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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended July 12, 2020
or
| | | | | | | | |
☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34851
RED ROBIN GOURMET BURGERS, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 84-1573084 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
6312 S. Fiddlers Green Circle, Suite 200N
Greenwood Village, Colorado 80111
(Address of principal executive offices) (Zip Code)
(303) 846-6000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large Accelerated Filer | ☐ | | Accelerated Filer | ☒ |
Non-accelerated Filer | ☐ | | Smaller Reporting Company | ☐ |
| | | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Title of each class | | Trading symbol(s) | | Name of each exchange on which registered | | |
Common Stock, $0.001 par value | | RRGB | | NASDAQ | (Global Select Market) | |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of August 10, 2020, there were 15,540,955 shares of the registrant's common stock, par value of $0.001 per share outstanding.
RED ROBIN GOURMET BURGERS, INC.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
| | | | | | | | | | | | | | |
| | (Unaudited) | | |
| | July 12, 2020 | | December 29, 2019 |
Assets: | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 26,138 | | | $ | 30,045 | |
Accounts receivable, net | | 8,989 | | | 22,372 | |
Inventories | | 24,983 | | | 26,424 | |
Prepaid expenses and other current assets | | 46,817 | | | 26,646 | |
| | | | |
Total current assets | | 106,927 | | | 105,487 | |
Property and equipment, net | | 461,350 | | | 518,013 | |
Right of use assets, net | | 415,900 | | | 426,248 | |
Goodwill | | — | | | 96,397 | |
Intangible assets, net | | 26,537 | | | 29,975 | |
Other assets, net | | 19,931 | | | 61,460 | |
Total assets | | $ | 1,030,645 | | | $ | 1,237,580 | |
Liabilities and stockholders' equity: | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 19,906 | | | $ | 33,040 | |
Accrued payroll and payroll-related liabilities | | 25,135 | | | 35,221 | |
Unearned revenue | | 43,938 | | | 54,223 | |
Current portion of lease obligations | | 62,068 | | | 42,699 | |
Current portion of long-term debt | | 9,692 | | | — | |
Accrued liabilities and other | | 44,250 | | | 29,403 | |
Total current liabilities | | 204,989 | | | 194,586 | |
Long-term debt | | 197,798 | | | 206,875 | |
Long-term portion of lease obligations | | 455,288 | | | 465,435 | |
Other non-current liabilities | | 14,479 | | | 10,164 | |
Total liabilities | | 872,554 | | | 877,060 | |
Stockholders' equity: | | | | |
Common stock; $0.001 par value: 45,000 shares authorized; 20,449 and 17,851 shares issued; 15,547 and 12,923 shares outstanding as of July 12, 2020 and December 29, 2019 | | 20 | | | 18 | |
Preferred stock, $0.001 par value: 3,000 shares authorized; no shares issued and outstanding as of July 12, 2020 and December 29, 2019 | | — | | | — | |
Treasury stock 4,902 and 4,928 shares, at cost, as of July 12, 2020 and December 29, 2019 | | (199,945) | | | (202,313) | |
Paid-in capital | | 240,812 | | | 213,922 | |
Accumulated other comprehensive loss, net of tax | | (5,503) | | | (4,373) | |
Retained earnings | | 122,707 | | | 353,266 | |
Total stockholders' equity | | 158,091 | | | 360,520 | |
Total liabilities and stockholders' equity | | $ | 1,030,645 | | | $ | 1,237,580 | |
See Notes to Condensed Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(In thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Weeks Ended | | | | Twenty-Eight Weeks Ended | | |
| | July 12, 2020 | | July 14, 2019 | | July 12, 2020 | | July 14, 2019 |
Revenues: | | | | | | | | |
Restaurant revenue | | $ | 160,144 | | | $ | 302,418 | | | $ | 461,578 | | | $ | 702,902 | |
Franchise and other revenues | | 978 | | | 5,563 | | | 5,609 | | | 14,945 | |
| | | | | | | | |
