Transactions with Related Parties (Notes)

6 Months Ended

Jun. 28, 2020

Related Party Transactions [Abstract]

Related Party Transactions Disclosure [Text Block]

Transactions with Related Parties

In connection with an acquisition of restaurants from BKC in 2012, the Company issued to BKC 100 shares of Series A Convertible Preferred Stock, which was exchanged for 100 shares of newly issued Series B Convertible Preferred Stock ("Series B Preferred Stock") in 2018, and as of June 28, 2020 is convertible into approximately 15.2% of the outstanding shares of the Company's common stock after giving effect to the conversion of the Series B Preferred Stock. Pursuant to the terms of the Series B Preferred Stock, BKC together with certain other entities that are both affiliates of BKC and either Restaurant Brands International or Restaurant Brands International Limited Partnership (collectively "RBI") are entitled to elect two representatives on the Company's board of directors.

The Company operates its Burger King® restaurants under franchise agreements with BKC and its Popeyes® restaurants under franchise agreements with Popeyes Louisiana Kitchen, Inc. ("PLK"), a subsidiary of RBI. These franchise agreements generally provide for an initial term of twenty years and currently have an initial franchise fee of fifty thousand dollars. Any franchise agreement, including renewals, can be extended at the Company's discretion for an additional 20 year term, with BKC's and PLK's approval, provided that, among other things, the restaurant meets the current restaurant image standard and the Company is not in default under terms of the franchise agreement. In addition to the initial franchise fee, the Company generally pays BKC a monthly royalty at a rate of 4.5% of Burger King restaurant sales and PLK a weekly royalty at a rate of 5.0% of Popeyes restaurant sales. Royalty expense was $15.9 million and $15.6 million in the three months ended June 28, 2020 and June 30, 2019, respectively and was $31.0 million and $28.0 million in the six months ended June 28, 2020 and June 30, 2019, respectively.

The Company is also generally required to contribute 4% of restaurant sales from its restaurants to an advertising fund utilized by BKC and PLK for its advertising, promotional programs and public relations activities, and additional amounts for additional local advertising in markets that approve such advertising. Advertising expense associated with these expenditures was $14.1 million and $14.4 million in the three months ended June 28, 2020 and June 30, 2019, respectively and $27.5 million and $25.8 million in the six months ended June 28, 2020 and June 30, 2019, respectively.

As of June 28, 2020, the Company leased 239 of its restaurant locations from BKC and 107 of these locations are subleased by BKC from various third party lessors. Aggregate rent under these BKC leases was $6.3 million and $6.8 million for the three months ended June 28, 2020 and June 30, 2019, respectively, and was $13.0 million and $13.6 million in the six months ended June 28, 2020 and June 30, 2019, respectively. The Company does not believe that such lease terms have been significantly affected by the fact that the Company and BKC are deemed to be related parties.

As of June 28, 2020 and December 29, 2019, the Company owed BKC and PLK $21.0 million and $14.0 million, respectively, related to the payment of advertising, royalties, rent and real estate taxes, which is normally remitted on a monthly basis.

The Company and BKC have entered into an Area Development and Remodeling Agreement ("Area Development Agreement") commencing on April 30, 2019 and ending on September 30, 2024, which supersedes the Operating Agreement dated as of May 30, 2012, as amended, between Carrols LLC and BKC. Pursuant to the Area Development Agreement, BKC assigned its right of first refusal under its franchise agreements with its franchisees to purchase all of the assets of a Burger King restaurant on the same terms proposed between such franchisee and a third party purchaser (the “ADA ROFR”), in 16 states and a limited number of counties in four additional states, and granted franchise pre-approval to acquire Burger King restaurants until the date that Carrols LLC has acquired more than an aggregate of an additional 500 Burger King restaurants excluding those restaurants the Company acquired in the Cambridge Merger. The continued assignment of the ADA ROFR is potentially subject to suspension at BKC's discretion in the event of non-compliance by Carrols LLC with certain terms as set forth in the Area Development Agreement. In 2019 Carrols LLC paid to BKC the total consideration of $3.0 million for the ADA ROFR.

The Company has assumed Cambridge's development agreement for Popeyes^®, which includes a right of first refusal for acquisitions in two southern states, as well as a development commitment to open, build and operate approximately 80 new Popeyes^® restaurants over six years.

In the first quarter of 2019, the Company received $1.9 million, recorded as other income, related to a settlement with BKC for their approval of new restaurant development by other franchisees which unfavorably impacted the Company's restaurants.