DEL TACO RESTAURANTS, INC., 10-K filed on 3/15/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Jan. 2, 2018
Mar. 12, 2018
Jun. 20, 2017
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jan. 02, 2018 
 
 
Document Fiscal Year Focus
2017 
 
 
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
--01-02 
 
 
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
 
38,445,409 
 
Entity Public Float
 
 
$ 475,000,000 
Consolidated Balance Sheets (Successor [Member], USD $)
In Thousands, unless otherwise specified
Jan. 2, 2018
Jan. 3, 2017
Current assets:
 
 
Cash and cash equivalents
$ 6,559 
$ 8,795 
Accounts and other receivables, net
3,828 
4,141 
Inventories
2,712 
2,718 
Prepaid expenses and other current assets
6,784 
4,204 
Total current assets
19,883 
19,858 
Property and equipment, net
156,124 
138,320 
Goodwill
320,638 
320,025 
Trademarks
220,300 
220,300 
Intangible assets, net
21,498 
24,782 
Other assets, net
3,881 
3,872 
Total assets
742,324 
727,157 
Current liabilities:
 
 
Accounts payable
18,759 
16,427 
Other accrued liabilities
35,257 
36,653 
Current portion of capital lease obligations and deemed landlord financing liabilities
1,415 
1,588 
Total current liabilities
55,431 
54,668 
Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net
170,639 
173,743 
Deferred income taxes
68,574 
91,273 
Other non-current liabilities
31,431 
30,140 
Total liabilities
326,075 
349,824 
Commitments and contingencies
   
   
Shareholders’ equity:
 
 
(Predecessor) preferred stock, $0.01 par value; 200,000 shares authorized; no shares issued and outstanding/(Successor) preferred stock, $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding
(Predecessor) common stock, $0.01 par value; 5,800,000 shares authorized; 3,907,835 shares issued and outstanding at December 30, 2014/(Successor) common stock, $0.0001 par value; 400,000,000 shares authorized; 38,802,425 shares issued and outstanding at December 29, 2015
Additional paid-in capital
349,334 
360,131 
Accumulated other comprehensive income
14 
172 
Retained earnings
66,897 
17,026 
Total shareholders’ equity
416,249 
377,333 
Total liabilities and shareholders’ equity
$ 742,324 
$ 727,157 
Consolidated Balance Sheets (Parenthetical) (Successor [Member], USD $)
Jan. 2, 2018
Jan. 3, 2017
Successor [Member]
 
 
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)
Preferred stock, shares outstanding (in shares)
Common stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock, shares authorized (in shares)
400,000,000 
400,000,000 
Common stock, shares issued (in shares)
38,434,274 
39,153,503 
Common stock, shares outstanding (in shares)
38,434,274 
39,153,503 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, except Share data, unless otherwise specified
6 Months Ended 12 Months Ended 6 Months Ended
Dec. 29, 2015
Successor [Member]
Jan. 2, 2018
Successor [Member]
Jan. 3, 2017
Successor [Member]
Jun. 30, 2015
Predecessor
Revenue:
 
 
 
 
Company restaurant sales
$ 206,939 
$ 452,148 
$ 434,064 
$ 200,676 
Franchise revenue
7,328 
16,464 
15,676 
6,693 
Franchise sublease income
1,183 
2,844 
2,343 
1,183 
Total revenue
215,450 
471,456 
452,083 
208,552 
Restaurant operating expenses:
 
 
 
 
Food and paper costs
59,263 
125,391 
120,116 
57,447 
Labor and related expenses
61,448 
145,012 
135,725 
61,120 
Occupancy and other operating expenses
43,191 
92,825 
88,908 
43,611 
General and administrative
17,501 
38,154 
37,220 
14,850 
Depreciation and amortization
11,276 
23,362 
23,129 
8,252 
Occupancy and other - franchise subleases
1,140 
2,608 
2,207 
1,109 
Pre-opening costs
366 
1,591 
700 
276 
Restaurant closure charges, net
2,015 
191 
435 
94 
Loss on disposal of assets, net
1,075 
312 
99 
Total operating expenses
196,203 
430,209 
408,783 
186,858 
Income from operations
19,247 
41,247 
43,300 
21,694 
Other expense (income), net:
 
 
 
 
Interest expense
3,652 
7,200 
6,327 
11,491 
Other income
(220)
Transaction-related costs
12,972 
731 
7,255 
Debt modification costs
78 
139 
Change in fair value of warrant liability
(35)
Total other expense, net
16,482 
7,200 
7,058 
18,850 
Income from operations before (benefit) provision for income taxes
2,765 
34,047 
36,242 
2,844 
(Benefit) provision for income taxes
112 
(15,824)
15,329 
740 
Net income
2,653 
49,871 
20,913 
2,104 
Other comprehensive (loss) income:
 
 
 
 
Change in fair value of interest rate cap, net of tax
(162)
172 
(24)
Reclassification of interest rate cap amortization included in net income
58 
Total other comprehensive (loss) income, net
(158)
172 
34 
Comprehensive income
$ 2,653 
$ 49,713 
$ 21,085 
$ 2,138 
Earnings per share:
 
 
 
 
Basic (in dollars per share)
$ 0.07 
$ 1.29 
$ 0.54 
$ 0.38 
Diluted (in dollars per share)
$ 0.07 
$ 1.25 
$ 0.53 
$ 0.37 
Weighted-average shares outstanding:
 
 
 
 
Basic (in shares)
38,802,425 
38,689,508 
38,725,541 
5,492,417 
Diluted (in shares)
40,249,993 
39,949,907 
39,274,649 
5,610,859 
Consolidated Statements of Shareholders' Equity (USD $)
Total
Predecessor
Successor
Common Stock
Predecessor
Common Stock
Successor
Additional Paid-in Capital
Predecessor
Additional Paid-in Capital
Successor
Accumulated Other Comprehensive Loss
Predecessor
Accumulated Other Comprehensive Loss
Successor
Retained Earnings (Accumulated Deficit)
Predecessor
Retained Earnings (Accumulated Deficit)
Successor
Beginning Balance at Dec. 30, 2014
 
$ 81,404,000 
 
$ 39,000 
 
$ 110,941,000 
 
$ (409,000)
 
$ (29,167,000)
 
Beginning Balance, Shares at Dec. 30, 2014
 
 
 
3,907,835 
 
 
 
 
 
 
 
Net income (loss)
 
2,104,000 
 
 
 
 
 
 
 
2,104,000 
 
Other comprehensive income (loss), net of tax
 
34,000 
 
 
 
 
 
34,000 
 
 
 
Comprehensive income (loss)
 
2,138,000 
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
532,000 
 
 
 
532,000 
 
 
 
 
 
Exercise and settlement of warrants
 
8,274,000 
 
2,000 
 
8,272,000 
 
 
 
 
 
Exercise and settlement of warrants (in shares)
 
 
 
213,025 
 
 
 
 
 
 
 
Exercise of options and distribution of restricted stock units, net of tax withholding
 
(7,533,000)
 
2,000 
 
(7,535,000)
 
 
 
 
 
Exercise of options and distribution of restricted stock units, net of tax withholding, Shares
 
 
 
237,948 
 
 
 
 
 
 
 
