DEL TACO RESTAURANTS, INC., 10-K filed on 3/18/2019
Annual Report
v3.19.1
Document and Entity Information - USD ($)
12 Months Ended
Jan. 01, 2019
Mar. 13, 2019
Jun. 19, 2018
Document And Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Jan. 01, 2019    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Trading Symbol TACO    
Entity Registrant Name Del Taco Restaurants, Inc.    
Entity Central Index Key 0001585583    
Current Fiscal Year End Date --01-01    
Entity Well-known Seasoned Issuer No    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Filer Category Accelerated Filer    
Entity Common Stock, Shares Outstanding   37,121,234  
Entity Public Float     $ 442,800,000
Entity Emerging Growth Company false    
Entity Small Business false    
Entity Shell Company false    
v3.19.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Jan. 01, 2019
Jan. 02, 2018
Current assets:    
Goodwill $ 321,531 $ 320,638
Successor    
Current assets:    
Cash and cash equivalents 7,153 6,559
Accounts and other receivables, net 3,167 3,828
Inventories 2,932 2,712
Prepaid expenses and other current assets 4,935 6,784
Assets held for sale 14,794 0
Total current assets 32,981 19,883
Property and equipment, net 161,429 156,124
Goodwill 321,531 320,638
Trademarks 220,300 220,300
Intangible assets, net 18,507 21,498
Other assets, net 4,208 3,881
Total assets 758,956 742,324
Current liabilities:    
Accounts payable 19,877 18,759
Other accrued liabilities 34,785 35,257
Current portion of capital lease obligations and deemed landlord financing liabilities 1,033 1,415
Total current liabilities 55,695 55,431
Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net 178,664 170,639
Deferred income taxes 69,471 68,574
Other non-current liabilities 32,852 31,431
Total liabilities 336,682 326,075
Commitments and contingencies
Shareholders’ equity:    
Preferred Stock, Value, Issued 0 0
Common Stock, Value, Issued 4 4
Additional paid-in capital 336,941 349,334
Accumulated other comprehensive income 180 14
Retained earnings 85,149 66,897
Total shareholders’ equity 422,274 416,249
Total liabilities and shareholders’ equity $ 758,956 $ 742,324
v3.19.1
Consolidated Balance Sheets (Parenthetical) - Successor - $ / shares
Jan. 01, 2019
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) 37,305,342 38,434,274
Common stock, shares outstanding (in shares) 37,305,342 38,434,274
v3.19.1
Consolidated Statements of Comprehensive Income (Loss) - USD ($)
3 Months Ended 4 Months Ended 6 Months Ended 12 Months Ended
Sep. 11, 2018
Jun. 19, 2018
Mar. 27, 2018
Sep. 12, 2017
Jun. 20, 2017
Mar. 28, 2017
Jan. 01, 2019
Jan. 02, 2018
Dec. 29, 2015
Jan. 01, 2019
Jan. 02, 2018
Jan. 03, 2017
Restaurant operating expenses:                        
Pre-opening costs                     $ 1,591,000  
Successor                        
Revenue:                        
Total revenue $ 117,830,000 $ 117,813,000 $ 112,554,000 $ 110,988,000 $ 108,581,000 $ 105,345,000 $ 157,293,000 $ 146,542,000   $ 505,490,000 471,456,000 $ 452,083,000
Restaurant operating expenses:                        
Labor and related expenses                   151,954,000 145,012,000 135,725,000
Occupancy and other operating expenses                   97,745,000 92,825,000 88,908,000
General and administrative                   43,773,000 38,154,000 37,220,000
Franchise advertising expenses                   13,300,000 0 0
Depreciation and amortization                   25,794,000 23,362,000 23,129,000
Occupancy and other - franchise subleases and other                   3,167,000 2,608,000 2,207,000
Pre-opening costs                 $ 700,000 1,584,000 1,591,000 731,000
Impairment of long-lived assets                   3,861,000 0 0
Restaurant closure charges, net                   394,000 191,000 435,000
Loss on disposal of assets, net                   1,012,000 1,075,000 312,000
Total operating expenses                   471,457,000 430,209,000 408,783,000
Income from operations 9,195,000 7,804,000 6,338,000 9,533,000 10,276,000 8,613,000 10,696,000 12,825,000   34,033,000 41,247,000 43,300,000
Other expense (income), net:                        
Interest expense                   9,075,000 7,200,000 6,327,000
Other income                   (660,000) 0 0
Transaction-related costs                   0 0 731,000
Total other expense, net                   8,415,000 7,200,000 7,058,000
Income from operations before provision (benefit) for income taxes                   25,618,000 34,047,000 36,242,000
Provision (benefit) for income taxes                 15,329,000 6,659,000 (15,824,000) 15,329,000
Net income $ 5,874,000 $ 4,210,000 $ 3,229,000 $ 5,101,000 $ 5,330,000 $ 4,238,000 $ 5,646,000 $ 35,202,000 $ 20,913,000 18,959,000 49,871,000 20,913,000
Other comprehensive income (loss):                        
Change in fair value of interest rate cap, net of tax                   122,000 (162,000) 172,000
Reclassification of interest rate cap amortization included in net income, net of tax                   44,000 4,000 0
Total other comprehensive income (loss), net                   166,000 (158,000) 172,000
Comprehensive income                   $ 19,125,000 $ 49,713,000 $ 21,085,000
Earnings per share:                        
Basic (in dollars per share) $ 0.15 $ 0.11 $ 0.08 $ 0.13 $ 0.14 $ 0.11 $ 0.15 $ 0.91 $ 0.54 $ 0.50 $ 1.29 $ 0.54
Diluted (in dollars per share) $ 0.15 $ 0.11 $ 0.08 $ 0.13 $ 0.13 $ 0.10 $ 0.15 $ 0.89 $ 0.53 $ 0.49 $ 1.25 $ 0.53
Weighted-average shares outstanding:                        
Basic (in shares)                 38,725,541 38,106,057 38,689,508 38,725,541
Diluted (in shares)                 39,274,649 38,683,959 39,949,907 39,274,649
Company restaurant sales | Successor                        
Revenue:                        
Revenue                   $ 471,193,000 $ 452,148,000 $ 434,064,000
Franchise revenue | Successor                        
Revenue:                        
Revenue                   17,569,000 16,464,000 15,676,000
Franchise advertising contributions | Successor                        
Revenue:                        
Revenue                   13,300,000 0 0
Franchise sublease and other income | Successor                        
Revenue:                        
Revenue                   3,428,000 2,844,000 2,343,000
Food and paper costs | Successor                        
Restaurant operating expenses:                        
Food and paper costs                   $ 128,873,000 $ 125,391,000 $ 120,116,000
v3.19.1
Consolidated Statements of Shareholders' Equity - Successor - USD ($)
Total
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Loss
Retained Earnings (Accumulated Deficit)
Beginning Balance at Dec. 29, 2015 $ 368,377,000 $ 4,000 $ 372,260,000 $ 0 $ (3,887,000)
Beginning Balance, Shares at Dec. 29, 2015   38,802,425      
Net income (loss) 20,913,000       20,913,000
Stock-based compensation 4,096,000 $ 0 4,096,000    
Common stock of Del Taco Restaurants, Inc. released from possible redemption, Shares   0      
Other comprehensive income (loss), net of tax 172,000     172,000  
Comprehensive income (loss) 21,085,000        
Stock-based compensation 5,000   5,000    
Tax withholdings on restricted stock vesting (916,000)   (916,000)    
Restricted stock awards vested, shares   164,336      
Exercise of stock options, shares   500      
Issuance of common stock (in shares)   1,533,542      
Issuance of common stock in exchange for warrants 0 $ 0 0    
Repurchase of common stock, shares   (1,347,300)      