Total revenues | | 161,122 | | | 307,981 | | | 467,187 | | | 717,847 | |
Costs and expenses: | | | | | | | | |
Restaurant operating costs (excluding depreciation and amortization shown separately below): | | | | | | | | |
Cost of sales | | 38,780 | | | 72,387 | | | 109,206 | | | 166,102 | |
Labor | | 62,742 | | | 106,538 | | | 181,308 | | | 249,432 | |
Other operating | | 34,663 | | | 43,000 | | | 86,954 | | | 98,565 | |
Occupancy | | 20,758 | | | 25,458 | | | 54,415 | | | 60,478 | |
Depreciation and amortization | | 20,560 | | | 21,369 | | | 48,880 | | | 49,807 | |
Selling, general, and administrative expenses | | 19,697 | | | 35,234 | | | 61,199 | | | 83,350 | |
Pre-opening costs | | 3 | | | — | | | 156 | | | 319 | |
Other charges | | 14,501 | | | 16,847 | | | 133,880 | | | 19,245 | |
Total costs and expenses | | 211,704 | | | 320,833 | | | 675,998 | | | 727,298 | |
| | | | | | | | |
Loss from operations | | (50,582) | | | (12,852) | | | (208,811) | | | (9,451) | |
Other expense: | | | | | | | | |
Interest expense, net and other | | 1,979 | | | 2,153 | | | 5,349 | | | 5,391 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Loss before income taxes | | (52,561) | | | (15,005) | | | (214,160) | | | (14,842) | |
Income tax provision (benefit) | | 3,700 | | | (15,986) | | | 16,399 | | | (16,462) | |
Net (loss) income | | $ | (56,261) | | | $ | 981 | | | $ | (230,559) | | | $ | 1,620 | |
(Loss) earnings per share: | | | | | | | | |
Basic | | $ | (4.09) | | | $ | 0.08 | | | $ | (17.38) | | | $ | 0.12 | |
Diluted | | $ | (4.09) | | | $ | 0.08 | | | $ | (17.38) | | | $ | 0.12 | |
Weighted average shares outstanding: | | | | | | | | |
Basic | | 13,741 | | | 12,970 | | | 13,262 | | | 12,969 | |
Diluted | | 13,741 | | | 13,043 | | | 13,262 | | | 13,047 | |
| | | | | | | | |
Other comprehensive income (loss): | | | | | | | | |
Foreign currency translation adjustment | | $ | 17 | | | $ | 406 | | | $ | (1,130) | | | $ | 77 | |
Other comprehensive income (loss), net of tax | | 17 | | | 406 | | | (1,130) | | | 77 | |
Total comprehensive (loss) income | | $ | (56,244) | | | $ | 1,387 | | | $ | (231,689) | | | $ | 1,697 | |
See Notes to Condensed Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | Treasury Stock | | | | | | Accumulated Other Comprehensive Loss, net of tax | | | | |
| | | | | | | | | | Paid-in Capital | | | | Retained Earnings | | |
| | Shares | | Amount | | Shares | | Amount | | | | | | | | Total |
Balance, December 29, 2019 | | 17,851 | | | $ | 18 | | | 4,928 | | | $ | (202,313) | | | $ | 213,922 | | | $ | (4,373) | | | $ | 353,266 | | | $ | 360,520 | |
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | — | | | — | | | (39) | | | 1,605 | | | (1,388) | | | — | | | — | | | 217 | |
| | | | | | | | | | | | | | | | |
Acquisition of treasury stock | | — | | | — | | | 72 | | | (1,635) | | | — | | | — | | | — | | | (1,635) | |
Non-cash stock compensation | | — | | | — | | | — | | | — | | | 712 | | | — | | | — | | | 712 | |
Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | (174,298) | | | (174,298) | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (1,147) | | | — | | | (1,147) | |
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Balance, April 19, 2020 | | 17,851 | | | $ | 18 | | | 4,961 | | | $ | (202,343) | | | $ | 213,246 | | | $ | (5,520) | | | $ | 178,968 | | | $ | 184,369 | |
Issuance of common stock, $0.001 par value, net of stock issuance costs | | 2,598 | | | 2 | | | — | | | — | | | 28,723 | | | — | | | — | | | 28,725 | |
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | — | | | — | | | (59) | | | 2,398 | | | (2,228) | | | — | | | — | | | 170 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Non-cash stock compensation | | — | | | — | | | — | | | — | | | 1,071 | | | — | | | — | | | 1,071 | |
Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | (56,261) | | | (56,261) | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 17 | | | — | | | 17 | |
Balance, July 12, 2020 | | 20,449 | | | $ | 20 | | | 4,902 | | | $ | (199,945) | | | $ | 240,812 | | | $ | (5,503) | | | $ | 122,707 | | | $ | 158,091 | |
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See Notes to Condensed Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | Treasury Stock | | | | | | Accumulated Other Comprehensive Loss, net of tax | | | | |
| | | | | | | | | | Paid-in Capital | | | | Retained Earnings | | |
| | Shares | | Amount | | Shares | | Amount | | | | | | | | Total |
Balance, December 30, 2018 | | 17,851 | | | $ | 18 | | | 4,880 | | | $ | (201,505) | | | $ | 212,752 | | | $ | (4,801) | | | $ | 376,341 | | | $ | 382,805 | |
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | — | | | — | | | (32) | | | 1,344 | | | (1,204) | | | — | | | — | | | 140 | |
| | | | | | | | | | | | | | | | |
Acquisition of treasury stock | | — | | | — | | | 31 | | | (974) | | | — | | | — | | | — | | | (974) | |
Non-cash stock compensation | | — | | | — | | | — | | | — | | | 477 | | | — | | | — | | | 477 | |
Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 639 | | | 639 | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (329) | | | — | | | (329) | |
Topic 842 transition impairment, net of tax | | — | | | — | | | — | | | — | | | — | | | — | | | (15,172) | | | (15,172) | |
Balance, April 21, 2019 | | 17,851 | | | $ | 18 | | | 4,879 | | | $ | (201,135) | | | $ | 212,025 | | | $ | (5,130) | | | $ | 361,808 | | | $ | 367,586 | |
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | — | | | — | | | (30) | | | 1,208 | | | (907) | | | — | | | — | | | 301 | |
| | | | | | | | | | | | | | | | |
Acquisition of treasury stock | | — | | | — | | | 17 | | | (501) | | | — | | | — | | | — | | | (501) | |
Non-cash stock compensation | | — | | | — | | | — | | | — | | | 941 | | | — | | | — | | | 941 | |
Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 981 | | | 981 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 406 | | | — | | | 406 | |
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Balance July 14, 2019 | | 17,851 | | | $ | 18 | | | 4,866 | | | $ | (200,428) | | | $ | 212,059 | | | $ | (4,724) | | | $ | 362,789 | | | $ | 369,714 | |
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See Notes to Condensed Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | Twenty-Eight Weeks Ended | | | | |
| | July 12, 2020 | | July 14, 2019 | | |
Cash flows from operating activities: | | | | | | |
Net (loss) income | | $ | (230,559) | | | $ | 1,620 | | | |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | | | | |
Depreciation and amortization | | 48,880 | | | 49,807 | | | |
Gift card breakage | | (1,806) | | | (4,320) | | | |
Goodwill and restaurant asset impairment | | 116,193 | | | 14,064 | | | |
Non-cash other charges | | 2,764 | | | 1,900 | | | |
Deferred income tax provision (benefit) | | 42,686 | | | (21,526) | | | |
Stock-based compensation expense | | 1,771 | | | 1,415 | | | |
Other, net | | 393 | | | 560 | | | |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | | 13,211 | | | 12,132 | | | |
| | | | | | |
Prepaid expenses and other current assets | | (18,807) | | | 3,459 | | | |
Lease assets, net of liabilities | | 17,666 | | | 1,502 | | | |
Trade accounts payable and accrued liabilities | | (9,374) | | | (7,388) | | | |
Unearned revenue | | (8,479) | | | (11,343) | | | |
Other operating assets and liabilities, net | | 6,854 | | | (136) | | | |
Net cash (used in) provided by operating activities | | (18,607) | | | 41,746 | | | |
Cash flows from investing activities: | | | | | | |
Purchases of property, equipment, and intangible assets | | (11,456) | | | (21,168) | | | |
Proceeds from sales of real estate and property, plant, and equipment and other investing activities | | 43 | | | 178 | | | |
