DEL TACO RESTAURANTS, INC., 10-Q filed on 5/7/2018
Quarterly Report
v3.8.0.1
Document and Entity Information - shares
3 Months Ended
Mar. 27, 2018
May 04, 2018
Document Information [Line Items]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 27, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q1  
Trading Symbol TACO  
Entity Registrant Name Del Taco Restaurants, Inc.  
Entity Central Index Key 0001585583  
Current Fiscal Year End Date --01-01  
Entity Filer Category Accelerated Filer  
Entity Common Stock, Shares Outstanding   38,452,666
v3.8.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 27, 2018
Jan. 02, 2018
Current assets:    
Cash and cash equivalents $ 10,038 $ 6,559
Accounts and other receivables, net 3,524 3,828
Inventories 2,739 2,712
Prepaid expenses and other current assets 3,216 6,784
Total current assets 19,517 19,883
Property and equipment, net 157,643 156,124
Goodwill 320,638 320,638
Trademarks 220,300 220,300
Intangible assets, net 20,711 21,498
Other assets, net 4,325 3,881
Total assets 743,134 742,324
Current liabilities:    
Accounts payable 16,040 18,759
Other accrued liabilities 32,947 35,257
Current portion of capital lease obligations and deemed landlord financing liabilities 1,309 1,415
Total current liabilities 50,296 55,431
Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net 171,472 170,639
Deferred income taxes 68,644 68,574
Other non-current liabilities 32,562 31,431
Total liabilities 322,974 326,075
Commitments and contingencies
Shareholders’ equity:    
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding 0 0
Common stock, $0.0001 par value; 400,000,000 shares authorized; 38,448,916 shares issued and outstanding at March 27, 2018; 38,434,274 shares issued and outstanding at January 2, 2018 4 4
Additional paid-in capital 350,543 349,334
Accumulated other comprehensive income 194 14
Retained earnings 69,419 66,897
Total shareholders’ equity 420,160 416,249
Total liabilities and shareholders’ equity $ 743,134 $ 742,324
v3.8.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - Successor [Member] - $ / shares
Mar. 27, 2018
Jan. 02, 2018
Preferred stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Preferred stock, shares authorized (in shares) 1,000,000 1,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Common stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Common stock, shares authorized (in shares) 400,000,000 400,000,000
Common stock, shares issued (in shares) 38,448,916 38,434,274
Common stock, shares outstanding (in shares) 38,448,916 38,434,274
v3.8.0.1
Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Thousands
3 Months Ended
Mar. 27, 2018
Mar. 28, 2017
Revenue:    
Company restaurant sales $ 105,109 $ 101,222
Franchise revenue 3,792 3,613
Franchise advertising contributions 2,936 0
Franchise sublease income 717 510
Total revenue 112,554 105,345
Restaurant operating expenses:    
Food and paper costs 28,973 27,918
Labor and related expenses 34,818 33,221
Occupancy and other operating expenses 21,986 20,718
General and administrative 10,429 9,305
Franchise advertising expenses 2,936 0
Depreciation and amortization 5,914 5,103
Occupancy and other - franchise subleases 638 481
Pre-opening costs 442 26
Restaurant closure charges, net (13) 9
Loss (gain) on disposal of assets, net 93 (49)
Total operating expenses 106,216 96,732
Income from operations 6,338 8,613
Other expense    
Interest expense 1,910 1,543
Total other expense 1,910 1,543
Income from operations before provision for income taxes 4,428 7,070
Provision for income taxes 1,199 2,832
Net income 3,229 4,238
Other comprehensive income (loss):    
Change in fair value of interest rate cap, net of tax 174 (88)
Reclassification of interest rate cap amortization included in net income 6 0
Total other comprehensive income (loss) 180 (88)
Comprehensive income $ 3,409 $ 4,150
Earnings per share:    
Basic (in dollars per share) $ 0.08 $ 0.11
Diluted (in dollars per share) $ 0.08 $ 0.10
Weighted-average shares outstanding    
Basic (in shares) 38,441,707 39,003,935
Diluted (in shares) 39,224,070 40,375,061
v3.8.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 27, 2018
Mar. 28, 2017
Operating activities    
Net income $ 3,229 $ 4,238
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 5,914 5,103
Amortization of favorable and unfavorable lease assets and liabilities, net (118) (147)
Amortization of deferred financing costs and debt discount 95 89
Stock-based compensation 1,274 1,069
Deferred income taxes 266 193
Loss (gain) on disposal of assets, net 93 (49)
Restaurant closure charges 33 43
Changes in operating assets and liabilities:    
Accounts and other receivables, net 1,017 994
Inventories (27) 88
Prepaid expenses and other current assets 3,568 1,914
Other assets (16) (18)
Accounts payable (2,609) (402)
Other accrued liabilities (973) (280)
Other non-current liabilities 654 (207)
Net cash provided by operating activities 12,400 12,628
Investing activities    
Purchases of property and equipment (9,594) (5,650)
Proceeds from disposal of property and equipment, net 573 0
Purchases of other assets (474) (201)
Proceeds from sale of company-operated restaurants 0 2,192
Net cash used in investing activities (9,495) (3,659)
Financing activities    
Repurchase of common stock and warrants (33) (8,010)
Payment of tax withholding related to restricted stock vesting (79) (59)
Payments on capital leases and deemed landlord financing (362) (379)
Proceeds from revolving credit facility 5,000 3,000
Payments on revolving credit facility (4,000) (3,000)
Proceeds from exercise of stock options 48 0
Net cash provided by (used in) financing activities 574 (8,448)
Increase in cash and cash equivalents 3,479 521
Cash and cash equivalents at beginning of period 6,559 8,795
Cash and cash equivalents at end of period 10,038 9,316
Supplemental cash flow information:    
Cash paid during the period for interest 1,377 1,066
Cash paid during the period for income taxes 0 0
Supplemental schedule of non-cash activities:    
Accrued property and equipment purchases 1,492 2,883
Write-offs of accounts receivables 6 0
Reclassification of interest rate cap amortization included in net income 6 0
Change in other asset for fair value of interest rate cap recorded to other comprehensive loss, net of tax $ 174 $ (88)
v3.8.0.1
Description of Business
3 Months Ended
Mar. 27, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business
Description of Business
Del Taco Restaurants, Inc. (f/k/a Levy Acquisition Corp. (“LAC”)) is a Delaware corporation headquartered in Lake Forest, California. The consolidated financial statements include the accounts of Del Taco Restaurants, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Del Taco”). The Company develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants. At March 27, 2018, there were 315 company-operated and 251 franchise-operated Del Taco restaurants located in 14 states, including one franchise-operated unit in Guam. At March 28, 2017, there were 305 company-operated and 249 franchise-operated Del Taco restaurants located in 15 states, including one franchise-operated unit in Guam.
v3.8.0.1
Basis of Presentation and Summary of Significant Accounting Policies
3 Months Ended
Mar. 27, 2018
Accounting Policies [Abstract]  
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). For additional information, these unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 2, 2018 ("2017 Form 10-K").
 
