DEL TACO RESTAURANTS, INC., 10-Q filed on 10/18/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
8 Months Ended
Sep. 11, 2018
Oct. 17, 2018
Document Information [Line Items]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 11, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
Trading Symbol TACO  
Entity Registrant Name Del Taco Restaurants, Inc.  
Entity Central Index Key 0001585583  
Current Fiscal Year End Date --01-01  
Entity Filer Category Accelerated Filer  
Entity Common Stock, Shares Outstanding   37,764,159
Entity Emerging Growth Company true  
Entity Ex Transition Period true  
Entity Small Business false  
v3.10.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 11, 2018
Jan. 02, 2018
Current assets:    
Cash and cash equivalents $ 6,628 $ 6,559
Accounts and other receivables, net 3,565 3,828
Inventories 2,596 2,712
Prepaid expenses and other current assets 4,793 6,784
Total current assets 17,582 19,883
Property and equipment, net 172,094 156,124
Goodwill 321,531 320,638
Trademarks 220,300 220,300
Intangible assets, net 19,450 21,498
Other assets, net 4,562 3,881
Total assets 755,519 742,324
Current liabilities:    
Accounts payable 20,172 18,759
Other accrued liabilities 40,706 35,257
Current portion of capital lease obligations and deemed landlord financing liabilities 1,109 1,415
Total current liabilities 61,987 55,431
Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net 169,174 170,639
Deferred income taxes 69,137 68,574
Other non-current liabilities 31,945 31,431
Total liabilities 332,243 326,075
Commitments and contingencies
Shareholders’ equity:    
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding 0 0
Common stock, $0.0001 par value; 400,000,000 shares authorized; 38,066,801 shares issued and outstanding at September 11, 2018; 38,434,274 shares issued and outstanding at January 2, 2018 4 4
Additional paid-in capital 343,412 349,334
Accumulated other comprehensive income 357 14
Retained earnings 79,503 66,897
Total shareholders’ equity 423,276 416,249
Total liabilities and shareholders’ equity $ 755,519 $ 742,324
v3.10.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - Successor [Member] - $ / shares
Sep. 11, 2018
Jan. 02, 2018
Preferred stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Preferred stock, shares authorized (in shares) 1,000,000 1,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Common stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Common stock, shares authorized (in shares) 400,000,000 400,000,000
Common stock, shares issued (in shares) 38,091,165 38,434,274
Common stock, shares outstanding (in shares) 38,091,165 38,434,274
v3.10.0.1
Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Thousands
3 Months Ended 8 Months Ended
Sep. 11, 2018
Sep. 12, 2017
Sep. 11, 2018
Sep. 12, 2017
Revenue:        
Total revenue $ 117,830 $ 110,988 $ 348,197 $ 324,914
Restaurant operating expenses:        
Labor and related expenses 35,301 33,635 105,541 100,041
Occupancy and other operating expenses 22,844 22,608 67,457 64,243
General and administrative 9,606 8,817 30,356 27,177
Cooperative Advertising Expense 3,155 0 9,227 0
Depreciation and amortization 5,855 5,522 17,616 15,903
Occupancy and other - franchise subleases 762 654 2,051 1,738
Pre-opening costs 259 354 900 531
Impairment of Long-Lived Assets Held-for-use 0 0 1,661 0
Restaurant closure charges, net 672 (16) 635 (1)
Loss on disposal of assets, net 580 233 760 524
Total operating expenses 108,635 101,455 324,860 296,492
Income from operations 9,195 9,533 23,337 28,422
Other expense, net        
Interest expense 2,062 1,628 5,984 4,798
Other Nonoperating Income (523) 0 (523) 0
Total other expense, net 1,539 1,628 5,461 4,798
Income from operations before provision for income taxes 7,656 7,905 17,876 23,624
Provision for income taxes 1,782 2,804 4,563 8,955
Net income 5,874 5,101 13,313 14,669
Other comprehensive income (loss):        
Change in fair value of interest rate cap, net of tax 23 (35) 312 (271)
Reclassification of interest rate cap amortization included in net income 15 0 31 0
Total other comprehensive income (loss) 38 (35) 343 (271)
Comprehensive income $ 5,912 $ 5,066 $ 13,656 $ 14,398
Earnings per share:        
Basic (in dollars per share) $ 0.15 $ 0.13 $ 0.35 $ 0.38
Diluted (in dollars per share) $ 0.15 $ 0.13 $ 0.34 $ 0.37
Weighted-average shares outstanding        
Basic (in shares) 38,191,335 38,695,099 38,310,842 38,744,963
Diluted (in shares) 39,391,284 39,839,571 39,108,573 40,016,062
Franchise Sublease Income [Member]        
Revenue:        
Revenue $ 808 $ 712 $ 2,253 $ 1,878
Product [Member]        
Revenue:        
Revenue 109,559 106,298 324,468 311,542
Franchise [Member]        
Revenue:        
Revenue 4,308 3,978 12,249 11,494
Franchise Advertising Contribution [Member]        
Revenue:        
Revenue 3,155 0 9,227 0
Service [Member]        
Restaurant operating expenses:        
Cost, Direct Material $ 29,601 $ 29,648 $ 88,656 $ 86,336
v3.10.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
8 Months Ended
Sep. 11, 2018
Sep. 12, 2017
Operating activities    
Net income $ 13,313 $ 14,669
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 17,616 15,903
Amortization of favorable and unfavorable lease assets and liabilities, net (602) (521)
Amortization of deferred financing costs, debt discount and interest rate cap 297 267
Stock-based compensation 4,079 3,340
Impairment of Long-Lived Assets Held-for-use 1,661 0
Deferred income taxes 698 2,607
Loss on disposal of assets, net 760 524
Restaurant closure charges 604 125
Changes in operating assets and liabilities:    
Accounts and other receivables, net 263 788
Inventories 116 76
Prepaid expenses and other current assets 1,993 (69)
Other assets 9 (84)
Accounts payable 649 3,633
Other accrued liabilities 1,732 2,319
Other non-current liabilities 1,120 283
Net cash provided by operating activities 44,308 43,860
Investing activities    
Purchases of property and equipment (30,575) (30,122)
Proceeds from disposal of property and equipment, net 1,323 7,733
Purchases of other assets (1,107) (705)
Acquisition of franchisees (1,841) 0
Proceeds from sale of company-operated restaurants 0 2,192
Net cash used in investing activities (32,200) (20,902)
Financing activities    
Repurchase of common stock and warrants (7,810) (10,711)
Payment of tax withholding related to restricted stock vesting (2,378) (1,923)
Payments on capital leases and deemed landlord financing (1,038) (1,133)
Proceeds from revolving credit facility 17,000 19,000
Payments on revolving credit facility (18,000) (30,000)
Proceeds from exercise of stock options 187 36
Net cash used in financing activities (12,039) (24,731)
Increase (decrease) in cash and cash equivalents 69 (1,773)
Cash and cash equivalents at beginning of period 6,559 8,795
Cash and cash equivalents at end of period 6,628 7,022
Supplemental cash flow information:    
Cash paid during the period for interest 5,513 4,355
Cash paid during the period for income taxes 675 4,743
Supplemental schedule of non-cash activities:    
Accrued property and equipment purchases 3,967 5,552
Write-offs of accounts receivables 26 0
Reclassification of interest rate cap amortization included in net income 31 0
Change in other asset for fair value of interest rate cap recorded to other comprehensive income (loss), net of tax $ 312 $ (271)
v3.10.0.1
Description of Business
8 Months Ended
Sep. 11, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business
Description of Business
Del Taco Restaurants, Inc. 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 September 11, 2018, there were 317 company-operated and 250 franchise-operated Del Taco restaurants located in 14 states, including one franchise-operated unit in Guam. At September 12, 2017, there were 305 company-operated and 253 franchise-operated Del Taco restaurants located in 15 states, including one franchise-operated unit in Guam.
v3.10.0.1
Basis of Presentation and Summary of Significant Accounting Policies
8 Months Ended
Sep. 11, 2018
Accounting Policies [Abstract]  
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). For additional information, these unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 2, 2018 ("2017 Form 10-K").
 