Net cash used in investing activities | | (11,413) | | | (20,990) | | | |
Cash flows from financing activities: | | | | | | |
Borrowings of long-term debt | | 135,000 | | | 162,000 | | | |
Payments of long-term debt and finance leases | | (134,385) | | | (174,464) | | | |
Purchase of treasury stock | | (1,635) | | | (1,475) | | | |
Debt issuance costs | | (2,952) | | | — | | | |
Proceeds from issuance of common stock, net of stock issuance costs | | 29,675 | | | — | | | |
Proceeds from exercise of stock options and employee stock purchase plan | | 666 | | | 693 | | | |
Net cash provided by (used in) financing activities | | 26,369 | | | (13,246) | | | |
Effect of exchange rate changes on cash | | (256) | | | 115 | | | |
Net change in cash and cash equivalents | | (3,907) | | | 7,625 | | | |
Cash and cash equivalents, beginning of period | | 30,045 | | | 18,569 | | | |
Cash and cash equivalents, end of period | | $ | 26,138 | | | $ | 26,194 | | | |
| | | | | | |
Supplemental disclosure of cash flow information | | | | | | |
Income taxes (refund received) paid | | $ | (3) | | | $ | 2,742 | | | |
Interest paid, net of amounts capitalized | | 4,915 | | | 5,482 | | | |
Change in construction related payables | | $ | (1,449) | | | $ | 1,883 | | | |
See Notes to Condensed Consolidated Financial Statements.
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 12, 2020, the Company owned and operated 450 restaurants located in 38 states. The Company also had 102 franchised full-service restaurants in 16 states and one Canadian province as of July 12, 2020. 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 29, 2019 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 29, 2019, filed with the SEC on February 25, 2020.
Our current and prior 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: | | | | |
Second Quarter 2020 | | July 12, 2020 | | 12 |
Second Quarter 2019 | | July 14, 2019 | | 12 |
First Quarter 2020 | | April 19, 2020 | | 16 |
First Quarter 2019 | | April 21, 2019 | | 16 |
Current and Prior Fiscal Years: | | | | |
Fiscal Year 2020 | | December 27, 2020 | | 52 |
Fiscal Year 2019 | | December 29, 2019 | | 52 |
Reclassifications
Certain amounts presented in prior periods have been reclassified to conform with the current period presentation. For the twenty-eight weeks ended July 14, 2019, the Company reclassified the following within net cash (used in) provided by operating activities on the condensed consolidated statements of cash flows: $14.1 million from Non-cash other charges to Goodwill and restaurant asset impairment and $1.5 million from Other operating assets and liabilities, net to Lease assets, net of liabilities.
Going Concern - Substantial Doubt Resolved
As required by ASC Topic 205-40, Presentation of Financial Statements - Going Concern, management has assessed the Company's ability to continue as a going concern for one year from the financial statement issuance date for the fiscal quarter ended July 12, 2020. On May 29, 2020, the Company obtained the First Amendment to the Credit Agreement and Waiver (the "Amendment") to the Company's Amended and Restated Credit Agreement (the "Credit Facility"). The Amendment provided relief from our existing events of default under the Credit Facility and provided covenant relief subject to the successful completion of a $25 million capital raise on or before November 13, 2020, as further disclosed in Note 8, Borrowings. As of the issuance date of our first quarter 2020 financial statements, the Company disclosed, as required under applicable accounting standards, that substantial doubt existed surrounding the Company's ability to meet its obligations within one year of the issuance date of the first quarter Form 10-Q because the capital raise was outside of management's control at the time.