The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2018 is a fifty-two week period ending January 1, 2019. Fiscal year 2017 is the fifty-two week period ended January 2, 2018. In a fifty-two week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes sixteen weeks of operations. For fiscal year 2018, the Company’s accompanying financial statements reflect the twelve weeks ended March 27, 2018. For fiscal year 2017, the Company’s accompanying financial statements reflect the twelve weeks ended March 28, 2017.
Effective January 3, 2018 (the first day of fiscal year 2018), the Company adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), as discussed below in Note 2, using the modified retrospective method of transition. Current year results have been prepared in accordance with the new standards.
In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full fiscal year.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances.
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842). This guidance will result in key changes to lease accounting and will aim to bring leases onto balance sheets to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations as well as the assets it owns versus leases. The new leasing standard will be effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. The new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with certain practical expedients available. The Company is in the process of implementing changes to its systems and processes in conjunction with its review of existing lease agreements. The cumulative effect of adoption will be recorded to retained earnings in the period of adoption. Based on a preliminary assessment, the Company expects that substantially all of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a material increase in the assets and liabilities on the Company's consolidated balance sheets.  The Company is continuing its evaluation, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures. The Company will adopt ASU No. 2016-02 during the first quarter of fiscal 2019.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU No. 2016-04, Liabilities-Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products, which is designed to provide guidance and eliminate diversity in the accounting for the derecognition of financial liabilities related to certain prepaid stored-value products using a revenue-like breakage model. The Company adopted the requirements of the new standard in the first fiscal quarter of 2018, utilizing the cumulative effect transition method. There was no material impact as a result of adopting this standard.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides a comprehensive new revenue recognition model that requires a company to recognize revenue in an amount that reflects the consideration it expects to receive for the transfer of promised goods or services to its customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09, also known as FASB Accounting Standards Codification ("ASC") Topic 606 ("Topic 606") supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition ("Topic 605"). On January 3, 2018 (the first day of fiscal year 2018), the Company adopted the requirements of Topic 606, utilizing the modified retrospective method of transition. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, as detailed below. Topic 606 does not materially impact the recognition of company restaurant sales or franchise royalty income from franchisees included in franchise revenue. Franchise sublease income is not within the scope of this new guidance.
Franchise Fees
The adoption of Topic 606 changed the timing of the recognition of initial franchise fees, including franchise and development fees, and renewal fees, both included in franchise revenue in the consolidated statements of comprehensive income. Under Topic 605, initial franchise fees were recognized when all material obligations had been performed and conditions had been satisfied, typically when operations of a new franchise restaurant had commenced, and renewal fees were recognized when a renewal agreement became effective. Topic 606 requires franchise and renewal fees to be deferred and recognized over the term of the related franchise agreement for the respective restaurant. Franchise agreements typically have a term of 20 years. The impact of the deferral of initial franchise and renewal fees received in a given year may be offset by the recognition of revenue from fees retrospectively deferred from prior years. Upon adoption, the Company recorded approximately $0.7 million as a cumulative effect adjustment to opening retained earnings comprised of $1.0 million of deferred franchise fees included in other non-current liabilities on the consolidated balance sheet as of January 3, 2018 (the first day of fiscal year 2018) related to franchise and renewal fees previously recognized since the Business Combination on June 30, 2015, partially offset by an adjustment of $0.3 million to deferred taxes related to the $1.0 million of deferred franchise fees.
During the twelve weeks ended March 27, 2018, the Company recognized $13,000 in franchise revenue related to the amortization of the deferred franchise fees recognized at January 2, 2018 as a result of the adoption of Topic 606.


Deferred franchise fees are recognized straight-line over the term of the underlying agreement and the amount expected to be recognized in franchise revenue for amounts in deferred franchise fees as of March 27, 2018 is as follows (in thousands):
FY 2018
 
$
47

FY 2019
 
60

FY 2020
 
60

FY 2021
 
59

FY 2022
 
59

Thereafter
 
702

Total Deferred Franchise Fees
 
$
987


Advertising
The adoption of the new guidance changed the reporting of advertising contributions from franchisees and the related advertising expenses, which were not previously included in the consolidated statements of comprehensive income. Topic 606 requires these franchise advertising contributions and expenses to be reported on a gross basis in the consolidated statements of comprehensive income, which impacted our total revenues and expenses. However, the franchise advertising contributions and expenses are expected to be largely offsetting and therefore does not have a significant impact on reported net income. The current year impact to revenue for franchise advertising contributions and to expenses for franchise advertising expenses for the twelve weeks ended March 27, 2018 was an increase of $2.9 million for both as a result of applying Topic 606.
Other Revenue Transactions
Certain other franchise expenses have previously been recorded net of the related fees received from franchisees. Under Topic 606, the Company is now including these revenues and expenditures on a gross basis within the consolidated statements of comprehensive income. While this change materially impacted the gross amount of reported franchise revenue and related expenses on the consolidated statements of comprehensive income, the impact is an offsetting increase to both revenue and expense such that there is not a significant, if any, impact on operating income and net income. The current year impact to revenues for the twelve weeks ended March 27, 2018 was an increase of $0.2 million as a result of applying Topic 606, with an offsetting increase in expenses.
Comparison To Amounts if Previous Standards Had Been in Effect

The following tables reflect the impact of the adoption of Topic 606 on the Company's consolidated balance sheet as of March 27, 2018 and on the Company's consolidated statements of comprehensive income and cash flows from operating activities for the twelve weeks ended March 27, 2018 and the amounts as if Topic 605 was in effect ("Amounts Under Previous Standards") (in thousands):


 
 
12 Weeks Ended March 27, 2018
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Liabilities and shareholders’ equity
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
16,040

 
$

 
$
16,040

Other accrued liabilities
 
32,947

 

 
32,947

Current portion of capital lease obligations and deemed landlord financing liabilities
 
1,309

 

 
1,309

Total current liabilities
 
50,296

 

 
50,296

Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net
 
171,472

 

 
171,472

Deferred income taxes
 
68,644

 
260

 
68,904

Other non-current liabilities
 
32,562

 
(962
)
 
31,600

Total liabilities
 
322,974

 
(702
)
 
322,272

Shareholders’ equity:
 
 
 
 
 
 
Preferred stock
 

 

 

Common stock
 
4

 