The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2018 is a fifty-two week period ending January 1, 2019. Fiscal year 2017 is the fifty-two week period ended January 2, 2018. In a fifty-two week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes sixteen weeks of operations. For fiscal year 2018, the Company’s accompanying financial statements reflect the twelve weeks ended September 11, 2018. For fiscal year 2017, the Company’s accompanying financial statements reflect the twelve weeks ended September 12, 2017.
Effective January 3, 2018 (the first day of fiscal year 2018), the Company adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), as discussed below in Note 2, using the modified retrospective method of transition. Current year results have been prepared in accordance with the new standards.
In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full fiscal year.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances.
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842). This guidance will result in key changes to lease accounting and will aim to bring leases onto balance sheets to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations as well as the assets it owns versus leases. The new leasing standard will be effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. The new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with certain practical expedients available. The Company plans to adopt the requirements of the new lease standard effective January 2, 2019, the first day of fiscal year 2019, and apply a modified retrospective adoption method. The Company anticipates taking advantage of the practical expedient options which allow an entity to not reassess whether any existing or expired contracts contain leases, not reassess lease classifications for existing or expired leases, and an entity does not need to reassess initial direct costs for any existing leases, and we are further evaluating other optional practical expedients and policy elections. The Company is in the process of implementing changes to its systems and processes in conjunction with its review of existing lease agreements. The cumulative effect of adoption will be recorded to retained earnings in the period of adoption. Based on a preliminary assessment, the Company expects that substantially all of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a material increase in the assets and liabilities on the Company's consolidated balance sheets.  The Company is continuing its evaluation, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures. The Company will adopt ASU No. 2016-02 during the first quarter of fiscal 2019.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides a comprehensive new revenue recognition model that requires a company to recognize revenue in an amount that reflects the consideration it expects to receive for the transfer of promised goods or services to its customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09, also known as FASB Accounting Standards Codification ("ASC") Topic 606 ("Topic 606") supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition ("Topic 605"). On January 3, 2018 (the first day of fiscal year 2018), the Company adopted the requirements of Topic 606, utilizing the modified retrospective method of transition. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, as detailed below. Topic 606 does not materially impact the recognition of company restaurant sales or franchise royalty income from franchisees included in franchise revenue.
Franchise Fees
The adoption of Topic 606 changed the timing of the recognition of initial franchise fees, including franchise and development fees, and renewal fees, both included in franchise revenue in the consolidated statements of comprehensive income. Under Topic 605, initial franchise fees were recognized when all material obligations had been performed and conditions had been satisfied, typically when operations of a new franchise restaurant had commenced, and renewal fees were recognized when a renewal agreement became effective. Topic 606 requires franchise and renewal fees to be deferred and recognized over the term of the related franchise agreement for the respective restaurant. Franchise agreements typically have a term of 20 years. The impact of the deferral of initial franchise and renewal fees received in a given year may be offset by the recognition of revenue from fees retrospectively deferred from prior years. Upon adoption, the Company recorded approximately $0.7 million as a cumulative effect adjustment to opening retained earnings comprised of $1.0 million of deferred franchise fees included in other non-current liabilities on the consolidated balance sheet as of January 3, 2018 (the first day of fiscal year 2018) related to franchise and renewal fees previously recognized since the business combination with Levy Acquisition Corp. on June 30, 2015, partially offset by an adjustment of $0.3 million to deferred taxes related to the $1.0 million of deferred franchise fees.
During the twelve and thirty-six weeks ended September 11, 2018, the Company recognized approximately $12,000 and $40,000, respectively, in franchise revenue related to the amortization of the deferred franchise fees recognized at January 2, 2018 as a result of the adoption of Topic 606.
Deferred franchise fees are recognized straight-line over the term of the underlying agreement and the amount expected to be recognized in franchise revenue for amounts in deferred franchise fees as of September 11, 2018 is as follows (in thousands):
FY 2018
 
$
21

FY 2019
 
69

FY 2020
 
67

FY 2021
 
65

FY 2022
 
65

Thereafter
 
805

Total Deferred Franchise Fees
 
$
1,092


Advertising
The adoption of the new guidance changed the reporting of advertising contributions from franchisees and the related advertising expenses, which were not previously included in the consolidated statements of comprehensive income. Topic 606 requires these franchise advertising contributions and expenses to be reported on a gross basis in the consolidated statements of comprehensive income, which impacted our total revenues and expenses. However, the franchise advertising contributions and expenses are expected to be largely offsetting and therefore does not have a significant impact on reported net income. The current year impact to revenue for franchise advertising contributions and to expenses for franchise advertising expenses for the twelve and thirty-six weeks ended September 11, 2018 was an increase of $3.1 million and $9.2 million, respectively, for both revenue and expenses as a result of applying Topic 606.
Other Revenue Transactions
Certain other franchise expenses have previously been recorded net of the related fees received from franchisees. Under Topic 606, the Company is now including these revenues and expenditures on a gross basis within the consolidated statements of comprehensive income. While this change materially impacted the gross amount of reported franchise revenue and related expenses on the consolidated statements of comprehensive income, the impact is an offsetting increase to both revenue and expense such that there is not a significant, if any, impact on operating income and net income. The current year impact to revenues for the twelve and thirty-six weeks ended September 11, 2018 was an increase of approximately $0.2 million and $0.5 million, respectively, as a result of applying Topic 606, with an offsetting increase in expenses.
Comparison to Amounts if Previous Standards Had Been in Effect

The following tables reflect the impact of the adoption of Topic 606 on the Company's consolidated balance sheet as of September 11, 2018 and on the Company's consolidated statements of comprehensive income and cash flows from operating activities for the thirty-six weeks ended September 11, 2018 and the amounts as if Topic 605 was in effect ("Amounts Under Previous Standards") (in thousands):
 
 
September 11, 2018
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Liabilities and shareholders’ equity
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
20,172

 
$

 
$
20,172

Other accrued liabilities
 
40,706

 