On June 17, 2020, the Company issued 2.6 million shares of common stock raising proceeds of $28.7 million, net of stock issuance costs, through its at-the-market equity offering. The equity raise satisfied the terms of the Amendment, and management expects to remain in compliance with the Credit Facility covenants for at least twelve months from the issuance of the July 12, 2020 Form 10-Q. Management has concluded there is not a substantial doubt regarding the Company’s ability to continue as a going concern.
Recent Accounting Pronouncements
Income Taxes
In December 2019, the Financial Accounting Standards Board ("FASB") issued Update 2019-12, Income Taxes ("Topic 740") as part of its Simplification Initiative. This guidance provides amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for annual and interim reporting periods beginning after December 15, 2020, and early adoption is permitted. We are currently evaluating the full impact this guidance will have on our consolidated financial statements.
We reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a significant impact on the Company's condensed consolidated financial statements.
2. COVID-19 Pandemic
Overview
Due to the novel coronavirus ("COVID-19") pandemic, we have navigated and continue to navigate an unprecedented time for our business and industry as we collectively work to maintain the stable operation of our business. During the second quarter of 2020, the Company began re-opening dining rooms at Company-owned restaurants in accordance with local limits with re-opened restaurants operating at no higher than 50% occupant capacity. Re-opening dining rooms was executed with the health, safety, and well-being of Red Robin's Team Members, Guests, and communities in mind, and strict adherence to US Centers for Disease Control ("CDC"), state, and local guidelines as our top priority. The COVID-19 pandemic has had a material adverse effect on our business, and we expect the impact from COVID-19 will continue to negatively affect our business through the remainder of fiscal year 2020.
Franchise Revenue
In response to COVID-19's effect on our franchise operations, we temporarily abated franchise royalty payments and advertising contributions effective March 20, 2020. During periods of abated payments, franchise revenue was not recognized or collected from our franchisees. Abated royalty payments and advertising contributions will not be collected by the Company. The Company began charging and collecting partial franchise royalty payments and advertising contributions during the latter half of the second fiscal quarter of 2020. Franchised restaurants operate under contractual arrangements with the Company, and the payments specified in the franchise contracts are accounted for under ASC Topic 606, Revenue from Contracts with Customers.
Rent
In response to the impact of COVID-19 on our operations, beginning April 1, 2020 the Company stopped making full lease payments under its existing lease agreements. During the suspension of payments, the Company continued to recognize expenses and liabilities for lease obligations and corresponding right-of-use assets on the balance sheet in accordance with ASC Topic 842.
We are engaging in ongoing constructive discussions with landlords regarding the potential restructuring of lease payments and rent concessions. As of July 12, 2020, the Company has contractually negotiated rent concessions on certain leases. The types of rent concessions the Company has negotiated include early termination, early renewal, rent deferral, and rent abatement.
For contractual rent concessions that do not substantially change the total cash flows of the lease, the Company has elected to account for these concessions assuming the existing lease agreements provide enforceable rights and obligations consistent with the relief issued by the Financial Accounting Standards Board titled ASC Topic 842 and ASC Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic ("FASB Relief"). For leases where the rent concession did not substantially change the total cash flows, the concession was accounted for as a remeasurement to the lease liability based on the original discount rate with a corresponding adjustment to the right-of-use asset. Additionally, the classification of the leases was not reassessed. The Company recorded an immaterial remeasurement to the lease liability and right-of-use asset resulting from contractual rent concessions under the FASB relief during the second fiscal quarter of 2020.
For contractual rent concessions that substantially changed the total cash flows of the lease and did not qualify for the FASB relief, we applied the modification framework in accordance with ASC Topic 842, Leases. The Company reassessed lease classification for rent concessions that did not qualify for the FASB relief, and it was concluded one lease changed from finance to operating and two leases changed from operating to finance. Based on updated discount rates, a $21.7 million remeasurement was recorded to increase the lease liability, a $21.7 million adjustment was recorded to increase the right-of-use asset, and an immaterial loss was recorded in Occupancy on the condensed consolidated statements of operations and comprehensive (loss) income. Contractual rent concessions granted to the Company did not grant the right to use additional assets not included in the original lease contracts, so no separate contracts were accounted for as part of the rent concession modifications.