Repurchase of common stock, value (15,314,000)   (15,314,000)    
Ending Balance at Jan. 03, 2017 377,333,000 $ 4,000 360,131,000 172,000 17,026,000
Ending Balance, Shares at Jan. 03, 2017   39,153,503      
Net income (loss) 49,871,000       49,871,000
Other comprehensive income (loss), net of tax (158,000)     (158,000)  
Comprehensive income (loss) 49,713,000        
Stock-based compensation 4,876,000   4,876,000    
Tax withholdings on restricted stock vesting (1,923,000)   (1,923,000)    
Restricted stock awards vested, shares   257,518      
Restricted stock awards vested, value   $ 0      
Exercise of stock options, shares   9,750      
Exercise of stock options, value 99,000   99,000    
Repurchase of common stock, shares   (986,497)      
Stock Repurchased During Period, Value   $ 0      
Repurchase of common stock, value (13,849,000)   (13,849,000)    
Ending Balance at Jan. 02, 2018 416,249,000 $ 4,000 349,334,000 14,000 66,897,000
Ending Balance, Shares at Jan. 02, 2018   38,434,274      
Adjustment for adoption of new revenue recognition standard, net of tax (707,000)       (707,000)
Net income (loss) 18,959,000       18,959,000
Other comprehensive income (loss), net of tax 166,000     166,000  
Comprehensive income (loss) 19,125,000        
Stock-based compensation 6,079,000   6,079,000    
Tax withholdings on restricted stock vesting (2,378,000)   (2,378,000)    
Restricted stock awards vested, shares   257,389      
Restricted stock awards vested, value   $ 0      
Exercise of stock options, shares   21,750      
Exercise of stock options, value 222,000   222,000    
Repurchase of common stock, shares   (1,408,071)      
Stock Repurchased During Period, Value   $ 0      
Repurchase of common stock, value (16,316,000)   (16,316,000)    
Ending Balance at Jan. 01, 2019 $ 422,274,000 $ 4,000 $ 336,941,000 $ 180,000 $ 85,149,000
Ending Balance, Shares at Jan. 01, 2019   37,305,342      
v3.19.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Jan. 01, 2019
Jan. 02, 2018
Jan. 03, 2017
Investing activities      
Proceeds from Divestiture of Businesses   $ 2,192  
Successor      
Operating activities      
Net income $ 18,959 49,871 $ 20,913
Adjustments to reconcile net income to net cash provided by operating activities:      
Allowance for doubtful accounts 45 0 0
Depreciation and amortization 25,794 23,362 23,129
Amortization of favorable and unfavorable lease assets and liabilities, net (767) (809) (607)
Amortization of deferred financing costs and interest rate cap 445 389 392
Stock-based compensation 6,079 4,876 4,096
Impairment of long-lived assets 3,861 0 0
Deferred income taxes 1,097 (22,594) 10,741
Loss on disposal of assets, net 1,012 1,075 312
Restaurant closure charges, net (449) (379) (179)
Other Noncash Income (523) 0 0
Changes in operating assets and liabilities:      
Accounts and other receivables, net 616 313 (921)
Inventories (220) 6 88
Prepaid expenses and other current assets 1,949 (2,580) (659)
Other assets (125) (162) (59)
Accounts payable 2 2,332 (404)
Other accrued liabilities (488) (1,526) 3,733
Other non-current liabilities 3,647 2,856 (3,387)
Net cash provided by operating activities 61,832 57,788 57,546
Investing activities      
Purchases of property and equipment (48,032) (50,627) (45,853)
Proceeds from disposal of property and equipment 1,323 9,907 3,423
Purchases of other assets (1,474) (1,033) (1,333)
Acquisition of franchisees (1,841) (1,128) (3,891)
Proceeds from Divestiture of Businesses 0 2,192 0
Net cash used in investing activities (50,024) (40,689) (47,654)
Financing activities      
Proceeds from deemed landlord financing liabilities 2,675 3,925 1,974
Repurchase of common stock and warrants (16,316) (13,849) (15,314)
Payment of tax withholding related to restricted stock vesting, option exercises and distribution of restricted stock units (2,378) (1,923) (916)
Payments on capital leases and deemed landlord financing (1,417) (1,587) (1,728)
Proceeds from revolving credit facility 31,000 31,500 24,000
Payments on revolving credit facility (25,000) (37,500) (19,000)
Payment for interest rate cap 0 0 (312)
Proceeds from Stock Options Exercised 222 99 5
Net cash used in financing activities (11,214) (19,335) (11,291)
Increase (decrease) in cash and cash equivalents 594 (2,236) (1,399)
Cash and cash equivalents at beginning of period 6,559 8,795 10,194
Cash and cash equivalents at end of period 7,153 6,559 8,795
Supplemental cash flow information:      
Cash paid during the period for interest 8,823 6,873 6,328
Cash paid during the period for income taxes, net of tax refunds 3,061 9,441 3,531
Supplemental schedule of non-cash activities:      
Increase (decrease) of purchases of property and equipment in accounts payable and accrued liabilities, net 556 2,305 64
Write-offs against bad debt reserves 26 0 72
Amortization of interest rate cap into net income, net of tax 44 4 0
Change in other asset for fair value of interest rate cap recorded to other comprehensive (loss) income, net of tax $ 122 $ (162) $ 172
v3.19.1
Description of Business
12 Months Ended
Jan. 01, 2019
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”) one of which includes Del Taco LLC which has all of the material assets and operations of the Company. The Company develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants. At January 1, 2019, there were 322 company-operated and 258 franchise-operated Del Taco restaurants located in 14 states, including one franchise-operated unit in Guam. At January 2, 2018, there were 312 company-operated and 252 franchise-operated Del Taco restaurants located in 14 states, including one franchise-operated unit in Guam.
The Company was originally incorporated in Delaware on August 2, 2013 as a special purpose acquisition company, formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more businesses. On June 30, 2015 (the "Closing Date"), the Company consummated its business combination with Del Taco Holdings, Inc. (“DTH”) pursuant to the agreement and plan of merger dated as of March 12, 2015 by and among LAC, Levy Merger Sub, LLC (“Levy Merger Sub”), LAC’s wholly owned subsidiary, and DTH (the “Merger Agreement”). Under the Merger Agreement, Levy Merger Sub merged with and into DTH, with DTH surviving the merger as a wholly-owned subsidiary of the Company (the “Business Combination” or “Merger”). In connection with the closing of the Business Combination, the Company changed its name from Levy Acquisition Corp. to Del Taco Restaurants, Inc.
v3.19.1
Basis of Presentation and Summary of Significant Accounting Policies
12 Months Ended
Jan. 01, 2019
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 Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal years 2018 and 2017 are both fifty-two week periods. 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. Fiscal year 2016 is a fifty-three week period. In a fifty-three week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes seventeen weeks of operations. For fiscal year 2018, the Company’s financial statements reflect the fifty-two weeks ended January 1, 2019. For fiscal year 2017, the Company's financial statements reflect the fifty-two weeks ended January 2, 2018. For fiscal year 2016, the Company’s financial statements reflect the fifty-three weeks ended January 3, 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.
Principles of Consolidation
The 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 Securities and Exchange Commission (“SEC”). The accompanying 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.


SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Variable Interest Entities
In accordance with Accounting Standards Codification ("ASC") 810, Consolidation, the Company applies the guidance related to variable interest entities ("VIE"), which defines the process for how an enterprise determines which party consolidates a VIE as primarily a qualitative analysis. The enterprise that consolidates the VIE (the primary beneficiary) is defined as the enterprise with (1) the power to direct activities of the VIE that most significantly affect the VIE's economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The Company franchises its operations through franchise agreements entered into with franchisees and therefore, the Company does not possess any ownership interests in franchise entities or other affiliates. The franchise agreements are designed to provide the franchisee with key decision-making ability to enable it to oversee its operations and to have a significant impact on the success of the franchise, while the Company’s decision-making rights are related to protecting the Company’s brand. Based upon the Company’s analysis of all the relevant facts and considerations of the franchise entities, the Company has concluded that the franchise agreements are not variable interest entities.
Revenue Recognition
Company Restaurant Sales from the operation of company-operated restaurants are recognized when food and service is delivered to customers. The Company reports revenue net of promotional allowances as well as sales taxes collected from customers and remitted to governmental taxing authorities.
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 related franchise agreement for the respective restaurant 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. Deferred development fees and deferred franchise fees are included in other non-current liabilities on the consolidated balance sheets. 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. To a lessor extent, Franchise Revenue also includes pass-through fees for services such as software maintenance and technology subscriptions since we are considered the principal related to the purchase and sale of the services to the franchisee and have no remaining performance obligations. The related expenses are recognized in general and administrative expenses.
Franchise Sublease and Other Income is comprised of rental income associated with properties leased or subleased to franchisees and is recognized as revenue on an accrual basis. In addition, Franchise Advertising Contributions consist of a percentage of franchise restaurant's net sales, typically 4%, paid to the Company for advertising and promotional services that the Company provides.  The offset is recorded to Franchise Advertising Expenses. As well as other franchise income related to information technology hardware such as point of sale equipment, tablets, kitchen display systems, servers, scanners and printers that we occasionally purchase from third party vendors and then sell to franchisees. Since we are considered the principal related to the purchase and sale of the hardware to the franchisee and have no remaining performance obligations, the franchisee reimbursement is recognized as Franchise Sublease and Other Income upon transfer of the hardware. The related expenses are recognized in Occupancy and Other - Franchise Subleases and Other.
Gift Cards
The Company sells gift cards to customers in its restaurants. The gift cards sold to customers have no stated expiration dates and are subject to potential escheatment laws in the various jurisdictions in which the Company operates. Deferred gift card income totaled $2.8 million and $2.5 million as of January 1, 2019 and January 2, 2018, respectively. The current portion of the deferred gift card income is included in other accrued liabilities on the consolidated balance sheets and totaled $1.5 million and $1.3 million as of January 1, 2019 and January 2, 2018. The non-current portion of the deferred gift card income was $1.3 million and $1.2 million as January 1, 2019 and January 2, 2018, respectively, and is included in other non-current liabilities on the consolidated balance sheets. The Company recognizes revenue from gift cards: (i) when the gift card is redeemed by the customer; or (ii) under the delayed recognition method, when the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and the Company determines that there is not a legal obligation to remit the unredeemed gift cards to the relevant jurisdiction. The determination of the gift card breakage rate is based upon Company specific historical redemption patterns. Recognized gift card breakage revenue was not significant to any period presented in the consolidated statements of comprehensive income. Any future revisions to the estimated breakage rate may result in changes in the amount of breakage revenue recognized in future periods but is not expected to be significant.
Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Amounts receivable from credit card issuers are typically converted to cash within 2 to 4 days of the original sales transaction and are considered to be cash equivalents.
Accounts and Other Receivables, Net
Accounts and other receivables, net consist primarily of receivables from franchisees, sublease tenants, a vendor and landlords. Receivables from franchisees include sublease rents, royalties, services and contractual marketing fees associated with the franchise agreements. Sublease tenant receivables relate to subleased properties where the Company is a party and obligated on the primary lease agreement. The vendor receivable is for earned reimbursements from a vendor and the landlord receivables are for earned landlord reimbursement related to restaurants opened. The allowance for doubtful accounts is based on historical experience and a review on a specific identification basis of the collectability of existing receivables and totaled $0.1 million as of both January 1, 2019 and January 2, 2018.
Vendor Allowances
The Company receives support from one of its vendors in the form of reimbursements. The reimbursements are agreed upon with the vendor, but do not represent specific, incremental, identifiable costs incurred by the Company in selling the vendor’s products. Such reimbursements are recorded as a reduction of the costs of purchasing the vendor’s products. The non-current portion of reimbursements received by the Company in advance is included in other non-current liabilities on the consolidated balance sheets and totaled $0.7 million and $1.1 million as of January 1, 2019 and January 2, 2018, respectively. The current portion of these reimbursements is included in other accrued liabilities on the consolidated balance sheets and totaled $0.4 million as of both January 1, 2019 and January 2, 2018.
Inventories
Inventories, consisting of food items, packaging and beverages, are valued at the lower of cost (first-in, first-out method) or market.
Assets Held for Sale
Assets held for sale represent the costs for three restaurants opened during 2018 that the Company plans to sell and lease back within the next year. Gains realized on sale-leaseback transactions are deferred and amortized over the lease terms and losses are recognized immediately in accordance with ASC 840, Leases. Assets held for sale also includes the net book value of property and equipment the Company plans to sell within the next year for 13 company-operated restaurants that the Company plans to sell to existing franchisees within the next year. If the determination is made that the Company no longer expects to sell an asset within the next year, the asset is reclassified out of assets held for sale. Assets held for sale consisted of the following at each fiscal year-end (in thousands):
 