 
40,706

Current portion of capital lease obligations and deemed landlord financing liabilities
 
1,109

 

 
1,109

Total current liabilities
 
61,987

 

 
61,987

Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net
 
169,174

 

 
169,174

Deferred income taxes
 
69,137

 
296

 
69,433

Other non-current liabilities
 
31,945

 
(1,092
)
 
30,853

Total liabilities
 
332,243

 
(796
)
 
331,447

Shareholders’ equity:
 
 
 
 
 
 
Preferred stock
 

 

 

Common stock
 
4

 

 
4

Additional paid-in capital
 
343,412

 

 
343,412

Accumulated other comprehensive income
 
357

 

 
357

Retained earnings
 
79,503

 
796

 
80,299

Total shareholders’ equity
 
423,276

 
796

 
424,072

Total liabilities and shareholders’ equity
 
$
755,519

 
$

 
$
755,519



 
12 Weeks Ended September 11, 2018
 
36 Weeks Ended September 11, 2018
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Company restaurant sales
$
109,559

 
$

 
$
109,559

 
$
324,468

 
$

 
$
324,468

Franchise revenue
4,308

 
(176
)
 
4,132

 
12,249

 
(423
)
 
11,826

Franchise advertising contributions
3,155

 
(3,155
)
 

 
9,227

 
(9,227
)
 

Franchise sublease income
808

 

 
808

 
2,253

 

 
2,253

Total revenue
117,830

 
(3,331
)
 
114,499

 
348,197

 
(9,650
)
 
338,547

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Restaurant operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Food and paper costs
29,601

 

 
29,601

 
88,656

 

 
88,656

Labor and related expenses
35,301

 

 
35,301

 
105,541

 

 
105,541

Occupancy and other operating expenses
22,844

 

 
22,844

 
67,457

 

 
67,457

General and administrative
9,606

 
(201
)
 
9,405

 
30,356

 
(545
)
 
29,811

Franchise advertising expenses
3,155

 
(3,155
)
 

 
9,227

 
(9,227
)
 

Depreciation and amortization
5,855

 

 
5,855

 
17,616

 

 
17,616

Occupancy and other - franchise subleases
762

 

 
762

 
2,051

 

 
2,051

Pre-opening costs
259

 

 
259

 
900

 

 
900

Impairment of long-lived assets

 

 

 
1,661

 

 
1,661

Restaurant closure charges, net
672

 

 
672

 
635

 

 
635

Loss on disposal of assets, net
580

 

 
580

 
760

 

 
760

Total operating expenses
108,635

 
(3,356
)
 
105,279

 
324,860

 
(9,772
)
 
315,088

Income from operations
9,195

 
25

 
9,220

 
23,337

 
122

 
23,459

Other expense, net
 
 
 
 
 
 
 
 
 
 
 
Interest expense
2,062

 

 
2,062

 
5,984

 

 
5,984

Other income
(523
)
 

 

 
(523
)
 

 
(523
)
Total other expense, net
1,539

 

 
2,062

 
5,461

 

 
5,461

Income from operations before provision for income taxes
7,656

 
25

 
7,158

 
17,876

 
122

 
17,998

Provision for income taxes
1,782

 
7

 
1,789

 
4,563

 
33

 
4,596

Net income
5,874

 
18

 
5,369

 
13,313

 
89

 
13,402

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Change in fair value of interest rate cap, net of
    tax
23

 

 
23

 
312

 

 
312

Reclassification of interest rate cap amortization
    included in net income
15

 

 
15

 
31

 

 
31

Total other comprehensive income
38

 

 
38

 
343

 

 
343

Comprehensive income
$
5,912

 
$
18

 
$
5,407

 
$
13,656

 
$
89

 
$
13,745

Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.15

 
$
(0.01
)
 
$
0.14

 
$
0.35

 
$

 
$
0.35

Diluted
$
0.15

 
$
(0.01
)
 
$
0.14

 
$
0.34

 
$

 
$
0.34



 
 
36 Weeks Ended September 11, 2018
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Operating activities
 
 
 
 
 
 
Net income
 
$
13,313

 
$
89

 
$
13,402

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
17,616

 

 
17,616

Amortization of favorable and unfavorable lease assets and liabilities, net
 
(602
)
 

 
(602
)
Amortization of deferred financing costs and debt discount
 
297

 

 
297

Stock-based compensation
 
4,079

 

 
4,079

Impairment of long-lived assets
 
1,661

 

 
1,661

Deferred income taxes
 
698

 
33

 
731

Loss on disposal of assets, net
 
760

 

 
760

Restaurant closure charges
 
604

 

 
604

Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts and other receivables, net
 
263

 

 
263

Inventories
 
116

 

 
116

Prepaid expenses and other current assets
 
1,993

 

 
1,993

Other assets
 
9

 

 
9

Accounts payable
 
649

 

 
649

Other accrued liabilities
 
1,732

 

 
1,732

Other non-current liabilities
 
1,120

 
(122
)
 
998

Net cash provided by operating activities
 
$
44,308

 
$

 
$
44,308


Summary of Significant Accounting Policies
Except for the accounting policies for revenue recognition discussed below that were updated as a result of adopting ASU No. 2014-09, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended January 2, 2018, filed with the SEC on March 15, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.
Revenue Recognition
Company restaurant sales from the operation of company-operated restaurants are recognized when food and service is delivered to customers. Franchise revenue is comprised of (i) development fees, (ii) franchise fees, (iii) on-going royalties, (iv) renewal fees and (v) other franchise revenue. Development and franchise fees, portions of which are collected in advance and are non-refundable, received pursuant to individual development agreements, grant the right to develop franchise-operated restaurants in future periods in specific geographic areas. Both development fees and franchise fees are deferred and recognized as revenue over the term of the franchise agreement and renewal fees are deferred and recognized over the term of the renewal agreement. Development fees and franchise fees are also generally recognized as revenue upon the termination of the development agreement with the franchisee. Royalties from franchise-operated restaurants are based on a percentage of franchise restaurant sales and are recognized in the period the related franchise-operated restaurant sales occur. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities. Franchise sublease income is comprised of rental income associated with properties leased or subleased to franchisees and is recognized as revenue on an accrual basis.
Advertising Costs
Franchisees pay a monthly fee to the Company typically equal to 4% of their restaurants’ net sales as contributions for advertising and promotional services that the Company provides and are included in revenue in franchise advertising contributions on the consolidated statements of comprehensive income. Company-operated restaurants contribute to the advertising fund on the same basis as franchise-operated restaurants.
Production costs for radio and television advertising are expensed when the commercials are initially aired. Costs of distribution of advertising are charged to expense on the date the advertising is aired or distributed. The portion of these costs related to company-operated restaurants, as well as other marketing-related expenses for advertising are included in occupancy and other operating expenses in the consolidated statements of comprehensive income. The portion of these costs related to franchise-operated restaurants for advertising are included in franchise advertising expenses on the consolidated statements of comprehensive income.
v3.10.0.1
Restaurant Closure Charges, Net
8 Months Ended
Sep. 11, 2018
Restructuring and Related Activities [Abstract]  
Restaurant Closure Charges, Net
Restaurant Closure Charges
Impairment of Long-Lived Assets
The company evaluates long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s cash flows are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. During the thirty-six weeks ended September 11, 2018, the Company evaluated certain restaurants having indicators of impairment based on operating performance and recorded an impairment charge totaling $1.7 million related to two restaurants. The Company wrote-off the value of leasehold improvements and other equipment based on the estimate of future recoverable cash flows. No such impairment charges were recorded during the thirty-six weeks ended September 12, 2017.
Restaurant Closure Charges, Net
At both September 11, 2018 and January 2, 2018, the restaurant closure liability is $2.8 million. The details of the restaurant closure activities are discussed below.
Restaurant Closures and Lease Reserves
The following table represents other restaurant closure liability activity related to restaurant closures prior to 2015 and sublease income shortfalls (in thousands):
 