 
4

Additional paid-in capital
 
350,543

 

 
350,543

Accumulated other comprehensive income
 
194

 

 
194

Retained earnings
 
69,419

 
702

 
70,121

Total shareholders’ equity
 
420,160

 
702

 
420,862

Total liabilities and shareholders’ equity
 
$
743,134

 
$

 
$
743,134



 
 
12 Weeks Ended March 27, 2018
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Revenue:
 
 
 
 
 
 
Company restaurant sales
 
$
105,109

 
$

 
$
105,109

Franchise revenue
 
3,792

 
(161
)
 
3,631

Franchise advertising contributions
 
2,936

 
(2,936
)
 

Franchise sublease income
 
717

 

 
717

Total revenue
 
112,554

 
(3,097
)
 
109,457

Operating expenses:
 
 
 
 
 
 
Restaurant operating expenses:
 
 
 
 
 
 
Food and paper costs
 
28,973

 

 
28,973

Labor and related expenses
 
34,818

 

 
34,818

Occupancy and other operating expenses
 
21,986

 

 
21,986

General and administrative
 
10,429

 
(153
)
 
10,276

Franchise advertising expenses
 
2,936

 
(2,936
)
 

Depreciation and amortization
 
5,914

 

 
5,914

Occupancy and other - franchise subleases
 
638

 

 
638

Pre-opening costs
 
442

 

 
442

Restaurant closure charges, net
 
(13
)
 

 
(13
)
Loss on disposal of assets, net
 
93

 

 
93

Total operating expenses
 
106,216

 
(3,089
)
 
103,127

Income from operations
 
6,338

 
(8
)
 
6,330

Other expense
 
 
 
 
 
 
Interest expense
 
1,910

 

 
1,910

Total other expense
 
1,910

 

 
1,910

Income from operations before provision for income taxes
 
4,428

 
(8
)
 
4,420

Provision for income taxes
 
1,199

 
(2
)
 
1,197

Net income
 
3,229

 
(6
)
 
3,223

Other comprehensive income:
 
 
 
 
 
 
Change in fair value of interest rate cap, net of tax
 
174

 

 
174

Reclassification of interest rate cap amortization included in net income
 
6

 

 
6

Total other comprehensive income
 
180

 

 
180

Comprehensive income
 
$
3,409

 
$
(6
)
 
$
3,403

Earnings per share:
 
 
 
 
 
 
Basic
 
$
0.08

 
$

 
$
0.08

Diluted
 
$
0.08

 
$

 
$
0.08



 
 
12 Weeks Ended March 27, 2018
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Operating activities
 
 
 
 
 
 
Net income
 
$
3,229

 
$
(6
)
 
$
3,223

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
5,914

 

 
5,914

Amortization of favorable and unfavorable lease assets and liabilities, net
 
(118
)
 

 
(118
)
Amortization of deferred financing costs and debt discount
 
95

 

 
95

Stock-based compensation
 
1,274

 

 
1,274

Deferred income taxes
 
266

 
(2
)
 
264

Loss on disposal of assets, net
 
93

 

 
93

Restaurant closure charges
 
33

 

 
33

Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts and other receivables, net
 
1,017

 

 
1,017

Inventories
 
(27
)
 

 
(27
)
Prepaid expenses and other current assets
 
3,568

 

 
3,568

Other assets
 
(16
)
 

 
(16
)
Accounts payable
 
(2,609
)
 

 
(2,609
)
Other accrued liabilities
 
(973
)
 

 
(973
)
Other non-current liabilities
 
654

 
8

 
662

Net cash provided by operating activities
 
$
12,400

 
$

 
$
12,400


Summary of Significant Accounting Policies
Except for the accounting policies for revenue recognition discussed below that were updated as a result of adopting ASU No. 2014-09, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended January 2, 2018, filed with the SEC on March 15, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.
Revenue Recognition
Company restaurant sales from the operation of company-operated restaurants are recognized when food and service is delivered to customers. Franchise revenue is comprised of (i) development fees, (ii) franchise fees, (iii) on-going royalties, (iv) renewal fees and (v) other franchise revenue. Development and franchise fees, portions of which are collected in advance and are non-refundable, received pursuant to individual development agreements, grant the right to develop franchise-operated restaurants in future periods in specific geographic areas. Both development fees and franchise fees are deferred and recognized as revenue over the term of the franchise agreement and renewal fees are deferred and recognized over the term of the renewal agreement. Development fees and franchise fees are also generally recognized as revenue upon the termination of the development agreement with the franchisee. Royalties from franchise-operated restaurants are based on a percentage of franchise restaurant sales and are recognized in the period the related franchise-operated restaurant sales occur. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities. Franchise sublease income is comprised of rental income associated with properties leased or subleased to franchisees and is recognized as revenue on an accrual basis.
Advertising Costs
Franchisees pay a monthly fee to the Company typically equal to 4% of their restaurants’ net sales as contributions for advertising and promotional services that the Company provides and are included in revenue in franchise advertising contributions on the consolidated statements of comprehensive income. Company-operated restaurants contribute to the advertising fund on the same basis as franchise-operated restaurants.
Production costs for radio and television advertising are expensed when the commercials are initially aired. Costs of distribution of advertising are charged to expense on the date the advertising is aired or distributed. The portion of these costs related to company-operated restaurants, as well as other marketing-related expenses for advertising are included in occupancy and other operating expenses in the consolidated statements of comprehensive income. The portion of these costs related to franchise-operated restaurants for advertising are included in franchise advertising expenses on the consolidated statements of comprehensive income.
v3.8.0.1
Restaurant Closure Charges, Net
3 Months Ended
Mar. 27, 2018
Restructuring and Related Activities [Abstract]  
Restaurant Closure Charges, Net
Restaurant Closure Charges, Net
At March 27, 2018 and January 2, 2018, the restaurant closure liability is $2.4 million and $2.8 million, respectively. The details of the restaurant closure activities are discussed below.
Restaurant Closures and Lease Reserves
The following table represents other restaurant closure liability activity related to restaurant closures prior to 2015 and sublease income shortfalls (in thousands):
 
 
Total
Balance at January 2, 2018
 
$
1,213

Charges for accretion in current period
 
17

Cash payments
 
(334
)
Balance at March 27, 2018
 
$
896


The current portion of the restaurant closure liability is $0.2 million at March 27, 2018 and $0.5 million at January 2, 2018, respectively, and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $0.7 million at both March 27, 2018 and January 2, 2018 and is included in other non-current liabilities in the consolidated balance sheets.
Restaurant Closure and Other Related Charges for 12 Underperforming Restaurants
During the fourth fiscal quarter of 2015, the Company closed 12 company-operated restaurants. During the twelve weeks ended March 27, 2018, the Company recorded accretion expense related to the closures, offset by $47,000 of sublease income from leases which are treated as deemed landlord financing. A summary of the restaurant closure liability activity, all of which relates to contract termination costs, for these 12 closed restaurants consisted of the following (in thousands):
 