 
January 1, 2019
 
January 2, 2018
Assets held for sale and leaseback
 
$
12,771

 
$

Other property and equipment held for sale
 
2,023

 

Assets held for sale
 
$
14,794

 
$


Property and Equipment
Property and equipment includes land, buildings, leasehold improvements, restaurant and other equipment, restaurant property leased to others and buildings under capital leases. Land, buildings, leasehold improvements, property and equipment acquired in business combinations are initially recorded at their estimated fair value. Land, buildings, leasehold improvements, property and equipment acquired or constructed in the normal course of business are initially recorded at cost. The Company provides for depreciation and amortization based on the estimated useful lives of assets using the straight-line method.
 
Estimated useful lives for property and equipment are as follows:
 
Buildings
  
20–35 years
Leasehold improvements
  
Shorter of useful life (typically 20 years) or lease term
Buildings under capital leases
  
Shorter of useful life (typically 20 years) or lease term
Restaurant and other equipment
  
3–15 years

The estimated useful lives for leasehold improvements are based on the shorter of the estimated useful lives of the assets or the related lease term, which generally includes reasonably assured option periods expected to be exercised by the Company when the Company would suffer an economic penalty if not exercised. Depreciation and amortization expense associated with property and equipment totaled $23.1 million for the fifty-two weeks ended January 1, 2019, $21.0 million for the fifty-two weeks ended January 2, 2018 and $20.6 million for the fifty-three weeks ended January 3, 2017. These amounts include $0.9 million for the fifty-two weeks ended January 1, 2019, $1.2 million for the fifty-three weeks ended January 2, 2018 and $1.4 million for the fifty-three weeks ended January 3, 2017 related to buildings under capital leases. Accumulated depreciation and amortization associated with property and equipment includes $2.2 million and $2.5 million related to buildings under capital leases as of January 1, 2019 and January 2, 2018, respectively.
The Company capitalizes construction costs which consist of internal payroll and payroll related costs and travel costs related to the successful acquisition, development, design and construction of the Company's new restaurants. Capitalized construction costs totaled $1.6 million for both the fifty-two weeks ended January 1, 2019 and fifty-two weeks ended January 2, 2018, and $1.3 million for the fifty-three weeks ended January 3, 2017. If the Company subsequently makes a determination that a site for which development costs have been capitalized will not be acquired or developed, any previously capitalized development costs are expensed and included in general and administrative expenses in the consolidated statements of comprehensive income. The Company capitalizes interest in connection with the construction of its restaurants. Interest capitalized totaled approximately $0.1 million for each of the fifty-two weeks ended January 1, 2019, the fifty-two weeks ended January 2, 2018, and the fifty-three weeks ended January 3, 2017.
Gains and losses on the disposal of assets are recorded as the difference between the net proceeds received, if any, and net carrying values of the assets disposed and are included in loss on disposal of assets, net in the consolidated statements of comprehensive income.
Deferred Financing Costs
Deferred financing costs represent third-party debt costs that are capitalized and amortized to interest expense over the associated term of the debt agreement using the effective interest method. Deferred financing costs, along with lender debt discount, are presented net of the related debt balances on the consolidated balance sheets.
Goodwill and Trademarks
The Company’s goodwill and trademarks are not amortized, but tested annually for impairment and tested more frequently for impairment if events and circumstances indicate that the asset might be impaired. The Company conducts annual goodwill and trademark impairment tests in the fourth quarter of each fiscal year or whenever an indicator of impairment exists.
In assessing potential goodwill impairment, the Company has the option to first assess the qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of net assets, including goodwill, is less than its carrying amount. If the qualitative factors indicate that it is more likely than not that the fair value of net assets, including goodwill, is less than its carrying amount, the Company performs a two-step impairment test of goodwill. In the first step, the Company estimates the fair value of net assets, including goodwill, and compares it to the carrying value of net assets, including goodwill. If the carrying value exceeds the estimated fair value of net assets, including goodwill, the second step is performed to measure the amount of the impairment loss, if any. In the second step, the amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value.
The methods the Company uses to estimate fair value include discounted future cash flows analysis and market valuation based on similar companies. Key assumptions included in the cash flow model include future revenues, operating costs, working capital changes, capital expenditures and a discount rate that approximates the Company's weighted average cost of capital.
The Company performs an annual impairment test for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise.
In assessing potential impairments for the fourth quarter test for 2018, the Company performed a qualitative assessment to determine whether it is more likely than not that the fair value of goodwill or indefinite-lived trademark are less than the carrying amount. Upon completion of the fourth quarter 2018 annual impairment assessment, the Company determined that no goodwill or trademark impairment was indicated. As of January 1, 2019, the Company is not aware of any significant indicators of impairment that exist for goodwill or trademark that would require additional analysis.
Intangible Assets, Net
Intangible assets primarily include favorable lease assets and franchise rights. Favorable lease assets represent the fair values of acquired lease contracts having contractual rents that are favorable compared to fair market rents as of the Closing Date of the Business Combination, and are amortized on a straight-line basis over the remaining lease terms to expense in the consolidated statements of comprehensive income. Franchise rights, which represent the fair value of franchise agreements based on the projected royalty revenue stream as of the Closing Date of the Business Combination, are amortized on a straight-line basis to depreciation and amortization expense in the consolidated statements of comprehensive income over the remaining term of the franchise agreements.
Other Assets, Net
Other assets, net consist of security deposits and other capitalized costs. The Company capitalizes certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use when both the preliminary project stage is completed and it is probable that the software will be used as intended. Capitalized software costs include only (i) external direct costs of materials and services utilized in developing or obtaining computer software, and (ii) compensation and related benefits for employees who are directly associated with the software projects. Capitalized software costs are amortized over the estimated useful life, typically 3 years. The net carrying value of capitalized software costs for the Company totaled $2.3 million and $2.1 million as of January 1, 2019 and January 2, 2018, respectively, and is included in other assets, net in the consolidated balance sheets. Capitalized software costs totaled $1.5 million for the fifty-two weeks ended January 1, 2019, $1.0 million for the fifty-two weeks ended January 2, 2018 and $1.3 million for the fifty-three weeks ended January 3, 2017. Amortization expenses totaled $1.2 million for the fifty-two weeks ended January 1, 2019, $1.0 million for the fifty-two weeks ended January 2, 2018 and $0.9 million for the fifty-three weeks ended January 3, 2017.
Long-Lived Assets
Long-lived assets, including property and equipment and definite lived intangible assets (other than goodwill and indefinite-lived intangible assets), are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. The Company evaluates such cash flows for individual restaurants and franchise agreements on an undiscounted basis. If it is determined that the carrying amounts of such long-lived assets are not recoverable, the assets are written down to their estimated fair values. The Company generally estimates fair value using either the land and building real estate value for the respective restaurant or the discounted value of the estimated cash flows associated with the respective restaurant or agreement. During the fifty-two weeks ended January 1, 2019, the Company evaluated certain restaurants having indicators of impairment based on operating performance and recorded an impairment charge totaling $3.9 million related to five restaurants. No such impairment charges were recorded during the fifty-two weeks ended January 2, 2019 or the fifty-three weeks ended January 3, 2017.
Rent Expense and Deferred Rent Liability
The Company has non-cancelable lease agreements for certain restaurant land and buildings under terms ranging up to 35 years, with one to four options to extend the lease generally for five to ten years per option period. At inception, each lease is evaluated to determine whether it will be classified as an operating or capital lease. Certain leases provide for contingent rentals based on percentages of net sales or have other provisions obligating the Company to pay related property taxes and certain other expenses. Contingent rentals are generally based on sales levels in excess of stipulated amounts as defined in the lease agreement, and thus are not considered minimum lease payments and are included in rent expense as incurred. Certain leases contain fixed and determinable escalation clauses for which the Company recognizes rental expense under these leases on the straight-line basis over the lease terms, which includes the period of time from when the Company takes possession of the leased space until the restaurant opening date (the rent holiday period), and the cumulative expense recognized on the straight-line basis in excess of the cumulative payments is included in other non-current liabilities. In addition, the Company subleases certain buildings to franchisees and other unrelated third parties, which are classified as operating leases.
In some cases, the land and building the Company will lease requires construction to ready the space for its intended use, and in certain cases, the Company has involvement with the construction of leased assets. The construction period begins when the Company executes the lease agreement with the landlord and continues until the space is substantially complete and ready for its intended use. In accordance with ASC 840, Leases, the Company must consider the nature and extent of its involvement during the construction period.
In accordance with ASC 840, Leases, the Company may expend cash for structural additions on leased premises that may be reimbursed in whole or in part by landlords as construction contributions pursuant to agreed-upon terms in the leases. Depending on the specifics of the leased space and the lease agreement, the amounts paid for structural components will be recorded during the construction period as construction-in-progress and the landlord construction contributions will be recorded as a deferred rent liability. Upon completion of construction for those leases that meet certain criteria, the lease may qualify for sale-leaseback treatment. For these leases, the deferred rent liability and the associated construction-in-progress will be removed and any gain on sale will be recorded as deferred income and amortized over the lease term to gain on disposal of assets and any loss on sale will be expensed immediately to loss on disposal of assets, net. If the lease does not qualify for sale-leaseback treatment, the deferred rent liability will be reclassified to a deemed landlord financing liability and will be amortized over the lease term based on the rent payments designated in the lease agreement with rent payments applied to deemed landlord financing liability and interest expense.
Unfavorable lease liabilities represent the fair values of acquired lease contracts having contractual rents that are unfavorable compared to fair market rents as of the Closing Date of the Business Combination, and are amortized on a straight-line basis over the remaining lease terms to expense in the consolidated statements of comprehensive income. As of January 1, 2019 and January 2, 2018, unfavorable lease liabilities had a gross carrying value of $19.2 million and $20.6 million, respectively, with accumulated amortization of $7.2 million and $6.1 million, respectively. Amortization credits recorded for unfavorable lease liabilities were $2.5 million during the fifty-two weeks ended January 1, 2019, $2.7 million during the fifty-two weeks ended January 2, 2018 and $2.6 million during the fifty-three weeks ended January 3, 2017. The weighted-average amortization period as of January 1, 2019 for unfavorable lease liabilities equaled 7.3 years. The estimated future amortization for unfavorable lease liabilities for the next five fiscal years is as follows (in thousands):
 
 
Unfavorable Lease Liabilities
2019
 
$
1,996

2020
 
1,854

2021
 
1,571

2022
 
1,422

2023
 
1,133


Insurance Reserves
Given the nature of the Company’s operating environment, the Company is subject to workers’ compensation and general liability claims. To mitigate a portion of these risks, the Company maintains insurance for individual claims in excess of deductibles per claim (the Company’s insurance deductibles range from $0.25 million to $0.50 million per occurrence for workers’ compensation and are $0.35 million per occurrence for general liability). The Company is not the primary obligor for its worker's compensation insurance policy. The amount of loss reserves and loss adjustment expenses is determined based on an estimation process that uses information obtained from both Company-specific and industry data, as well as general economic information. Loss reserves are based on estimates of expected losses for determining reported claims and as the basis for estimating claims incurred but not reported. The estimation process for loss exposure requires management to continuously monitor and evaluate the life cycle of claims. Management also monitors the reasonableness of the judgments made in the prior year’s estimation process (referred to as a hindsight analysis) and adjusts current year assumptions based on the hindsight analysis. The Company utilizes actuarial methods to evaluate open claims and estimate the ongoing development exposure related to workers’ compensation and general liability.
Advertising Costs
Franchisees pay a weekly fee to the Company of 4% of their restaurants’ net sales as reimbursement for advertising and promotional services that the Company provides. Fees received in advance of payment for provided services are included in other accrued liabilities and were $0.7 million and $0.3 million at January 1, 2019 and January 2, 2018, respectively. Company-operated restaurants contribute to the advertising fund on the same basis as franchise-operated restaurants. At January 1, 2019 and January 2, 2018, the Company had an additional $0.9 million and $0.4 million, respectively, accrued for this requirement.
 