Issuance of common stock
 
91,236,000 
 
24,000 
 
91,212,000 
 
 
 
 
 
Tax withholdings on restricted stock vesting
 
(7,533,000)
 
 
 
 
 
 
 
 
 
Issuance of common stock (in shares)
 
 
 
2,348,968 
 
 
 
 
 
 
 
Ending Balance at Jun. 30, 2015
 
176,051,000 
 
67,000 
 
203,422,000 
 
(375,000)
(27,063,000)
 
Ending Balance, Shares at Jun. 30, 2015
 
 
 
6,707,776 
 
 
 
 
 
 
 
Beginning Balance at Jun. 29, 2015
 
176,051,000 
 
 
 
 
 
 
 
 
 
Tax withholdings on restricted stock vesting
(7,500,000)
 
 
 
 
 
 
 
 
 
 
Issuance of common stock (in shares)
 
3,089,532 
 
 
 
 
 
 
 
 
 
Ending Balance at Jun. 30, 2015
 
 
3,318,000 
 
1,000 
 
9,857,000 
 
 
(6,540,000)
Beginning Balance, Shares at Jun. 30, 2015
 
 
 
 
5,127,606 
 
 
 
 
 
 
Net income (loss)
 
 
2,653,000 
 
 
 
 
 
 
 
2,653,000 
Common stock of Del Taco Restaurants, Inc. released from possible redemption
 
 
136,213,000 
 
1,000 
 
136,212,000 
 
 
 
 
Common stock of Del Taco Restaurants, Inc. released from possible redemption, Shares
 
 
 
 
13,621,279 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
 
2,653,000 
 
 
 
 
 
 
 
 
Issuance of warrants
 
 
389,000 
 
 
 
389,000 
 
 
 
 
Stock-based compensation
 
 
1,498,000 
 
 
 
1,498,000 
 
 
 
 
Issuance of common stock
 
 
224,306,000 
 
2,000 
 
224,304,000 
 
 
 
 
Tax withholdings on restricted stock vesting
 
 
 
 
 
 
 
 
 
 
Issuance of common stock (in shares)
 
 
 
 
20,053,540 
 
 
 
 
 
 
Ending Balance at Dec. 29, 2015
 
 
368,377,000 
 
4,000 
 
372,260,000 
 
 
(3,887,000)
Ending Balance, Shares at Dec. 29, 2015
 
 
 
 
38,802,425 
 
 
 
 
 
 
Net income (loss)
 
 
20,913,000 
 
 
 
 
 
 
 
20,913,000 
Other comprehensive income (loss), net of tax
 
 
172,000 
 
 
 
 
 
172,000 
 
 
Comprehensive income (loss)
 
 
21,085,000 
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
4,096,000 
 
 
 
4,096,000 
 
 
 
 
Stock Issued During Period, Shares, Other
 
 
 
 
1,533,542 
 
 
 
 
 
 
Tax withholdings on restricted stock vesting
 
 
(916,000)
 
 
 
(916,000)
 
 
 
 
Restricted stock awards vested, shares
 
 
 
 
164,336 
 
 
 
 
 
 
Restricted stock awards vested, value
 
 
 
 
 
 
 
 
 
 
Exercise of stock options, shares
 
 
 
 
500 
 
 
 
 
 
 
Exercise of stock options, value
 
 
5,000 
 
 
 
5,000 
 
 
 
 
Repurchase of common stock, shares
 
 
 
 
(1,347,300)
 
 
 
 
 
 
Stock Repurchased During Period, Value
 
 
 
 
 
 
 
 
 
 
Repurchase of common stock, value
 
 
(15,314,000)
 
 
 
(15,314,000)
 
 
 
 
Ending Balance at Jan. 03, 2017
 
 
377,333,000 
 
 
 
360,131,000 
 
172,000 
 
17,026,000 
Ending Balance, Shares at Jan. 03, 2017
 
 
 
 
39,153,503 
 
 
 
 
 
 
Beginning Balance at Sep. 06, 2016
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
8,039,000 
 
 
 
 
 
 
 
 
Ending Balance at Jan. 03, 2017
 
 
377,333,000 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
4,238,000 
 
 
 
 
 
 
 
 
Ending Balance at Mar. 28, 2017
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance at Jan. 03, 2017
 
 
377,333,000 
 
 
 
360,131,000 
 
172,000 
 
17,026,000 
Beginning 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
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
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 
 
 
 
 
 
 
Beginning Balance at Sep. 12, 2017
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
35,202,000 
 
 
 
 
 
 
 
 
Ending Balance at Jan. 02, 2018
 
 
$ 416,249,000 
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended 12 Months Ended 6 Months Ended
Dec. 29, 2015
Successor
Jan. 2, 2018
Successor
Jan. 3, 2017
Successor
Jun. 30, 2015
Predecessor
Operating activities
 
 
 
 
Net income
$ 2,653 
$ 49,871 
$ 20,913 
$ 2,104 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
11,276 
23,362 
23,129 
8,249 
Amortization of favorable and unfavorable lease assets and liabilities, net
(364)
(809)
(607)
Amortization of deferred financing costs and interest rate cap
155 
389 
392 
908 
Subordinated note interest paid-in-kind
37 
Debt modification costs
78 
139 
Stock-based compensation
1,498 
4,876 
4,096 
532 
Change in fair value of warrant liability
(35)
Deferred income taxes
88 
(22,594)
10,741 
551 
Loss on disposal of assets, net
1,075 
312 
99 
Restaurant closure charges, net
(379)
(179)
Changes in operating assets and liabilities:
 
 
 
 
Accounts and other receivables, net
313 
(921)
154 
Inventories
(265)
88 
145 
Prepaid expenses and other current assets
653 
(2,580)
(659)
(426)
Increase (Decrease) in Other Noncurrent Assets
(162)
(59)
Accounts payable
(3,309)
2,332 
(404)
4,222 
Other accrued liabilities
3,434 
(1,526)
3,733 
(5,026)
Other non-current liabilities
1,177 
2,856 
(3,387)
(1,573)
Net cash provided by operating activities
17,085 
57,788 
57,546 
10,083 
Investing activities
 
 
 
 
Purchases of property and equipment
(18,593)
(50,627)
(45,853)
(14,813)
Proceeds from disposal of property and equipment
9,907 
3,423 
42 
Proceeds from the Company’s trust account
149,989 
Purchases of other assets
(589)
(1,033)
(1,333)
(513)
Acquisition of franchisees
(1,128)
(3,891)
Proceeds from Divestiture of Businesses
2,192 
Proceeds from dissolution of investments in partnerships
1,586 
Acquisition of Del Taco Holdings, net of cash acquired
(89,827)
Net cash (used in) provided by investing activities
42,566 
(40,689)
(47,654)
(15,284)
Financing activities
 
 
 