 
Total
Balance at January 2, 2018
 
$
1,611

Charges for accretion in current period
 
16

Cash payments
 
(141
)
Balance at March 27, 2018
 
$
1,486


The current portion of the restaurant closure liability is $0.3 million at both March 27, 2018 and January 2, 2018 and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $1.2 million and $1.3 million at March 27, 2018 and January 2, 2018, respectively, and is included in other non-current liabilities in the consolidated balance sheets.
v3.8.0.1
Goodwill and other Intangible Assets
3 Months Ended
Mar. 27, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and other Intangible Assets
Goodwill and other Intangible Assets
Goodwill was $320.6 million at both March 27, 2018 and January 2, 2018.
There have been no changes in the carrying amount of trademarks since January 2, 2018.
The Company’s other intangible assets at March 27, 2018 and January 2, 2018 consisted of the following (in thousands):
 
 
March 27, 2018
 
January 2, 2018
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Favorable lease assets
 
$
13,707

 
$
(4,814
)
 
$
8,893

 
$
13,744

 
$
(4,442
)
 
$
9,302

Franchise rights
 
15,203

 
(3,569
)
 
11,634

 
15,284

 
(3,282
)
 
12,002

Reacquired franchise rights
 
243

 
(59
)
 
184

 
243

 
(49
)
 
194

Total amortized other intangible assets
 
$
29,153

 
$
(8,442
)
 
$
20,711

 
$
29,271

 
$
(7,773
)
 
$
21,498



During the twelve weeks ended March 27, 2018, the Company wrote-off $37,000 of favorable lease assets related to the termination of a lease and $0.1 million of franchise rights associated with the closure of one franchise-operated restaurant.
v3.8.0.1
Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
3 Months Ended
Mar. 27, 2018
Debt Disclosure [Abstract]  
Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
The Company’s long-term debt, capital lease obligations and deemed landlord financing liabilities at March 27, 2018 and January 2, 2018 consisted of the following (in thousands):
 
 
 
March 27, 2018
 
January 2, 2018
2015 Senior Credit Facility, net of debt discount of $680 and $747 and deferred financing costs of $230 and $252 at March 27, 2018 and January 2, 2018, respectively
 
$
153,090

 
$
152,001

Total outstanding indebtedness
 
153,090

 
152,001

Obligations under capital leases and deemed landlord financing liabilities
 
19,691

 
20,053

Total debt
 
172,781

 
172,054

Less: amounts due within one year
 
1,309

 
1,415

Total amounts due after one year, net
 
$
171,472

 
$
170,639

 
At March 27, 2018 and January 2, 2018, the Company assessed the amounts recorded under the 2015 Senior Credit Facility and determined that such amounts approximated fair value.
2015 Revolving Credit Facility
On August 4, 2015, the Company refinanced its existing senior credit facility and entered into a new credit agreement (the “Credit Agreement”). The Credit Agreement, which matures on August 4, 2020, provides for a $250 million revolving credit facility (the “2015 Senior Credit Facility”).

The Credit Agreement contains certain financial covenants, including the maintenance of a consolidated total lease adjusted leverage ratio and a consolidated fixed charge coverage ratio. The Company was in compliance with the financial covenants as of March 27, 2018. Substantially all of the assets of the Company are pledged as collateral under the 2015 Senior Credit Facility.
At March 27, 2018, the weighted-average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 3.4%. At March 27, 2018, the Company had a total of $77.8 million of availability for additional borrowings under the 2015 Senior Credit Facility as the Company had $154.0 million of outstanding borrowings and letters of credit outstanding of $18.2 million which reduce availability under the 2015 Senior Credit Facility.
v3.8.0.1
Derivative Instruments
3 Months Ended
Mar. 27, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
In June 2016, the Company entered into an interest rate cap agreement that became effective July 1, 2016, to hedge cash flows associated with interest rate fluctuations on variable rate debt, with a termination date of March 31, 2020 ("2016 Interest Rate Cap Agreement"). The 2016 Interest Rate Cap Agreement had an initial notional amount of $70.0 million of the 2015 Senior Credit Facility that effectively converted that portion of the outstanding balance of the 2015 Senior Credit Facility from variable rate debt to capped variable rate debt, resulting in a change in the applicable interest rate from an interest rate of one-month LIBOR plus the applicable margin (as provided by the 2015 Senior Credit Facility) to a capped interest rate of 2.00% plus the applicable margin. During the period from July 1, 2016 through March 27, 2018, the 2016 Interest Rate Cap Agreement had no hedge ineffectiveness.
2016 Interest Rate Cap Agreement
To ensure the effectiveness of the 2016 Interest Rate Cap Agreement, the Company elected the one-month LIBOR rate option for its variable rate interest payments on term balances equal to or in excess of the applicable notional amount of the interest rate cap agreement as of each reset date. The reset dates and other critical terms on the term loans perfectly match with the interest rate cap reset dates and other critical terms during the twelve weeks ended March 27, 2018.
During the twelve weeks ended March 27, 2018, the Company reclassified $6,000 of interest expense related to the hedges of these transactions into earnings. As of March 27, 2018, the Company was hedging forecasted transactions expected to occur through March 31, 2020. Assuming interest rates at March 27, 2018 remain constant, $0.3 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next 24 months. The Company intends to ensure that this hedge remains effective, therefore, approximately $0.1 million is expected to be reclassified into interest expense over the next 12 months.
The effective portion of the 2016 Interest Rate Cap Agreement through March 27, 2018 was included in accumulated other comprehensive income.
v3.8.0.1
Fair Value Measurements
3 Months Ended
Mar. 27, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
The fair values of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate their carrying amounts due to their short maturities. The carrying value of the 2015 Senior Credit Facility approximated fair value. The 2016 Interest Rate Cap Agreement is recorded at fair value in the Company’s consolidated balance sheets.
As of March 27, 2018 and January 2, 2018, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. For both periods, this included a derivative instrument related to interest rates. The Company determined the fair value of the interest rate cap contract based on counterparty quotes, with appropriate adjustments for any significant impact of nonperformance risk of the parties to the interest rate cap contract. Therefore, the Company categorized this interest rate cap contract as Level 2 fair value measurements. The fair value of the 2016 Interest Rate Cap Agreement was $0.6 million and $0.3 million at March 27, 2018 and January 2, 2018, respectively, and is included in other assets in the consolidated balance sheets.