 
Total
Balance at January 2, 2018
 
$
1,213

Charges for accretion in current period
 
49

Cash payments
 
(406
)
Balance at September 11, 2018
 
$
856


The current portion of the restaurant closure liability is $0.2 million at September 11, 2018 and $0.5 million at January 2, 2018, respectively, and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $0.7 million at both September 11, 2018 and January 2, 2018 and is included in other non-current liabilities in the consolidated balance sheets.
Restaurant Closure and Other Related Charges for 12 Underperforming Restaurants
During the fourth fiscal quarter of 2015, the Company closed 12 company-operated restaurants. During the thirty-six weeks ended September 11, 2018, the Company recorded accretion expense related to the closures and net adjustments of $0.5 million to the lease termination liability for two restaurants due to changes in estimates, offset by $0.2 million of sublease income from leases which are treated as deemed landlord financing. A summary of the restaurant closure liability activity, all of which relates to contract termination costs, for these 12 closed restaurants consisted of the following (in thousands):
 
 
Total
Balance at January 2, 2018
 
$
1,611

Charges for accretion in current period
 
45

Cash payments
 
(246
)
Adjustments to estimates based on current activity
 
510

Balance at September 11, 2018
 
$
1,920


The current portion of the restaurant closure liability is $0.5 million at September 11, 2018 and $0.3 million at January 2, 2018, respectively, and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is $1.4 million and $1.3 million at September 11, 2018 and January 2, 2018, respectively, and is included in other non-current liabilities in the consolidated balance sheets.
v3.10.0.1
Franchise Acquisitions (Notes)
8 Months Ended
Sep. 11, 2018
Franchise Acquisitions [Abstract]  
FranchiseAcquisitions [Text Block]
Franchise Acquisitions
The Company acquired four franchise-operated restaurants during the thirty-six weeks ended September 11, 2018, of which one closed prior to the completion of the purchase. 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 thirty-six weeks ended September 12, 2017. The following table provides detail of the combined acquisitions for the thirty-six weeks ended September 11, 2018 (dollars in thousands):
 
 
September 11, 2018
Franchise-operated restaurants acquired from franchisees
 
4
 
 
 
Goodwill
 
$
893

Property and equipment
 
798

Reacquired franchise rights
 
150

Total Consideration
 
$
1,841

During the thirty-six weeks ended September 11, 2018, the Company wrote-off $0.6 million of unfavorable lease liabilities related to franchise subleases, offset by $0.1 million of straight line deferred rent assets (included in other assets) which were terminated in connection with the Company's acquisition of the related franchise-operated restaurants.
v3.10.0.1
Goodwill and other Intangible Assets
8 Months Ended
Sep. 11, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and other Intangible Assets
Goodwill and other Intangible Assets
Goodwill was $321.5 million at September 11, 2018 compared to $320.6 million at January 2, 2018. The change is due to the purchase of four franchise-operated restaurants as described in more detail in Note 4.
There have been no changes in the carrying amount of trademarks since January 2, 2018.
The Company’s other intangible assets at September 11, 2018 and January 2, 2018 consisted of the following (in thousands):
 
 
September 11, 2018
 
January 2, 2018
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Favorable lease assets
 
$
13,591

 
$
(5,494
)
 
$
8,097

 
$
13,744

 
$
(4,442
)
 
$
9,302

Franchise rights
 
15,162

 
(4,146
)
 
11,016

 
15,284

 
(3,282
)
 
12,002

Reacquired franchise rights
 
417

 
(80
)
 
337

 
243

 
(49
)
 
194

Total amortized other intangible assets
 
$
29,170

 
$
(9,720
)
 
$
19,450

 
$
29,271

 
$
(7,773
)
 
$
21,498



During the thirty-six weeks ended September 11, 2018, the Company wrote-off $0.2 million of favorable lease assets related to the termination of three leases and $0.1 million of franchise rights associated with the closure of one franchise-operated restaurant. The Company reclassified $24,000 of franchise rights as reacquired franchise rights related to the Company's acquisition of one franchise-operated restaurant and acquired $0.2 million of reacquired franchise rights in connection with the Company's purchase of three franchise-operated restaurants (see Note 4).
v3.10.0.1
Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
8 Months Ended
Sep. 11, 2018
Debt Disclosure [Abstract]  
Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
The Company’s long-term debt, capital lease obligations and deemed landlord financing liabilities at September 11, 2018 and January 2, 2018 consisted of the following (in thousands):
 
 
 
September 11, 2018
 
January 2, 2018
2015 Senior Credit Facility, net of debt discount of $547 and $747 and deferred financing costs of $185 and $252 at September 11, 2018 and January 2, 2018, respectively
 
$
151,268

 
$
152,001

Total outstanding indebtedness
 
151,268

 
152,001

Obligations under capital leases and deemed landlord financing liabilities
 
19,015

 
20,053

Total debt
 
170,283

 
172,054

Less: amounts due within one year
 
1,109

 
1,415

Total amounts due after one year, net
 
$
169,174

 
$
170,639

 
At September 11, 2018 and January 2, 2018, the Company assessed the amounts recorded under the 2015 Senior Credit Facility and determined that such amounts approximated fair value.
2015 Revolving Credit Facility
On August 4, 2015, the Company refinanced its existing senior credit facility and entered into a new credit agreement (the “Credit Agreement”). The Credit Agreement, which matures on August 4, 2020, provides for a $250 million revolving credit facility (the “2015 Senior Credit Facility”).

