair value of the assets acquired and liabilities assumed as follows (in thousands):
Fair Value at Acquisition Date
Property and equipment, net $ 2,637
Operating lease assets 7,400
Operating lease liabilities ( 8,250 )
Operating lease assets, net ( 850 )
Other assets, net of liabilities (1)
299
Intangible assets, net 1,443
Total purchase price $ 3,529
(1) Includes inventory, prepaid assets, till cash, and gift card and loyalty liabilities.
Of the $ 2.6 million in property and equipment, $ 1.7 million is related to leasehold improvements and $ 1.0 million is related to personal property. The $ 0.9 million in net operating lease assets is related to acquired unfavorable leases, which reduces the acquired operating lease right-of-use assets. Of the $ 1.4 million of intangible assets, $ 1.2 million is related to reacquired franchise rights, which will be amortized on a straight-line basis. The fair value measurement of tangible and intangible assets and liabilities as of the acquisition date is based on significant inputs not observed in the market and thus represents a level 3 fair value measurement.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.