The Company's assets and liabilities measured at fair value on a recurring basis as of March 27, 2018 and January 2, 2018 were as follows (in thousands):

 
March 27, 2018 (Unaudited)
 
Markets for Identical Assets
(Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
572

 
$

 
$
572

 
$

Total assets measured at fair value
$
572

 
$

 
$
572

 
$

 
 
 
 
 
 
 
 
 
January 2, 2018
 
Markets for Identical Assets (Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
332

 
$

 
$
332

 
$

Total assets measured at fair value
$
332

 
$

 
$
332

 
$

v3.8.0.1
Other Accrued Liabilities and Other Non-current Liabilities
3 Months Ended
Mar. 27, 2018
Other Liabilities Disclosure [Abstract]  
Other Accrued Liabilities and Other Non-current Liabilities
Other Accrued Liabilities and Other Non-current Liabilities
A summary of other accrued liabilities follows (in thousands):
 
 
 
March 27, 2018
 
January 2, 2018
Employee compensation and related items
 
$
10,544

 
$
12,945

Accrued insurance
 
6,713

 
7,232

Accrued sales tax
 
3,749

 
3,987

Accrued advertising
 
2,402

 
728

Accrued real property tax
 
1,905

 
1,331

Restaurant closure liability
 
493

 
794

Other
 
7,141

 
8,240

 
 
$
32,947

 
$
35,257


 
A summary of other non-current liabilities follows (in thousands):
 
 
 
March 27, 2018
 
January 2, 2018
Unfavorable lease liabilities
 
$
13,941

 
$
14,469

Insurance reserves
 
6,866

 
5,965

Deferred rent liability
 
3,146

 
2,972

Deferred development and initial franchise fees
 
2,549

 
1,335

Restaurant closure liability
 
1,890

 
2,030

Unearned trade discount, non-current
 
1,057

 
1,149

Deferred gift card income
 
836

 
1,234

Other
 
2,277

 
2,277

 
 
$
32,562

 
$
31,431

v3.8.0.1
Stock-Based Compensation
3 Months Ended
Mar. 27, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation
Stock-Based Compensation
In connection with the approval of the Business Combination, the Del Taco Restaurants, Inc. 2015 Omnibus Incentive Plan (the “2015 Plan”) was approved by shareholders to offer eligible employees, directors and consultants cash and stock-based incentive awards. Awards under the 2015 Plan are generally not restricted to any specific form or structure and could include, without limitation, stock options, stock appreciation rights, restricted stock, other stock-based awards, other cash-based compensation and performance awards. Under the plan, there were 3,300,000 shares of common stock reserved and authorized. At March 27, 2018, there were 1,374,844 shares of common stock available for grant under the 2015 Plan.
Stock-Based Compensation Expense
The total compensation expense related to the 2015 Plan was $1.3 million and $1.1 million for the twelve weeks ended March 27, 2018 and March 28, 2017, respectively.
Restricted Stock Awards
A summary of outstanding and unvested restricted stock activity as of March 27, 2018 and changes during the period from January 2, 2018 through March 27, 2018 are as follows:
 
 
 
Shares
 
Weighted-Average
Grant Date
Fair Value
Nonvested at January 2, 2018
 
1,088,910

 
$
11.92

Granted
 
20,000

 
12.29

Vested
 
(16,250
)
 
12.26

Forfeited
 

 

Nonvested at March 27, 2018
 
1,092,660

 
$
11.93


For both the twelve weeks ended March 27, 2018 and March 28, 2017, the Company made payments of $0.1 million related to tax withholding obligations for the vesting of restricted stock awards in exchange for 9,892 and 4,686 shares withheld, respectively. As of March 27, 2018, there was $7.8 million of unrecognized expense, net of estimated forfeitures, related to restricted stock awards which is expected to be recognized over a weighted-average remaining period of 2.3 years. The fair value of these awards was determined based on the Company’s stock price on the grant date.
Stock Options
A summary of stock option activity as of March 27, 2018 and changes during the period from January 2, 2018 through March 27, 2018 are as follows:
 
 
Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
 
 
 
 
 
(in years)
 
(in thousands)
Options outstanding at January 2, 2018
 
417,000

 
$
11.04

 
5.5
 
$
641

Granted
 

 

 

 

Exercised
 
(4,750
)
 
10.06

 

 

Forfeited/Expired
 
(26,500
)
 
11.25

 

 

Options outstanding at March 27, 2018
 
385,750

 
$
11.04

 
5.2
 
$
135

Options exercisable at March 27, 2018
 
115,498

 
$
10.12

 
4.5
 
$
37

Options exercisable and expected to vest at March 27, 2018
 
359,553

 
$
10.98

 
5.2
 
$
126


The aggregate intrinsic value in the table above is the amount by which the current market price of the Company's stock exceeds the exercise price on January 2, 2018 and March 27, 2018, respectively.
As of March 27, 2018, there was $0.7 million of unrecognized stock compensation expense, net of estimated forfeitures, related to stock option grants which is expected to be recognized over a weighted-average remaining period of 2.4 years.
v3.8.0.1
Shareholders' Equity
3 Months Ended
Mar. 27, 2018
Equity [Abstract]  
Shareholders' Equity
Shareholders’ Equity
On February 26, 2016, the Company's Board of Directors authorized a share repurchase program covering up to $25.0 million in the aggregate of the Company's common stock and warrants which was effective immediately and expires upon completion of the repurchase program, unless terminated earlier by the Board of Directors. On August 23, 2016, the Company announced that the Board of Directors increased the repurchase program by $25.0 million, to $50.0 million. Purchases under the program may be made in open market or privately negotiated transactions. During the twelve weeks ended March 27, 2018, the Company repurchased 9,811 warrants for an average price per warrant of $3.37 for an aggregate cost of approximately $33,000, including incremental direct costs to acquire the warrants. The Company expects to retire the repurchased shares and therefore has accounted for them as constructively retired as of March 27, 2018. As of March 27, 2018, there was approximately $20.9 million remaining under the share repurchase program. The Company has no obligations to repurchase shares or warrants under this authorization, and the timing and value of shares and warrants purchased will depend on the Company's stock price, warrant price, market conditions and other factors.
v3.8.0.1
Earnings per Share
3 Months Ended
Mar. 27, 2018
Earnings Per Share [Abstract]  
Earnings per Share
Earnings per Share
Basic income per share is calculated by dividing net income attributable to Del Taco’s common shareholders for the period by the weighted average number of common shares outstanding for the period. In computing dilutive income per share, basic income per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards, including warrants, restricted stock, common stock options and restricted stock units.
Below are basic and diluted net income per share for the periods indicated (amounts in thousands except share and per share data):
 
 
 