The Credit Agreement contains certain financial covenants, including the maintenance of a consolidated total lease adjusted leverage ratio and a consolidated fixed charge coverage ratio. The Company was in compliance with the financial covenants as of September 11, 2018. Substantially all of the assets of the Company are pledged as collateral under the 2015 Senior Credit Facility.
At September 11, 2018, the weighted-average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 3.8%. At September 11, 2018, the Company had a total of $80.7 million of availability for additional borrowings under the 2015 Senior Credit Facility as the Company had $152.0 million of outstanding borrowings and letters of credit outstanding of $17.3 million which reduce availability under the 2015 Senior Credit Facility.
v3.10.0.1
Derivative Instruments
8 Months Ended
Sep. 11, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
2016 Interest Rate Cap Agreement
In June 2016, the Company entered into an interest rate cap agreement that became effective July 1, 2016, to hedge cash flows associated with interest rate fluctuations on variable rate debt, with a termination date of March 31, 2020 ("2016 Interest Rate Cap Agreement"). The 2016 Interest Rate Cap Agreement had an initial notional amount of $70.0 million of the 2015 Senior Credit Facility that effectively converted that portion of the outstanding balance of the 2015 Senior Credit Facility from variable rate debt to capped variable rate debt, resulting in a change in the applicable interest rate from an interest rate of one-month LIBOR plus the applicable margin (as provided by the 2015 Senior Credit Facility) to a capped interest rate of 2.00% plus the applicable margin. As of September 11, 2018, one-month LIBOR was 2.1%. During the twelve weeks ended September 11, 2018, the Company received payments totaling approximately $10,000 related to the 2016 Interest Rate Cap Agreement. During the period from July 1, 2016 through September 11, 2018, the 2016 Interest Rate Cap Agreement had no hedge ineffectiveness.
To ensure the effectiveness of the 2016 Interest Rate Cap Agreement, the Company elected the one-month LIBOR rate option for its variable rate interest payments on term balances equal to or in excess of the applicable notional amount of the interest rate cap agreement as of each reset date. The reset dates and other critical terms on the term loans perfectly match with the interest rate cap reset dates and other critical terms during the twelve weeks ended September 11, 2018.
During the twelve weeks and thirty-six weeks ended September 11, 2018, the Company reclassified approximately $15,000 and $31,000, respectively, of interest expense related to the hedges of these transactions into earnings. As of September 11, 2018, the Company was hedging forecasted transactions expected to occur through March 31, 2020. Assuming interest rates at September 11, 2018 remain constant, $0.3 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next 18 months. The Company intends to ensure that this hedge remains effective, therefore, approximately $0.1 million is expected to be reclassified into interest expense over the next 12 months.
The effective portion of the 2016 Interest Rate Cap Agreement through September 11, 2018 was included in accumulated other comprehensive income.
v3.10.0.1
Fair Value Measurements
8 Months Ended
Sep. 11, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
The fair values of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate their carrying amounts due to their short maturities. The carrying value of the 2015 Senior Credit Facility approximated fair value. The 2016 Interest Rate Cap Agreement is recorded at fair value in the Company’s consolidated balance sheets.
As of September 11, 2018 and January 2, 2018, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. For both periods, this included a derivative instrument related to interest rates. The Company determined the fair value of the interest rate cap contract based on counterparty quotes, with appropriate adjustments for any significant impact of nonperformance risk of the parties to the interest rate cap contract. Therefore, the Company categorized this interest rate cap contract as Level 2 fair value measurements. The fair value of the 2016 Interest Rate Cap Agreement was $0.8 million and $0.3 million at September 11, 2018 and January 2, 2018, respectively, and is included in other assets in the consolidated balance sheets.

The Company's assets and liabilities measured at fair value on a recurring basis as of September 11, 2018 and January 2, 2018 were as follows (in thousands):

 
September 11, 2018 (Unaudited)
 
Markets for Identical Assets
(Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
770

 
$

 
$
770

 
$

Total assets measured at fair value
$
770

 
$

 
$
770

 
$

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

 
$

 
$
332

 
$

Total assets measured at fair value
$
332

 
$

 
$
332

 
$

v3.10.0.1
Other Accrued Liabilities and Other Non-current Liabilities
8 Months Ended
Sep. 11, 2018
Other Liabilities Disclosure [Abstract]  
Other Accrued Liabilities and Other Non-current Liabilities
Other Accrued Liabilities and Other Non-current Liabilities
A summary of other accrued liabilities follows (in thousands):
 
 
 
September 11, 2018
 
January 2, 2018
Employee compensation and related items
 
$
12,268

 
$
12,945

Accrued insurance
 
6,417

 
7,232

Accrued sales tax
 
4,811

 
3,987

Accrued real property tax
 
2,186

 
1,331

Accrued advertising
 
1,324

 
728

Accrued income tax payable
 
1,200

 

Restaurant closure liability
 
658

 
794

Other
 
11,842

 
8,240

 
 
$
40,706

 
$
35,257


 
A summary of other non-current liabilities follows (in thousands):
 
 
 
September 11, 2018
 
January 2, 2018
Unfavorable lease liabilities
 
$
12,661

 
$
14,469

Insurance reserves
 
7,647

 
5,965

Deferred rent liability
 
3,607

 
2,972

Deferred development and initial franchise fees
 
2,600

 
1,335

Restaurant closure liability
 
2,118

 
2,030

Unearned trade discount, non-current
 
863

 
1,149

Deferred gift card income
 
589

 
1,234

Other
 
1,860

 
2,277

 
 
$
31,945

 
$
31,431



During the thirty-six weeks ended September 11, 2018, the Company wrote-off $0.6 million of unfavorable lease liabilities related to franchise subleases which were terminated in connection with the Company's acquisition of the related franchise-operated restaurants (see Note 4 for more information).
v3.10.0.1
Stock-Based Compensation
8 Months Ended
Sep. 11, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation
Stock-Based Compensation
In connection with the approval of the Business Combination, the Del Taco Restaurants, Inc. 2015 Omnibus Incentive Plan (the “2015 Plan”) was approved by shareholders to offer eligible employees, directors and consultants cash and stock-based incentive awards. Awards under the 2015 Plan are generally not restricted to any specific form or structure and could include, without limitation, stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards, other cash-based compensation and performance awards. Under the plan, there were 3,300,000 shares of common stock reserved and authorized. At September 11, 2018, there were 878,601 shares of common stock available for grant under the 2015 Plan.
Stock-Based Compensation Expense
The total compensation expense related to the 2015 Plan was $1.5 million and $1.2 million for the twelve weeks ended September 11, 2018 and September 12, 2017, respectively, and $4.1 million and $3.3 million for the thirty-six weeks ended September 11, 2018 and September 12, 2017, respectively.
Restricted Stock Awards
A summary of outstanding and unvested restricted stock activity as of September 11, 2018 and changes during the period from January 2, 2018 through September 11, 2018 are as follows:
 
 
 
Shares
 
Weighted-Average
Grant Date
Fair Value
Nonvested at January 2, 2018
 
1,088,910

 
$
11.92

Granted
 
594,619

 
13.88

Vested
 
(425,873
)
 
11.85

Forfeited
 
(8,750
)
 
13.56

Nonvested at September 11, 2018
 
1,248,906

 
$
12.87


For the thirty-six weeks ended September 11, 2018 and September 12, 2017, the Company made payments of $2.4 million and $1.9 million, respectively, related to tax withholding obligations for the vesting of restricted stock awards in exchange for 168,484 and 140,209 shares withheld, respectively. As of September 11, 2018, there was $11.9 million of unrecognized stock compensation expense, net of estimated forfeitures, related to restricted stock awards that is expected to be recognized over a weighted-average remaining period of 2.8 years. The fair value of these awards was determined based on the Company’s stock price on the grant date.
Stock Options
A summary of stock option activity as of September 11, 2018 and changes during the period from January 2, 2018 through September 11, 2018 are as follows:
 