 
Proceeds from term loan, net of debt discount
23,654 
Proceeds from deemed landlord financing liabilities
1,208 
3,925 
1,974 
Proceeds from issuance of common stock
35,000 
91,236 
Repurchase of common stock and warrants
(13,849)
(15,314)
Payment of tax withholding related to restricted stock vesting, option exercises and distribution of restricted stock units
(1,923)
(916)
(7,533)
Payments on term loans
(227,100)
Payments on capital leases and deemed landlord financing
(864)
(1,587)
(1,728)
(831)
Payment on subordinated notes
(108,113)
Proceeds from revolving credit facility, net of debt discount
162,556 
31,500 
24,000 
10,000 
Payments on revolving credit facility
(14,000)
(37,500)
(19,000)
(6,000)
Payment for interest rate cap
(312)
Payments for debt issue costs
(484)
(593)
Repayment of note payable
(500)
Payment of deferred underwriter compensation
(5,250)
Proceeds from Stock Options Exercised
99 
Net cash (used in) provided by financing activities
(49,457)
(19,335)
(11,291)
1,820 
(Decrease) increase in cash and cash equivalents
10,194 
(2,236)
(1,399)
(3,381)
Cash and cash equivalents at beginning of period
8,795 
10,194 
 
Cash and cash equivalents at end of period
10,194 
6,559 
8,795 
5,172 
Supplemental cash flow information:
 
 
 
 
Cash paid during the period for interest
3,216 
6,873 
6,328 
13,548 
Cash paid during the period for income taxes, net of tax refunds
161 
9,441 
3,531 
46 
Supplemental schedule of non-cash activities:
 
 
 
 
Accrued property and equipment purchases
306 
2,305 
64 
1,549 
Write-offs against bad debt reserves
72 
Amortization of interest rate cap into net income, net of tax
58 
Change in other asset for fair value of interest rate cap recorded to other comprehensive (loss) income, net of tax
(162)
172 
(24)
Warrant liability reclassified to equity upon exercise of warrants
8,274 
Issuance of shares for consideration in the acquisition of Del Taco Holdings, Inc.
189,306 
Issuance of warrants as payment for working capital loans
389 
Common stock of Del Taco Restaurants, Inc. reclassified to equity upon release from possible redemption
$ 136,213 
$ 0 
$ 0 
$ 0 
Description of Business
Description of Business
Description of Business
Del Taco Restaurants, Inc. (f/k/a Levy Acquisition Corp. (“LAC”)) is a Delaware corporation headquartered in Lake Forest, California. The consolidated financial statements include the accounts of Del Taco Restaurants, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Del Taco”). The Company develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants. At 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. At January 3, 2017, there were 310 company-operated and 241 franchise-operated Del Taco restaurants located in 15 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. See Note 3 for further discussion of the Business Combination.
DTH has no material assets or operations. DTH's direct subsidiary, F&C Restaurant Holding Co. ("F&C RHC") also has no material assets or operations, but was the issuer of subordinated notes in May 2010. F&C RHCs' direct subsidiary, Sagittarius Restaurants LLC ("SAG Restaurants"), also has no material assets or operations and was also an issuer of subordinated notes in May 2010. The outstanding balances for the F&C RHC and SAG Restaurants subordinated notes were fully redeemed in March 2015. See Note 8 for additional discussion on the F&C RHC and SAG Restaurants subordinated notes.
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
As a result of the Business Combination, the Company is the acquirer for accounting purposes, and DTH is the acquiree and accounting predecessor. The Company’s financial statement presentation distinguishes a “Predecessor” for DTH for periods prior to the Closing Date. The Company is the “Successor” for periods after the Closing Date, which includes consolidation of DTH subsequent to the Business Combination on June 30, 2015. The Merger was accounted for as a business combination using the acquisition method of accounting, and the Successor financial statements reflect a new basis of accounting that is based on the fair value of the net assets acquired. See Note 3 for further discussion of the Business Combination. As a result of the application of the acquisition method of accounting as of the Closing Date, the financial statements for the Predecessor period and for the Successor period are presented on a different basis of accounting and are therefore, not comparable. The historical financial information of Del Taco, formerly LAC, prior to the Business Combination has not been reflected in the financial statements as those amounts have been considered de-minimus.
For the Consolidated Statements of Shareholders’ Equity, the Predecessor results reflect the equity balances and activities of DTH at December 30, 2014 through June 30, 2015 prior to the closing of the Business Combination and the Successor results reflect the LAC equity balances at June 30, 2015 prior to the closing of the Business Combination and the activities for Del Taco through January 2, 2018.
 