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. These costs, as well as other marketing-related expenses for advertising are included in occupancy and other operating expenses in the consolidated statements of comprehensive income for Company expenses and included in franchise advertising expenses in the consolidated statements of comprehensive income for franchise expenses. Advertising expenses for the Company were $19.0 million for the fifty-two weeks ended January 1, 2019, $18.1 million for the fifty-two weeks ended January 2, 2018 and $17.2 million for the fifty-three weeks ended January 3, 2017.
Pre-opening Costs
Pre-opening costs, which include restaurant labor, supplies, cash and non-cash rent expense and occupancy and other operating costs incurred prior to the opening of a new restaurant are expensed as incurred. Pre-opening costs were $1.6 million for both the fifty-two weeks ended January 1, 2019 and the fifty-two weeks ended January 2, 2018, and $0.7 million for the fifty-three weeks ended January 3, 2017.
Restaurant Closure Charges, Net
The Company makes decisions to close restaurants based on their cash flows, anticipated future profitability and leasing arrangements. The Company determines if discontinued operations treatment is appropriate and estimates the future obligations, if any, associated with the closure of restaurants and records the corresponding restaurant closure liability at the time the restaurant is closed. These restaurant closure obligations primarily consist of the liability for the present value of future lease obligations, net of estimated sublease income. Restaurant closure charges, net are comprised of direct costs related to the restaurant closure and initial charges associated with the recording of the liability at fair value, accretion of the restaurant closure liability during the period, any positive or negative adjustments to the restaurant closure liability in subsequent periods as more information becomes available and sublease income from leases which are treated as deemed landlord financing. Changes to the estimated liability for future lease obligations based on new facts and circumstances are considered to be a change in estimate and are recorded prospectively. Accretion expense is recorded in order to appropriately reflect the present value of the lease obligations as of the end of a reporting period. Lease payments net of sublease income received related to these obligations reduce the overall liability. To the extent that the disposal or abandonment of related property and equipment results in gains or losses, such gains or losses are included in loss on disposal of assets, net in the consolidated statements of comprehensive income.
Stock-Based Compensation Expense
The Company recognizes compensation expense for all share-based payment awards made to employees and non-employee board of directors based on their estimated grant date fair values using the Black-Scholes option pricing model for option grants and the closing price of the underlying common stock on the date of the grant for restricted stock awards. The Company recognizes these compensation costs for only those awards expected to vest, on a straight-line basis over the requisite service period of the award. The Company estimates the number of awards expected to vest based, in part, on historical forfeiture rates and also based on management's expectations of employee turnover within the specific employee groups receiving the awards. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Stock-based compensation expense for the Company’s stock-based compensation awards is recognized ratably over the vesting period on a straight-line basis.
Income Taxes
The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for temporary differences between financial statement and income tax reporting, using tax rates scheduled to be in effect at the time the items giving rise to the deferred taxes reverse. The Company recognizes the impact of a tax position in the financial statements if that position is more likely than not of being sustained by the taxing authority. Accordingly, the Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Derivative Instruments and Hedging Activities
The Company is exposed to variability in future cash flows resulting from fluctuations in interest rates related to its variable rate debt. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in interest rates, the Company has used various interest rate contracts including interest rate caps. The Company recognizes all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. When they qualify as hedging instruments, the Company designates interest rate caps as cash flow hedges of forecasted variable rate interest payments on certain debt principal balances.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings.
The Company enters into interest rate derivative contracts with major banks and is exposed to losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts.
Contingencies
The Company recognizes liabilities for contingencies when an exposure that indicates it is probable that an asset has been impaired or that a liability has been incurred and the amount of impairment or loss can be reasonably estimated. The Company’s ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates. When the reasonable estimate is a range, the recorded loss will be the best estimate within the range. The Company records legal settlement costs when those costs are probable and reasonably estimable.
Comprehensive Income (Loss)
Comprehensive income (loss) includes changes in equity from transactions and other events and circumstances from nonoperational sources, including, among other things, the Company’s unrealized gains and losses on effective interest rate caps which are included in other comprehensive income (loss), net of tax.
Segment Information
An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Company’s chief operating decision makers in deciding how to allocate resources. Similar operating segments can be aggregated into a single operating segment if the businesses are similar. Management has determined that the Company has one operating segment, and therefore one reportable segment. The Company’s chief operating decision maker (CODM) is its Chief Executive Officer; its CODM reviews financial performance and allocates resources at a consolidated level on a recurring basis.
Related Party Transactions
Of the 424,439 warrants purchased during the fifty-two weeks ended January 2, 2018, 400,000 warrants were purchased from PW Acquisitions, LP, a related party, at $3.75 per warrant, representing a 5% discount from the closing price of $3.95 per warrant on the transaction date. A member of the Company's Board of Directors is the chief executive officer and managing member of the general partner of PW Acquisitions, LP.
Fair Value of Financial Instruments
The Company measures fair value using the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three tiers in the fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
 
Level 1, defined as observable inputs such as quoted prices in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs which reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include the use of third-party pricing services, option pricing models, discounted cash flow models and similar techniques.
 
Concentration of Risks
Financial instruments that potentially subject the Company to a concentration of credit risk are cash and cash equivalents. The Company maintains its day-to-day operating cash balances in non-interest-bearing accounts. Although the Company at times maintains balances that exceed amounts insured by the Federal Deposit Insurance Corporation, it has not experienced any losses related to these balances and management believes the credit risk to be minimal.
The Company extends credit to franchisees for franchise and advertising fees on customary credit terms, which generally do not require collateral or other security. In addition, management believes there is no concentration of risk with any single franchisee or small group of franchisees whose failure or nonperformance would materially affect the Company’s results of operations.
The Company has entered into a long-term purchase agreement with a distributor for delivery of essentially all food and paper supplies to all company-operated and franchise-operated restaurants except for one location in Guam. Disruption in shipments from this distributor could have a material adverse effect on the results of operations and financial condition of the Company. However, management of the Company believes sufficient alternative distributors exist in the marketplace although it may take some time to enter into replacement distribution arrangements and the cost of distribution may increase as a result.
As of January 1, 2019, Del Taco operated and franchised a total of 376 restaurants in California (255 company-owned and 121 franchise-operated locations). As a result, the Company is particularly susceptible to adverse trends and economic conditions in California. In addition, given this geographic concentration, negative publicity regarding any of the restaurants in California could have a material adverse effect on the Company’s business and operations, as could other regional occurrences such as local strikes, fires, earthquakes or other natural disasters.
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board ("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 quarter of 2018, utilizing the cumulative effect transition method. There was no material impact of the standard on the Company's consolidated financial statements and related disclosures 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 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 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 twenty 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 fifty-two weeks ended January 1, 2019, the Company recognized approximately $0.1 million in franchise revenue related to the amortization of the deferred franchise fees recognized at January 3, 2018 as a result of the adoption of Topic 606, and recognized approximately $0.1 million in franchise revenue as a result of the termination of one development agreement.
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 January 1, 2019 is as follows (in thousands):
FY 2019
 
$
87

FY 2020
 
83

FY 2021
 
81

FY 2022
 
80

FY 2023
 
77

Thereafter
 
962

Total Deferred Franchise Fees
 
$
1,370


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 fifty-two weeks ended January 1, 2019 was an increase of $13.3 million for both revenue and expense as a result of applying Topic 606.
Other Revenue Transactions
The Company, previously under Topic 605, recorded certain other franchise expenses 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 related 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 fifty-two weeks ended January 1, 2019 was an increase of approximately $0.7 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 January 1, 2019 and on the Company's consolidated statements of comprehensive income and cash flows from operating activities for the fifty-two weeks ended January 1, 2019 and the amounts as if Topic 605 was in effect ("Amounts Under Previous Standards") (in thousands):
 
 
January 1, 2019
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Liabilities and shareholders’ equity
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
19,877

 
$

 
$
19,877

Other accrued liabilities
 
34,785

 

 
34,785

Current portion of capital lease obligations and deemed landlord financing liabilities
 
1,033

 

 
1,033

Total current liabilities
 
55,695

 

 
55,695

Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net
 
178,664

 