 
Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
 
 
 
 
 
(in years)
 
(in thousands)
Options outstanding at January 2, 2018
 
417,000

 
$
11.04

 
5.5
 
$
641

Granted
 
106,000

 
14.04

 

 

Exercised
 
(18,000
)
 
10.36

 

 

Forfeited/Expired
 
(40,000
)
 
11.18

 

 

Options outstanding at September 11, 2018
 
465,000

 
$
11.74

 
5.3
 
$
672

Options exercisable at September 11, 2018
 
191,496

 
$
10.53

 
4.4
 
$
422

Options exercisable and expected to vest at September 11, 2018
 
430,834

 
$
11.64

 
5.2
 
$
650


The aggregate intrinsic value in the table above is the amount by which the current market price of the Company's stock exceeds the exercise price on January 2, 2018 and September 11, 2018, respectively.
As of September 11, 2018, there was $1.0 million of unrecognized stock compensation expense, net of estimated forfeitures, related to stock option grants which is expected to be recognized over a weighted-average remaining period of 2.7 years.
v3.10.0.1
Shareholders' Equity
8 Months Ended
Sep. 11, 2018
Equity [Abstract]  
Shareholders' Equity
Shareholders’ Equity
On February 26, 2016, the Company's Board of Directors authorized a share repurchase program covering up to $25.0 million in the aggregate of the Company's common stock and warrants which was effective immediately and expires upon completion of the repurchase program, unless terminated earlier by the Board of Directors. On August 23, 2016, the Company announced that the Board of Directors increased the repurchase program by $25.0 million, to $50.0 million. The Board of Directors authorized an additional increase for the repurchase program effective July 23, 2018 of another $25.0 million, to a total of $75.0 million. Purchases under the program may be made in open market or privately negotiated transactions. During the twelve weeks ended September 11, 2018, the Company repurchased (1) 235,041 shares of common stock for an average price per share of $12.74 for an aggregate cost of approximately $3.0 million, including incremental direct costs to acquire the shares, and (2) 5,972 warrants for an average price per warrant of $3.07 for an aggregate cost of approximately $18,000, including incremental direct costs to acquire the warrants. During the thirty-six weeks ended September 11, 2018, the Company repurchased (1) 642,862 shares of common stock for an average price per share of $12.00 for an aggregate cost of approximately $7.7 million, including incremental direct costs to acquire the shares, and (2) 26,915 warrants for an average price per warrant of $3.02 for an aggregate cost of approximately $0.1 million, including incremental direct costs to acquire the warrants. The Company expects to retire the repurchased shares and therefore has accounted for them as constructively retired as of September 11, 2018. As of September 11, 2018, there was approximately $38.1 million remaining under the share repurchase program. The Company has no obligations to repurchase shares or warrants under this authorization, and the timing and value of shares and warrants purchased will depend on the Company's stock price, warrant price, market conditions and other factors.
v3.10.0.1
Earnings per Share
8 Months Ended
Sep. 11, 2018
Earnings Per Share [Abstract]  
Earnings per Share
Earnings Per Share
Basic income per share is calculated by dividing net income attributable to Del Taco’s common shareholders for the period by the weighted average number of common shares outstanding for the period. In computing dilutive income per share, basic income per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards, including warrants, restricted stock, common stock options and restricted stock units.
Below are basic and diluted net income per share for the periods indicated (amounts in thousands except share and per share data):
 
 
 
12 Weeks Ended
 
36 Weeks Ended
 
 
September 11, 2018
 
September 12, 2017
 
September 11, 2018
 
September 12, 2017
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
5,874

 
$
5,101

 
$
13,313

 
$
14,669

Denominator:
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic
 
38,191,335

 
38,695,099

 
38,310,842

 
38,744,963

Dilutive effect of unvested restricted stock
 
309,973

 
319,624

 
333,815

 
430,589

Dilutive effect of stock options
 
43,829

 
30,477

 
24,697

 
25,673

Dilutive effect of warrants
 
846,147

 
794,371

 
439,219

 
814,837

Weighted-average shares outstanding - diluted
 
39,391,284

 
39,839,571

 
39,108,573

 
40,016,062

Net income per share - basic
 
$
0.15

 
$
0.13

 
$
0.35

 
$
0.38

Net income per share - diluted
 
$
0.15

 
$
0.13

 
$
0.34

 
$
0.37

Antidilutive stock options and unvested restricted stock awards excluded from the computations
 