The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal years 2017 and 2015 are both a 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 2017, the Company’s financial statements reflect the fifty-two weeks ended January 2, 2018 (Successor). For fiscal year 2016, the Company's financial statements reflect the fifty-three weeks ended January 3, 2017 (Successor). For fiscal year 2015, the Company’s financial statements reflect the twenty-six weeks ended December 29, 2015 (Successor) and the twenty-six weeks ended June 30, 2015 (Predecessor).
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. Additionally, the Company held a 1% ownership interest in four public limited partnerships in which the Company served as general partner. The limited partners had substantive kick-out rights over the general partner giving the limited partners power to direct the activities of the limited partnerships. The partnerships were liquidated and dissolved in December 2015. See the Related Party Transactions policy below for more information. Based upon the Company’s analysis of all the relevant facts and considerations of the franchise entities and the four public limited partnerships, the Company has concluded that the franchise agreements are not variable interest entities and the four public limited partnerships were 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. Franchise revenue comprise (i) development fees, (ii) franchise fees, (iii) on-going royalties and (iv) renewal fees. 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 when the Company has substantially fulfilled its obligation pursuant to the development agreement. Development fees and franchise fees are generally recognized as revenue upon the opening of a franchise restaurant or upon termination of the development agreement with the franchisee. Deferred development fees and deferred franchise fees, which are included in other non-current liabilities on the consolidated balance sheets totaled $1.3 million and $1.4 million as of January 2, 2018 (Successor) and January 3, 2017 (Successor), respectively. 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. Renewal fees are recognized when a renewal agreement becomes effective. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities. Promotional allowances totaled approximately $14.2 million during the fifty-two weeks ended January 2, 2018 (Successor), $13.6 million during the fifty-three weeks ended January 3, 2017 (Successor) and $5.8 million and $5.4 million during the twenty-six weeks ended December 29, 2015 (Successor) and June 30, 2015 (Predecessor), respectively. Franchise sublease income is comprised of rental income associated with properties leased or subleased to franchisees and is recognized as revenue on an accrual basis.
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 $2.5 million and $2.4 million as of January 2, 2018 (Successor) and January 3, 2017 (Successor), respectively. The current portion of the deferred gift card income is included in other accrued liabilities on the consolidated balance sheets and totaled $1.3 million and $1.2 million as of January 2, 2018 (Successor) and January 3, 2017 (Successor), respectively. The non-current portion of the deferred gift card income was $1.2 million as of both January 2, 2018 (Successor) and January 3, 2017 (Successor) 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 2, 2018 (Successor) and January 3, 2017 (Successor).
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 $1.1 million and $1.6 million as of January 2, 2018 (Successor) and January 3, 2017 (Successor), 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 2, 2018 (Successor) and January 3, 2017 (Successor).
Inventories
Inventories, consisting of food items, packaging and beverages, are valued at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment includes land, buildings, leasehold improvements, restaurant and other equipment, and buildings under capital leases. Land, leasehold improvements, property and equipment acquired in business combinations are initially recorded at their estimated fair value. Land, 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 $21.0 million for the fifty-two weeks ended January 2, 2018 (Successor), $20.6 million for the fifty-three weeks ended January 3, 2017 (Successor) and $10.1 million and $7.1 million for the twenty-six weeks ended December 29, 2015 (Successor) and June 30, 2015 (Predecessor), respectively. These amounts include $1.2 million for the fifty-two weeks ended January 2, 2018 (Successor), $1.4 million for the fifty-three weeks ended January 3, 2017 (Successor) and $0.8 million and $0.3 million for the twenty-six weeks ended December 29, 2015 (Successor) and June 30, 2015 (Predecessor), respectively, related to buildings under capital leases. Accumulated depreciation and amortization associated with property and equipment includes $2.5 million and $2.2 million related to buildings under capital leases as of January 2, 2018 (Successor) and January 3, 2017 (Successor), 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 the fifty-two weeks ended January 2, 2018 (Successor), $1.3 million for the fifty-three weeks ended January 3, 2017 (Successor), respectively and $0.5 million for both the twenty-six weeks ended December 29, 2015 (Successor) and June 30, 2015 (Predecessor). 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 both the fifty-two weeks ended January 2, 2018 (Successor) and the fifty-three weeks ended January 3, 2017 (Successor) and $25,000 and $40,000 for the twenty-six weeks ended December 29, 2015 (Successor) and June 30, 2015 (Predecessor), respectively.
Gains and losses on the disposal of assets are recorded as the difference between the net proceeds received 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 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.
In assessing potential impairments for the fourth quarter test for 2017, 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 2017 annual impairment assessment, the Company determined that no goodwill or trademark impairment was indicated. As of January 2, 2018, 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 term 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 $2.1 million and $2.0 million as of January 2, 2018 (Successor) and January 3, 2017 (Successor), respectively, and is included in other assets, net in the consolidated balance sheets. Capitalized software costs totaled $1.0 million for the fifty-two weeks ended January 2, 2018 (Successor), $1.3 million for the fifty-three weeks ended January 3, 2017 (Successor) and $0.6 million and $0.5 million for the twenty-six weeks ended December 29, 2015 (Successor) and June 30, 2015 (Predecessor), respectively. Amortization expenses totaled $1.0 million for the fifty-two weeks ended January 2, 2018 (Successor), $0.9 million for the fifty-three weeks ended January 3, 2017 (Successor) and $0.4 million for both the twenty-six weeks ended December 29, 2015 (Successor) and June 30, 2015 (Predecessor).
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.
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.
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 value of acquired lease contracts having contractual rents that are unfavorable compared to fair market rents and are amortized on a straight-line basis over the expected lease term to expense in the consolidated statements of comprehensive income. As of January 2, 2018 (Successor) and January 3, 2017 (Successor), unfavorable lease liabilities had a gross carrying value of $20.6 million and $21.0 million with accumulated amortization of $6.1 million and $3.9 million, respectively. The Company reclassified $2.6 million of unfavorable lease liabilities during the fourth quarter of fiscal 2015 related to the 12 closed underperforming locations and re-characterized the amount as restaurant closure liability, as described in Note 4. Amortization credits recorded for unfavorable lease liabilities were $2.7 million during the fifty-two weeks ended January 2, 2018 (Successor), $2.6 million during the fifty-three weeks ended January 3, 2017 (Successor) and $1.3 million and $0.3 million during the twenty-six weeks ended December 29, 2015 (Successor) and June 30, 2015 (Predecessor), respectively. The weighted-average amortization period as of January 2, 2018 (Successor) for unfavorable lease liabilities equaled 7.9 years. The estimated future amortization for unfavorable lease liabilities for the next five fiscal years is as follows (in thousands):
 