 
178,664

Deferred income taxes
 
69,471

 
370

 
69,841

Other non-current liabilities
 
32,852

 
(1,369
)
 
31,483

Total liabilities
 
336,682

 
(999
)
 
335,683

Shareholders’ equity:
 
 
 
 
 
 
Preferred stock
 

 

 

Common stock
 
4

 

 
4

Additional paid-in capital
 
336,941

 

 
336,941

Accumulated other comprehensive income
 
180

 

 
180

Retained earnings
 
85,149

 
999

 
86,148

Total shareholders’ equity
 
422,274

 
999

 
423,273

Total liabilities and shareholders’ equity
 
$
758,956

 
$

 
$
758,956


 
 
52 Weeks Ended January 1, 2019
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Revenue:
 
 
 
 
 
 
Company restaurant sales
 
$
471,193

 
$

 
$
471,193

Franchise revenue
 
17,569

 
(370
)
 
17,199

Franchise advertising contributions
 
13,300

 
(13,300
)
 

Franchise sublease and other income
 
3,428

 
(312
)
 
3,116

Total revenue
 
505,490

 
(13,982
)
 
491,508

Operating expenses:
 
 
 
 
 
 
Restaurant operating expenses:
 
 
 
 
 
 
Food and paper costs
 
128,873

 

 
128,873

Labor and related expenses
 
151,954

 

 
151,954

Occupancy and other operating expenses
 
97,745

 

 
97,745

General and administrative
 
43,773

 
(770
)
 
43,003

Franchise advertising expenses
 
13,300

 
(13,300
)
 

Depreciation and amortization
 
25,794

 

 
25,794

Occupancy and other - franchise subleases and other
 
3,167

 
(312
)
 
2,855

Pre-opening costs
 
1,584

 

 
1,584

Impairment of long-lived assets
 
3,861

 

 
3,861

Restaurant closure charges, net
 
394

 

 
394

Loss on disposal of assets, net
 
1,012

 

 
1,012

Total operating expenses
 
471,457

 
(14,382
)
 
457,075

Income from operations
 
34,033

 
400

 
34,433

Other expense, net
 
 
 
 
 
 
Interest expense
 
9,075

 

 
9,075

Other income
 
(660
)
 

 
(660
)
Total other expense, net
 
8,415

 

 
8,415

Income from operations before provision for income taxes
 
25,618

 
400

 
26,018

Provision for income taxes
 
6,659

 
108

 
6,767

Net income
 
18,959

 
292

 
19,251

Other comprehensive income:
 
 
 
 
 
 
Change in fair value of interest rate cap, net of
    tax
 
122

 

 
122

Reclassification of interest rate cap amortization
    included in net income
 
44

 

 
44

Total other comprehensive income
 
166

 

 
166

Comprehensive income
 
$
19,125

 
$
292

 
$
19,417

Earnings per share:
 
 
 
 
 
 
Basic
 
$
0.50

 
$
0.01

 
$
0.51

Diluted
 
$
0.49

 
$
0.01

 
$
0.50


 
 
52 Weeks Ended January 1, 2019
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Operating activities
 
 
 
 
 
 
Net income
 
$
18,959

 
$
292

 
$
19,251

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Allowance for doubtful accounts
 
45

 

 
45

Depreciation and amortization
 
25,794

 

 
25,794

Amortization of favorable and unfavorable lease assets and liabilities, net
 
(767
)
 

 
(767
)
Amortization of deferred financing costs and debt discount
 
445

 

 
445

Stock-based compensation
 
6,079

 

 
6,079

Impairment of long-lived assets
 
3,861

 

 
3,861

Deferred income taxes
 
1,097

 
108

 
1,205

Loss on disposal of assets, net
 
1,012

 

 
1,012

Restaurant closure charges
 
449

 

 
449

Other income
 
(523
)
 

 
(523
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts and other receivables, net
 
616

 

 
616

Inventories
 
(220
)
 

 
(220
)
Prepaid expenses and other current assets
 
1,949

 

 
1,949

Other assets
 
(125
)
 

 
(125
)
Accounts payable
 
2

 

 
2

Other accrued liabilities
 
(488
)
 

 
(488
)
Other non-current liabilities
 
3,647

 
(400
)
 
3,247

Net cash provided by operating activities
 
$
61,832

 
$

 
$
61,832


Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which clarifies the accounting implementation costs in cloud computing arrangements. The standard is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, and issued additional clarifications and improvements during 2018. This guidance amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and issued additional clarifications and improvements throughout 2018. 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 pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet. 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 will adopt the requirements of the new lease standard effective January 2, 2019, the first day of fiscal year 2019, and will apply a modified retrospective adoption method using the optional transition method to apply the standard as of the effective date and therefore will not apply the standard to the comparative periods presented in the Company's financial statements. The Company has elected the package of practical expedients which allows an entity to not reassess whether any existing or expired contracts contain leases, nor reassess lease classifications for existing or expired leases, and an entity does not need to reassess initial direct costs for any existing leases. The Company will not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. Further, the Company will elect a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases with terms of 12 months or less. The Company is finalizing the impact of the standard to its accounting policies, processes, disclosures, and internal control over financial reporting and has implemented necessary upgrades to its existing lease system.
The adoption of ASU 2016-02 will have a significant impact on our consolidated balance sheet as the Company will record material right-of-use assets and operating lease liabilities upon adoption and will derecognize all landlord funded assets, deemed landlord financing liabilities and deferred rent liabilities upon transition. The Company expects to record operating lease liabilities of approximately $220 million to $240 million based on the present value of the remaining minimum rental payments using discount rates as of the effective date. In addition, the Company expects to record corresponding right-of-use assets of approximately $210 million to $230 million, based upon the operating lease liabilities adjusted for prepaid and deferred rent, unamortized favorable and unfavorable lease balances, liabilities associated with lease termination costs and impairment of right-of-use assets recognized in retained earnings as of January 2, 2019. At the beginning of the period of adoption, the Company will record the cumulative effect of adoption to retained earnings. Following adoption in fiscal 2019, leases historically treated as deemed landlord financing liabilities will be treated as operating leases resulting in an increase in occupancy and other expense and a decrease to depreciation expense and interest expense. The Company anticipates substantial new disclosure requirements under Topic 842. The Company is continuing its evaluation, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
v3.19.1
Restaurant Closure and Other Related Charges
12 Months Ended
Jan. 01, 2019
Restructuring and Related Activities [Abstract]  
Restaurant Closure and Other Related Charges
Restaurant Closure and Other Related Charges
At January 1, 2019 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
During the fifty-two weeks ended January 1, 2019, there were adjustments to subleases for existing restaurant closure liabilities which resulted in a favorable adjustment of $0.5 million. The following table presents other restaurant closure liability activity for each period related to current year and prior year restaurant closures and sublease income shortfalls (in thousands):
 
 
52 Weeks Ended
January 1, 2019
 
52 Weeks Ended
January 2, 2018
 
53 Weeks Ended
January 3, 2017
Closure liability at beginning of period
 
$
1,213

 
$
1,365

 
$
1,023

Adjustments to estimate based on current activity
 
(513
)
 
22

 
439

Charges related to current period activity
 

 
46

 

Charges for accretion in current period
 
54

 
97

 
80

Cash payments
 
(435
)
 
(317
)
 
(177
)
Closure liability at end of period
 
$
319

 
$
1,213

 
$
1,365


The current portion of the restaurant closure liability is $0.1 million at January 1, 2019 and $0.5 million at 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 $0.2 million and $0.7 million at January 1, 2019 and January 2, 2018, respectively, 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 as previously announced. No discontinued operations treatment was required for any of these closures. During the fifty-two weeks ended January 1, 2019, the Company recorded accretion expense related to the closures and net adjustments of $0.7 million to the lease termination liability for five restaurants due to changes in estimates, net of $0.2 million of sublease income from leases which are treated as deemed landlord financing.
A summary of the restaurant closure liability activity for these 12 closed restaurants consisted of the following (in thousands):
 
 
Contract termination costs
 
Other associated costs
 
Total
Balance at December 29, 2015
 
$
3,637

 
$
163

 
$
3,800

Charges for accretion and other in current period
 
133

 