664,760

 
469,691

 
307,718

 
188,369

v3.10.0.1
Income Taxes
8 Months Ended
Sep. 11, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The effective income tax rates were 23.3% and 35.5% for the twelve weeks ended September 11, 2018 and September 12, 2017, respectively. The provision for income taxes was $1.8 million and $2.8 million for the twelve weeks ended September 11, 2018 and September 12, 2017, respectively. The effective income tax rates were 25.5% and 37.9% for the thirty-six weeks ended September 11, 2018 and September 12, 2017, respectively. The provision for income taxes was $4.6 million and $9.0 million for the thirty-six weeks ended September 11, 2018 and September 12, 2017, respectively.
The income tax expense for the twelve weeks ended September 11, 2018 is driven by the estimated effective income tax rate of 23.3% which primarily consists of statutory federal and state tax rates based on apportioned income and the impact of non-tax deductible compensation to executives, reduced by higher stock compensation expense deductible for tax related to the June 30, 2018 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense, as well as federal targeted job credits. The income tax expense for the twelve weeks ended September 12, 2017 is driven by the estimated effective income tax rate of 35.5% which primarily consists of statutory federal and state tax rates based on apportioned income, reduced by higher stock compensation expense deductible for tax related to the June 30, 2017 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense, as well as federal targeted job credits.
The income tax expense for the thirty-six weeks ended September 11, 2018 is driven by the estimated effective income tax rate of 25.5% which primarily consists of statutory federal and state tax rates based on apportioned income and the impact of non-tax deductible compensation to executives, reduced by higher stock compensation expense deductible for tax related to the June 30, 2018 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense, as well as federal targeted job credits. The income tax expense for the thirty-six weeks ended September 12, 2017 is driven by the estimated effective income tax rate of 37.9% which primarily consists of statutory federal and state tax rates based on apportioned income, reduced by higher stock compensation expense deductible for tax related to the June 30, 2017 vesting of certain restricted stock awards as compared to the cumulative amount recorded as stock-based compensation expense, as well as federal targeted job credits.
On December 22, 2017, the Tax Cuts and Jobs Act, (the “Act”) was enacted, reducing the U.S. federal corporate income tax rate from 35% to 21%, among other changes, for tax years beginning after December 31, 2017.
The SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Act for which the accounting under ASC 740, Income Taxes (“ASC 740”) is incomplete. To the extent that a company's accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act.
The Company re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The Company will continue to analyze additional information and guidance related to the Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of September 11, 2018, and the Company will continue to refine such amounts within the measurement period provided by SAB 118. The Company expects to complete its analysis no later than the fourth quarter of 2018.
Management believes it is more likely than not that all deferred tax assets will be realized and therefore no valuation allowance as of September 11, 2018 and January 2, 2018 is required.
v3.10.0.1
Commitments and Contingencies
8 Months Ended
Sep. 11, 2018
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
The primary claims in the Company’s business are workers’ compensation and general liabilities. These insurance programs are self-insured or high deductible programs with excess coverage that management believes is sufficient to adequately protect the Company. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured or high deductible limits, including provision for estimated claims incurred but not reported. Because of the uncertainty of the ultimate resolution of outstanding claims, as well as the uncertainty regarding claims incurred but not reported, it is possible that management’s provision for these losses could change materially. However, no estimate can currently be made of the range of additional losses.
Purchasing Commitments
The Company enters into various purchase obligations in the ordinary course of business, generally of short term nature. Those that are binding primarily relate to commitments for food purchases and supplies, amounts owed under contractor and subcontractor agreements, orders submitted for equipment for restaurants under construction, information technology service agreements and marketing initiatives, some of which are related to both company-operated and franchise-operated locations. The Company also has a long-term beverage supply agreement with a major beverage vendor whereby marketing rebates are provided to the Company and its franchisees based upon the volumes of purchases for system-wide restaurants which vary according to demand for beverage syrup. This contract has terms extending into 2021. The Company’s future estimated cash payments under existing contractual purchase obligations for goods and services as of September 11, 2018, are approximately $57.9 million. The Company has excluded agreements that are cancelable without penalty.
Litigation
In March 2014, a former Del Taco employee filed a purported class action complaint alleging that Del Taco has not appropriately provided meal breaks and failed to pay wages to its California hourly employees. Discovery is in process and Del Taco intends to assert all of its defenses to this threatened class action and the individual claims. Del Taco has several defenses to the action that it believes could prevent the certification of the class, as well as the potential assessment of any damages on a class basis. Legal proceedings are inherently unpredictable, and the Company is not able to predict the ultimate outcome or cost of the unresolved matter. However, based on management’s current understanding of the relevant facts and circumstances, the Company does not believe that these proceedings give rise to a probable or estimable loss and should not have a material adverse effect on the Company’s financial position, operations or cash flows. Therefore, Del Taco has not recorded any amount for the claim as of September 11, 2018.
In September 2018, the Equal Employment Opportunity Commission (“EEOC”) filed a complaint on behalf of an individual complainant and an additional class of individuals alleging that Del Taco engaged in unlawful employment practices on the basis of sex and retaliation in violation of Title VII and are seeking an unspecified amount of damages. Del Taco has several defenses to the action that it believes could prevent a finding of liability in the case. Legal proceedings are inherently unpredictable, and Del Taco is not able to predict the ultimate outcome or cost of the unresolved matter. However, based on management’s current understanding of the relevant facts and circumstances, Del Taco does not believe that these proceedings give rise to a probable or estimable loss and should not have a material adverse effect on Del Taco’s financial position, operations or cash flows. Therefore, Del Taco has not recorded any amount for the claim as of September 11, 2018.
The Company and its subsidiaries are parties to other legal proceedings incidental to their businesses, including claims alleging the Company’s restaurants do not comply with the Americans with Disabilities Act of 1990. In the opinion of management, based upon information currently available, the ultimate liability with respect to those other actions will not have a material effect on the operating results, cash flows or the financial position of the Company. However, due to the risks and uncertainties inherent in legal proceedings and litigation, actual results could differ from expectations.
v3.10.0.1
Basis of Presentation and Summary of Significant Accounting Policies (Policies)
8 Months Ended
Sep. 11, 2018
Accounting Policies [Abstract]  
Significant Accounting Policies [Text Block]
Summary of Significant Accounting Policies
Except for the accounting policies for revenue recognition discussed below that were updated as a result of adopting ASU No. 2014-09, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended January 2, 2018, filed with the SEC on March 15, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.
Revenue Recognition
Company restaurant sales from the operation of company-operated restaurants are recognized when food and service is delivered to customers. Franchise revenue is comprised of (i) development fees, (ii) franchise fees, (iii) on-going royalties, (iv) renewal fees and (v) other franchise revenue. Development and franchise fees, portions of which are collected in advance and are non-refundable, received pursuant to individual development agreements, grant the right to develop franchise-operated restaurants in future periods in specific geographic areas. Both development fees and franchise fees are deferred and recognized as revenue over the term of the franchise agreement and renewal fees are deferred and recognized over the term of the renewal agreement. Development fees and franchise fees are also generally recognized as revenue upon the termination of the development agreement with the franchisee. Royalties from franchise-operated restaurants are based on a percentage of franchise restaurant sales and are recognized in the period the related franchise-operated restaurant sales occur. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities. Franchise sublease income is comprised of rental income associated with properties leased or subleased to franchisees and is recognized as revenue on an accrual basis.
Advertising Costs
Franchisees pay a monthly fee to the Company typically equal to 4% of their restaurants’ net sales as contributions for advertising and promotional services that the Company provides and are included in revenue in franchise advertising contributions on the consolidated statements of comprehensive income. Company-operated restaurants contribute to the advertising fund on the same basis as franchise-operated restaurants.
Production costs for radio and television advertising are expensed when the commercials are initially aired. Costs of distribution of advertising are charged to expense on the date the advertising is aired or distributed. The portion of these costs related to company-operated restaurants, as well as other marketing-related expenses for advertising are included in occupancy and other operating expenses in the consolidated statements of comprehensive income. The portion of these costs related to franchise-operated restaurants for advertising are included in franchise advertising expenses on the consolidated statements of comprehensive income.
Revenue Recognition, Deferred Revenue [Policy Text Block]
Revenue Recognition
Company restaurant sales from the operation of company-operated restaurants are recognized when food and service is delivered to customers. Franchise revenue is comprised of (i) development fees, (ii) franchise fees, (iii) on-going royalties, (iv) renewal fees and (v) other franchise revenue. Development and franchise fees, portions of which are collected in advance and are non-refundable, received pursuant to individual development agreements, grant the right to develop franchise-operated restaurants in future periods in specific geographic areas. Both development fees and franchise fees are deferred and recognized as revenue over the term of the franchise agreement and renewal fees are deferred and recognized over the term of the renewal agreement. Development fees and franchise fees are also generally recognized as revenue upon the termination of the development agreement with the franchisee. Royalties from franchise-operated restaurants are based on a percentage of franchise restaurant sales and are recognized in the period the related franchise-operated restaurant sales occur. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities. Franchise sublease income is comprised of rental income associated with properties leased or subleased to franchisees and is recognized as revenue on an accrual basis.
Basis of Presentation
Basis of Presentation
The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). For additional information, these unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 2, 2018 ("2017 Form 10-K").
 