Goodwill
We performed a goodwill impairment analysis during the first quarter of 2020 resulting in full impairment of our goodwill balance totaling $95.4 million. The goodwill impairment is included in Other charges on the condensed consolidated statements of operations and comprehensive (loss) income for the twenty-eight weeks ended July 12, 2020 and was measured as the amount by which the carrying amount of the reporting unit, including goodwill, exceeded its fair value.
Restaurant Assets
During the twelve weeks ended July 12, 2020, the Company recognized $5.3 million of impairment related to restaurant assets included in Other charges on the condensed consolidated statements of operations and comprehensive (loss) income resulting from the continuing and projected future results of 6 Company-owned restaurants. Restaurant asset impairment of $2.3 million was related to 4 permanently closed Company-owned restaurants and included in Restaurant closure and refranchising costs in Note 7, Other Charges. Additional restaurant asset impairment was recognized during the twelve weeks ended July 12, 2020 due to changes in management's forecast. Although current fiscal year to date results continue to align with management's forecast, the increase in reported COVID-19 cases across the United States and factors associated with the pandemic have changed management's expectation on the timing of the Company's recovery and projected results in future fiscal periods at certain restaurants. If reported COVID-19 cases continue to increase or other factors associated with the pandemic continue to develop, management's forecast could change in future periods requiring additional restaurant asset impairment.
The Company recognized $15.5 million of impairment related to restaurant assets during the first quarter of 2020 resulting from the continuing and projected future results of 24 Company-owned restaurants. The restaurant asset impairment is included in Other charges on the condensed consolidated statements of operations and comprehensive (loss) income for the twenty-eight weeks ended July 12, 2020.
Recoverability of restaurant assets, including restaurant sites, leasehold improvements, information technology systems, right-of-use assets, amortizable intangible assets, and other fixed assets, to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. Each restaurant's past and present operating performance was reviewed in combination with projected future results primarily through projected undiscounted cash flows that included management's current expectation of future financial impacts from COVID-19. If the restaurant assets were determined to be impaired through comparison of the assets carrying value to its undiscounted cash flows, the Company compared the carrying amount of each restaurant's assets to its fair value as estimated by management to calculate the impairment amount. The fair value of restaurant assets is generally determined using a discounted cash flow projection model, which is based on significant inputs not observed in the market and represents a level 3 fair value measurement. In certain cases, management uses other market information, when available, to estimate the fair value of a restaurant's assets. The restaurant asset impairment charges represent the excess of the carrying amount over the estimated fair value of the restaurant assets calculated using a discounted cash flow projection model.
Income Tax
The March 19, 2020 passage of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") created an opportunity for the Company to carry back 2019 and 2020 projected net operating losses ("NOL's"). As a result, $35 million of federal and state tax receivables are recorded in Prepaid expenses and other current assets on the condensed consolidated balance sheets as of July 12, 2020 and are expected to generate projected cash tax refunds in the range of $14 million to $17 million within the next 12 months. The remaining receivables will be carried forward as allowed under applicable taxing jurisdictions.
As a result of these projected NOL carrybacks, approximately $58 million of the previously utilized FICA tip tax credits will be reinstated. As of July 12, 2020, the existing $79 million FICA tip credit carryforwards will be utilized based on projected future taxable income, however they are anticipated to be replaced by originating FICA tip credits that are not projected to be utilized in the carry forward period. Therefore, a $79 million valuation allowance has been established for the FICA tip credit carryforwards. $27 million of the valuation allowance was recognized during the twelve weeks ended July 12, 2020. To the extent future actual taxable income exceeds the current projections, the FICA tip credit carryforwards may become realizable. The Company's $90 million deferred tax assets are recorded net of the $79 million valuation allowance in Other assets, net on the condensed consolidated balance sheets as of July 12, 2020.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the future reversals of existing deferred tax liabilities and projected taxable income, including whether future originating deductible temporary differences are likely to be realized.