 
133

Cash payments
 
(1,444
)
 
(163
)
 
(1,607
)
Reclassification of lease related liabilities
 
(553
)
 

 
(553
)
Balance at January 3, 2017
 
1,773

 

 
1,773

Charges for accretion in current period
 
70

 

 
70

Cash payments
 
(376
)
 

 
(376
)
Adjustment to estimates based on current activity
 
144

 

 
144

Balance at January 2, 2018
 
1,611

 

 
1,611

Charges for accretion in current period
 
61

 

 
61

Cash payments
 
(327
)
 

 
(327
)
Adjustment to estimates based on current activity
 
747

 

 
747

Balance at January 1, 2019
 
$
2,092

 
$

 
$
2,092


The current portion of the restaurant closure liability is $0.5 million and $0.3 million at January 1, 2019 and 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 $1.6 million and $1.3 million at January 1, 2019 and January 2, 2018, respectively, and is included in other non-current liabilities in the consolidated balance sheets.
v3.19.1
Property and Equipment, Net
12 Months Ended
Jan. 01, 2019
Property, Plant and Equipment [Abstract]  
Property and Equipment, Net
Property and Equipment, Net
Property and equipment, net at January 1, 2019 and January 2, 2018 consisted of the following, excluding amounts related to properties classified as held for sale (in thousands):
 
 
January 1, 2019
 
January 2, 2018
Land
 
$
1,929

 
$
9,800

Buildings
 
4,335

 
2,325

Restaurant and other equipment
 
87,767

 
74,075

Leasehold improvements
 
121,409

 
100,192

Buildings under capital leases
 
3,390

 
4,625

Restaurant property leased to others
 
991

 
3,090

Construction-in-progress
 
10,697

 
11,905

 
 
230,518

 
206,012

Less: Accumulated depreciation
 
(69,089
)
 
(49,888
)
Property and Equipment, Net
 
$
161,429

 
$
156,124



Impairment of long-lived assets
The Company evaluated long-lived assets for indicators of impairment on a periodic basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. During Fiscal 2018, the Company evaluated certain restaurants that had indicators of impairment based on operating performance and recorded an impairment charge totaling $3.9 million. The Company wrote-off the value of leasehold improvements for those restaurants and wrote-off the value of restaurant and other equipment based on the estimate of future recoverable cash flows of the restaurant and other equipment assets. No impairment charges were recorded in continuing operations in the accompanying consolidated statements of comprehensive income for any other periods presented.
v3.19.1
Summary of Refranchsing and Franchise Acquisitions (Notes)
12 Months Ended
Jan. 01, 2019
Franchise Acquisitions [Abstract]  
Refranchising and Franchise Acquisitions
Summary of Refranchising and Franchise Acquisitions
Refranchising
In connection with the sale of company-operated restaurants to franchisees, the Company typically enters into several agreements, in addition to an asset purchase agreement, with franchisees including franchise and lease agreements. The Company typically sells the restaurants' inventory and equipment and retains ownership of the leasehold interest on the real estate of the lease and/or sublease to the franchisee. The Company has determined that its restaurant dispositions usually represent multiple-element arrangements, and as such, the cash consideration is allocated to the separate elements based on their relative selling price. Cash consideration generally includes up-front consideration for the sale of the restaurants and franchise fees and future cash consideration for royalties and lease payments. The Company considers the future lease payments in allocating the initial cash consideration received. The Company compares the stated rent under the lease and/or sublease agreements with comparable market rents and the Company records favorable or unfavorable lease assets/liabilities with a corresponding offset to the gain or loss on the sale of the company-operated restaurants. The cash consideration per restaurant for franchise fees is consistent with the amounts stated in the related franchise agreements which are charged for separate standalone arrangements. Therefore, the Company recognizes the franchise fees when earned. Future royalty income is also recognized in revenue as earned.
The Company sold 5 company-operated restaurants to franchisees during the fifty-two weeks ended January 2, 2018. The Company did not sell any company-operated restaurants to franchisees during the fifty-two weeks ended January 1, 2019 or the fifty-three weeks ended January 3, 2017. The following table provides detail of the related gain recognized during the fifty-two weeks ended January 2, 2018 (dollars in thousands):
 
 
52 Weeks Ended January 2, 2018
Company-operated restaurants sold to franchisees
 
5
 
 
 
Proceeds from the sale of company-operated restaurants
 
$
2,192

Net assets sold (primarily furniture, fixtures and equipment)
 
(1,261
)
Goodwill related to the company-operated restaurants sold to franchisees
 
(247
)
Net unfavorable lease liabilities (a)
 
(548
)
Other costs
 
(5
)
Gain on sale of company-operated restaurants (b)
 
$
131

(a) The Company recorded favorable lease assets of $0.1 million and unfavorable lease liabilities of $0.6 million as a result of subleasing land, buildings and leasehold improvements to franchisees, in connection with the sale of company-operated restaurants.
(b) Included in loss on disposal of assets, net on the consolidated statements of comprehensive income.
Franchise Acquisitions
The Company acquired three franchise-operated restaurants during the fifty-two weeks ended January 1, 2019, one franchise-operated restaurant during the fifty-two weeks ended January 2, 2018 and six franchise-operated restaurants during the fifty-three weeks ended January 3, 2017. The Company accounts for the acquisition of franchise-operated restaurants using the acquisition method of accounting for business combinations. The purchase price allocations were based on fair value estimates determined using significant unobservable inputs (Level 3). The goodwill recorded primarily relates to the market position and future growth potential of the markets acquired and is expected to be deductible for income tax purposes.



The following table provides detail of the combined acquisitions for both the fifty-two weeks ended January 1, 2019, fifty-two weeks ended January 2, 2018 and the fifty-three weeks ended January 3, 2017 (dollars in thousands):
 
 
52 Weeks Ended January 1, 2019
 
52 Weeks Ended January 2, 2018
 
53 Weeks Ended January 3, 2017
Franchise-operated restaurants acquired from franchisees
 
3
 
1
 
6
 
 
 
 
 
 
 
Goodwill
 
$
893

 
$
860

 
$
969

Property and equipment
 
798

 
360

 
821

Land and building
 

 

 
2,127

Reacquired franchise rights
 
150

 

 

Unfavorable lease liability
 

 
(85
)
 

Liabilities assumed
 

 
(7
)
 
(26
)
Total Consideration
 
$
1,841

 
$
1,128

 
$
3,891



Total consideration for the franchise-operated restaurants excluding the land and building acquired from a franchisee was $1.8 million during the fifty-three weeks ended January 3, 2017.

During the fifty-two weeks ended January 1, 2019, the Company wrote-off $0.6 million of unfavorable lease liabilities related to franchise subleases, offset by $0.1 million of straight line deferred rent assets (included in other assets) which were terminated in connection with the Company's acquisition of the related franchise-operated restaurants.
v3.19.1
Goodwill and Other Intangible Assets
12 Months Ended
Jan. 01, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the fifty-two weeks ended January 1, 2019 are as follows (in thousands):
 
Goodwill
Balance as of January 2, 2018
$
320,638

Acquisition of franchise-operated restaurants
893

Balance as of January 1, 2019
$
321,531



The increase in goodwill was due to an adjustment of $0.9 million related to the acquisition of three franchise-operated restaurants during the fifty-two weeks ended January 1, 2019, as described in more detail in Note 5.
The carrying value of trademarks was $220.3 million at both January 1, 2019 and January 2, 2018.
The Company’s other intangible assets at January 1, 2019 and January 2, 2018 consisted of the following (in thousands):
 
 
January 1, 2019
 
January 2, 2018
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Favorable lease assets
 
$
13,118

 
$
(5,542
)
 
$
7,576

 
$
13,744

 
$
(4,442
)
 
$
9,302

Franchise rights
 
15,032

 
(4,411
)
 
10,621

 
15,284

 
(3,282
)
 
12,002

Reacquired franchise rights
 
417

 
(107
)
 
310

 
243

 
(49
)
 
194

Total amortized other intangible assets
 
$
28,567

 
$
(10,060
)
 
$
18,507

 
$
29,271

 
$
(7,773
)
 
$
21,498



During the fifty-two weeks ended January 1, 2019, the Company wrote-off $0.2 million of favorable lease assets related to the termination of three leases and $0.4 million of favorable lease assets associated with nine franchise locations were fully amortized.
During the fifty-two weeks ended January 1, 2019, the Company wrote-off $0.1 million of franchise rights associated with the closure of one franchise operated restaurant, $0.1 million of franchise rights associated with six franchise locations were fully amortized and the Company reclassified $24,000 of franchise rights as reacquired franchise rights from the acquisition of one franchise location. During the fifty-two weeks ended January 2, 2018, $0.1 million of franchise rights associated with five franchise locations were fully amortized and the Company reclassified $0.1 million of franchise rights as reacquired franchise rights from the acquisition of one franchise location.
In addition, during the fifty-two weeks ended January 1, 2019, the Company acquired $0.2 million of reacquired franchise rights in connection with the Company's purchase of two franchise-operated restaurants.
Favorable lease assets are related to below-market leasing arrangements. Favorable lease assets are amortized on a lease-by-lease basis using the straight-line method over the remaining lease terms of the underlying leases. Franchise rights are amortized using the straight-line method over the remaining life of the franchise agreements or 40 years, whichever is less. The weighted-average amortization periods as of January 1, 2019 for favorable lease assets and franchise rights equaled 6.6 years and 12.1 years, respectively.
Amortization expense for amortizable intangible assets totaled $3.1 million, $3.3 million and $3.6 million for the fifty-two weeks ended January 1, 2019, fifty-two weeks ended January 2, 2018, and fifty-three weeks ended January 3, 2017, respectively, and includes amortization of favorable lease assets of $1.7 million, $1.9 million and $2.0 million for the fifty-two weeks ended January 1, 2019, fifty-two weeks ended January 2, 2018 and fifty-three weeks ended January 3, 2017, respectively, and amortization of franchise rights of $1.4 million, $1.3 million and $1.6 million for the fifty-two weeks ended January 1, 2019, fifty-two weeks ended January 2, 2018 and fifty-three weeks ended January 3, 2017, respectively. The estimated future amortization for favorable lease assets and franchise rights for the next five fiscal years is as follows (in thousands):

 
 
Favorable Lease Assets
 
Franchise Rights
2019
 
$
1,443

 
$
1,245

2020
 
1,171

 
1,176

2021
 
1,005

 
1,064

2022
 
922

 
965

2023
 
746

 
880

v3.19.1
Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
12 Months Ended
Jan. 01, 2019
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 debt, obligations under capital leases and deemed landlord financing liabilities at January 1, 2019 and January 2, 2018 consisted of the following (in thousands): 
 
 
January 1, 2019
 
January 2, 2018
2015 Senior Credit Facility, net of debt discount of $459 and $747 and deferred financing costs of $155 and $252 at January 1, 2019 and January 2, 2018, respectively
 
$
158,386

 
$
152,001

Total outstanding indebtedness
 
158,386

 
152,001

Obligations under capital leases and deemed landlord financing liabilities
 
21,311

 
20,053

Total debt, net
 
179,697

 
172,054

Less: amounts due within one year
 
1,033

 
1,415

Total amounts due after one year, net
 
$
178,664

 
$
170,639

 
At January 1, 2019 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”).
At the Company’s option, loans under the 2015 Senior Credit Facility may bear interest at a base rate or LIBOR, plus an applicable margin determined in accordance with a consolidated total lease adjusted leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the Federal Funds Rate plus 1⁄2 of 1%, (b) the prime rate of Bank of America, and (c) LIBOR plus 1.00%. For LIBOR loans, the applicable margin is in the range of 1.50% to 2.50%, and for base rate loans the applicable margin is in the range of 0.50% and 1.50%. The 2015 Senior Credit Facility capacity used to support letters of credit currently incurs fees equal to the applicable margin of 1.75%. The 2015 Senior Credit Facility unused commitment currently incurs a 0.20% fee.
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 January 1, 2019. Substantially all of the assets of the Company are pledged as collateral under the 2015 Senior Credit Facility.
The Company capitalized lender debt discount costs and deferred financing costs of $1.4 million and $0.5 million, respectively, in connection with the refinancing. Lender debt discount costs and deferred financing costs associated with the 2015 Senior Credit Facility are presented net of the 2015 Senior Credit Facility balance on the consolidated balance sheets and will be amortized to interest expense over the term of the 2015 Senior Credit Facility. Amortization of deferred financing costs and debt discount related to the 2015 Senior Credit Facility totaled $0.4 million for each of the fifty-two weeks ended January 1, 2019, the fifty-two weeks ended January 2, 2018 and the fifty-three weeks ended January 3, 2017.
At January 1, 2019, the weighted average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 4.27%. At January 1, 2019, the Company had a total of $73.7 million of availability for additional borrowings under the 2015 Senior Credit Facility as the Company had $159.0 million of outstanding borrowings and $17.3 million of letters of credit outstanding which reduce availability under the 2015 Senior Credit Facility.
Other Debt Information

Based on debt agreements and leases in place as of January 1, 2019, future maturities of debt, obligations under capital leases and deemed landlord financing liabilities were as follows (in thousands):
 
2019
 
$
1,033

2020
 
159,881

2021
 
832

2022
 
777

2023
 
927

Thereafter
 
16,861

Total maturities
 
180,311

Less: debt discount and deferred financing costs
 
(614
)
Total debt, net
 
$
179,697

v3.19.1
Derivative Instruments
12 Months Ended
Jan. 01, 2019
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 has a 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 January 1, 2019, the 2016 Interest Rate Cap Agreement had no hedge ineffectiveness.
As of December 29, 2015 and through June 30, 2016, the Company had an interest rate cap agreement to hedge cash flows associated with interest rate fluctuations on variable rate debt ("2013 Interest Rate Cap Agreement"). The 2013 Interest Rate Cap Agreement had a notional amount of $87.5 million as of December 29, 2015. The individual caplet contracts within the interest rate cap agreement expired at various dates through June 30, 2016.
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 fifty-two weeks ended January 1, 2019.
During the fifty-two weeks ended January 1, 2019, the Company reclassified $0.1 million of interest expense related to hedges of these transactions into earnings. As of January 1, 2019, the Company was hedging forecasted transactions expected to occur through March 31, 2020. Assuming interest rates at January 1, 2019 remain constant, $0.2 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next 15 months. The Company intends to ensure that this hedge remains effective, therefore, approximately $0.2 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 January 1, 2019 was included in accumulated other comprehensive income.
2013 Interest Rate Cap Agreement
As of the July 1, 2015 interest reset date, 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 2013 Interest Rate Cap Agreement,


and as a result, this hedge became ineffective. Therefore, after July 1, 2015 through June 30, 2016, any changes in fair value were recorded through interest expense.
v3.19.1
Fair Value Measurements
12 Months Ended
Jan. 01, 2019
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 January 1, 2019 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, these included derivative instruments related to interest rates. The Company determined the fair values of the interest rate cap contracts based on counterparty quotes, with appropriate adjustments for any significant impact of nonperformance risk of the parties to the interest rate cap contracts. Therefore, the Company has categorized these interest rate cap contracts as Level 2 fair value measurements. The fair value of the 2016 Interest Rate Cap Agreement was $0.5 million at January 1, 2019 and $0.3 million at January 2, 2018 and is included in other assets in the Company’s consolidated balance sheets.
 
The following is a summary of the estimated fair values for the long-term debt instruments (in thousands):
 
 
 
January 1, 2019
 
January 2, 2018
 
 
Estimated
Fair Value
 
Book Value
 
Estimated
Fair Value
 
Book Value
2015 Senior Credit Facility
 
$
158,386

 
$
158,386

 
$
152,001

 
$
152,001


The Company’s assets and liabilities measured at fair value on a recurring basis as of January 1, 2019 and January 2, 2018 were as follows (in thousands):
<
 
January 1, 2019
 
Markets for Identical Assets
(Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
499

 
$

 
$
499

 
$

Total assets measured at fair value
$
499

 
$

 
$
499

 
$

 
 
 
 
 
 
 
 
 
January 2, 2018
 
Markets for Identical Assets (Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)