 
Unfavorable Lease Liabilities
2018
 
$
2,273

2019
 
2,055

2020
 
1,913

2021
 
1,630

2022
 
1,452


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 monthly 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 $0.3 million and $0.7 million at January 2, 2018 (Successor) and January 3, 2017 (Successor), respectively. Company-operated restaurants contribute to the advertising fund on the same basis as franchise-operated restaurants. At January 2, 2018 (Successor) and January 3, 2017 (Successor), the Company had an additional $0.4 million and $1.0 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. Advertising expenses for the Company were $18.1 million for the fifty-two weeks ended January 2, 2018 (Successor), $17.2 million for the fifty-three weeks ended January 3, 2017 (Successor) and $7.6 million and $8.7 million for the twenty-six weeks ended December 29, 2015 (Successor) and June 30, 2015 (Predecessor), respectively.
Pre-opening Costs
Pre-opening costs, which include restaurant labor, supplies, cash and non-cash rent expense and other costs incurred prior to the opening of a new restaurant are expensed as incurred. Pre-opening costs were $1.6 million for the fifty-two weeks ended January 2, 2018 (Successor), $0.7 million for the fifty-three weeks ended January 3, 2017 (Successor) and $0.4 million and $0.3 million for the twenty-six weeks ended December 29, 2015 (Successor) and June 30, 2015 (Predecessor), respectively.
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, except for gains or losses on the disposal of property and equipment related to the 12 underperforming restaurants, which are included in restaurant closure charges, net on the consolidated statements of comprehensive income.
Stock-Based Compensation Expense
The Company measures and recognizes compensation expense for all share-based payment awards made to employees 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. 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 (Successor), 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.
The Company previously entered into long-term leases for 22 Del Taco restaurants whereby the lessors were one of four public partnerships where the Company served as general partner with a 1% ownership interest. The leases required monthly rent payments in an amount equal to 12% of gross sales which were recorded within occupancy and other operating expenses in the consolidated statements of comprehensive income and totaled $1.4 million for both the twenty-six weeks ended December 29, 2015 (Successor) and June 30, 2015 (Predecessor).
The Company recorded a fair value adjustment through the initial purchase price allocation, as described in Note 3, of $1.5 million for the estimated fair value of its investment in the four public partnerships.
On July 24, 2015, the four public partnerships entered into an agreement to sell all of the properties, subject to the approval by a majority in interest of the limited partners in each of the public partnerships, to a third party that is not affiliated with the Company. The sale of the properties included new long-term leases between the Company and the third party buyer and was approved by the respective limited partners on November 23, 2015. On December 14, 2015, the four public partnerships consummated the sale, and were subsequently liquidated and dissolved and the assets of the respective partnerships were distributed pursuant to the terms of their respective partnership agreements. During the twenty-six weeks ended December 29, 2015 (Successor), the Company recorded a gain of $0.2 million, included in other income in the consolidated statements of comprehensive income, based on the approximate $1.8 million distribution received in excess of the $1.6 million carrying value of its investment in the partnerships.
At December 30, 2014 (Predecessor), DTH had $108.1 million of subordinated notes outstanding due to its three largest shareholders that bore interest at 13.0%. On March 20, 2015, DTH used proceeds from the Step 1 of the Business Combination, as described in Note 3, a $10.0 million revolver borrowing and amended term loan proceeds of $25.1 million to fully redeem the then outstanding balance of $111.2 million of subordinated notes. Interest expense related to subordinated notes was $3.1 million for the twenty-six weeks ended June 30, 2015 (Predecessor). See Note 8 for further discussion regarding the subordinated notes.
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 2, 2018, Del Taco operated and franchised a total of 373 restaurants in California (252 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 January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, Business Combinations (Topic 804): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether certain transactions should be accounted for as acquisitions or disposals of assets or businesses. The Company elected, as permitted by the standard, to early adopt ASU 2017-01 in the third quarter of 2017. The adoption of ASU 2017-01 did not have a material impact to the Company's consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify various aspects of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. This standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period, with early adoption permitted. As ASU 2016-09 requires recognition of certain tax benefits associated with stock-based compensation on a discrete basis, the Company anticipates that its effective tax rate may vary from quarter to quarter depending on the Company’s stock price in each period. The Company anticipates that ASU 2016-09 will potentially increase or lower its effective tax rate, relative to the U.S. statutory rate, depending on the amount of stock-based compensation deductible for tax related to the vesting of restricted stock awards or exercise of stock options as compared to cumulative stock-based compensation recorded. The Company adopted ASU 2016-09 during the first fiscal quarter of 2017. The Company will continue to estimate forfeitures.
Recently Issued Accounting Standards
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which 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 Company is currently evaluating the impact of the standard on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard simplifies the subsequent measurement of goodwill, requiring only a single-step quantitative test to identify and measure impairment based on the excess of a reporting unit's carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative impairment test is necessary. This standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The standard requires adoption on a prospective basis. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-04, Liabilities-Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products, which is designed to provide guidance and eliminate diversity in the accounting for the derecognition of financial liabilities related to certain prepaid stored-value products using a revenue-like breakage model. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. This standard is to be applied retrospectively or using a cumulative effect transition method as of the date of adoption. The Company is currently evaluating the impact of the standard on its consolidated financial statements and related disclosures as well as the expected adoption method.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidance will result in key changes to lease accounting and will aim to bring leases onto balance sheets to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations as well as the assets it owns versus leases. The new leasing standard will be effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. The new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with certain practical expedients available. Based on a preliminary assessment, the Company expects that substantially all of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a material increase in the assets and liabilities on the Company's consolidated balance sheets. The Company is continuing its evaluation, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures. The Company will adopt ASU 2016-02 during the first quarter of fiscal 2019.
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. This ASU is effective for annual periods and interim periods beginning after December 15, 2017. ASU 2014-09 is to be applied retrospectively or using a cumulative effect transition method. The Company will adopt ASU 2014-09 in fiscal year 2018, using the modified retrospective method of adoption.
ASU 2014-09 will not materially impact the recognition of company restaurant sales or franchise royalty income from franchisees included in franchise revenue. Franchise sublease income is not within the scope of this new guidance.
The adoption of ASU 2014-09 will change 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. Currently, initial franchise fees are recognized when all material obligations have been performed and conditions have been satisfied, typically when operations of a new franchise restaurant have commenced, and renewal fees are recognized when a renewal agreement becomes effective. ASU 2014-09 requires franchise and renewal fees to be deferred and recognized over the term of the related franchise agreement for the respective restaurant. 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 will record approximately $1.0 million as a cumulative effect adjustment to opening retained earnings and deferred revenue as of January 3, 2018 (the first day of fiscal 2018) related to franchise and renewal fees previously recognized since the Business Combination on June 30, 2015. During fiscal 2017 and 2016, the Company recorded initial franchise and renewal fees of $0.6 million and $0.3 million, respectively, as component of franchise revenue in the consolidated statements of comprehensive income.
The adoption of the new guidance will change the reporting of advertising fund contributions from franchisees and the related advertising fund expenditures, which are not currently included in the consolidated statements of comprehensive income. ASU 2014-09 requires these advertising fund contributions and expenditures to be reported on a gross basis in the consolidated statements of comprehensive income, which will have an impact to our total revenues and expenses. However, the Company expects such advertising fund contributions and expenditures will be largely offsetting and therefore does not expect a significant impact on its reported net income. Franchise contributions to the Company's advertising programs for fiscal 2017 and 2016 were $12.7 million and $12.1 million, respectively.
Additionally, certain other franchise expenses have been recorded net of the related fees received from franchisees. Under ASU 2014-09, the Company will include these revenues and expenditures on a gross basis within the consolidated statements of comprehensive income. While this change will materially impact the gross amount of reported franchise revenue and related expenses on the consolidated statements of comprehensive income, the impact will be an offsetting increase to both revenue and expense such that there will not be a significant, if any, impact on operating income and net income. Other franchise fees received from franchisees for fiscal 2017 and 2016 were $0.8 million and $0.8 million, respectively.
Business Combination
Business Combination
Business Combination
On June 30, 2015, the Company and DTH completed the Business Combination pursuant to the Merger Agreement under which the Company’s wholly-owned subsidiary, Levy Merger Sub, merged with and into DTH, with DTH surviving the merger as a wholly-owned subsidiary of the Company.
Concurrent with the execution of the Merger Agreement, Levy Epic Acquisition Company, LLC (“Levy Newco”), Levy Epic Acquisition Company II, LLC (“Levy Newco II” and with Levy Newco, the “Levy Newco Parties”), DTH and the DTH stockholders entered into a stock purchase agreement (the “Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, the Levy Newco Parties agreed to purchase 2,348,968 shares of DTH common stock from DTH for $91.2 million in cash, and to purchase 740,564 shares of DTH common stock directly from existing DTH shareholders for $28.8 million in cash (the “Initial Investment”). As a result of this Initial Investment, an aggregate of 3,089,532 shares of DTH common stock was purchased by the Levy Newco Parties for total cash consideration of $120.0 million. Concurrent with the consummation of the Initial Investment, DTH increased its borrowing capacity under its existing term loan credit facility by $25.1 million. Proceeds from the increased borrowings under the term loan, a $10.0 million revolver borrowing and the $91.2 million received by DTH from the sale of DTH common stock to the Levy Newco Parties was used to fully repay the outstanding balance of DTH’s subordinated notes (see Note 8), and pay approximately $15.7 million of transaction costs, which included $7.5 million of employee withholding taxes resulting from the acceleration of outstanding stock options and restricted stock units due to the change in control triggered by the Initial Investment. Employee equity redemptions were exchanged for such withholding taxes. The transactions described in this paragraph are hereafter collectively referred to as “Step 1.”
 
Also concurrent with Step 1, the Company entered into common stock purchase agreements pursuant to which certain investors committed to acquire 3,500,000 shares of the Company’s common stock upon the closing of the Business Combination for total consideration of $35 million (the “Step 2 Investment”). The additional funds provided by these investors were used as additional cash consideration in the Business Combination.
The consideration for the Business Combination was provided by (1) the funds remaining in the Company’s trust account of $150 million after Delaware franchise taxes, stockholder redemptions, and $10.2 million of expenses paid for by the Company, (2) the $35 million provided by the Step 2 Investment, and (3) shares of the Company’s common stock. The Levy Newco Parties received only stock merger consideration in the Business Combination. The common stock purchase agreements entered into in connection with the Step 1 Investment and the closing of the Business Combination is hereafter referred to as “Step 2.” Step 1 and Step 2 are collectively referred to herein as the “Transactions.”
Step 2 is accounted for as a business combination under the scope of the FASB’s ASC 805, Business Combinations, or ASC 805. Pursuant to ASC 805, the Company has been determined to be the accounting acquirer based on the evaluation of the following facts and circumstances:
 