12 Weeks Ended
 
 
March 27, 2018
 
March 28, 2017
Numerator:
 
 
 
 
Net income
 
$
3,229

 
$
4,238

Denominator:
 
 
 
 
Weighted-average shares outstanding - basic
 
38,441,707

 
39,003,935

Dilutive effect of unvested restricted stock
 
306,583

 
454,810

Dilutive effect of stock options
 
21,454

 
23,190

Dilutive effect of warrants
 
454,326

 
893,126

Weighted-average shares outstanding - diluted
 
39,224,070

 
40,375,061

Net income per share - basic
 
0.08

 
$
0.11

Net income per share - diluted
 
0.08

 
$
0.10

Antidilutive stock options, unvested restricted stock awards and warrants excluded from the computations
 
128,048

 
36,500

Antidilutive stock options, unvested restricted stock and warrants were excluded from the computation of diluted net income per share due to the assumed proceeds from the award’s exercise or vesting being greater than the average market price of the common shares.
v3.8.0.1
Income Taxes
3 Months Ended
Mar. 27, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The effective income tax rates were 27.1% and 40.1% for the twelve weeks ended March 27, 2018 and March 28, 2017, respectively. The provision for income taxes consisted of income tax expense of $1.2 million and $2.8 million for the twelve weeks ended March 27, 2018 and March 28, 2017, respectively.
The income tax expense for the twelve weeks ended March 27, 2018 is driven by the estimated effective income tax rate of 27.1% which primarily consists of statutory federal and state tax rates based on apportioned income and the impact of non-tax deductible compensation to executives partially offset by federal targeted job credits. The income tax expense for the twelve weeks ended March 28, 2017 is driven by the estimated effective income tax rate of 40.1% which primarily consists of statutory federal and state tax rates based on apportioned income, partially offset by federal targeted job credits.
On December 22, 2017, the Tax Cuts and Jobs Act, (the “Act”) was enacted, reducing the U.S. federal corporate income tax rate from 35% to 21%, among other changes, for tax years beginning after December 31, 2017.
The SEC staff issued Staff Accounting Bulletin 118, ("SAB 118") which provides guidance on accounting for the tax effects of the Act for which the accounting under ASC 740, Income Taxes (“ASC 740”) is incomplete. To the extent that a company's accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act.
The Company re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The Company will continue to analyze additional information and guidance related to the Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of March 27, 2018, and the Company will continue to refine such amounts within the measurement period provided by SAB 118. The Company expects to complete its analysis no later than the fourth quarter of 2018.
Management believes it is more likely than not that all deferred tax assets will be realized and therefore no valuation allowance as of March 27, 2018 and January 2, 2018 is required.
v3.8.0.1
Commitments and Contingencies
3 Months Ended
Mar. 27, 2018
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
The primary claims in the Company’s business are workers’ compensation and general liabilities. These insurance programs are self-insured or high deductible programs with excess coverage that management believes is sufficient to adequately protect the Company. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured or high deductible limits, including provision for estimated claims incurred but not reported. Because of the uncertainty of the ultimate resolution of outstanding claims, as well as the uncertainty regarding claims incurred but not reported, it is possible that management’s provision for these losses could change materially. However, no estimate can currently be made of the range of additional losses.
Purchasing Commitments
The Company enters into various purchase obligations in the ordinary course of business, generally of short term nature. Those that are binding primarily relate to commitments for food purchases and supplies, amounts owed under contractor and subcontractor agreements, orders submitted for equipment for restaurants under construction, information technology service agreements and marketing initiatives, some of which are related to both company-operated and franchise-operated locations. The Company also has a long-term beverage supply agreement with a major beverage vendor whereby marketing rebates are provided to the Company and its franchisees based upon the volumes of purchases for system-wide restaurants which vary according to demand for beverage syrup. This contract has terms extending into 2021. The Company’s future estimated cash payments under existing contractual purchase obligations for goods and services as of March 27, 2018, are approximately $67.5 million. The Company has excluded agreements that are cancelable without penalty.
Litigation
In March 2014, a former Del Taco employee filed a purported class action complaint alleging that Del Taco has not appropriately provided meal breaks and failed to pay wages to its California hourly employees. Discovery is in process and Del Taco intends to assert all of its defenses to this threatened class action and the individual claims. Del Taco has several defenses to the action that it believes could prevent the certification of the class, as well as the potential assessment of any damages on a class basis. Legal proceedings are inherently unpredictable, and the Company is not able to predict the ultimate outcome or cost of the unresolved matter. However, based on management’s current understanding of the relevant facts and circumstances, the Company does not believe that these proceedings give rise to a probable or estimable loss and should not have a material adverse effect on the Company’s financial position, operations or cash flows. Therefore, Del Taco has not recorded any amount for the claim as of March 27, 2018.
The Company and its subsidiaries are parties to other legal proceedings incidental to their businesses, including claims alleging the Company’s restaurants do not comply with the Americans with Disabilities Act of 1990. In the opinion of management, based upon information currently available, the ultimate liability with respect to those other actions will not have a material effect on the operating results, cash flows or the financial position of the Company. However, due to the risks and uncertainties inherent in legal proceedings and litigation, actual results could differ from expectations.
v3.8.0.1
Basis of Presentation and Summary of Significant Accounting Policies (Policies)
3 Months Ended
Mar. 27, 2018
Accounting Policies [Abstract]  
Significant Accounting Policies [Text Block]
Summary of Significant Accounting Policies
Except for the accounting policies for revenue recognition discussed below that were updated as a result of adopting ASU No. 2014-09, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended January 2, 2018, filed with the SEC on March 15, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.
Revenue Recognition
Company restaurant sales from the operation of company-operated restaurants are recognized when food and service is delivered to customers. Franchise revenue is comprised of (i) development fees, (ii) franchise fees, (iii) on-going royalties, (iv) renewal fees and (v) other franchise revenue. Development and franchise fees, portions of which are collected in advance and are non-refundable, received pursuant to individual development agreements, grant the right to develop franchise-operated restaurants in future periods in specific geographic areas. Both development fees and franchise fees are deferred and recognized as revenue over the term of the franchise agreement and renewal fees are deferred and recognized over the term of the renewal agreement. Development fees and franchise fees are also generally recognized as revenue upon the termination of the development agreement with the franchisee. Royalties from franchise-operated restaurants are based on a percentage of franchise restaurant sales and are recognized in the period the related franchise-operated restaurant sales occur. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities. Franchise sublease income is comprised of rental income associated with properties leased or subleased to franchisees and is recognized as revenue on an accrual basis.
Advertising Costs
Franchisees pay a monthly fee to the Company typically equal to 4% of their restaurants’ net sales as contributions for advertising and promotional services that the Company provides and are included in revenue in franchise advertising contributions on the consolidated statements of comprehensive income. Company-operated restaurants contribute to the advertising fund on the same basis as franchise-operated restaurants.
Production costs for radio and television advertising are expensed when the commercials are initially aired. Costs of distribution of advertising are charged to expense on the date the advertising is aired or distributed. The portion of these costs related to company-operated restaurants, as well as other marketing-related expenses for advertising are included in occupancy and other operating expenses in the consolidated statements of comprehensive income. The portion of these costs related to franchise-operated restaurants for advertising are included in franchise advertising expenses on the consolidated statements of comprehensive income.
Revenue Recognition, Deferred Revenue [Policy Text Block]
Revenue Recognition
Company restaurant sales from the operation of company-operated restaurants are recognized when food and service is delivered to customers. Franchise revenue is comprised of (i) development fees, (ii) franchise fees, (iii) on-going royalties, (iv) renewal fees and (v) other franchise revenue. Development and franchise fees, portions of which are collected in advance and are non-refundable, received pursuant to individual development agreements, grant the right to develop franchise-operated restaurants in future periods in specific geographic areas. Both development fees and franchise fees are deferred and recognized as revenue over the term of the franchise agreement and renewal fees are deferred and recognized over the term of the renewal agreement. Development fees and franchise fees are also generally recognized as revenue upon the termination of the development agreement with the franchisee. Royalties from franchise-operated restaurants are based on a percentage of franchise restaurant sales and are recognized in the period the related franchise-operated restaurant sales occur. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities. Franchise sublease income is comprised of rental income associated with properties leased or subleased to franchisees and is recognized as revenue on an accrual basis.
Basis of Presentation
Basis of Presentation
The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). For additional information, these unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 2, 2018 ("2017 Form 10-K").
 