3. 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 12, 2020 | | July 14, 2019 | | July 12, 2020 | | July 14, 2019 |
Restaurant revenue | | $ | 160,144 | | | $ | 302,418 | | | $ | 461,578 | | | $ | 702,902 | |
Franchise revenue(1) | | 380 | | | 4,389 | | | 3,277 | | | 9,752 | |
Gift card breakage | | 392 | | | 639 | | | 1,806 | | | 4,320 | |
Other revenue | | 206 | | | 535 | | | 526 | | | 873 | |
Total revenues | | $ | 161,122 | | | $ | 307,981 | | | $ | 467,187 | | | $ | 717,847 | |
———————————————————
(1) The decrease in Franchise revenue is driven by the temporary abatement and non-collection of franchise payments. See Note 2, COVID-19 Pandemic, for further discussion.
Contract liabilities
Components of Unearned revenue in the accompanying condensed consolidated balance sheets are as follows (in thousands):
| | | | | | | | | | | |
| July 12, 2020 | | December 29, 2019 |
Unearned gift card revenue | $ | 33,306 | | | $ | 43,544 | |
Deferred loyalty revenue | $ | 10,632 | | | $ | 10,679 | |
Revenue recognized in the condensed consolidated statements of operations and comprehensive (loss) income for the redemption 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 12, 2020 | | July 14, 2019 |
Gift card revenue | | $ | 12,990 | | | $ | 18,380 | |
4. Leases
Leases are included in right-of-use assets, net, current portion of lease obligations, and long-term portion of lease liabilities on our condensed consolidated balance sheet as of July 12, 2020 and December 29, 2019 as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
July 12, 2020 | | Finance | | Operating | | Total |
Right of use assets, net | | $ | 11,340 | | | $ | 404,560 | | | $ | 415,900 | |
| | | | | | |
Current portion of lease obligations | | 1,070 | | | 60,998 | | | 62,068 | |
Long-term portion of lease obligations | | 12,532 | | | 442,756 | | | 455,288 | |
Total | | $ | 13,602 | | | $ | 503,754 | | | $ | 517,356 | |
| | | | | | |
December 29, 2019 | | Finance | | Operating | | Total |
Right of use assets, net | | $ | 7,552 | | | $ | 418,696 | | | $ | 426,248 | |
| | | | | | |
Current portion of lease obligations | | 725 | | | 41,974 | | | 42,699 | |
Long-term portion of lease obligations | | 8,822 | | | 456,613 | | | 465,435 | |
Total | | $ | 9,547 | | | $ | 498,587 | | | $ | 508,134 | |
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 as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Weeks Ended | | | | Twenty-Eight Weeks Ended | | |
| | July 12, 2020 | | July 14, 2019 | | July 12, 2020 | | July 14, 2019 |
Operating lease cost | | $ | 14,949 | | | $ | 17,442 | | | $ | 36,939 | | | $ | 41,114 | |
Finance lease cost: | | | | | | | | |
Amortization of right of use assets | | 185 | | | 193 | | 388 | | | 441 |
Interest on lease liabilities | | 124 | | | 125 | | 262 | | | 294 |
Total finance lease cost | | $ | 309 | | | $ | 318 | | | $ | 650 | | | $ | 735 | |
Variable lease cost | | 4,988 | | | 6,647 | | | 13,305 | | | 15,532 | |
Total | | $ | 20,246 | | | $ | 24,407 | | | $ | 50,894 | | | $ | 57,381 | |
Maturities of our lease liabilities as of July 12, 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Finance Leases | | Operating Leases | | Total |
Remainder of 2020 | $ | 889 | | | $ | 49,486 | | | $ | 50,375 | |
2021 | 1,393 | | | 75,225 | | | 76,618 | |
2022 | 1,527 | | | 73,836 | | | 75,363 | |
2023 | 1,406 | | | 71,959 | | | 73,365 | |