The Company paid cash and equity consideration for all of the equity in DTH;
Investments by the Company and Levy Newco Parties were considered multiple arrangements that should be treated as a single transaction for accounting purposes; and
The existing stockholders of the Company and the Levy Newco Parties retain relatively more voting rights in the combined company than the historical DTH stockholders.
DTH constitutes a business, with inputs, processes, and outputs. Accordingly, the acquisition of DTH constitutes the acquisition of a business for purposes of ASC 805, and due to the change in control from the merger, is accounted for using the acquisition method.
The following summarizes the merger consideration paid to DTH stockholders (except for the Levy Newco Parties) (in thousands):
 
Calculation of
Purchase Price
Cash consideration paid (1)
$
105,164

Value of share consideration issued (2)
69,305

Fair value of equity interests acquired in Step 1 (3)
120,000

Less: Transaction expenses paid by the Company (1)
(10,164
)
Total purchase price
$
284,305

 
(1)
Each issued and outstanding share of DTH stock held by DTH stockholders other than the Levy Newco Parties was converted into the right to receive the per share merger consideration, which equaled $38.84 per DTH share, payable in cash and the Company’s common stock. Cash consideration was paid with respect to all common stock of DTH except for shares held by the Levy Newco Parties. The aggregate amount of cash consideration paid directly to DTH stockholders was $95 million. Total cash consideration paid also included $10.2 million of expenses paid by the Company for the closing of Step 2.
(2)
The stock merger consideration consisted of the Company’s common stock issued to DTH stockholders as part of the merger consideration in exchange for shares of DTH common stock. Company shares exchanged for the DTH shares held by the Levy Newco Parties are discussed in (3) below. The following summarizes the number of shares of the Company’s common stock issued to DTH stockholders other than the Levy Newco Parties:
(in thousands, except share and per share data)
Calculation of
Share
Consideration
Number of shares issued
4,553,540

Value per share as of June 30, 2015
$
15.22

Value of share consideration transferred
$
69,305

 
(3)
The Company exchanged its common stock for DTH shares held by the Levy Newco Parties acquired in Step 1. The Transactions were accounted for as related events transferring control of DTH to the Company through a minority investment in Step 1 and a controlling interest in Step 2. The Levy Newco Parties’ shares of DTH common stock were exchanged for shares of the Company’s common stock in the Business Combination, but represent a previously held equity interest in an acquired company. The previously held equity interest had the same value as its $120 million purchase price.

The Company recorded an allocation of the purchase price to DTH’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value as of the Closing Date. The final purchase price allocation is as follows (in thousands):
 
 
Purchase Price
Allocation
Cash and cash equivalents
$
5,173

Accounts receivable and other receivables
3,228

Inventories
2,541

Prepaid expenses and other current assets
4,266

Total current assets
15,208

Property and equipment
105,524

Intangible assets
250,490

Other assets
4,194

Total identifiable assets acquired
375,416

Accounts payable
(18,866
)
Other accrued liabilities
(26,607
)
Current portion of capital lease obligations and deemed landlord financing liabilities
(1,670
)
Long-term debt, capital lease obligations and deemed landlord financing liabilities
(246,562
)
Deferred income taxes
(80,254
)
Other long-term liabilities
(36,208
)
Net identifiable liabilities assumed
(34,751
)
Goodwill
319,056

Total gross consideration
$
284,305



The final values allocated to intangible assets and the useful lives are as follows (in thousands):
 
 
Fair Value
 
Useful life
Favorable lease assets and other intangible assets
 
$
14,290

 
0.6 to 19 years
Trademarks
 
220,300

 
Indefinite
Franchise agreements
 
15,900

 
0.1 to 40 years
Total intangible assets
 
$
250,490

 
 
Unfavorable lease liabilities (1)
 
$
(23,652
)
 
1.5 to 19 years
Weighted average life of definite-lived intangibles
 
 
 
11 years
 
(1)
Included in other non-current liabilities on the consolidated balance sheets.

During the fifty-three weeks ended January 3, 2017 (Successor), the Company recorded a net $0.8 million adjustment to goodwill due to a change in estimate for the liability for deferred income taxes. The goodwill of $319.1 million arising from the Business Combination is primarily attributable to the market position and future growth potential of DTH for both company-operated and franchise-operated restaurants. Approximately $0.6 million of goodwill is expected to be deductible for income tax purposes.
For the fifty-three weeks ended January 3, 2017 (Successor), the Company recorded approximately $0.7 million of transaction-related expenses, of which $0.1 million related to the Business Combination. During the fifty-three weeks ended January 3, 2017 (Successor), the Company was able to recover legal defense costs related to a purported class action and derivative complaint (See Note 17 for further discussion) of $0.5 million from its insurance company related to costs previously expensed. For the twenty-six weeks ended December 29, 2015 (Successor) and the twenty-six weeks ended June 30, 2015 (Predecessor), the Company incurred approximately $12.3 million and $7.3 million, respectively, of transaction expenses directly related to Step 1 and Step 2 of the Business Combination. Also included in transaction-related costs on the consolidated statements of comprehensive income for the twenty-six weeks ended December 29, 2015 (Successor) was $0.7 million of costs related to the secondary offering as described in Note 13.
LAC incurred $4.5 million of transaction-related expenses not reported with DTH’s Predecessor consolidated statements of comprehensive income that were directly related to the Business Combination for the twenty-six weeks ended June 30, 2015 (Predecessor). Transaction-related expenses, which were $2.9 million through the second fiscal quarter ended June 16, 2015 and $0.5 million for the fiscal year 2014, were reported by LAC in prior 10-Q and 10-K filings which are also not reported with DTH’s Predecessor consolidated statements of comprehensive income (loss). Cash outflows of $4.3 million related to transaction-related expenses previously expensed by LAC are reported as a cash outflows for operating activities for the twenty-six weeks ended December 29, 2015 (Successor). In addition, in connection with the Business Combination, the Company paid deferred underwriter compensation of $5.3 million in connection with the Company’s initial public offering in November 2013 as well as repaid working capital loans of $0.5 million to the Company’s sponsor, Levy Acquisition Sponsor LLC, both of which were accrued on LAC’s balance sheet at June 16, 2015, and not included with DTH’s Predecessor consolidated balance sheet. Both of these payments are included as cash outflows for financing activities for the twenty-six weeks ended December 29, 2015 (Successor).
Property and Equipment, Net
Property and Equipment, Net
Property and Equipment, Net
Property and equipment, net at January 2, 2018 (Successor) and January 3, 2017 (Successor) consisted of the following (in thousands):
 
 
Successor
 
 
January 2, 2018
 
January 3, 2017
Land
 
$
9,800

 
$
13,919

Buildings
 
2,325

 
3,391

Restaurant and other equipment
 
74,075

 
58,699

Leasehold improvements
 
100,192

 
78,739

Buildings under capital leases
 
4,625

 
5,433

Restaurant property leased to others
 
3,090

 

Construction-in-progress
 
11,905

 
8,703

 
 
206,012

 
168,884

Less: Accumulated depreciation
 
(49,888
)
 
(30,564
)
Property and Equipment, Net
 
$
156,124

 
$
138,320

Summary of Refranchsing and Franchise Acquisitions (Notes)
Refranchising and Franchise Acquisitions
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 five company-operated restaurants to franchisees during the fifty-two weeks ended January 2, 2018 (Successor). There were no company-operated restaurants sold during the fifty-three weeks ended January 3, 2017 (Successor), the twenty-six weeks ended December 29, 2015 (Successor) or the twenty-six weeks ended June 30, 2015 (Predecessor). The following table provides detail of the related gain recognized during the fifty-two weeks ended January 2, 2018 (Successor) (dollars in thousands):
 
 
Successor
 
 
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 one franchise-operated restaurant during the fifty-two weeks ended January 2, 2018 (Successor) and six franchise-operated restaurants during the fifty-three weeks ended January 3, 2017 (Successor). 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. There were no franchise acquisitions during the twenty-six weeks ended December 29, 2015 (Successor) or the twenty-six weeks ended June 30, 2015 (Predecessor). The following table provides detail of the combined acquisitions for the fifty-two weeks ended January 2, 2018 (Successor) and the fifty-three weeks ended January 3, 2017 (dollars in thousands):

 
 
Successor
 
 
52 Weeks Ended January 2, 2018
 
53 Weeks Ended January 3, 2017
Franchise-operated restaurants acquired from franchisees
 
1
 
6
 
 
 
 
 
Goodwill
 
$
860

 
$
969

Property and equipment
 
360

 
821

Land and building
 

 
2,127

Unfavorable lease liability
 
(85
)
 

Liabilities assumed
 
(7
)
 
(26
)
Total Consideration
 
$
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 (Successor).
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the fifty-two weeks ended January 2, 2018 (Successor) are as follows (in thousands):
 
 
 
Goodwill
Balance as of January 3, 2017 (Successor)
$
320,025

Sale of company-operated restaurants
(247
)
Acquisition of franchise-operated restaurants
860

Balance as of January 2, 2018 (Successor)
$
320,638



The increase in goodwill was due to an adjustment of $0.9 million related to the acquisition of one franchise-operated restaurant offset by $(0.2) million related to the sale of five company-operated restaurants to franchisees during the fifty-two weeks ended January 2, 2018 (Successor), as described in more detail in Note 6.
The carrying value of trademarks was $220.3 million at both January 2, 2018 (Successor) and January 3, 2017 (Successor).
The Company’s other intangible assets at January 2, 2018 (Successor) and January 3, 2017 (Successor) consisted of the following (in thousands):
 
 
Successor
 
 
January 2, 2018
 
January 3, 2017
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Favorable lease assets
 
$
13,744

 
$
(4,442
)
 
$
9,302

 
$
14,176

 
$
(2,996
)
 
$
11,180

Franchise rights
 
15,284

 
(3,282
)
 
12,002

 
15,489

 
(2,038
)
 
13,451

Reacquired franchise rights
 
243

 
(49
)
 
194

 
161

 
(10
)
 
151

Total amortized other intangible assets
 
$
29,271

 
$
(7,773
)
 
$
21,498

 
$
29,826

 
$
(5,044
)
 
$
24,782



During the fifty-two weeks ended January 2, 2018 (Successor), $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. During the fifty-three weeks ended January 3, 2017 (Successor), the Company wrote-off $0.2 million of franchise rights associated with the closure of four franchise locations and reclassified $0.2 million of franchise rights as reacquired franchise rights from the acquisition of six franchise locations.
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 2, 2018 (Successor) for favorable lease assets and franchise rights equaled 7.3 years and 13.0 years, respectively.
Amortization expense for amortizable intangible assets totaled $3.3 million, $3.6 million, $1.7 million and $1.0 million for the fifty-two weeks ended January 2, 2018 (Successor), fifty-three weeks ended January 3, 2017 (Successor), twenty-six weeks ended December 29, 2015 (Successor) and twenty-six weeks ended June 30, 2015 (Predecessor), respectively, and includes amortization of favorable lease assets of $1.9 million, $2.0 million, $1.0 million and $0.3 million for the fifty-two weeks ended January 2, 2018 (Successor), fifty-three weeks ended January 3, 2017 (Successor), twenty-six weeks ended December 29, 2015 (Successor) and twenty-six weeks ended June 30, 2015 (Predecessor), respectively, and amortization of franchise rights of $1.3 million, $1.6 million, $0.7 million and $0.7 million for the fifty-two weeks ended January 2, 2018 (Successor), fifty-three weeks ended January 3, 2017 (Successor), twenty-six weeks ended December 29, 2015 (Successor) and twenty-six weeks ended June 30, 2015 (Predecessor), 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
2018
 
$
1,722

 
$
1,293

2019
 
1,447

 
1,255

2020
 
1,171

 
1,186

2021
 
1,005

 
1,074

2022
 
922

 
973

Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
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 2, 2018 (Successor) and January 3, 2017 (Successor) consisted of the following (in thousands): 
 
 
Successor
 
 
January 2, 2018
 
January 3, 2017
2015 Senior Credit Facility, net of debt discount of $747 and $1,035 and deferred financing costs of $252 and $349 at January 2, 2018 (Successor) and January 3, 2017 (Successor), respectively
 
$
152,001

 
$
157,616

Total outstanding indebtedness
 
152,001

 
157,616

Obligations under capital leases and deemed landlord financing liabilities
 
20,053

 
17,715

Total debt, net
 
172,054

 
175,331

Less: amounts due within one year
 
1,415

 
1,588

Total amounts due after one year, net
 
$
170,639

 
$
173,743

 
At January 2, 2018 (Successor) and January 3, 2017 (Successor), the Company assessed the amounts recorded under the 2015 Senior Credit Facility and determined that such amounts approximated fair value.
2015 Revolving Credit Facility (Successor)
On August 4, 2015, the Company refinanced its existing senior credit facility (“2013 Senior Credit Facility”) and entered into a new credit agreement (the “Credit Agreement”). The Credit Agreement, which matures on August 4, 2020, provides for a $250 million revolving credit facility (the “2015 Senior Credit Facility”). The Company utilized $164 million of proceeds from the Credit Agreement to refinance in total its 2013 Senior Credit Facility and pay costs associated with the refinancing. The 2013 Senior Credit Facility, as amended March 20, 2015, totaled $267.1 million, consisting of an initial $227.1 million term loan (“2013 Term Loan”) and a $40 million revolver (“2013 Revolver”). At the time of the refinance, a $162.5 million term loan balance was outstanding and $17.6 million of revolver capacity was utilized to support outstanding letters of credit under the 2013 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 applicable margin was initially set at 2.00% for LIBOR loans and at 1.00% for base rate loans until delivery of financial statements and a compliance certificate for the fourth fiscal quarter ending after the closing date of the Credit Agreement. Following delivery of financial statements and a compliance certificate for the fourth fiscal quarter ending December 29, 2015 (Successor), the applicable margin decreased 0.25% for both LIBOR and base rate loans during the first fiscal quarter of 2016. 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 2, 2018 (Successor). 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 and expensed $0.1 million as debt modification costs in the consolidated statements of comprehensive income for the twenty-six weeks ended December 29, 2015 (Successor). 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 both the fifty-two weeks ended January 2, 2018 (Successor) and the fifty-three weeks ended January 3, 2017 (Successor) and $0.2 million during the twenty-six weeks ended December 29, 2015 (Successor).
At January 2, 2018 (Successor), the weighted average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 3.32%. At January 2, 2018 (Successor), the Company had a total of $78.8 million of availability for additional borrowings under the 2015 Senior Credit Facility as the Company had $153.0 million of outstanding borrowings and $18.2 million of letters of credit outstanding which reduce availability under the 2015 Senior Credit Facility.
DTH 2013 Senior Credit Facility
On April 21, 2014, DTH amended its 2013 Senior Credit Facility whereby the term loan was increased by $62.0 million to $220.0 million and the 2013 Revolver remained at $40.0 million, the proceeds of which were used for a $62.0 million partial redemption of SAG Restaurants subordinated notes (the "April 2014 Debt Refinance"). 
In March 2015, DTH amended its 2013 Senior Credit Facility to increase the 2013 Term Loan by $25.1 million to $227.1 million (the “March 2015 Debt Refinance”). A portion of the proceeds from Step 1 of the Business Combination, described in Note 3, proceeds of $10 million from the 2013 Revolver and the March 2015 Debt Refinance proceeds were used to fully redeem the then outstanding balance of subordinated notes of $111.2 million.
On March 12, 2015, DTH satisfied the rating condition in its 2013 Senior Credit Facility resulting in a decrease in interest rate to LIBOR (not to be less than 1.00%) plus a margin of 4.25%.
The Company incurred lender costs and third-party costs associated with the March 2015 Debt Refinance of $1.6 million of which $1.5 million was capitalized as lender debt discount and $0.1 million was expensed as debt modification costs in the consolidated statements of comprehensive income for the twenty-six weeks ended June 30, 2015 (Predecessor).
Lender debt discount costs and deferred financing costs associated with the 2013 Senior Credit Facility were amortized to interest expense over the term of the 2013 Term Loan using the effective interest method. Amortization of deferred financing costs including debt discount totaled $0.9 million during the twenty-six weeks ended June 30, 2015 (Predecessor).
Subordinated Notes (Predecessor)
In connection with Step 1 of the Business Combination and the March 2015 Debt Refinance discussed above, DTH fully redeemed the outstanding balance of the SAG Restaurants LLC (SAG Restaurants) subordinated notes ("SAG Restaurants Sub Notes") and F&C Restaurant Holding Co. (F&C RHC) subordinated notes ("F&C RHC Sub Notes") on March 20, 2015 of $111.2 million.
For the twenty-six weeks ended June 30, 2015 (Predecessor), interest expense related to the SAG Restaurants Sub Notes and F&C RHC Sub Notes was $3.1 million.
Other Debt Information

Based on debt agreements and leases in place as of January 2, 2018 (Successor), future maturities of debt, obligations under capital leases and deemed landlord financing liabilities were as follows (in thousands):
 
2018
 
$
1,415

2019
 
988

2020
 
153,847

2021
 
804

2022
 
791

Thereafter
 
15,208

Total maturities
 
173,053

Less: debt discount and deferred financing costs
 
(999
)
Total debt, net
 
$
172,054

Derivative Instruments
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 2, 2018 (Successor), the 2016 Interest Rate Cap Agreement had no hedge ineffectiveness.
As of December 29, 2015 (Successor) 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 (Successor). The individual caplet contracts within the interest rate cap agreement expired at various dates through June 30, 2016.
2016 Interest Rate Cap Agreement (Successor)
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 2, 2018 (Successor).
During the fifty-two weeks ended January 2, 2018 (Successor), the Company reclassified $4,000 of interest expense related to hedges of these transactions into earnings. As of January 2, 2018 (Successor), the Company was hedging forecasted transactions expected to occur through March 31, 2020. Assuming interest rates at January 2, 2018 (Successor) remain constant, $0.3 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next 27 months. The Company intends to ensure that this hedge remains effective, therefore, approximately $60,000 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 2, 2018 (Successor) was included in accumulated other comprehensive income.
2013 Interest Rate Cap Agreement (Predecessor)
To ensure the effectiveness of the 2013 Interest Rate Cap Agreement through June 30, 2015 (Predecessor), the Company elected the three-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 twenty-six weeks ended June 30, 2015 (Predecessor).
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.
The effective portion of the 2013 Interest Rate Cap Agreement through June 30, 2015 (Predecessor) was included in accumulated other comprehensive income and included as a fair value adjustment through the purchase price allocation as described in Note 3.

Warrant Liability (Predecessor)
On March 20, 2015, warrants to purchase 597,802 shares of DTH common stock held by a former large shareholder of DTH were exercised at a strike price of $25.00 per share based on a fair value of $8.3 million determined based on the common stock price of the Initial Investment discussed above in Note 3. Upon exercise, 384,777 shares of DTH common stock were redeemed as payment for the strike price resulting in 213,025 shares of DTH common stock being issued. DTH recorded a mark-to-market adjustment of $35,000 to reduce the liability during the twenty-six weeks ended June 30, 2015 (Predecessor) and then reclassified the balance of the warrant liability of $8.3 million to shareholders’ equity.
Fair Value Measurements
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 2, 2018 (Successor) and January 3, 2017 (Successor), 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 $0.3 million at January 2, 2018 (Successor) and $0.6 million at January 3, 2017 (Successor) 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):
 
 
 
Successor
 
 
January 2, 2018
 
January 3, 2017
 
 
Estimated
Fair Value
 
Book Value
 
Estimated
Fair Value
 
Book Value
2015 Senior Credit Facility
 
$
152,001

 
$
152,001

 
$
157,616

 
$
157,616


The Company’s assets and liabilities measured at fair value on a recurring basis as of January 2, 2018 (Successor) and January 3, 2017 (Successor) were as follows (in thousands):
 
January 2, 2018
 
Markets for Identical Assets
(Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
332

 
$

 
$
332

 
$

Total assets measured at fair value
$
332

 
$

 
$
332

 
$

 
 
 
 
 
 
 
 
 
January 3, 2017
 
Markets for Identical Assets (Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
598

 
$

 
$
598

 
$

Total assets measured at fair value
$
598

 
$

 
$
598

 
$

Other Accrued Liabilities and Other Non-current Liabilities
Other Accrued Liabilities and Other Non-current Liabilities
Other Accrued Liabilities and Other Non-Current Liabilities
A summary of other accrued liabilities follows (in thousands):
 
 
Successor
 
 
January 2, 2018
 
January 3, 2017
Employee compensation and related items
 
$
12,945

 
$
13,783

Accrued insurance
 
7,232

 
8,192

Accrued sales tax
 
3,987

 
3,916

Accrued real property tax
 
1,331

 
1,274

Restaurant closure liability
 
794

 
875

Accrued advertising
 
728

 
1,657

Other
 
8,240

 
6,956

 
 
$
35,257

 
$
36,653


 
A summary of other non-current liabilities follows (in thousands):
 
 
 
Successor
 
 
January 2, 2018
 
January 3, 2017
Unfavorable lease liabilities
 
$
14,469

 
$
17,072

Insurance reserves
 
5,965

 
4,269

Deferred rent liability
 
2,972

 
1,676

Restaurant closure liabilities
 
2,030

 
2,263

Deferred development and initial franchise fees
 
1,335

 
1,385

Deferred gift card income
 
1,234