The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2018 is a fifty-two week period ending January 1, 2019. Fiscal year 2017 is the fifty-two week period ended January 2, 2018. In a fifty-two week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes sixteen weeks of operations. For fiscal year 2018, the Company’s accompanying financial statements reflect the twelve weeks ended March 27, 2018. For fiscal year 2017, the Company’s accompanying financial statements reflect the twelve weeks ended March 28, 2017.
Effective January 3, 2018 (the first day of fiscal year 2018), the Company adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), as discussed below in Note 2, using the modified retrospective method of transition. Current year results have been prepared in accordance with the new standards.
In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full fiscal year.
Principles of Consolidation
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances
Recently Issued and Recently Adopted Accounting Standards
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842). This guidance will result in key changes to lease accounting and will aim to bring leases onto balance sheets to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations as well as the assets it owns versus leases. The new leasing standard will be effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. The new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with certain practical expedients available. The Company is in the process of implementing changes to its systems and processes in conjunction with its review of existing lease agreements. The cumulative effect of adoption will be recorded to retained earnings in the period of adoption. Based on a preliminary assessment, the Company expects that substantially all of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a material increase in the assets and liabilities on the Company's consolidated balance sheets.  The Company is continuing its evaluation, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures. The Company will adopt ASU No. 2016-02 during the first quarter of fiscal 2019.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU No. 2016-04, Liabilities-Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products, which is designed to provide guidance and eliminate diversity in the accounting for the derecognition of financial liabilities related to certain prepaid stored-value products using a revenue-like breakage model. The Company adopted the requirements of the new standard in the first fiscal quarter of 2018, utilizing the cumulative effect transition method. There was no material impact as a result of adopting this standard.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides a comprehensive new revenue recognition model that requires a company to recognize revenue in an amount that reflects the consideration it expects to receive for the transfer of promised goods or services to its customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09, also known as FASB Accounting Standards Codification ("ASC") Topic 606 ("Topic 606") supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition ("Topic 605"). On January 3, 2018 (the first day of fiscal year 2018), the Company adopted the requirements of Topic 606, utilizing the modified retrospective method of transition. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, as detailed below. Topic 606 does not materially impact the recognition of company restaurant sales or franchise royalty income from franchisees included in franchise revenue. Franchise sublease income is not within the scope of this new guidance.
Franchise Fees
The adoption of Topic 606 changed the timing of the recognition of initial franchise fees, including franchise and development fees, and renewal fees, both included in franchise revenue in the consolidated statements of comprehensive income. Under Topic 605, initial franchise fees were recognized when all material obligations had been performed and conditions had been satisfied, typically when operations of a new franchise restaurant had commenced, and renewal fees were recognized when a renewal agreement became effective. Topic 606 requires franchise and renewal fees to be deferred and recognized over the term of the related franchise agreement for the respective restaurant. Franchise agreements typically have a term of 20 years. The impact of the deferral of initial franchise and renewal fees received in a given year may be offset by the recognition of revenue from fees retrospectively deferred from prior years. Upon adoption, the Company recorded approximately $0.7 million as a cumulative effect adjustment to opening retained earnings comprised of $1.0 million of deferred franchise fees included in other non-current liabilities on the consolidated balance sheet as of January 3, 2018 (the first day of fiscal year 2018) related to franchise and renewal fees previously recognized since the Business Combination on June 30, 2015, partially offset by an adjustment of $0.3 million to deferred taxes related to the $1.0 million of deferred franchise fees.
During the twelve weeks ended March 27, 2018, the Company recognized $13,000 in franchise revenue related to the amortization of the deferred franchise fees recognized at January 2, 2018 as a result of the adoption of Topic 606.


Deferred franchise fees are recognized straight-line over the term of the underlying agreement and the amount expected to be recognized in franchise revenue for amounts in deferred franchise fees as of March 27, 2018 is as follows (in thousands):
FY 2018
 
$
47

FY 2019
 
60

FY 2020
 
60

FY 2021
 
59

FY 2022
 
59

Thereafter
 
702

Total Deferred Franchise Fees
 
$
987


Advertising
The adoption of the new guidance changed the reporting of advertising contributions from franchisees and the related advertising expenses, which were not previously included in the consolidated statements of comprehensive income. Topic 606 requires these franchise advertising contributions and expenses to be reported on a gross basis in the consolidated statements of comprehensive income, which impacted our total revenues and expenses. However, the franchise advertising contributions and expenses are expected to be largely offsetting and therefore does not have a significant impact on reported net income. The current year impact to revenue for franchise advertising contributions and to expenses for franchise advertising expenses for the twelve weeks ended March 27, 2018 was an increase of $2.9 million for both as a result of applying Topic 606.
Other Revenue Transactions
Certain other franchise expenses have previously been recorded net of the related fees received from franchisees. Under Topic 606, the Company is now including these revenues and expenditures on a gross basis within the consolidated statements of comprehensive income. While this change materially impacted the gross amount of reported franchise revenue and related expenses on the consolidated statements of comprehensive income, the impact is an offsetting increase to both revenue and expense such that there is not a significant, if any, impact on operating income and net income. The current year impact to revenues for the twelve weeks ended March 27, 2018 was an increase of $0.2 million as a result of applying Topic 606, with an offsetting increase in expenses.
Comparison To Amounts if Previous Standards Had Been in Effect