The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2018 is a fifty-two week period ending January 1, 2019. Fiscal year 2017 is the fifty-two week period ended January 2, 2018. In a fifty-two week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes sixteen weeks of operations. For fiscal year 2018, the Company’s accompanying financial statements reflect the twelve weeks ended September 11, 2018. For fiscal year 2017, the Company’s accompanying financial statements reflect the twelve weeks ended September 12, 2017.
Effective January 3, 2018 (the first day of fiscal year 2018), the Company adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), as discussed below in Note 2, using the modified retrospective method of transition. Current year results have been prepared in accordance with the new standards.
In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full fiscal year.
Principles of Consolidation
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances
Recently Issued and Recently Adopted Accounting Standards
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842). This guidance will result in key changes to lease accounting and will aim to bring leases onto balance sheets to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations as well as the assets it owns versus leases. The new leasing standard will be effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. The new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with certain practical expedients available. The Company plans to adopt the requirements of the new lease standard effective January 2, 2019, the first day of fiscal year 2019, and apply a modified retrospective adoption method. The Company anticipates taking advantage of the practical expedient options which allow an entity to not reassess whether any existing or expired contracts contain leases, not reassess lease classifications for existing or expired leases, and an entity does not need to reassess initial direct costs for any existing leases, and we are further evaluating other optional practical expedients and policy elections. The Company is in the process of implementing changes to its systems and processes in conjunction with its review of existing lease agreements. The cumulative effect of adoption will be recorded to retained earnings in the period of adoption. Based on a preliminary assessment, the Company expects that substantially all of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a material increase in the assets and liabilities on the Company's consolidated balance sheets.  The Company is continuing its evaluation, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures. The Company will adopt ASU No. 2016-02 during the first quarter of fiscal 2019.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides a comprehensive new revenue recognition model that requires a company to recognize revenue in an amount that reflects the consideration it expects to receive for the transfer of promised goods or services to its customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09, also known as FASB Accounting Standards Codification ("ASC") Topic 606 ("Topic 606") supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition ("Topic 605"). On January 3, 2018 (the first day of fiscal year 2018), the Company adopted the requirements of Topic 606, utilizing the modified retrospective method of transition. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, as detailed below. Topic 606 does not materially impact the recognition of company restaurant sales or franchise royalty income from franchisees included in franchise revenue.
Franchise Fees
The adoption of Topic 606 changed the timing of the recognition of initial franchise fees, including franchise and development fees, and renewal fees, both included in franchise revenue in the consolidated statements of comprehensive income. Under Topic 605, initial franchise fees were recognized when all material obligations had been performed and conditions had been satisfied, typically when operations of a new franchise restaurant had commenced, and renewal fees were recognized when a renewal agreement became effective. Topic 606 requires franchise and renewal fees to be deferred and recognized over the term of the related franchise agreement for the respective restaurant. Franchise agreements typically have a term of 20 years. The impact of the deferral of initial franchise and renewal fees received in a given year may be offset by the recognition of revenue from fees retrospectively deferred from prior years. Upon adoption, the Company recorded approximately $0.7 million as a cumulative effect adjustment to opening retained earnings comprised of $1.0 million of deferred franchise fees included in other non-current liabilities on the consolidated balance sheet as of January 3, 2018 (the first day of fiscal year 2018) related to franchise and renewal fees previously recognized since the business combination with Levy Acquisition Corp. on June 30, 2015, partially offset by an adjustment of $0.3 million to deferred taxes related to the $1.0 million of deferred franchise fees.
During the twelve and thirty-six weeks ended September 11, 2018, the Company recognized approximately $12,000 and $40,000, respectively, in franchise revenue related to the amortization of the deferred franchise fees recognized at January 2, 2018 as a result of the adoption of Topic 606.
Deferred franchise fees are recognized straight-line over the term of the underlying agreement and the amount expected to be recognized in franchise revenue for amounts in deferred franchise fees as of September 11, 2018 is as follows (in thousands):
FY 2018
 
$
21

FY 2019
 
69

FY 2020
 
67

FY 2021
 
65

FY 2022
 
65

Thereafter
 
805

Total Deferred Franchise Fees
 
$
1,092


Advertising
The adoption of the new guidance changed the reporting of advertising contributions from franchisees and the related advertising expenses, which were not previously included in the consolidated statements of comprehensive income. Topic 606 requires these franchise advertising contributions and expenses to be reported on a gross basis in the consolidated statements of comprehensive income, which impacted our total revenues and expenses. However, the franchise advertising contributions and expenses are expected to be largely offsetting and therefore does not have a significant impact on reported net income. The current year impact to revenue for franchise advertising contributions and to expenses for franchise advertising expenses for the twelve and thirty-six weeks ended September 11, 2018 was an increase of $3.1 million and $9.2 million, respectively, for both revenue and expenses as a result of applying Topic 606.
Other Revenue Transactions
Certain other franchise expenses have previously been recorded net of the related fees received from franchisees. Under Topic 606, the Company is now including these revenues and expenditures on a gross basis within the consolidated statements of comprehensive income. While this change materially impacted the gross amount of reported franchise revenue and related expenses on the consolidated statements of comprehensive income, the impact is an offsetting increase to both revenue and expense such that there is not a significant, if any, impact on operating income and net income. The current year impact to revenues for the twelve and thirty-six weeks ended September 11, 2018 was an increase of approximately $0.2 million and $0.5 million, respectively, as a result of applying Topic 606, with an offsetting increase in expenses.
Comparison to Amounts if Previous Standards Had Been in Effect

The following tables reflect the impact of the adoption of Topic 606 on the Company's consolidated balance sheet as of September 11, 2018 and on the Company's consolidated statements of comprehensive income and cash flows from operating activities for the thirty-six weeks ended September 11, 2018 and the amounts as if Topic 605 was in effect ("Amounts Under Previous Standards") (in thousands):
 
 
September 11, 2018
 
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Liabilities and shareholders’ equity
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
20,172

 
$

 
$
20,172

Other accrued liabilities
 
40,706

 

 
40,706

Current portion of capital lease obligations and deemed landlord financing liabilities
 
1,109

 

 
1,109

Total current liabilities
 
61,987

 

 
61,987

Long-term debt, capital lease obligations and deemed landlord financing liabilities, excluding current portion, net
 
169,174

 

 
169,174

Deferred income taxes
 
69,137

 
296

 
69,433

Other non-current liabilities
 
31,945

 
(1,092
)
 
30,853

Total liabilities
 
332,243

 
(796
)
 
331,447

Shareholders’ equity:
 
 
 
 
 
 
Preferred stock
 

 

 

Common stock
 
4

 

 
4

Additional paid-in capital
 
343,412

 

 
343,412

Accumulated other comprehensive income
 
357

 

 
357

Retained earnings
 
79,503

 
796

 
80,299

Total shareholders’ equity
 
423,276

 
796

 
424,072

Total liabilities and shareholders’ equity
 
$
755,519

 
$

 
$
755,519



 
12 Weeks Ended September 11, 2018
 
36 Weeks Ended September 11, 2018
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
 
As Reported
 
Adjustments for Prior Revenue Recognition Standards
 
Amounts Under Previous Standards
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Company restaurant sales
$
109,559

 
$

 
$
109,559