The following tables reflect the impact of the adoption of Topic 606 on the Company's consolidated balance sheet as of March 27, 2018 and on the Company's consolidated statements of comprehensive income and cash flows from operating activities for the twelve weeks ended March 27, 2018 and the amounts as if Topic 605 was in effect ("Amounts Under Previous Standards") (in thousands):


 
 
12 Weeks Ended March 27, 2018
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Liabilities and shareholders’ equity
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
16,040

 
$

 
$
16,040

Other accrued liabilities
 
32,947

 

 
32,947

Current portion of capital lease obligations and deemed landlord financing liabilities
 
1,309

 

 
1,309

Total current liabilities
 
50,296

 

 
50,296

Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net
 
171,472

 

 
171,472

Deferred income taxes
 
68,644

 
260

 
68,904

Other non-current liabilities
 
32,562

 
(962
)
 
31,600

Total liabilities
 
322,974

 
(702
)
 
322,272

Shareholders’ equity:
 
 
 
 
 
 
Preferred stock
 

 

 

Common stock
 
4

 

 
4

Additional paid-in capital
 
350,543

 

 
350,543

Accumulated other comprehensive income
 
194

 

 
194

Retained earnings
 
69,419

 
702

 
70,121

Total shareholders’ equity
 
420,160

 
702

 
420,862

Total liabilities and shareholders’ equity
 
$
743,134

 
$

 
$
743,134



 
 
12 Weeks Ended March 27, 2018
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Revenue:
 
 
 
 
 
 
Company restaurant sales
 
$
105,109

 
$

 
$
105,109

Franchise revenue
 
3,792

 
(161
)
 
3,631

Franchise advertising contributions
 
2,936

 
(2,936
)
 

Franchise sublease income
 
717

 

 
717

Total revenue
 
112,554

 
(3,097
)
 
109,457

Operating expenses:
 
 
 
 
 
 
Restaurant operating expenses:
 
 
 
 
 
 
Food and paper costs
 
28,973

 

 
28,973

Labor and related expenses
 
34,818

 

 
34,818

Occupancy and other operating expenses
 
21,986

 

 
21,986

General and administrative
 
10,429

 
(153
)
 
10,276

Franchise advertising expenses
 
2,936

 
(2,936
)
 

Depreciation and amortization
 
5,914

 

 
5,914

Occupancy and other - franchise subleases
 
638

 

 
638

Pre-opening costs
 
442

 

 
442

Restaurant closure charges, net
 
(13
)
 

 
(13
)
Loss on disposal of assets, net
 
93

 

 
93

Total operating expenses
 
106,216

 
(3,089
)
 
103,127

Income from operations
 
6,338

 
(8
)
 
6,330

Other expense
 
 
 
 
 
 
Interest expense
 
1,910

 

 
1,910

Total other expense
 
1,910

 

 
1,910

Income from operations before provision for income taxes
 
4,428

 
(8
)
 
4,420

Provision for income taxes
 
1,199

 
(2
)
 
1,197

Net income
 
3,229

 
(6
)
 
3,223

Other comprehensive income:
 
 
 
 
 
 
Change in fair value of interest rate cap, net of tax
 
174

 

 
174

Reclassification of interest rate cap amortization included in net income
 
6

 

 
6

Total other comprehensive income
 
180

 

 
180

Comprehensive income
 
$
3,409

 
$
(6
)
 
$
3,403

Earnings per share:
 
 
 
 
 
 
Basic
 
$
0.08

 
$

 
$
0.08

Diluted
 
$
0.08

 
$

 
$
0.08



 
 
12 Weeks Ended March 27, 2018
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Operating activities
 
 
 
 
 
 
Net income
 
$
3,229

 
$
(6
)
 
$
3,223

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
5,914

 

 
5,914

Amortization of favorable and unfavorable lease assets and liabilities, net
 
(118
)
 

 
(118
)
Amortization of deferred financing costs and debt discount
 
95

 

 
95

Stock-based compensation
 
1,274

 

 
1,274

Deferred income taxes
 
266

 
(2
)
 
264

Loss on disposal of assets, net
 
93

 

 
93

Restaurant closure charges
 
33

 

 
33

Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts and other receivables, net
 
1,017

 

 
1,017

Inventories
 
(27
)
 

 
(27
)
Prepaid expenses and other current assets
 
3,568

 

 
3,568

Other assets
 
(16
)
 

 
(16
)
Accounts payable
 
(2,609
)
 

 
(2,609
)
Other accrued liabilities
 
(973
)
 

 
(973
)
Other non-current liabilities
 
654

 
8

 
662

Net cash provided by operating activities
 
$
12,400

 
$

 
$
12,400

Advertising Costs, Policy [Policy Text Block]
Advertising Costs
Franchisees pay a monthly fee to the Company typically equal to 4% of their restaurants’ net sales as contributions for advertising and promotional services that the Company provides and are included in revenue in franchise advertising contributions on the consolidated statements of comprehensive income. Company-operated restaurants contribute to the advertising fund on the same basis as franchise-operated restaurants.
Production costs for radio and television advertising are expensed when the commercials are initially aired. Costs of distribution of advertising are charged to expense on the date the advertising is aired or distributed. The portion of these costs related to company-operated restaurants, as well as other marketing-related expenses for advertising are included in occupancy and other operating expenses in the consolidated statements of comprehensive income. The portion of these costs related to franchise-operated restaurants for advertising are included in franchise advertising expenses on the consolidated statements of comprehensive income.
v3.8.0.1
Basis of Presentation and Summary of Significant Accounting Policies Revenue Recognition (Tables)
3 Months Ended
Mar. 27, 2018
RevenueRemainingPerformanceObligationExpectedTimingOfSatisfaction [Abstract]  
Schedule of New Accounting Pronouncements and Changes in Accounting Principles [Table Text Block]
The following tables reflect the impact of the adoption of Topic 606 on the Company's consolidated balance sheet as of March 27, 2018 and on the Company's consolidated statements of comprehensive income and cash flows from operating activities for the twelve weeks ended March 27, 2018 and the amounts as if Topic 605 was in effect ("Amounts Under Previous Standards") (in thousands):


 
 
12 Weeks Ended March 27, 2018
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Liabilities and shareholders’ equity
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable